Barclays' new boss Antony Jenkins must decide in the coming months whether to pick up business left open by a retreat from investment banking by UBS and other rivals, or push even harder with cuts to the British bank's own operation.
Jenkins, who became chief executive three months ago after Bob Diamond left Barclays over an interest rate rigging scandal, is in the middle of a review aimed at cutting pay, shaking up the bank's culture and reshaping its strategy.
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Its investment bank is expected to be cut back, although Jenkins said on Wednesday he was "absolutely committed" to the universal banking model and saw opportunities as rivals retreat.
"What we're seeing is some of the smaller scale players taking positions to exit, and for those that remain that is a positive," he told reporters on a conference call. "We are a very strong player in the flow business in FICC (fixed income, currencies and commodities), so for us that is a good thing."
Flow business refers to income from the low-margin processing of clients' orders and trading, where there are big benefits of scale.
UBS's shock pullback from debt trading this week and cull of 10,000 jobs has intensified scrutiny of how far investment banks are going to cut costs.
Jenkins was already juggling how to reduce the investment bank's excessive pay and risk-taking, but still protect a business that provided 54 percent of underlying profits in the first nine months of this year.
He made clear on Wednesday he will go further on cutting pay, but is wary of damaging the franchise.
Compensation in the investment bank represents 39 percent of income this year, down from 46 percent a year earlier. "We don't intend to stop there. We think we need to continue to drive that ratio down over time, but recognizing we will protect the franchise as we do," Jenkins said.
The ratio at Barclays is lower than at most of its rivals, although J.P.Morgan has a ratio of 34 percent.
"The strategic battleground is around costs," said Mediobanca analyst Chris Wheeler, suggesting that reforms at Barclays will be far more modest than at UBS, which did not have a leading position in the fixed income business.
Fixed income is the cornerstone of Barclays, built up over a decade by Diamond who was once a bond trader. The UBS move could send more business to Barclays or Deutsche Bank, Europe's other debt market powerhouse.
Stricter rules following the financial crisis have forced banks to set aside more capital against bonds they hold for trading and many other areas of activity, often dragging returns below the average 10-12 percent cost of equity.
Return on equity in flow rates and flow credit will drop to 11-14 percent on average, from 18-19 percent before, according to consultancy McKinsey. Returns on structured products could dip to below 10 percent, but most other areas are seen averaging returns of 11-13 percent, McKinsey estimated.
The Jenkins review - Project Transform - will be preceded by a review of the investment bank by its boss Rich Ricci, called Project Mango, which could be finished by the end of the year.
The return on offer is likely to dictate how Jenkins proceeds. He has said he will put each business in one of three buckets - worth expanding; worth trying to turn around; or needing the axe.
Profitability is likely to be the main determinant, and return on equity in investment banking improved to 14.2 percent so far this year, beating the group's 11.5 percent cost of equity and up from 12 percent a year ago.
But it had a weaker performance in the third quarter than most rivals, with investment banking income of 2.6 billion pounds, up 17 percent on the year but down 13 percent on the previous quarter. (Additional reporting by Sarah White; editing by David Stamp)