Barclays PLC

Taleb and banks

2009-05-04T02:45:00.000-07:00

Nassim Taleb has written two very enjoyable books so far. In his book "The Black Swan", he vividly exposed the risk of investing in banks:

...institution makes steady profits over a long time, only to lose everything in a single reversal of fortune. ... If they look conservative, it is because their loans only go bust on rare, very rare, occassions. There is no way to gauge the effectiveness of their lending activity by observing it over a day, a week, a month, or ... even a century! In the summer of 1982, large American banks lost close to all their past earnings (cumulatively), about everything they ever made in the history of American banking - everything. They had all been lending to South and Central American countries that all defaulted at the same time - "an event of an exceptional nature." So it took just one summer to figure out that this was a sucker's business and that all their earnings came from a very risky game. All that while the bankers led everyone, specially themselves, into believing that they were "conservative". They were not conservative; just phenomenally skilled at self-deception by burying the possibility of a large, devastating loss under the rug. In fact, the travesty repeated itself a decade later, with the "risk-conscious" large banks once again under financial strain, many of them near-bankrupt, under the real-estate collapse of the early 1990s in which the now defunct savings and loan industry required a taxpayer-funded bailout of more than half a trillion dollars. The Federal Reserve bank protected them at our expense: when "conservative" bankers make profits, they get the benefits; when they are hurt, we pay the costs.

I read this book in 2007 but did not heed its warning. These "highly improbable" banking disasters seem to be occurring rather frequently in recent decades. With banks so highly leveraged, I suppose this is to be be expected.

By averaging down after the share price fell well below even the lowest prices that Barclays agreed to sell its shares to the Middle Eastern investors, and selling after the recent quadrupling of the share price, I have managed to make a small overall profit. However, it was not worth the tense ride!

Media reports following 2008 results

2009-02-09T03:40:00.000-08:00

Reuters 9/2/09

http://uk.reuters.com/article/businessNews/idUKTRE5181X420090209?feedType=nl&feedName=ukmorningdigest

Barclays said it expected 2009 to be "another challenging year" with credit market losses set to shrink but bad debt charges likely to rise as recession takes its toll.

"2009 will be another tough year. In 2008 we've had a crisis in the banking system; the principal issue for 2009 is going to be rapid economic slowdown, in a sense more a familiar but nonetheless (a) pretty brutal slowdown in economic growth all around the world," said Barclays Chief Executive John Varley.

The UK economy was likely to contract by at least 2 percent this year, he said.

Barclays had had a good start to the year with the performance of its Barclays Capital investment bank arm "extremely strong," the group said. It plans to restart paying dividends in the second half of this year.

The bank reported a 2008 pretax profit of 6.1 billion pounds, down from 7.1 billion in 2007 but ahead of an average forecast of 5.8 billion from 13 analysts polled by Reuters Estimates, since new profit guidance was issued on January 26.

Its equity tier 1 ratio was 6.7 percent at the end of the year, up from 5.1 percent a year earlier, which is said gave it a cushion to absorb rising bad debts.

"We do not need more capital," Varley told reporters on a conference call. "These ratios are well ahead of the minimum required by the Financial Services Authority, and create a substantial loss-absorption capability."

Cantos interview 9/2/09: John Varley's comments

www.cantos.com

Well, we need to recognise that the year's only a month old, so I caveat my response by making that qualification. But I am pleased actually with how we've started 2009. We've seen very high levels of customer and client activity in the first month of the year. It's very clear to us, for example, that Barclays Capital is benefiting from the now complete integration of our new Lehman's business, and we've seen good activity levels in Barclays Capital. And similarly across the Global Retail and Commercial Banking businesses the same sort of trends that we were seeing in 2008, where GRCB performed well, are observable in the first weeks of the year.

Citywire 9/2/09

http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=328824&re=4708&ea=91427

'As you know, we are committed to recommencing dividend payments in the second half of this year and, to be clear, what this means is paying a dividend before the end of 2009 which relates to the current year,' [Varley] said.

Chairman Marcus Agius said the business had remained solidly profitable despite strong headwinds, in what was a very difficult economic environment. He said the bank intended to start paying a dividend again in the second half of 2009.

Varley: 'Although we have been careful over recent years to avoid inappropriate risk concentration in our major loan books in retail and commercial banking, our plans for 2009 assume that impairments will continue to be at a high level.'

Telegraph 9/2/09

http://www.telegraph.co.uk/finance/newsbysector/epic/barc/4571960/Barclays-chief-executive-John-Varley-says-sorry-for-banks-crisis.html

Bob Diamond ...said the scepticism about Barclays' approach to valuing its assets was driven by "uninformed rhetoric". He added: "It is hugely frustrating to hear this noise". Mr Diamond said the acquisition of Lehman was "game changing". The bank had held back from bidding for the whole of Lehman because of the huge overlap with its business in Europe, so when the opportunity arose to buy just the US business it was "almost too good to be true," Mr Diamond said. The deal would enable Barclays to take advantage of major opportunities such as helping governments raise money.

Independent 9/2/09

http://www.independent.co.uk/news/business/news/barclays-scraps-directors-bonuses-1604727.html

Collins Stewart analyst Alex Potter said: "The outlook statement makes for grim reading, alluding to downturns and recessions."

Although Barclays expects an overall decrease in the gross £8.1 billion in writedowns it saw in 2008, it anticipates that impairments as a percentage of its loans could rise to between 1.3 per cent and 1.5 per cent.

Based on 2008's loans and advances of £510 billion, this could imply bad debt charges of more than £7 billion this year.

To trust the management or the markets?

2009-01-23T02:14:00.000-08:00

If the management is to be believed, the Barclays share price of about 50p now is very low. Is the market right in not trusting the management? Only time will tell. For the record, I give below some of the comments by management recently. It will be interesting to look at these a year or so from now.

John Varley's interview on 22 Jan 09 at Cantos

www.cantos.com

...the government was very clear it’s not looking for ordinary equity as a means of satisfying that payment [for insurance of toxic assets]. Or it could be cash. What is our predisposition? Our predisposition would be to pay in cash.

We felt that by saying what we said - that consensus profit before tax for Barclays for calendar year 2008 is £5.3bn and that we expected was to announce a pre-tax profit result well ahead of consensus. The reason for saying that is it would be irreconcilable for our trading performance in the fourth quarter of 2008 to have been very bad for us to have been able to say what we said about our performance relative to consensus.

...we said two things about our capital ratios in our announcement last Friday. We said that on a pro-forma basis - taking account of the conversion of the mandatory convertible notes that are convertible by the end of June of this year - that our core tier one ratio would be 6.5 percent at the year end and that our tier one ratio would be 9.5 percent at the year end. Now that’s important because in each of those cases those capital ratios are well ahead of the regulatory minimum that had been established by the Financial Services Authority.

