By Christopher Thompson
LONDON (Reuters Breakingviews) - Talk of Barclays considering a merger with Standard Chartered reveals little about the UK bank except its limited options for boosting returns. Chairman John McFarlane is keen on a combination with the emerging markets lender, the Financial Times reported on Wednesday. A deal appears to make little financial sense. But it underscores how little Barclays Chief Executive Jes Staley can do in the short term to appease investors.
Here are some good reasons for corporate mergers: complimentary businesses, potential for cost savings and overlapping geographic footprints. Almost none of these apply to a combination of Barclays and Standard Chartered. The former is a 36 billion pound retail and investment bank with operations in the United Kingdom and United States; the latter a 25 billion pound emerging markets lender focused on Asia and Africa. Granted, they are both headquartered in London, and run by American CEOs who previously worked for the same investment bank. Apart from closing a head office and firing one JPMorgan alumnus, however, it’s hard to see much synergy.
If Barclays still had an extensive overseas retail network, there might be more savings on offer. But Staley has spent the past two-and-a-half years retrenching. The bank sold its biggest emerging markets business, Barclays Africa, to satisfy regulators and declutter its balance sheet.
The merged bank – presumably named BarChart – would also face some real-world impediments in the form of extra capital requirements that regulators impose on the world’s biggest lenders. Both are already systemically important financial institutions. With about $700 billion of combined risk-weighted assets at the end of the first quarter, the two would probably face a higher surcharge which would offset the benefits of any cost savings.
Like most companies, banks constantly size up potential merger partners. And Barclays, which reported a negative return on tangible equity of 3.6 percent last year, clearly needs a boost. But it has little scope to do more by itself. Activist investor Edward Bramson, who owns a 5 percent stake, wants Barclays to slim down its trading division. But rival Deutsche Bank’s woes offer a cautionary reminder to those who believe investment bank restructuring is painless. Staley insists his traders can earn their cost of capital over time. Blue-sky talk about possible mergers merely underlines the lack of appealing alternatives.
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