Barclays is preparing to tell 7,000 clients to do more trading with the firm or find another bank, the latest move in an industrywide trend of winnowing down customer lists to the ones that produce significant profits.
The British bank launched a new computer system called Flight Deck this month that ranks every customer of its trading unit by the return they generate on the firm's capital, allowing Barclays to prioritize its most lucrative relationships and jettison those that have become a drag. Since 2014 the bank has culled 17,000 clients as tougher capital rules make dealing with many smaller firms less profitable, and the new system has identified an additional 7,000 that may need to go.
Global investment banks have been cutting ties with smaller clients and scrambling to capture a greater share of business from the world's elite fund managers as new rules led the industry to rethink its traditional focus on revenue. Lenders from Citigroup to HSBC Holdings are instituting strictly tiered client lists, lavishing attention on the handful of money managers at the top while reducing the time spent with the least active players.
"We have the returns figures, so we can go and have those tough conversations with clients that don't meet our hurdle rates," Kashif Zafar, the London-based co-head of global distribution and co-head of macro products, said in an interview. "We're not in the old-school business of doing big revenue with poor returns. That's a failing strategy."
As a general rule, Barclays wants at least a 10% return on capital from every customer, Zafar said. Those that don't currently meet the threshold will be given the option to do more business with the bank to get there; if they can't or won't, they'll have to leave in what the bank terms a managed transition.
Barclays is embarking on its second round of pruning as the industry follows suit. Deutsche Bank AG is scaling back coverage of about 3,400 customers in the markets business, a person familiar with the move said this month. Morgan Stanley ranks its most profitable European fixed-income customers in three groups: "supercore," "core" and "base." Citigroup's top five hedge-fund clients form an elite group known as the "Focus Five," according to people with knowledge of the list.
Although smaller clients may feel slighted, banks are in a tight spot. Eight years after the financial crisis, low profitability has led to shares of European banks trading at fractions of their book value. Lenders have built up capital buffers multiple times higher than before the crisis and are spending billions more a year on compliance, while rules have curbed the firms' risk-taking and ability to make market bets.
"In my whole career, I've never seen banks genuinely get tough about optimizing client relationships and exiting where they can't generate adequate returns," said Laurie Mayers, an associate managing director of banking at Moody's Investors Service. "Considering the pressure they're under, I think they're finally doing it instead of just talking about it. There's an urgency now, and they are exiting material numbers."
Barclays's markets unit ranks its top 500 clients, which make two-thirds of its revenue, into gold, platinum and diamond levels, with the numbers tapering toward the top. The division -- which encompasses credit, equities, rates and foreign-exchange trading -- will have about 8,000 customers once the "off-boarding" drive is complete, about a quarter of the number it had two-and-a-half years ago.
"We came from a world where more is better: more clients, more transactions, more market share," said Brett Tejpaul, the New York-based co-head of global distribution for credit and equities. "The onset of capital rules changed the business -- more now isn't necessarily better, and we need to be a lot more selective. In the past we all had a rather one dimensional view through the revenue metric."
The Flight Deck technology platform, along with a new system called Jetbridge that handles the documentation and other tasks involved in taking on a client, are aimed at reducing some of the wasted cost that built up through acquisitions last decade. Many of the first 17,000 clients to go were "essentially inactive," but Barclays was still spending money to help maintain 70,000 legal entities tied to the relationships, Tejpaul said.
Traditional asset management firms are the most stable relationships and have been consistently growing in assets over the past six years, Tejpaul said. Hedge funds are more volatile and the industry's leading players regularly change, so the amount of business they do with Barclays requires more careful monitoring so they are ranked correctly.
Barclays is bringing more discipline to the level of service it provides to each type of client, Tejpaul said. "That's easy to say, but a little bit trickier to do in practice, because the industry's been built on a client-first service model."
Barclays's trading business enters the process with some momentum after years of declining revenue. Markets revenue climbed 4% in the first nine months of the year, outpacing results at its European rivals. The firm's corporate and investment bank reported an 8.7% return on tangible equity in the first nine months of 2016, up from 8% in the same period a year earlier.
The bank tied with JPMorgan Chase for highest client share in European fixed-income in 2016, according to a survey released last week by Greenwich Associates.
"Markets are becoming more volatile and therefore our client wallet is going up in macro," Zafar said, referring to the rates and currency businesses. "People have misinterpreted low volatility in 2013 and 2014 as evidence of a structural decline caused by regulation. They were actually the anomaly for macro. 2017 will be more along the improving trend."