...we have made many statements to the market during the course of 2008. We have raised capital during the course of 2008. But each time we do that not only are there rigorous internal processes – in other words the Risk Committee of the Board and the Accounts Committee of the Board and the Audit Committee of the Board – ensuring that it is satisfied with the rigour with which these numbers are prepared. Not only that. Not only the application of scrutiny and rigour by external auditors, but also of course the application of rigour and scrutiny by sponsors as we have issued capital. So we have an absolutely clear obligation to ensure that we apply the appropriate process to the publication of our numbers. We take that obligation with deadly seriousness. We have a real time obligation to ensure that the numbers that we publish are reliable and our numbers are reliable.

There’s one last acid test that it is worth referring to as well, which is that the best justification of the realism of the marks is whether when you dispose of assets you dispose of them at the marks. During the course of 2008 we have disposed of substantial amounts of assets and we have disposed of those assets at the marks.

... the tripartite authorities rely on the Financial Services Authority to undertake that scrutiny on their behalf in respect of all banks. We have in Barclays, as other banks do, what is referred to by the Financial Services Authority as a close and continuous relationship which requires us to give full disclosure at all times and, of course, the Financial Services Authority acting on behalf of the tripartite authorities ensure that they understand very intimately what’s going on in terms of the way in which the business is being run and that they have good disclosure and good transparency relating to our balance sheet and again, that’s an obligation that we take with deadly seriousness because if we were not honouring that obligation, believe me we would not be allowed to do business, simple as that.

We are open for business and the best way of judging that is by reference to our activity levels. If I look, for example, at lending to small and medium enterprise businesses, customers who have a business turnover of up to £20m, we’ve increased that lending during the course of 2008 by about 7 percent. If I look at the business start up market, Barclays has never been more active than today. If I look at residential mortgages, another area of important credit provision to the markets, the average of our new lending market share during the period 2005 through 2007 was about 5 percent. What’s the equivalent figure in 2008? It’s well over 25 percent. We are open for business.

The Times of 23 Jan 09

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5570035.ece

...according to Barclays’ view of the world, RBS was simply an “extreme example” that, along with HBOS, was not genuinely representative of the rest of the banking sector, with HSBC, Barclays and Banco Santander, Abbey’s Spanish owner, in “a different space” from HBOS and RBS.

The bank notes that its Tier 1 capital ratio, a key measure of financial strength, stands at 9.5 per cent – comfortably higher than the 6 per cent to 7 per cent expected by the Financial Services Authority – while a more generous interpretation of the capital rules could make that look even better.

Mr Varley is expected to stick to the bank’s policy, widely criticised in the market, of not writing down the value of some instruments on its balance sheet “to market” – the price they would reach if sold today – as others have done. However, one analyst said: “Intellectually, Barclays may well be right. But they are in the eye of the storm and it doesn’t matter what the facts are. The market is saying it doesn’t know what the facts are, so it is discounting what is known, just in case.”

The Independent of 23 Jan 09

http://www.independent.co.uk/news/business/news/barclays-will-make-profit-for-2008-insists-varley-1513573.html

Mr Varley said the Financial Services Authority had been in close contact and was comfortable with the bank's disclosures about its balance sheet. "If we were not honouring that obligation, believe me we would not be allowed to do business, simple as that," he said.

The Scotsman of 23 Jan 09

http://thescotsman.scotsman.com/business/Barclays-small-print--could.4906260.jp

Barclays said yesterday that the suggestion of foreign control was "based on the premise that Barclays will need to raise capital before 30 June". It added: "We said in our statement of 16 January that our pro forma tier 1 capital ratio is approximately 9.5 per cent, well ahead of the level required by the Financial Services Authority."

Barclays said the anti-dilution clause in the Mandatory Convertible Notes agreement had been present in other fund raisings of this type and was fully disclosed. The bank added: "This clause has no bearing on Barclays' ability to participate in the package of measures announced by the Tri-partite Authorities on Monday."

Reason to hold

2008-11-04T09:52:00.001-08:00

I decided to hold because I estimate that the yield (at the present price) will be 11% in 2010 and can be expected to increase in future years (till their next bout of excess risk taking and value destruction!). My calculation is shown in the spreadsheet below. It includes the following assumptions:
1 The profit after tax in 2010 will be the same as in 2007
2 The tax rate will be unchanged
3 The RCI warrants will be converted into shares in 2009
4 Dividend will be 50% of eps

Positives, negatives and unknowns

2008-11-01T14:32:00.000-07:00

Following the new fund raising and the price having fallen to 179p, I do not know whether to sell or hold (definitely not buy!). The positives, negatives and unknowns that I can identify are:

I Positives

A Dividend resumption soon
1 Probably in 2nd half of 2009
2 Dividend rate unknown but will probably be significantly lower than dividends paid in the last 12 months because of larger number of shares in issue and high cost of borrowings

B Powerful large new shareholders may exercise better control over management

C Barclays will be among the biggest in the world for investment banking and investment management

D New Middle East shareholders may help open doors to new business in that region

E Bad news may have already been discounted

F Avoids politically motivated decisions by not resorting to government aid, e.g.
1 Not lending to small businesses that Barclays do not consider good risks
2 No curbs on expansion overseas
3 No compulsion to shrink investment banking

G Profits in 9 months to 30/9/08 slightly higher than corresponding period of previous year

II Negatives

A Very high cost of new capital suggests high perceived risk

B Management appear to have accepted the worse terms than that offered by the government in order to protect its own interests, e.g. the chairman and CEO may have been forced to resign if the government capital was accepted and the curbs on remuneration would have been unacceptable to Bob Diamond, etc

C Blatant flouting of pre-emption rights of private shareholders and even, to a large extent, of institutional shareholders

D High interest rates on new RCI’s will hamper future profitability and dividend paying ability

E Very high commissions, etc of about 4% of capital raised

III Unknown

A Do not know whether JP Morgan is being overly pessimistic when it forecasts that
1 Even after the cash injection, Barclays would still have a capital shortfall of at least £3.6 billion
2 Barclays would not be paying dividends in the foreseeable future

Media comments re Lehman acquisition

2008-09-21T10:02:00.000-07:00

Extracts:

Barclays announcement 17/08/08
http://www.investorrelations.barclays.co.uk/INV/A/Content/Files/Lehman_Press_Release_170908.pdf

The Board of Barclays announces that Barclays has agreed, subject to US Court and relevant regulatory approvals, to acquire Lehman Brothers North American investment banking and capital markets operations and supporting infrastructure. The transaction will create a premier integrated global bulge bracket investment banking company with a leading presence in all major markets and across all major lines of business including: equity capital markets, debt capital markets, mergers and acquisitions, commodities trading and foreign exchange.

