Barclays profits flat on weakening business levels

Image caption,
Incoming chief executive Bob Diamond was faced with a further fall in business at the investment bank unit that he previously ran

Barclays has reported a small rise in underlying profits in the latest quarter as business continued to slow.

Total profits for the third quarter were £1.27bn ($2.03bn) before adjusting for the rising market value of Barclays debts, up 8.5% from the previous quarter, but down 28% from a year ago.

Net of this "own credit charge" profits before tax were only £327m, down 76%.

Gross income of £7.4bn - a measure of overall business - was down 4.5% from the quarter before and 9.5% from 2009.

Sagging revenues

The fall in business was led by a 24% year-on-year drop in top level income at the firm's investment bank, Barclays Capital, according to the UK company's statement.

While Barclays Capital saw fees from advisory work holding up well, revenues at its various capital markets sales and trading business lines continued to sag.

However, the Barclays group overall benefited from a reduction in losses on its existing loans portfolio.

Total impairments of £1.22bn in the quarter were down 23% from the previous three months, and down 27% from a year ago.

"Our income and profit performance was resilient for the first nine months of 2010, despite a subdued economic environment and moderate volumes," said current chief executive John Varley, who will make way for the former head of Barclays Capital, Bob Diamond, in March.

Capital raising

Markets took the results well, with Barclays' share price rising 3% to about 294 pence in morning trading.

Much of the poor performance had been anticipated by markets, according to equity analyst Michael Trippitt of brokerage Oriel Securities, and was already reflected in the price.

Instead, he points to the turnaround in bad debts, as well as receding fears over the bank's need to raise new capital, as reasons for the rally following the results' release.

"There had been concerns about possible capital-raising because of Basel III," he told BBC News, referring to the new, stricter international capital requirements.

But he said Barclays' management made surprisingly upbeat comments on an investor conference call about the bank's ability to expand its way to a healthier capital ratio, and to take actions to lower capital requirements under the new rules.

Fair value?

Barclays Capital was also responsible for the group's "own credit charge" adjustment.

The £947m charge pushed the investment banking unit into a loss for the quarter, and caused the group's post-exceptional profit figure to drop 85% from the previous quarter.

The investment bank values debts in its accounts according to the current market level, to reflect the fact that many of its borrowings are made as part of temporary trading positions.

But as the market's perception of the bank's credit has improved, so the market value of its liabilities has risen.

Some analysts say that this same "fair value of debt" accounting rule flattered Barclays' bottom line during the financial crisis, as the market value of the investment bank's debts plummeted.

"It's an accounting convention that is just a nonsense, but you have to do it," said Mr Tippitt. "Analysts don't like it any more than the financial directors. The distortions and gyrations it causes in the earnings stream are enormous."

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