Three years into Barclays' costly global expansion from fixed-income shop to full investment bank, the Asia leg of the build-out is struggling to gain ground on its rivals.
Barclays hired an A-list of veteran and expensive Asia investment bankers after the 2008 financial crisis, with the hope of forming a banking and equities business that would put them in the same league as Goldman Sachs and Morgan Stanley.
While the U.S. and European arms of the new Barclays muscled into Wall Street, the Asia operation was hit by delays in its equity platform roll-out, heavier-than-expected competition from local firms, and a quick rebound in Asian markets that allowed competitors to regain momentum.
"Unfortunately the high hopes of 2009 for Asia are not in the bucket today, with economic prospects in China not as good as hoped and Japan not yet turned around," said Crispin Odey, founding partner of Odey Asset Management, a hedge fund that owned 16.7 million shares in Barclays as of February 29th.
Thomson Reuters estimated fee data shows only incremental gains in market share since 2009 in both equity capital markets (ECM) and mergers and activity (M&A), while the bank remains a strong player in its established businesses of fixed income sales and trading.
In the Asia equity and equity-related league table standings for 2011 (excluding Japan and Australia), Barclays failed to make the top 20, according to Thomson Reuters.
Barclays Capital ranked 16th in the region's M&A standings last year, the data show. First-quarter estimated fee data show Barcap in 8th place globally and in 17th place in Asia Pacific.
Building up a complicated business in such a competitive market takes time. But for Barclays' Asian aspirations, some investors are getting impatient as markets sour again.
With regulation putting pressure on banks' spare cash worldwide, scrutiny on Barclays' spending in Asia will only heighten if the region's revenues fail to jump.
"The real issue for Barclays at the moment is the threat to their cost of funding... and that outweighs anything they might be doing in investment banking," Odey said.
Odey's wife, former JO Hambro Capital Management CEO Nichola Pease, is a member of one of the families that founded Barclays.
When Barclays launched the Asia expansion, a key ingredient was a global roll-out of the equity platform it picked up when it bought the U.S. business of Lehman Brothers after Lehman's 2008 collapse.
In September 2009, Barclays Asia CEO Robert Morrice told Reuters of the plan for a single platform to buy, sell, and distribute stocks worldwide, which he acknowledged was unusual.
"I don't think people could do that in the past because of different investments in different regions," he said then.
The bank turned to Japan first, and planned to have the Hong Kong phase finished by September 2010. While Japan was complete that year, only in recent months has the all-important Hong Kong roll-out been finalized. The execution was hit by several delays and it still does not reach Australia.
"I think they underestimated how complicated the technology part of this whole thing was," said a source involved with the Asia part of the plan.
One problem with the equity roll-out plan, according to the source, was the technology systems of each region were not compatible with each other. One minor example was that in equity derivatives, Barclays used Microsoft Windows while Lehman was on Linux.
On a larger scale, the source said, Barclays discovered less connectivity and synergies than it hoped, and instead found that what worked for an equity product in New York, did not work in Japan under one system.
Morrice told Reuters in an interview last week that the renewed downturn in markets had forced the bank to re-calibrate its goal to increase Asia's contribution to corporate and investment bank revenues to 20 percent by 2015 from historical levels of 8 to 13 percent.
"You're not seeing equities transactions yet because the deals aren't there across the market. But if I believed that the markets will stay like this for five years, we wouldn't be doing this," Morrice said.
"Those who have seen for themselves the scale of opportunity in the region will grind it out as long as they can."
Asia contributed just 4 percent of global income for the Barclays group in 2011, the same as it did in 2010 and just one percentage point higher than in 2009, according to filings.
MISSING CHINA TICK
Barclays has a fully loaded Japan bank yet has struggled to build its China-focused business, which undercuts efforts to sell itself as a full-service Asian investment bank.
Some smaller rivals who attempted to build an Asia equities platform after the 2008 crisis also ran into headwinds, with Samsung Securities and Daiwa among those that also built up, and later, scaled back.
"If we had predicted this market environment when we began the build-out, we might have adjusted our strategy," Morrice said.
Barclays still lacks a joint venture with a local securities firm in China, unlike most of its peers, and has failed to win the big China equity underwriting mandates that bring fees and league-table standing.
"That is a tick in the box missing versus the competition," he said. "However, China is not somewhere where you want to rush in and do the wrong thing. We are looking for the right partner."
It wasn't until May that the equities research team started mainland China property coverage, one of the most eagerly followed sectors in Asia.
The heavy-spending, hard-charging approach of Barclays in Asia was illustrated by the two-year stint of Stephen O'Sullivan, who was poached from Macquarie at the end of 2009 as head of Asia research.
O'Sullivan immediately set to work hiring senior analysts in batches from the competition. Two sources with knowledge of the matter say his initial target was to hire more than 100 analysts for the equity research division, though what remains now is somewhere around 50, they say.
While Barclays was able to build a list of talented and respected analysts, it came at a cost. Unlike some banks that have one senior, managing director-level veteran at the top of the research division, Barclays' has six managing directors in that division, sources say. Managing directors are typically the highest ranked and highest paid bracket of an investment bank.
Even a relatively junior floor of research analysts is an expensive operation at a bank, because these positions typically do not bring in direct revenues. They are a key cog in the equities machine, but the groups are often referred to as a cost center, as they cost more than they make.
Whether the research division wants to be a costly leader in market share or a scrappy, profitable bunch, appears to be unclear, according to an analyst at Barclays.
"There's no strategy," said the analyst, who did not want to be named. "Everybody's an MD," the analyst quipped.
O'Sullivan left Barclays at the end of last year, sources with knowledge of the matter said. Reuters was unable to reach O'Sullivan for comment.
Morrice said that building a research division from the ground up required hiring senior people.
"Yes, we might have a different shaped pyramid compared to some competitors, but that's because we're building from scratch," Morrice said.
"There is an emphasis on producing high-quality research early on, which means hiring senior analysts first and then over time they can bring along others."
Barclays also suffered a blow in the increasingly important world of electronic trading of shares. Michael Kim and Shun Yet Jan were hired from Bank of America Merrill Lynch to build out the bank's e-trading platform in Asia; both lasted just one year before leaving.
In investment banking, the build-out began in earnest with the poaching from Morgan Stanley of the respected Matthew Ginsburg in September 2009. He was followed the next year by lieutenants Ed King, head of M&A; and Peter Ding and Gary Kuo, who would run Greater China investment banking together.
Financial industry headhunters said at the time, that batch of hires alone would cost the bank more than $10 million.
The bank continued its run of hiring talent from top-tier Asia firms by naming former Goldman Sachs M&A banker Johan Leven as co-head of corporate finance in March 2010, the same month that Morrice told the Financial Times the goal was to hire another 100 M&A bankers in a year.
"A key metric we look at is productivity, or revenue per head, and we're within 10-15 percent of the top names on the street already," Morrice told Reuters
In equity deals, the bank's estimated Asia-Pacific fees were $49 million in 2011, a market share of 0.68 percent, up from $33.9 million in 2010 (0.42 percent market share)and $6.4 million in 2009 (0.11 percent).
In M&A, Barclays has made similar small gains, increasing market share in estimated fees from 0.19 percent in 2009 to 0.96 percent in 2010 and 1.49 percent in 2011, the data show.
The 2011 figure represents a total estimated fee haul in M&A for Asia excluding Japan of $57 million last year. That is around half the fees in that category earned by Morgan Stanley, the data show.
"Market conditions need to stabilize and improve before we will begin to see improved returns on the investments we have made in equities and investment banking," Morrice said.
(Editing by John Mair)