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Analysis-Barclays maps uncertain route to a simpler, stronger future

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Analysis-Barclays maps uncertain route to a simpler, stronger future
© Reuters. FILE PHOTO: A branch of Barclays Bank is seen, in London, Britain, February 23, 2022. REUTERS/Peter Nicholls/File Photo

By Sinead Cruise, Lawrence White and Iain Withers

LONDON (Reuters) – Barclays, unveiling its biggest revamp since 2016, sought to appease investors seeking a clearer route to less volatile returns.

Yet the British lender’s plan to dedicate fewer financial resources to its investment bank is at odds with ambitions to expand in some of the unit’s higher-risk businesses, investors said.

Barclays has historically devoted much of its capital to investment banking, roiling more conservative shareholders who say other businesses posting more reliable profits have been under-invested as a result.

The bank will continue to allocate the lion’s share of its firepower to investment banking, and while a bigger push into domestic lending is broadly welcomed, some analysts and investors are unconvinced the bank can grow market share enough to meet its lofty revenue goals, against strong competition and a skittish UK economy.

Barclays’ long-awaited strategic update presented on Tuesday will have the bank return at least 10 billion pounds ($12.66 billion) to investors and reorganize into five units from the current three business lines, a move it said would create a simpler and better balanced bank.

This so-called “re-segmentation” aims to give investors greater transparency of performance in each division, unlike the previous structure which reported corporate lending and investment banking revenues together, the bank said.

In a key part of the overhaul, Barclays will reduce the share of risk-weighted assets (RWA) devoted to its investment bank to around 50% by 2026 from about 63%.

In turn, the bank plans to deploy around 30 billion pounds more to its UK consumer, corporate lending and private banking arms that generate higher returns.

“Today’s announcement from Barclays is welcome as far as it goes,” said Jeremy Hosking, founder and portfolio manager at Hosking Partners.

“But shareholders are still waiting for a diagnosis of the 15-year share price undervaluation of the bank, in particular as to whether it is cyclical or structural.”

Barclays shares rose as much as 9.4% on Tuesday and closed up 8.6% – their biggest daily gain since November 2020. In the last 12 months, they have lost over 7%, compared with a 4.2% rise in a key regional banking index

The average returns on tangible equity (RoTE) in the businesses the bank has pledged to invest in ranged from 18% to 31% in the two years to end-2023, compared with a more modest 10% at the investment bank, company figures show.

By reallocating its capital, Barclays says revenue will grow to around 30 billion by 2026 from 25.4 billion pounds in 2023.

Scepticism abounds. Many analysts and commentators said the rejig did not reflect a “de-risking” of the investment bank but rather an ambition to grow other units faster to reduce the investment bank’s outsized influence on group profit.

And with such strong competition posed by NatWest Group in British small business lending, Lloyds Banking Group (LON:) in mortgages and HSBC in corporate lending, Barclays’ big UK bet is not guaranteed to succeed.

STANDING STILL

What is more, the capital underpinning Barclays’ investment bank will still far exceed that deployed by rivals, such as BNP Paribas (OTC:) and UBS in their investment banks. Both lenders boast healthier valuations than Barclays and similarly handsome shareholder payout plans.

Within the investment bank, Barclays intends to further grow its financing business, Chief Executive C.S. Venkatakrishnan told investors on Tuesday, referring to the lucrative but potentially risky practice of lending money to large institutional clients against stocks or bonds as collateral.

Barclays has invested heavily in the business, growing revenues from 1.8 billion pounds at an undisclosed point to 2.9 billion in 2023, he said.

Analysts at Citi estimate the investment bank is expected to account for 2.7 billion pounds of the targeted 4.6 billion-pound increase in group revenues by 2026, a goal they describe as “highly ambitious”.

Those revenue goals, they say, rely on a 900 million pound bounce in the industry’s overall fee pool over the period and 1.2 billion pounds of growth in equity capital markets and advisory fees as well as additional sales to existing clients.

Other investors and analysts voiced doubts whether the plan will offer as much reassurance as executives hope.