Barclays will acquire trading assets with a current estimated value of £40bn (US$72bn) and trading liabilities with a current estimated value of £38bn (US$68bn) for a cash consideration of £0.14bn (US$0.25bn). Barclays will also acquire the New York
headquarters of Lehman Brothers as well as its two data centres at close to their current market value.

In response to this opportunity, certain Barclays shareholders have expressed support for the transaction and interest in increasing their shareholdings in Barclays. The Board of Barclays expects these discussions to lead to a subscription of at least £0.6bn (US$1bn) of additional equity. The proposed transaction with Lehman Brothers and the additional equity would result in an enhancement of Barclays earnings and capital ratios.

Robert E Diamond Jr, Barclays President, said “This is a once in a lifetime opportunity"

Reuters 17/08/08
http://uk.reuters.com/article/businessNews/idUKLF57014720080917?feedType=nl&feedName=ukdailyinvestor
Barclays agreed to pay about $1.75 billion (1 billion pounds) for some of the bank's prime U.S. assets following its bankruptcy filing.
Most of the price tag was accounted for by Lehman's New York headquarters and two data centres, while Barclays will pay just $250 million in cash for Lehman's North American investment banking and capital markets businesses.
The operations include fixed income and equities sales, trading and research, and investment banking,

Barclays said some of its shareholders had expressed interest in increasing their stakes in the bank as part of their support for the deal, and its board expects those discussions to lead to a subscription of at least $1 billion of additional equity.

Citywire 17/08/08
http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=314503&re=3730&ea=91427&ViewFull=True
Barclays has acquired Lehman Brothers's North American investment banking and capital markets businesses for £140 million in what it described as 'a once in a lifetime opportunity' but said it will have to raise at least £600 million in a share offering to pay for the deal.
The banking group said it will acquire trading assets with a current estimated value of £40 billion and trading liabilities with a current estimated value of £38 billion. It will acquire the New York headquarters of Lehman Brothers as well as its two data centres at close to their current market value, taking the full price of the acquisition to £1 billion.

Barclays has indicated it has traded satisfactorily in July and August, with the monthly run-rate slightly below the average in the first half of the year, reflecting usual seasonality, with all businesses profitable.

Citywire 17/08/08
http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=314562&re=3737&ea=91427&Page=1&ViewFull=True

Barclays had been considering making a bid for Lehman Brothers for some time, the bank's chief executive John Varley said this afternoon.
This preparation meant the group was able to move quickly to make an offer for those parts of the business it wanted when the bank filed for bankruptcy protection, Varley said.

He said Barclays had identified Lehman as a potential target, but because of Barclays’ stringent approach to capital discipline, it had been waiting for a move in the price.
Varley said this interest had meant Barclays had been 'minimising our exposure to Lehman' over the summer.

Barclays management said there was a fantastic strategic fit and the business Barclays were acquiring were good businesses with strong revenues.
‘Lehman's cash equity business is extremely profitable,’ said Diamond.
'The franchise of the trader dealer business remains strong & healthy,' said Varley
'Lehman has scale and depth in the US but not in the same areas as Barclays Capital,’ he added.
By product, Lehman brings excellence in equities and government-backed bonds, whereas Barclays Capital brings excellence in commodities and forex, among others.
Varley said there would be some overlap but said it was 'surprisingly little’.

Varley said the Lehman deal would have been accretive even without any issuance but - since the group had the support of some its shareholders - thought it was a good idea to combine the two operations in order to fund future growth of the newly acquired business.

Telegraph 19/09/09
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/09/19/cnbarclays119.xml

Barclays raised £700m in fresh equity capital yesterday - in a move that will give it one of the strongest balance sheets among British banks.
The fundraising is on top of £600m that is to be injected by key shareholders and follows acquisition of the US assets of failed investment bank Lehman Brothers.
Barclays took the City by surprise announcing - and completing within five hours - the share placing with institutional investors.

It brings to £1.3bn the new equity capital that the bank will raise following its move on Lehmans' American investment banking and capital markets business, just two months after raising £4.5bn in a share placing.
The investors tapped yesterday paid 310p for each of the 226m new shares - a discount of 2.4pc on the closing price the previous day. But they suffered an effective loss immediately with the bank's share price falling 16¾ to close at 301p as the financial sector lost ground broadly.

Barclays executives were upbeat nonetheless, with the share issue expected to bolster the bank's core equity tier one ratio - a key measure of balance-sheet strength - by about 20 basis points to 6.5pc. Analysts expect the Lehmans deal and proposed further capital injection of £600m to increase the ratio further, to about 6.9pc - second only to HSBC among Britain's biggest banks.

The £700.6m raised yesterday represents a 2.8pc increase in Barclays' issued share capital, with the further £600m to take that figure beyond 5pc - in theory still leaving the bank space to tap investors for about that sum again without a time-consuming rights issue.

Times: 20/09/08
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4794376.ece#cid=OTC-RSS&attr=1185799

A bankruptcy judge today decided that Lehman Brothers can sell its investment banking and trading businesses to Barclays...

The deal was said to be worth $1.75 billion earlier in the week but the value was in flux after lawyers announced changes to the terms on Friday. It may now be worth closer to $1.35 billion, which includes the $960m price tag on Lehman’s Midtown Manhattan office tower.

Lehman lawyers announced a number of changes to the deal before the hearing, which started at 4:30 pm Friday and continued well past midnight. They said the value of stock Barclays will buy and liabilities it will assume had fallen since the start of the week due to market volatility. Under the new deal, Barclays will buy $47.4 billion in securities and assume $45.5 billion in liabilities.
Barclays also said it would buy three additional units - Lehman Brothers Canada Inc., Argentina-based Lehman Brothers Sudamerica SA and Lehman Brothers Uruguay SA. The two South American entities are part of Lehman’s money management business. Barclays is not paying extra to get the three units.
There was no change to a $250 million goodwill payment and the purchase of two data centres in New Jersey that will go to Barclays, although Barclays may pay less for them.

Sunday Times: 21/09/08
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4794897.ece

They had been prepared to sanction the initial deal, but when they heard details of the second, which allowed Diamond to cherry-pick assets, they knew that on fundamentals they had a bargain.
Varley said: “We didn’t declare on the first transaction what we would have paid, but of course we are paying a lot less than we would have because we are buying a smaller business and because the circumstances are different.”
It has long been the intention of Varley and Diamond to crack Wall Street. They already have an operation there under the Barclays Capital banner which has expanded from 4,000 staff to 16,000 in the past three years – but the aim up to now was to expand organically.
Varley believes Diamond has delivered a generational deal that could enable Britain’s third-biggest bank to take on Wall Street, which is one of the most competitive markets in the world.
Varley is acutely aware of the execution risk but he said: “The markets are defining, in a brutal way, the winners and losers and my determination is that – not withstanding the toughness of these markets – Barclays will be a winner.

