British bank Barclays Plc is set to miss its key profit target after its investment bank ended 2011 with its worst quarter for three years.
A slump in bond trading income due to the euro zone debt crisis dragged down annual profit, prompting Chief Executive Bob Diamond to push back a return on equity (RoE) target of 13 percent he set less than a year ago.
The idea of 13 percent is pie in the sky and even getting to 10 percent is a long way away, said Alex Potter, analyst at Berenberg Bank. Return on equity is a measure of profitability.
Rivals including Credit Suisse, UBS and Deutsche Bank have all struggled to maintain profitability in their investment banks during 2011, hit by volatile trading and tougher regulations.
That has raised fears among banks that the squeeze on the fat returns they enjoyed in the past in core areas such as fixed income marks a permanent structural downturn.
Diamond did not abandon his RoE target but said: Thirteen percent remains absolutely the right target and is very achievable, but we may not achieve it in 2013 given the impact of the external environment.
The bank's return on equity of 5.8 percent last year -- against 7.2 percent in 2010 and well below its cost of capital of about 11.5 percent -- was unacceptable, he said.
They need to get harder in restructuring these banks, Berenberg's Potter said, adding Barclays was still not getting to grips with its high staff costs.
Barclays said it had cut bonuses at investment bank unit Barclays Capital (BarCap) by 32 percent from 2010 and said incentive awards across the group were down 26 percent. Cash bonuses for BarCap staff will be capped at 65,000 pounds this year.
But that did not go far enough, according to the Association of British Insurers (ABI), which represents major investors and has called on UK banks to cut pay to deliver better returns.
This appears to be very close to business as usual. It is not the signal of the change required in order to improve the investment case, said Robert Talbut, chairman of the ABI's investment committee.
BarCap's bonus pool was 1.5 billion pounds, or an average of 64,000 pounds for its 24,000 staff. Across the group the average bonus was 15,200 pounds. We need to balance being competitive and being responsive to the mood, and we are being responsive, Diamond said.
Diamond, who became chief executive a year ago after a decade building up BarCap, has for years been one of Europe's best-paid bank executives and has faced calls to forgo his bonus at a time when executive payouts generally have become a hot political issue.
Bonuses for senior executives will be down 48 percent from 2010, but Diamond refused to comment on whether he would be awarded one or what he planned to do. He is paid a base salary of 1.35 million pounds and is likely to get an additional sum of between 2 million and 3 million, according to media reports, down from 6.5 million for 2010.
Barclays, Britain's fourth-biggest bank by market value, reported a pretax profit of 5.9 billion pounds for 2011, down 3 percent on the year and below analysts' forecast of 6.1 billion, according to a company poll.
Its shares fell in early trading but bounced back and were up 1 percent at 235 pence in early afternoon trade, after hitting a seven-month high.
Dealers said investors were encouraged by a decent performance in retail banking, a one-third fall in bad loans to 3.8 billion pounds and a final dividend of 3 pence, more than expected.
Income at BarCap fell to 1.8 billion pounds in the fourth quarter, down 19 percent on the previous three months and almost half of its level a year ago. Income for the year was 10.3 billion, down almost a quarter on 2010.
A slump in bond trading and advisory work hammered all banks late last year and BarCap fared worse than some U.S. rivals, but not as badly as Credit Suisse.
The fourth quarter was certainly tough and all the second half was difficult, but we see that as an anomaly, said Rich Ricci, co-head of BarCap. It has had an encouraging start to this year, he said.
Ricci said he was still targeting annual BarCap income of between 12 million pounds and 14 billion and an RoE of 15 percent. We're not backing away from that, he said.
BarCap's fixed income, currency and commodities income in the fourth quarter fell 32 percent from the previous three months and its equities income fell 10 percent, but advisory was up 30 percent.
Total staff costs fell 4 percent to 11.4 billion pounds from a year earlier, or an average of 73,800 per employee. The bank cut 6,400 jobs during the year.
Diamond said the bank will cut annual costs by 2 billion pounds under his revamp plan, which also includes shaking out underperforming areas and shrinking loans.
The economic and regulatory environment will continue to be challenging this year, he said.
He said Barclays had not taken any of the cheap, three-year cash offered to lenders by the European Central Bank in December, but said it had been a terrific move to help banks.
(Additional reporting by Sudip Kar-Gupta; Editing by Jane Merriman and David Holmes)