Barclays forced to rethink Diamond plan When Bob Diamond presented his bold plan in February 2011 to boost profitability by eradicating or fixing more than a third of Barclays" businesses in less than three years, he was no doubt counting on more favourable markets. A few months after the new chief executive laid out his strategy for the UK-based bank, Portugal was bailed out and Greece looked in danger of defaulting on its vast debts. Barclays" plans to sort out businesses across Spain, Italy and Portugal - which analysts believe make up a large chunk of its underperforming operations - were suddenly a much bigger challenge. The sharp downturn, together with regulatory uncertainty putting the brakes on restructuring its investment bank, means progress in reshaping Barclays has been slower than analysts expected. Analysts are still waiting for meaningful change that will provide a clearer path to Mr Diamond's targeted return on equity of 13 per cent. It is an aspiration he has already been forced to postpone once and one that analysts are yet to factor into their forecasts. "The 13 per cent ROE target looks challenging given the current macro and capital markets environment," says Andrew Coombs, a banking analyst at Citigroup. We are forecasting an ROE closer to 8 per cent for 2013. Non-core units on the way out Weeding out underperforming businesses is a common aim of the big British banks as they seek to build up their returns in challenging economic and regulatory markets, writes Sharlene Goff. Many embarked on ambitious "flag-planting" strategies in the years leading up to the financial crisis - opening businesses with only a handful of branches in many different countries. They are now moving to reverse them fast. HSBC was one of the first to set strict hurdles - or "filters" - that each one of its global businesses must surpass, or else risk being restructured or shut down. Like Barclays, HSBC plans to only maintain a retail banking presence in markets where it deems itself to have sufficient scale. Achieving this is arguably more straightforward for HSBC as its sub-scale operations are centred round Latin America, Asia and eastern Europe. These should be easier to sell than businesses in the troubled southern European markets such as Spain and Italy, which are tarnished by grim economic conditions. HSBC recently provided a detailed update on its progress in reshaping the business. It said it had sold or closed 28 businesses so far, removing about $55bn of risk-weighted assets from its balance sheet. Last year it made 16 disposals, including its US cards business and US branches. It has completed a further 12 this year, including its general insurance business and operations in Costa Rica, El Salvador and Honduras. It has also disposed of retail operations in Poland, Russia, Japan, Thailand and Chile. On a smaller scale, Lloyds Banking Group is also withdrawing from far-flung international operations - its businesses in the United Arab Emirates and Australia, for example. Earlier this week Lloyds offloaded a large package of distressed Australian property loans. Royal Bank of Scotland's wealth arm Coutts has a similar strategy of focusing on core markets - the UK, Middle East, Asia, Switzerland and eastern Europe - and withdrawing from smaller markets. Barclays executives insist they are pleased with the bank's progress given the challenging markets. It has shut down or shrunk a number of its sub-scale retail operations - in Russia, India, Indonesia and Pakistan, for example - and embarked on a costly clean-up of its Spanish business, helping to return the corporate division to profitability. In the investment bank it has reduced by about £10bn its capital-draining credit market assets to £13bn since the end of 2010. Other non-core divisions - the retail financial planning arm in the UK, housing units in the US and Germany and the bank's 20 per cent stake in fund manager BlackRock - have also been sold or closed. In addition, while the bank's share price has fallen by a quarter in the past year, it has held up relatively well compared with some other banks. "On the current valuation Barclays is one of our preferred stocks of the European banking sector," says Mr Coombs. Nevertheless, analysts want tougher action. "Investors have largely overlooked these smaller changes," says one. To get to the target ROE, Barclays needs to take more drastic measures. The bigger changes analysts would like to see include disposing of the bank's retail operations in Italy, Portugal and France, which are far larger than the businesses it had in emerging markets but are still viewed as sub-scale. Barclays has tried to sell its Italian business, which has almost 1m customers, about £17bn of loans and 190 branches, and its smaller French operation, which focuses on wealthier customers. But given the turmoil sweeping the eurozone, buyers are hesitant. "They're not going to have people knocking on their door for these businesses," says another analyst. At the same time large funding gaps at Barclays" European retail businesses make them difficult to simply shut down. Overall Barclays has about £44bn of European retail loans, funded by only £16bn of deposits. Recent efforts to match overseas loans with locally raised funding - the £8bn Barclays took from Europe's longer-term refinancing operation scheme, for instance - have reduced this discrepancy. But analysts say the differential between loans and deposits would deter buyers. They estimate that the widest funding gap is in Italy, where Barclays" mortgage book was still growing in the first quarter of this year. The other main element of Barclays" restructuring is its investment bank, which will be hit hard by tougher regulatory demands on capital and proposals to force UK banks to ringfence their retail operations. So far it has focused on cutting its credit market exposures, which have weighed on profitability, and stripping out costs. "The big issue is the profitability of the investment bank," says Robert Law, an analyst at Nomura. The whole industry is grappling with regulatory changes - and responding with price increases, cost cutting and capital reallocation. But it is difficult to tell how far Barclays will have to go at this stage. Barclays executives say good progress has been made towards the 15 per cent investment banking return on equity target by taking market share from rivals and cutting costs. However analysts say the bank needs to step up its efforts to address less profitable divisions, including structured credit, rates and its cash equities unit in Europe and Asia, which they say remain sub-scale despite significant investment. They are concerned that, as legacy assets in the investment bank will need to be run down over time and the eurozone crisis disrupts plans to sell underperforming divisions, there is no quick fix. Shareholders are set to receive an update on Barclays" progress - and a clearer idea of when it could hit its 13 per cent ROE target - at an investor day in the autumn. Those hoping for evidence of more radical action to reshape the bank by that point may be disappointed. "Given that Bob has already moved away from formal targets, without committing to new ones, we think he will err on the side of sticking it out rather than taking tough action to improve returns over the short-term," bemoans one analyst.