Background research on Lehman had been done months ago in early summer. Varley said: “Our thought was that if the price moved into the zone where we thought we could generate good value for our shareholders then we would be very interested in moving. I think it is very unlikely in an even semi-normal situation that the price we had in mind would have been a price that the Lehman board would have wanted.”

Media comments following interim results

2008-08-07T09:54:00.000-07:00

Barclays' investor relations
http://www.investorrelations.barclays.co.uk/BRC1/jsp/brccontrol?task=articleFWgroup&site=inv&value=1168&menu=394
Links to results announcement, presentation, webcast, conference call, etc.

Financial Times - Lex column
Needs subscription to read or paper FT
Is [Barclays] performing well or not? Certainly, investors have no idea. ... much of Barclays' underlying business seems to be holding up well. Yet ... impairments and potential problem loans are rising fast and will continue doing so as economic growth slows. Perhaps the biggest cause of the market's schizophrenia is that no one knows what regulators will do. ... if regulators wade in with new benchmarks, particularly regarding leverage, ... Barclays will need more capital.

Financial Times - Peter Thal Larsen and Jane Croft
http://www.ft.com/cms/s/0/b58e46dc-6446-11dd-af61-0000779fd18c.html?nclick_check=1
Barclays has offloaded troubled loans and securities worth £6.3bn during the past few months in a sign that investors have become more willing to buy debt assets affected by the credit crunch.
Deals were at prices consistent with valuations on Barclays’ balance sheet and did not require the bank to provide financing. Bob Diamond ... said ... “Even difficult assets – even mortgage assets – are moving to new buyers.” Barclays has also sold whole subprime-mortgage loans worth £828m, Alt-A mortgages worth £750m and commercial mortgages worth £700m.

Financial Times - Jane Croft (video)
http://www.ft.com/cms/84d2eba2-2a26-11dc-9208-000b5df10621.html
Some of the write downs that they have taken on things like the monoline exposures that they have got in the US seem quite light compared to rivals. They have taken average 14% whereas their competitors have taken 30%-60% write-downs.

Telegraph - Questor
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/08/cxquest108.xml
Varley reckons the worst of the financial crisis is over and many analysts say the shares are already priced for the looming economic downturn. The big question is whether the bank will have to take significantly more writedowns on its credit market portfolio. But so many big reputations have been staked on those assets performing that there is reason for confidence.

Revenues at Barclays Capital, the investment bank that has driven growth in recent years, are still growing once you strip out the writedowns, despite the worst market dislocation in a generation. Costs have been slashed by 30pc. Divisions such as foreign exchange, commodities and interest rates are resilient.
In the UK, retail banking improved profits by 7pc to £690m and saw only a modest increase in bad debts. Barclaycard profits jumped 30pc to £88m after the acquisition of Goldfish and the commercial bank avoided the severe provisions seen at rivals. The bad news was a worsening outlook in South Africa and Spain.

By maintaining an unchanged, cash dividend and producing solid results, Barclays has earned investors' faith - even if questions linger about the writedowns. Trading on 7.5 times 2008 earnings, buy.

Telegraph - Philip Aldrick
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/08/cnbarc108.xml
[John Varley] accepted that "the world ahead is not going to be an easy place", but said: "The moment of greatest potential stress is now behind us. That was the liquidity crunch..." ... he added: "The world of the next 12 months will be one of economic slowdown but not of widespread recession."

All Barclays' businesses were profitable, with the UK retail bank - which accounted for 26pc of net new UK mortgage lending in the half - improving profits by 7pc to £690m as bad debt charges rose just £11m to £288m. Impairments for the whole group climbed 40pc to £1.34bn, largely due to Spain and South Africa. At Barclays Capital, the investment bank, profits slumped 68pc to £524m after the writedowns.
The group is paying an unchanged 11.5p interim cash dividend on October 1, and plans to hold the final payout. The dividend will not be raised until twice covered by earnings.

Times - Patrick Hosking, Banking and Finance Editor
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4481739.ece
Mr Diamond argued that Barclays had successfully offloaded £6 billion of assets at prices at or close to their value in the books, giving the lie to critics who said that it had overvalued problem assets. “There's no better proof than that,” he said.
Barclays also defended its unusual policy of ignoring falls in the market prices of leveraged loans. Barclays argues that because it plans to hold its £5 billion of buyout loans to maturity and the borrowers are meeting all interest payments, there is no need for a markdown.

Reuters
http://www.reuters.com/article/innovationNews/idUSWLA775420080807
Diamond said there were good opportunities for BarCap to take market share during difficult market conditions, especially in the United States.
"We recognize how difficult the conditions are out there and the need to be cautious and to balance risk and reward, but we're not without focus on opportunities," he said. "The firms with the best franchises and business models can potentially see a pickup in business."
He said challenging market conditions are likely to remain this year and through 2009.
"We don't think this will spill into a deep, dark recession but we do think it's a cyclical event with a weaker, slower economy around the world," he said, suggesting the duration of the downturn will be unclear until the bottom of a U.S. housing market slump has been reached.

Reuters - Steve Slater
http://uk.reuters.com/article/businessNews/idUKWLA773520080807?feedType=nl&feedName=ukdailyinvestor
Bob Diamond ... said that reflected resilience in tough markets, but tough conditions were set to last. "Our operating hypothesis is that we're not going back to markets like 2005 and 2006, we're going to be in more challenging environments for the balance of 2008 and really throughout 2009,"

Against a difficult backdrop, Varley said core tier 1 capital would keep "a substantial margin" above its long-term target of 5.25 percent.

Barclays said it grabbed a 26 percent net share of the UK mortgage market in the first half, more than four times its traditional 6 percent share.

a tough backdrop created "significant opportunities" to take advantage, Varley said.

Citywire - Chris Marshall
http://www.citywire.co.uk/personal/-/news/markets-companies-and-funds/content.aspx?ID=310814&re=3475&ea=91427
Barclays profits of £2.7 billion before tax, coming in slightly above analysts’ expectations, were dragged down by Barclays Capital, its investment banking division, which posted profits before tax of £524m, 68% down compared to the previous year. Bob Diamond ... said that it had been ‘the toughest environment in the investment banking business in 25 years’

... it has made progress in reducing US sub-prime and other credit market exposures in its investment management business. But it said that in Barclaycard UK impairment charges decreased and UK mortgage impairment charges remained very low as its mortgage book is conservatively positioned.

