Source: The Associated Press

John Varley, who guided Barclays bank through the credit crisis without resorting to a government bailout, will retire next year as chief executive, to be succeeded by the head of the group’s highly profitable investment banking operation, the company said Tuesday.

Robert E. Diamond Jr., 59, will take over as CEO on March 31. Currently the head of corporate and investment banking as well as the Barclays Wealth unit, he joined the company in 1996.

Diamond is moving up as governments are reviewing regulation, including a possibly momentous move in Britain to force banks to divorce investment banking from retail operations. At home, Barclays may also feel pressure from the government’s austerity drive which will shrink public spending.

Following its acquisition of Lehman Brothers’ U.S. operations, Barclays has become heavily dependent on the investment banking activity which is now Diamond’s domain.

Barclays Capital now commands 60% of the company’s capital needs, a share that may increase due to regulatory changes, yet is likely to be less profitable than the Barclays retail side, Evolution Securities said in a research note.

Barclays shares were down 3.14% at 312.8 pence in midmorning trading on the London Stock Exchange.

“Barclays is one of the very few stocks in our universe of banks that shows downside,” said Arturo De Frias, analyst at Evolution Securities, who rates the bank’s shares as “sell.”

“In the last three months, Barclays has underperformed the sector: the stock price is 5% up, albeit with considerable volatility, whilst the FTSE Eurotop 300 Banks has jumped 12%. Given the considerable pressures on investment banking returns, we expect this underperformance to continue.”

Diamond’s salary will be 1.35 million pounds (US$2.08 million) with bonuses of up to 250% of that figure. The bank said it also intended to award a long term, performance-based share incentive of 500% of base salary in 2011.

Barclays’ chairman Marcus Agius told reporters in a conference call that Diamond’s compensation was “well benchmarked” against the pay of other chief executives of major banks, but the pay package may be politically sensitive.

“In times of austerity, industry compensation continues to sit uncomfortably with politicians and the electorate, while questions over broader European banking strength have resurfaced,” said Keith Bowman, analyst at Hargreaves Lansdown Stockbrokers.

Under Varley’s leadership, Barclays secured private investment in the Middle East to shore up its capital position during the credit crisis, and he led Barclays’ move to expand its investment banking business by acquiring the U.S. operations of Lehman Brothers following its collapse.

Varley said it was his intention when he took the top job seven years ago that he would move on at age 55, a milestone he reaches in April. He will continue as a special adviser on regulatory matters for another six months beyond his retirement date.

Jerry del Missier and Rich Ricci will become co-chief executives of Barclays Capital, effective October 1.

Danny Clarke, analyst at Shore Capital, said Diamond’s move up had long been expected.

“Bob Diamond is highly respected in the industry, with an exceptional track-record at Barclays Capital, developing it into a top-tier global franchise over the past 14 years,” Clarke said.

“We believe his appointment as group CEO reflects progress delivered at BarCap and the importance of the investment banking operations in the group’s future strategy.”