“The buybacks will help, but the second part of the picture is growing revenue,” Sajeer Ahmed, portfolio manager at Aegon (NYSE:) Asset Management, told Reuters.

“Fund managers will treat this part of the investment case with scepticism. In particular, because it involves growing the investment bank.”

Growth will require a breakthrough in select segments, namely the buying and selling of European interest-rate products, equity derivatives and securitisation where Barclays is currently ranked outside the sector’s top five players.

Rupak Ghose, a corporate strategist and financial markets analyst, said the strategic objectives outlined by Barclays were unlikely to bolster the bank’s shares over the long term.

“This is a big return of capital but I fear a dead cat bounce,” he said.

($1 = 0.7897 pounds)

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Palantir, Anduril join forces with tech groups to bid for Pentagon contracts, FT reports

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(Reuters) – Data analytics firm Palantir Technologies (NASDAQ:) and defense tech company Anduril Industries are in talks with about a dozen competitors to form a consortium that will jointly bid for U.S. government work, the Financial Times reported on Sunday.

The consortium, which could announce agreements with other tech groups as early as January, is expected to include SpaceX, OpenAI, autonomous shipbuilder Saronic and artificial intelligence data group Scale AI, the newspaper said, citing several people with knowledge of the matter.

“We are working together to provide a new generation of defence contractors,” a person involved in developing the group told the newspaper.

The consortium will bring together the heft of some of Silicon Valley’s most valuable companies and will leverage their products to provide a more efficient way of supplying the U.S. government with cutting-edge defence and weapons capabilities, the newspaper added.

Palantir, Anduril, OpenAI, Scale AI and Saronic did not immediately respond to a Reuters request for comment. SpaceX could not be immediately reached for a comment.

Reuters reported earlier this month that President-elect Donald Trump’s planned U.S. government efficiency drive involving Elon Musk could lead to more joint projects between big defense contractors and smaller tech firms in areas such as artificial intelligence, drones and uncrewed submarines.

Musk, who was named as a co-leader of a government efficiency initiative in the incoming government, has indicated that Pentagon spending and priorities will be a target of the efficiency push, spreading anxiety at defense heavyweights such as Boeing (NYSE:) , Northrop Grumman (NYSE:) , Lockheed Martin (NYSE:) and General Dynamics (NYSE:) .

Musk and many small defense tech firms have been aligned in criticizing legacy defense programs like Lockheed Martin’s F-35 fighter jet while calling for mass production of cheaper AI-powered drones, missiles and submarines.

Such views have given major defense contractors more incentive to partner with emerging defense technology players in these areas.

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Weakened Iran could pursue nuclear weapon, White House’s Sullivan says

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By Simon Lewis (JO:)

(Reuters) -The Biden administration is concerned that a weakened Iran could build a nuclear weapon, White House National Security Adviser Jake Sullivan said on Sunday, adding that he was briefing President-elect Donald Trump’s team on the risk.

Iran has suffered setbacks to its regional influence after Israel’s assaults on its allies, Palestinian Hamas and Lebanon’s Hezbollah, followed by the fall of Iran-aligned Syrian President Bashar al-Assad.

Israeli strikes on Iranian facilities, including missile factories and air defenses, have reduced Tehran’s conventional military capabilities, Sullivan told CNN.

“It’s no wonder there are voices (in Iran) saying, ‘Hey, maybe we need to go for a nuclear weapon right now … Maybe we have to revisit our nuclear doctrine’,” Sullivan said.

Iran says its nuclear program is peaceful, but it has expanded uranium enrichment since Trump, in his 2017-2021 presidential term, pulled out of a deal between Tehran and world powers that put restrictions on Iran’s nuclear activity in exchange for sanctions relief.

Sullivan said that there was a risk that Iran might abandon its promise not to build nuclear weapons.

“It’s a risk we are trying to be vigilant about now. It’s a risk that I’m personally briefing the incoming team on,” Sullivan said, adding that he had also consulted with U.S. ally Israel.

Trump, who takes office on Jan. 20, could return to his hardline Iran policy by stepping up sanctions on Iran’s oil industry.