BBC news - Robert Peston http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/08/barclays_credit_and_credibilit.html
And there are three very striking features of these figures:
1) impairment charges, ignoring the credit-markets ghastliness, are up only a bit - and charges against loan losses in UK retail banking are only very slightly higher (which will make HBOS feel queasy);2) it's been ruthless in cutting costs, to prepare itself for leaner times;3) and it has captured a staggering 26% of the new mortgage lending market, up from just 6%.
That last statistic tells you quite how hobbled are most of the other British banks. Barclays is capturing huge share of a rapidly shrinking market because it has the wherewithal and confidence to play.
And lest you think it is taking foolish risks with house prices falling, the average value of these new mortgages is 51% of the value of the respective properties - so it'll make good money on all scenarios for our economy other than Armageddon.

Accountancy Age - Penny Sukhraj http://www.accountancyage.com/accountancyage/news/2223444/barclays-takes-8bn-writedown
'They have written off significantly more than they flagged in June and still the profit has met consensus. These are bad results, but in relative terms they are pretty decent.' said London-based analyst at MF Global Securities Ltd, Simon Maughan.

Varley's and Diamond's views

2008-06-30T03:13:00.000-07:00

As reported in Telegraph of 29 June 08:

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/06/29/cnbarc129.xml

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/29/ccprof129.xml&page=1

Extracts:

Without extra funds, Citi estimates that Barclays will have a tier-one capital ratio of 5.8 per cent at the end of 2008, which would be the "ninth worst [of 66 banks] in Europe". However, Mr Varley, interviewed with Barclays president and investment banking head Bob Diamond, responded:
"Bob and I hear people talking in the market, talking as though there is some eternal truth about an equity ratio of 6 per cent or 6.5 per cent.
"As an organisation, you have to form a point of view about how much capital you need to run your business.
"You have to be prudent in that and you have to be analytical in that. You have to determine that number and that's what you've got to have. You don't want to have a penny more than that because if you have surplus capital you dilute your returns."

Mr Varley said: "The environment is in itself humbling. This has been a very significant market dislocation. The question is how do you handle that? How do you manage the risk? How do you cope with the difficulties the environment throws up? If you analyse Barclays through that relative light, Barclays has coped well with that environment."

"...I don't think we've been behaving like a constrained [by capital inadequacy] bank.
I don't see constraint in the hiring that Bob's been doing in his businesses. I don't see it in the acquisition of a bank in Russia, I don't see it in the acquisition of a credit card business in the UK and I don't see it in the opening of 600 branches outside the UK in the first five months of this year.
We're not behaving like a bank that's hunkered down and uncertain about the future. We're very clear about what we should be doing."

Diamond believes a particular opportunity is the US. "We've been cautious in the US," he says, "because most foreign banks have not succeeded when they've entered the US market. It's bigger, yes, but it's far more competitive.
"However, we entered 2008 with six or seven of the key players in the US domestic capital markets pulling back.
"It's counter-trend to be investing in the US but we see an opportunity to move into the top three or top five in all the areas that are important to us and we're already seeing progress."
Indeed, in the first half of 2008, Diamond says Barclays will be in the US top three for agency residential mortgages, when it has previously never even been in the top 10.
"We're not going to do everything in the US all at once but we do have a plan that will take us two to three years and will be a significant investment," he says.
"The conventional wisdom is that you can grow organically in some businesses but not in retail and commercial banking. We are defying that."

Will the £4.5bn be enough? "Yes, I mean, of course," replies Varley. "We have thought carefully about what resources we need. You don't want to have a penny more than that because if you have surplus capital you dilute your returns. We have been thoughtful and I hope that if you look at Barclays over the years, you can see a pattern of thoughtfulness"

£4.5bn fund raising

2008-06-26T02:37:00.000-07:00

http://www.offer.barclays.com/index_main.php?task=view&section=press&language=en&cnt=bb&med=asx&type=video

Barclays share issue web site that has press release, presentation and webcast.

http://uk.reuters.com/article/businessNews/idUKL2563723720080625?feedType=nl&feedName=ukdailyinvestor
Citywire

"About half the capital will be directed at higher (capital) ratios and about half will be directed at new business opportunities," said Barclays Chief Executive John Varley.

The fundraising would have increased its core tier 1 capital ratio to 6.3 percent at the end of last year, from the 5.1 percent it reported.
That ratio will stay above its target of 5.25 percent for "the foreseeable future" but will come down from 6.3 percent as cash is used for growth, possibly on acquisitions, Varley told reporters on a conference call.

intends to keep paying dividends in cash and the annual payout would be in line with last year's 34p per share until the dividend is more than twice covered by earnings.

SMFG will get a 2 percent stake and a co-operation agreement will give it access to Barclays Capital's investment bank platform and its India and Pakistan footprint, while Barclays will be able to access a wider Japanese and Asian network for areas such as private banking.

Varley said he wouldn't rule out acquisitions, but is mainly focused on taking advantage of higher margins and problems the credit crunch has created among rivals.
Bob Diamond, head of investment bank Barclays Capital, said there was "a terrific opportunity" to grab market share on Wall Street as "six or seven" big U.S. banks have stepped back during the market turmoil.
Barclays has opened over 600 branches outside Britain this year and bought a bank in Russia and a UK credit card business, and Varley said it is taking "a substantially higher" share of UK mortgage lending.

Diamond said the bank had better-quality assets, was managing risk better than rivals, and had avoided getting involved in many of the leveraged finance deals that had caused others to take big writedowns

http://www.marketwatch.com/news/story/barclays-executives-strike-defiant-tone/story.aspx?guid=%7B2A99E6E5-A29A-4898-8064-9C5E6EA3B8FE%7D&dist=msr_1
Wall Street Journal

Varley said the U.K. lender wasn't a "slave to volumes." He pointed to the British residential mortgage business, noting Barclays has been able to gain market share at much better margins even though the market has contracted sharply as both house prices and mortgage approvals tumble.
The acquisition of Goldfish, a credit-card company that has changed hands several times, is another example of Barclays' willingness to strike deals in a tougher environment, he said

Diamond ... also defended charges it hasn't been as aggressive as rivals it marking down assets.
"Our marks shouldn't be an issue," he said, using the group's leveraged finance business as an example.
"I said last July that we weren't uncomfortable with our risk, I talked about Alltel in the U.S. and (Alliance) Boots in the U.K.," he said.
"We were offered to be the lead manager on Clear Channel, we were offered to be the lead manager on EMI, and we said no thank you to those deals. I could go through two or three other deals (that Barclays turned down,)" Diamond said.
Diamond also dismissed worries about the impact from recent credit rating downgrades of bond insurers on securities that Barclays holds, saying the lender uses its own models when it feels external ratings agencies are too optimistic.

