Barclays is buying back a troublesome $9.3bn portfolio of credit assets, codenamed Protium, 18 months after selling it to a fund dominated by former employees in an elaborate accounting manoeuvre designed to make its profits less volatile.

The bank detailed the U-turn on Wednesday as it reported a 9 per cent fall in profits for the first quarter of 2011. Barclays’ shares fell 4 per cent to 289.65p following the results.

Analysts said the Protium affair had damaged Barclays’ reputation but the more concerning news was on the outlook for earnings. Barclays had said previously it was comfortable with analysts’ consensus expectations for £7bn of underlying pre-tax profit this year.

But management said on Wednesday the number, while still correct, did not include an estimated £400m hit from a government levy on UK banks.

“Effectively that is a 6 per cent downgrade,” said Simon Maughan, analyst at MF Global.

Analysts said the 8.1 per cent return on equity for the three months to March was flattered by the non-inclusion of the levy hit and a £190m write-up of the value of Protium assets. They questioned the write-up, given that indices relating to underlying credit market assets fell in the first quarter.

Barclays is taking back full ownership of the Protium assets from C12, a spun-off entity created in September 2009 to wind down the portfolio over 10 years with the help of a $12.6bn loan from Barclays. The manoeuvre was designed to protect the bank from losses created by fluctuations in the market value of assets that remained illiquid after the financial crisis.

But under new Basel III global rules, banks must hold more capital against loans of this type. Barclays will pay an $83m break fee to C12. It has also agreed to buy out unidentified third-party investors in the fund for $270m. In addition, Barclays will invest $750m into another C12 credit fund called Helix.

Barclays made a pre-tax profit of £1.66bn in the first quarter, down 9 per cent on the same period in 2010. Stripping out the effect of acquisitions, disposals and fluctuations in the value of its own debt, adjusted pre-tax profit was £2bn, up 10 per cent.

But Barclays Capital, the investment banking business and engine of the group’s profitability, disappointed investors, with underlying pre-tax profit slipping 15 per cent to £1.33bn

Additional reporting by Sam Jones

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