February 13, 2020 / 10:52 AM / 12 days ago

Breakingviews - Jes Staley’s old associate haunts Barclays revival

Chief executive officer of Barclays, Jes Staley, takes part in the Yahoo Finance All Markets Summit in New York, U.S., February 8, 2017.

ZURICH (Reuters Breakingviews) - Barclays shareholders have a new headache to add to an older problem. The British bank on Thursday said regulators were probing Chief Executive Jes Staley’s characterisation of his relationship with U.S. financier Jeffrey Epstein, who killed himself while awaiting trial on sex-trafficking charges. At the same time, the American admitted that his plan to lift Barclays’ return on tangible equity to 10% by 2020 looks tricky. The new revelations serve as an unwelcome distraction for investors worrying that the financial goal is out of reach.

Staley’s past relationship with Epstein was well known. The New York Times last year reported that the financier had referred “dozens” of wealthy clients to the former JPMorgan executive; Staley says he had no contact with Epstein since taking charge of Barclays in 2015. The surprise is that Britain’s Financial Conduct Authority and Prudential Regulation Authority are investigating Staley’s representations about his professional dealings with Epstein, and the company’s subsequent response to inquiries.

The bank’s board said on Thursday that it believes Staley has been “sufficiently transparent”. It’s unclear what the ramifications will be if regulators think otherwise. But the probe is another stain on Staley’s personal reputation. In 2018 he was fined 642,000 pounds for trying to identify a whistle-blower who sent letters criticising an employee of the bank.

That will worry investors who are counting on Staley to pump the bank’s ROTE closer to its probable 10% cost of equity. Last year the key metric reached 9%, excluding fines and legal charges. Staley clung to the 10% ambition on Thursday, but admitted it had become harder given low interest rates and a “challenging macroeconomic environment”.

To hit Staley’s goal this year, Barclays will need to generate almost 5 billion pounds of earnings, based on consensus estimates of tangible book value. That requires a heroic 16% jump from last year’s level. Barclays shares, which fell 3% on Thursday morning, trade at a 33% discount to the bank’s tangible book value, implying that shareholders think Staley will fail. A renewed focus on his old associate will only cement that cut-price valuation.

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