© Reuters. FILE PHOTO: Iranian flag flies in front of the UN office building, housing IAEA headquarters, in Vienna, Austria, May 24, 2021. REUTERS/Lisi Niesner/File Photo

Sullivan said Trump would have an opportunity to pursue diplomacy with Tehran, given Iran’s “weakened state.”

“Maybe he can come around this time, with the situation Iran finds itself in, and actually deliver a nuclear deal that curbs Iran’s nuclear ambitions for the long term,” he said.

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Ukraine says Russian general deliberately targeted Reuters staff in August missile strike

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(Reuters) -Ukraine’s security service has named a Russian general it suspects of ordering a missile strike on a hotel in eastern Ukraine in August and said he acted “with the motive of deliberately killing employees of” Reuters.

The Security Service of Ukraine (SBU) said in a statement on Friday that Colonel General Alexei Kim, a deputy chief of Russia’s General Staff, approved the strike that killed Reuters safety adviser Ryan Evans and wounded two of the agency’s journalists on Aug. 24.

In a statement posted on Telegram messenger the SBU said it was notifying Kim in absentia that he was an official suspect in its investigation into the strike on the Sapphire Hotel in Kramatorsk, a step in Ukrainian criminal proceedings that can later lead to charges.

In a separate, 15-page notice of suspicion, in which the SBU set out findings from its investigation, the agency said that the decision to fire the missile was made “with the motive of deliberately killing employees of the international news agency Reuters who were engaged in journalistic activities in Ukraine”.

The document, which was published on the website of the General Prosecutor’s Office on Friday, said that Kim had received intelligence that Reuters staff were staying in Kramatorsk. It added that Kim would have been “fully aware that the individuals were civilians and not participating in the armed conflict”.

The Russian defence ministry did not respond to a request for comment on the SBU’s findings and has not replied to previous questions about the attack. The Kremlin also did not respond to a request for comment. Kim did not reply to messages sent by Reuters to his mobile telephone seeking comment about the SBU’s statement and whether the strike deliberately targeted Reuters staff.

The SBU did not provide evidence to support its claims, nor say why Russia targeted Reuters. In response to questions from the news agency, the security agency declined to provide further details, saying its criminal investigation was still under way and it was therefore not able to disclose such information.

Reuters has not independently confirmed any of the SBU’s claims.

Reuters said on Friday: “We note the news today from the Ukrainian security services regarding the missile attack on August 24, 2024, on the Sapphire Hotel in Kramatorsk, a civilian target more than 20 km from Russian-occupied territory.”

“The strike had devastating consequences, killing our safety adviser, Ryan Evans, and injuring members of our editorial team. We continue to seek more information about the attack. It is critically important for journalists to be able to report freely and safely,” the statement said.

Reuters declined to comment further on the allegation that its staff were deliberately targeted.

The SBU statement said Kim had been named a suspect under two articles of the Ukrainian criminal code: waging an aggressive war and violating the laws and customs of war.

“It was Kim who signed the directive and gave the combat order to fire on the hotel, where only civilians were staying,” it said.

Evans, a 38-year-old former British soldier who had worked as a safety adviser for Reuters since 2022, was killed instantly in the strike.

The SBU statement gave some details about how the strike had occurred, according to its investigation.

“To carry out the attack, the Russian colonel general involved one of his subordinate missile forces units,” the Ukrainian agency said, adding that the strike was carried out with an Iskander-M ballistic missile.

The SBU did not identify the specific unit.

© Reuters. FILE PHOTO: Reuters safety advisor Ryan Evans holds a cat during a news assignment, as Russia's attack on Ukraine continues, during intense shelling in Kramatorsk, Ukraine, December 26, 2022. REUTERS/Clodagh Kilcoyne/File Photo

Ivan Lyubysh-Kirdey, a videographer for the news agency who was in a room across the corridor, was seriously wounded. Kyiv-based text correspondent Dan Peleschuk was also injured.

The remaining three members of the Reuters team escaped with minor cuts and scratches.

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