Barclays braced for 'difficult and challenging' market

Banking giant Barclays today posted profits of £7.08bn (€9.4bn) for 2007, but revealed a £1.6bn (€2.1bn) hit from the credit crunch and warned of “at least” another six months of turmoil.

Banking giant Barclays today posted profits of £7.08bn (€9.4bn) for 2007, but revealed a £1.6bn (€2.1bn) hit from the credit crunch and warned of “at least” another six months of turmoil.

The group cautioned over an economic slowdown in the UK and US and said it was braced for further “difficult and challenging” market conditions amid the ongoing credit crisis.

Barclays’ profits were down 1% on 2006 after the £1.6bn (€2.1bn) write-down seen so far from the collapse in America’s sub-prime mortgage market and subsequent credit squeeze.

The losses mainly related to investments linked to US sub-prime homeloans in its Barclays Capital investment banking arm, with £782m (€1bn) also put aside to cover further bad debts relating to the market woes.

However, the write-down was less than feared, at just £300m (€397m) more than the £1.3bn (€1.7bn) already announced last November.

Today’s results were eagerly awaited, with Barclays the first of the “big five” UK banks to unveil audited results since the credit crisis.

The bank’s figures come against a backdrop of concerns over the extent of the fall-out among banks.

Bank of England Governor Mervyn King recently urged banks to come clean over their losses as mounting fears has led to a further tightening in credit conditions.

Further write-downs revealed today by French bank Credit Suisse just a weeks after its annual results knocked already fragile confidence in the sector.

But Barclays said its “resilient” performance last year gave it greater confidence to weather the storm.

Shares rose 4%, steadying after an initial poor reception to the figures following the Credit Suisse announcement.

Barclays said it made provisions of £2.8bn (€3.70bn) to cover bad debt charges and impairments – up 30% on 2006 – although the increase was largely down to the £782m (€1bn) hit from exposure to the US high risk home loans and credit turmoil.

Arrears and defaults within its retail banking and Barclaycard arm “significantly” improved, down 7% to £2.01bn (€2.6bn), according to the group.

John Varley, Barclays group chief executive, said: “Barclays delivered a resilient performance in 2007 in a year of contrasting market conditions.”

UK retail banking pre-tax profits rose 9% to £1.28bn (€1.7bn) in spite of a £116m (€154m) payout to settle customer claims on overdraft fees from previous years.

Its Barclaycard business also saw a hike in profits, up 18% on 2006 to £540m (€715m), driven by a robust performance in its international operation, with 40% of cards now held outside of the UK.

The group’s investment banking arm Barclays Capital took the £1.6bn (€2.1bn) impact from the credit crunch in its stride, improving on the 2006 record pre-tax profits, up another 5% to £2.34bn (€3bn).

Barclays gave investors a boost with a 10% hike in the dividend payment, which had been widely expected following speculation over the weekend.

Shares soared nearly 8% yesterday in anticipation of the dividend increase.

Alex Potter, analyst at Collins Stewart, said the £300m (€397m) increase in write-downs came as a relief.

“This is better than many fears and provides a good read-across to other UK banks,” he said.

“The prospect of further write-downs cannot be discounted but a dividend increase and the ’confident’ outlook gives us comfort.”

Barclays is still vulnerable to further troubles in the credit market and sub-prime mortgage sector.

It revealed today that Barclays Capital’s exposure in credit market positions had soared since last year, with £12.4bn (€16.4bn) related to the troubled commercial property market, up from £8.3bn (€11bn) at the end of last June.

It also has £1.3bn (€1.72) in exposure to US monoline insurers, which guarantee the repayment of bonds and are at threat of widespread downgrading amid the credit woes.

This monoline exposure is up nearly ten-fold on the £140m (€185m) reported at the half-year stage.

Mr Varley cautioned that Barclays would “have to be disciplined in our risk management and rigorous in our approach to lending” over the year ahead.

Last year was a testing 12 months for Barclays, given the credit conditions, but also its failed attempt to merge with Dutch bank ABN Amro.

Rival and NatWest parent Royal Bank of Scotland won what was a tense takeover tussle, securing ABN for €71bn in October.

Mr Varley admitted 2007 was a trying year: “The market threw everything it could do at us last year, but we can see the result Barclays generated.

“It’s right to be realistic, but we shouldn’t feel a lack of confidence.”

When asked about concerns that soon to be nationalised Northern Rock may have an unfair advantage in the UK banking market, he added that it was a “theoretical worry” but not a concern in practice.

Lloyds TSB is the next of the major players to report on Friday, while mortgage bank Alliance & Leicester posts results on Wednesday.

The big five are expected to report a combined profits haul of around £38bn (€50bn), with little gain on the £37.3bn (€49.8bn) posted for 2006.

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