http://www.theherald.co.uk/business/news/display.var.2364456.0.Barclays_boosted_by_4_5bn_injection.php The Herald

Panmure Gordon analyst Sandy Chen is particularly worried about its exposure to monoline insurers, which stood at £2.8bn at the end of the first quarter of 2008. Monolines guarantee debt repayments and Chen reckons these could suffer from rising loan defaults.
He said: "Amidst the hurly- burly of other banks' write-downs and capital raisings, the pace and organisation of (Barclays') £4.5bn share issue are impressive. Stepping back, though, it seems to us that little has changed in the deteriorating fundamental outlook (particularly with monoline write-downs)."

http://www.thesun.co.uk/sol/homepage/news/money/city/article244711.ece
Sun
[Varley] said: “We want to make sure we have the full tool kit available to us.”
This is likely to include opening more branches overseas — where Barclays has opened 600 so far this year and is aiming for a further 300.
But Bob Diamond, head of the bank’s investment banking arm Barclays Capital, said expansion could include taking out rivals on Wall Street — where there are some “terrific opportunities”.

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/26/cnbarc126.xml
Telegraph

Shareholders also applauded Barclays' pledge to preserve the dividend at last year's level and pay it in cash - in contrast to HBOS, RBS and Bradford & Bingley

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/26/ccbarc126.xml
Telegraph

"There is no difference in how the sponsoring banks, Credit Suisse and JP Morgan Cazenove, would conduct due-diligence and how underwriters might. Why would they take any risk at all with their reputation? Believe me, they shook the tree," Mr Varley insisted, adding: "What motivation do we have in raising capital today and not disclosing?" [John Varley]

While Barclays' clever fundraising was widely lauded for avoiding the dreaded rights issue process, the bank's accompanying disclosure fell short of rivals HBOS and Royal Bank of Scotland.

The suspicion remains that official underwriters would have demanded fuller disclosure than Qatari and Japanese investors with strategic intentions

http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/06/26/cxquest126.xml

Telegraph - Questor

Forget price/earnings ratios, tangible book value, return on equity, or any other valuation measure - any company whose board stresses that the dividend is safe "in the absence of unforeseen circumstances" when yielding 10pc has to be cheap. So long as you trust the management.
At Barclays, it all seems to come down to management. Chief executive John Varley and his colleagues have staked their careers on the bank's performance.

given the level of due diligence likely to have been undertaken by the Qataris and others before they signed up, it is a reasonable assumption that there isn't anything likely to prove fatal out there.

http://www.ft.com/cms/s/0/74844fcc-4319-11dd-81d0-0000779fd2ac.html?nclick_check=1

Unlike some of its rivals, Barclays has taken the decision to hold loans on its books in such a way that they do not have to be revalued to prevailing market prices. Bob Diamond, Barclays' president, yesterday pointed out that the bank had been proved right in not marking down the value of its debt in the buyout of Alltel, the US telecom group. Alltel was recently sold to Verizon, the rival US telecom group, and Barclays expects the debt to be repaid in full.

Standard & Poor's yesterday acknowledged that Barclays' approach - while legitimate - gave cause for concern. "Significant uncertainties remain about the ultimate value of structured credit and leveraged finance positions," the agency wrote as it confirmed a negative outlook on Barclays' credit rating. "Indeed, in our opinion, Barclays' markdowns would likely have been materially greater had it applied fair-value accounting to certain of these exposures in line with many peers."
Barclays' upbeat outlook may yet be proved right - and investors yesterday gave them the benefit of the doubt. But if sceptics' concerns on Barclays' balance sheet come true, the consequences for Mr Varley and Mr Diamond would be dire.

Barclays bouncing back?

2008-06-23T12:55:00.000-07:00

According to The Scrutineer in The Scotsman, Barclays is bouncing back:
http://thescotsman.scotsman.com/business/The-Scrutineer-Barclays-bouncing-back.4190478.jp

Extracts:

Its plan to possibly go the placing route, probably via sovereign wealth funds, rather than a pure rights issue, looks pleasingly cat-footed on the hot tin roof that is the banking sector.

...any new shares issued by Barclays are very unlikely to be at the deep discounts of other banks. Royal Bank of Scotland's discount was 35 per cent, HBOS's was 45 per cent, and Bradford & Bingley's was 48 per cent. Most banking analysts believe if Barclays went to the sovereign funds they would get away with a discount of 10 per cent at worst, and perhaps even be able to issue stock at a small premium to the market price.

The likely clawback mechanism for existing Barclays' shareholders to get a slice of any new issue action also neatly sidesteps the opprobrium B&B attracted through bringing in its new shareholder, Texas Pacific, without such a pre-emptive offer for shareholders.

And such a placing with blue-chip funds (possibly including existing Barclays' shareholders, China Development Bank and Temasek) should lead to less of the "shorting" of shares that have bedeviled other recent cash calls and driven the market share prices lower.

Barclays said profits in its global retail and commercial banking divisions had shown strong growth in May compared with May 2007. Profits in investment banking and investment management were in line with a year before, it said. In other words it looks virtually certain no further nasty stuff from the provisions woodshed is likely to scar Barclays' interim results six weeks or so hence.

Barclays may have boxed itself into a corner?

2008-06-15T12:48:00.000-07:00

The bank has been relentlessly upbeat about the hit it has taken from the credit crisis. Wrongly so, argues the City. Philip Aldrick and Katherine Griffiths report in The Telegraph:http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/...

Extracts:

The main problem has been scepticism about the hits Barclays has taken on its "toxic" treasury assets, such as sub-prime mortgages and collateralised debt obligations. But Diamond and Varley have not helped matters with limited disclosures on sub-prime related writedowns. Analysts are in no doubt that Barclays is being more optimistic than peers. Had Barclays marked all its assets as conservatively as RBS, it would be nursing an additional £8bn of writedowns, according to Citigroup.

Bankers do stress that a bald read-across can be misleading, with Varley himself saying: "Risk management at the different banks is not generic, so you would not expect the marks to be generic." And analysts do accept that Barclays' risk management has been better than most. But the bank's excessive confidence is not convincing anyone. Should one monoline insurer or any of Barclays' leveraged loan debts default, it would lead to heavy additional writedowns.

Any underwriter will demand thorough due diligence, particularly on the "toxic" treasury assets, with even the typically more relaxed sovereign wealth funds recently turning ultra-cautious. Due diligence threatens to expose Barclays' writedowns to greater scrutiny and will almost certainly lead to more provisions. Cynics say Varley and Diamond are loathe to take the decision because the U-turn could put their jobs on the line.

