Here’s How Barclays Has Fared Under New Regulations

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In his first deal since replacing Bob Diamond, Barclays’ (NYSE:BCS) new chief executive set the bank’s strategy firmly towards retail banking with its ING (NYSE:ING) Direct deal.

Anthony Jenkins, previously head of Barclays retail banking operations, became the company’s chief executive at the end of August, after the Libor interest rate rigging scandal forced Diamond to resign.

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Tuesday’s takeover of ING’s British savings and loan business and its 1.5 million customers was the Jenkins’s first deal since assuming the position. The bank’s chief executive intends to focus more on retail banking and less on riskier investment banking

ING announced plans in August to leave the United Kingdom, as part of its plans to divest assets in order to increase capital and repay Dutch state aid. Barclays will take over the company’s Direct UK business, which includes 750 employees, 10.9 billion pounds, or $17.5 billion, of deposits, and 5.6 billion of mortgages. Barclays will buy the company’s loans at a 3 percent discount to their face value, leaving ING with a 320 million euro, or $415 million, loss on the transaction after tax

Over the past week, Barclays has announced plans to cut costs and prepare for new regulations, and promoted two of the top consumer banking bosses.

Chief Executive of Barclays UK Retail, Ashok Vaswani, said of the deal in a press release, “The acquisition of ING Direct UK is a good fit with Barclays existing UK retail banking business.”

When ING Direct was launched in Britain in 2003, it was one of the most aggressive new banks; it shook up the United Kingdom’s savings market with high interest rates, which were due to its low cost, mostly online, operating model.

For ING, the deal will release around 330 million euros of capital, so that it can repay Dutch state aid received in 2008. The bank also sold its Canadian online bank in August, and is trying to sell its Asian investment management and insurance operations, a deal which could raise approximately $7 billion for the company.

Jenkins’, as part of his efforts to reform culture at a bank that regulators said were taking too many risks, must revive profitability and resurrect the company’s share price. The ING Direct deal will meet his target to deliver return on equity above its 11.5 percent cost, and would not have a material impact on its capital. However, the deal is subject to regulatory approval, which will be finalized in the second quarter of 2013.

Most banks are finding it difficult to deliver a return on equity above their cost as tougher regulations have squeezed profits and forced them to hold more capital. In 2010 and 2011, Barclays had an adjusted return on equity of 7 percent, while returns across global banks decreased to an average 7.6 percent last year, well below the average cost of equity of 10 to 12 percent. New regulation, slow revenue growth, and high costs have had their impact, according to a study by McKinsey & Co.

McKinsey has said that banks are still many years from developing new business models that will produce sustainable profits.

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