First-half pre-tax profits at Barclays fell by a third to £2.75bn, the bank revealed on Thursday, as it took impairment charges and credit provisions totalling £2.45bn, up from £959m.
John Varley, chief executive of the bank, which last month raised £4.5bn in fresh capital from shareholders, said the profit fall was “acutely disappointing” and “our shareholders have had to endure a lot” with the falling share price.
Analysts’ predictions for the figures had varied widely, with one as low as £2.2bn and one at nearly £3bn, with an average around £2.6bn. The shares opened down ¼p at 369p, above the 296p and 282p prices of the share issue.
Mr Varley warned that it would be wrong “to suggest that the market conditions over the foreseeable future will be anything other than tough”. Economies around the world were slowing and “we must remain very vigilant to managing risk”.
Of the £2.45bn impairment charges, £1.11bn related to US subprime mortgages and other credit market exposures. Excluding these, impairment charges increased 40 per cent. Mr Varley said credit market writedowns ”stabilised in the second quarter” at around £1bn, the same as in the first quarter.
Some analysts have questioned whether Barclays has been sufficiently prudent in taking provisions. Mr Varley said: ”We are completely confident about the rigour we have applied to the marks” in taking writedowns. He said the bank had reduced its credit market exposures by £8bn in the first half.
Chris Lucas, finance director, said that while in the main the bank had reflected market movements in quantifying the writedowns, it had taken a more conservative stance against its exposure to monoline insurers. “We’ve been more forward looking in our mark downs,” he said.
The biggest divisional profit fall came from Barclays Capital, the investment banking arm, where profits before tax dropped 68 per cent to £524m, after losses of £1.98bn due to credit market dislocation, of which £871m was taken against income.
Barclays partly offset the losses by booking a gain of £852m on the value of notes issued by BarCap.
Bob Diamond, head of BarCap, said that “issues around liquidity and the functioning of the money markets are now behind us.” Looking forward, he said, concerns centred around slowing economies and imbalances in supply and demand for some commodities, notable oil.
He said “it’s as tough an environment as I have seen in 25 years in the business. We are not going back to markets of 2005 and 2006, it will remain challenging for the rest of 2008 and throughout 2009.”
Mr Varley said BarCap had increased its income in the first half and gained market share in many areas, such as commodities, equity derivatives, interest rate products ant foreign exchange.
Profits before tax at Barclays Global Investors, the investment management business, fell 32 per cent to £265m, after charges of £196m, which the bank said was related to “selective support of liquidity products” which had been done to help clients.
Mr Varley said that other parts of the bank had performed well and that the dislocation in the markets had thrown up opportunities and half the capital raised in July would be used to fund expansion.
For example, its share of the new mortgage market in the UK had jumped from 6 per cent to 26 per cent in the half year, as the bank was “open for business”. Outside the UK the retail and commercial banking business had been expanding by opening new branches, buying a bank in Russia and setting up a business in Pakistan. The Barclaycard credit card business was expanding rapidly, with profits in the half year up 30 per cent.
At the same time Barclays had been careful to avoid some difficult areas. Construction and property companies comprised only 13 per cent of its UK commercial loan book, a “significantly lower proportion than would be seen generally across the UK market.”
After the equity issue in July the bank’s equity Tier 1 ratio was 6.3 per cent, up from 5 per cent at the end of June. That was more than 100 basis points above its 5.25 per cent target Mr Varley said, and half the proceeds of the share issue would be devoted to keeping that ratio above target.
The interim dividend is held at 11.5p and will be paid in cash.