Varley likes to maintain he has options, unlike RBS and HBOS, but, though Barclays' problems may not be as severe, the pressure for a capital raising is just as great. Now that the others have addressed the issue, Barclays is the only major lender left in the spotlight.

Given that Seegers is desperate to do a deal for a bank in these cut-price markets, Varley's pressures are perhaps even greater than those at rival banks. The coming months will be his toughest test yet.

Press comment following interim management statement

2008-05-18T06:10:00.000-07:00

FT: Peter Thal Larsen, Banking Editor
http://www.ft.com/cms/s/0/9c5160f6-22e1-11dd-93a9-000077b07658.html

Barclays' core Tier 1 ratio at the end of March was 5.1 per cent and the bank indicated that this was likely to fall further by the end of June.
Chris Lucas, finance director, refused to be drawn on how the bank would rebuild its capital but added: "We would agree that regulators will be over time looking for higher capital ratios and looking for less leverage in institutions. That will be an industry-wide phenomenon and we will have to be part of that."

The Herald: Tim Sharp
http://www.theherald.co.uk/business/news/display.var.2275510.0.Barclays_keeps_quiet_on_rights_issue.php

The bank expects its core tier one capital ratio - a key measure of its financial cushion - to be slightly lower at the end of June than the 5.1% it reported at the end of 2007.
Finance director Chris Lucas maintained that the company was still targeting a ratio of some 5.25%, but said the company was prepared to run above or below this level, "depending on circumstances".
This is at variance with many of its competitors. HBOS and Royal Bank of Scotland have already announced capital raising to bring their core capital ratios above 6%.
Analysts at Lehman Brothers calculate that achieving a 6% tier one ratio would require the bank to issue shares worth £5bn, plus more for additional writedowns.

The Scotsman: Martin Flanagan
http://thescotsman.scotsman.com/business/Barclays-leaves-question-mark-over.4090737.jp

Lucas told analysts yesterday that he remained comfortable with an average forecast for 2008 profits of £6.4bn – which would be down 10 per cent from 2007 in slowing financial markets.

The bank said it expected its core Tier 1 capital ratio, a measure of its financial strength underpinning loans, to be slightly lower at the end of June than the 5.1 per cent it reported at the end of 2007. It intends to lift this to 5.25 per cent "in time".

Lucas said the bank did not intend to follow the lead of several rivals by paying its dividend in shares to save cash. "Our view on scrip dividends is they are not really a dividend, and therefore are not attractive to us," he said.

Times: Christine Seib
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3941556.ece

John Varley, chief executive, called scrip dividends an oxymoron and ruled out paying Barclays shareholders in stock.
“A scrip dividend isn’t really a dividend. We’re clear about what our shareholders like. They like dividends and dividends mean cash,” he said.

RBS, HBOS and B&B opted for rights issues to take their core equity Tier 1 ratios above 6 per cent, which they said was essential in volatile markets. But Mr Varley was scornful of such targets and said that a few months of stable stock markets would raise questions about their rush to issue equity.
“Six per cent isn’t an eternal truth,” he said. “You should be appropriately begrudging in your capital issuance. If there were three months of stability in the market, I think there would be a lot more questions about share issuance so far.”
However, he did not rule out some form of capital raising: “We’re not taking any of these options off the table.”

Chris Lucas, the bank’s finance director, said that financial regulators expected capital ratios to increase over time but that the Financial Services Authority was “aware of our plans and intentions”.

The bank’s £1.7 billion writedown, on top of a £1.6 billion loss last year, was offset by an accounting gain of £700 million from the deterioration in the value of its own debt. However, about £500 million of this gain was wiped out in April.

Telegraph: Philip Aldrick
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/16/cnbarclays116.xml

John Varley said: "I accept this is a good time to have a ratio at, or better, than your target. Do we need to raise capital? We don't. But we shouldn't take any options off the table."

Mr Varley insisted the bank was in the enviable position of being able to choose to strengthen its position by generating profits and reining in loan growth.

He also claimed to be at ease with looming economic risks including an anticipated 5pc-10pc fall in UK house prices over the next two years. "Is Barclays behaving like a constrained bank? You don't see us hunkering down. We are managing to compete strongly in these markets."

Mr Varley rejected suggestions that Barclays should follow rivals Royal Bank of Scotland and HBOS by setting a more conservative capital ratio target. "It's not clear to me that there is something magic about a 6pc capital ratio. You don't want to be in a position where you have too much capital."

In another veiled swipe at RBS and HBOS, finance director Chris Lucas ruled out paying the dividend in shares. "Our view on scrip dividends is they are not really a dividend, and therefore are not attractive to us," he said.

Analysts questioned if Barclays had taken sufficient writedowns on its £8.2bn exposure to US sub-prime, which have been marked down just 30pc compared with 60pc at RBS. Mr Varley said: "Risk management at the different banks is not generic so you would not expect the marks to be generic."

The bank also said its UK mortgage market share had jumped to 20pc, from 6pc, in the first quarter as rivals pulled back.

Independent: Sean Farrell, Financial Editor
http://www.independent.co.uk/news/business/news/pressure-mounts-on-barclays-to-strengthen-its-capital-position-829389.html

Moody's cut Barclays' financial strength ratingto B from B+ with a negative outlook.

Telegraph: Philip Aldrick
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/05/19/cndir119.xml

Mr Seegers has suffered the biggest personal loss after buying £1.95m of Barclays stock last year at 613p. The stake is now worth £1.33m. Mr Diamond is nursing losses of £357,000.
Barclays chief executive John Varley and chairman Marcus Agius have lost £185,000 on their stock purchases.

Barcap continues to expand

2008-04-24T11:26:00.000-07:00

Extract from The independent on 25 April by Sean Farrell, Financial Editor
http://www.independent.co.uk/news/business/news/barclays-rubbishes-rumours-of-rbsstyle-rights-issue-815502.html

Mr Diamond said market conditions would be challenging this year but that BarCap would outperform the sector. Despite fears of massive City job cuts, he said his London staff count would be about the same or maybe higher by the end of the year.

Extracts from Bloomberg article on 22 April
http://www.bloomberg.com/apps/news?pid=20601102&sid=aIEPwHE8T0XE&refer=uk
Barclays Hires Archibald Cox Jr. as Americas Chairman (Update2)
By Yalman Onaran

Barclays Plc ... hired Archibald Cox Jr., a Wall Street veteran who ran First Boston Corp. in the 1990s, as chairman of its Americas business.

Cox succeeds Chet Feldberg, 68, who's retiring after serving as chairman of Barclays Americas for eight years.
The appointment of Cox is part of Barclays's plan to increase earnings in the U.S. Diamond ... is increasing securities trading in the U.S. to take share from rivals weakened by credit writedowns. Barclays Capital President Jerry del Missier moved to the U.S. this year, and Diamond is spending more time there to help lift the division's growth.
Cox's experience will help ``at a time of both great challenges and great opportunities,'' Diamond said in the statement.

The No. 1 priority for us is the U.S.,'' Diamond said in February when the bank posted its full-year results. ``There is an opportunity to move into the top three tier,'' he said.

Diamond is pushing commodities, equities and prime brokerage businesses as well as growth in Asia, the Middle East and Africa as credit market turmoil holds back its fixed income and lending units.

I'll be involved in developing and executing strategy, mostly in the Americas but also in Europe and Asia as well,'' Cox said in an interview. `The current crisis provides Barclays a great opportunity to grow because it is relatively unscathed so far.''

Does not seem to have liquidity problems

2008-04-16T13:38:00.000-07:00

Extracts from FT of 15 Apr 08
http://www.ft.com/cms/s/0/dd395978-0b23-11dd-8ccf-0000779fd2ac.html

Barclays ‘wide open’ to new mortgage business
By Jane Croft, Retail Banking Correspondent

Barclays said it was “wide open” for new mortgage business at a time when other lenders were reining back because of the credit squeeze.

Barclays took 9.3 per cent of net new mortgage lending in the second half of 2007 – its highest level for at least three years – compared with 4.5 per cent in the second half of 2006.

Mr Seegers pointed out to investors at a seminar in London that the retail bank was self-funding – and did not have to rely on wholesale markets – and its loans were more than supported by its savings balances.
Deanna Oppenheimer, head of UK retail banking, added that Barclays saw the current market turmoil as an “opportunity”

The bank also attracted strong volumes of savings and new small business banking accounts

Barclays opened 400 branches and sales points in the first quarter of 2008 alone. Last year, it opened 644 branches and sales centres.
In the UAE, Barclays had become the second largest issuer of credit cards within three months of launch and it was becoming the biggest bank in sub-Saharan Africa.

Barclaycard is now targeting in the US, where it acquired Juniper, a card business, in 2004 and where customer loan balances have expanded from $1.6bn in 2005 to $6.5bn (£3.3bn) now. Barclays is now the 11th largest issuer of cards in the US and the second largest in South Africa

Risks relative to other banks

2008-03-18T01:56:00.000-07:00

Extracts from Telegraph, 18/03/08 - Philip Aldrick:
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/18/cnukbanks118.xml

UK lenders' share prices plunge on investors' fears of contagion - despite their relative safety.

The writedowns, of less than £2bn each, that have been taken by even the UK's most aggressive lenders, Barclays and Royal Bank of Scotland, have been tiny compared with the multi-billion dollar writedowns made at Merrill Lynch, Citigroup, Morgan Stanley and UBS

[The chart in the article shows that the percentage of toxic debt to tangible equity is highest for Barclays at 80% compared to, say RBS at 29% and HSBC at 7%. I do not know how reliable these figures are.]

[A table showing coreTier 1 equity ratios shows Barclays ratio at 5.6% compared to RBS 4.5% and HSBC at 7.8%.]

Barclays has an even larger credit market exposure to its tangible book value, but it specialised in selling such assets through its Barclays Capital operation and so is thought to have more sophisticated risk management.

The vulnerabilities of both Barclays and RBS leave them exposed to further sub-prime writedowns - looking increasingly likely given the constant deterioration in the value of money market assets.

Dividend cut 15 years ago

2008-03-16T12:44:00.000-07:00

Interesting to see what happened in the past. From International Herald Tribune of 5 March 1993:

Peter Wood, its finance director, said the decision to lop 6 pence off the interim dividend of 12 pence a share was "a difficult decision felt to be in the best long-run interests of the group."
http://www.iht.com/articles/1993/03/05/zbar.php

According to Sharescope, the dividend for 1992 was 3.79p (probably adjusted for rights, etc) compared to 34p for 2007 - a growth rate of over 15%. Together with the capital appreciation (even at today's depressed prices), anyone brave enough to have invested shortly after the gloom following the dividend cut would have been well rewarded for the risk.

Barclays poised to pounce in US

2008-03-16T01:30:00.000-07:00

From Telegraph of 16/3/08 - Philip Aldrick
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/15/cnbarclays115.xml

Barclays president Bob Diamond is to spend half his time in New York as the bank seeks to capitalise on problems at its Wall Street rivals and beef up its US operation.

Mr Diamond ... made his ambition clear last month when saying "the biggest opportunity in investment banking is in the US". He added: "I can't look back in two-to-three years… and say I flinched. I won't say that."

Barclays believes the problems at several of Wall Street's bulge bracket banks give it an unprecedented opportunity to out-muscle the competition.

To support Mr Diamond's plans, which will involve a significant increase in headcount, Barclays is expected to divert a large amount of resource to the US investment bank. Jerry del Missier, Mr Diamond's apparent successor and president of BarCap, has already moved to the US.

Press extracts, etc following prelims

2008-02-19T03:44:00.000-08:00

Full announcement at
http://www.investorrelations.barclays.co.uk/INV/A/Content/Files/2007_Barclays_Results_Announcement_web.pdf

Archived webcast of presentation following announcement at
http://pres.investorrelations.barclays.co.uk/barclays059/default3.asp?Media=

Webcast of interview with John Varley at
http://w3.cantos.com/cantos/dyn/org.php
(Log in and search for "Barclays" in "Banks")

Spring investor pack
http://www.investorrelations.barclays.co.uk/INV/A/Content/Files/Barclays_Spring_Investor_Presentation.pdf

Extracts from articles, with links to full articles, appearing in the press following preliminary results announcement on 19 Feb 08:

FT - Maggie Urry
http://www.ft.com/cms/s/d6811b38-dec4-11dc-91d4-0000779fd2ac.html

Profits were in line with forecasts and it announced a near 10 per cent increase in its dividend.

Impairment charges relating to the credit market turmoil amounted to £1.6bn for the year, only £300m higher than the £1.3bn Barclays reported in a trading update in November. The figure benefited from a £658m gain on the fair value of debt issues by Barclays Capital

Tier 1 capital ratio was 7.8 per cent at year-end – ahead of its 7.25 per cent target. Pre-tax profits were £7.08bn, down from £7.14bn, but Mr Varley said profits were up 3 per cent if disposals were excluded.

Mr Varley said ... “We feel right on top of our risk – we know where our risk is,”

The group revealed a £1.34bn exposure to US monoline insurers, but the bank had “put our best risk management people on that” and hedges were in place against it.

Bob Diamond ... said that ... the subprime exposure could take two to three years to work out ...
He said the first half of 2008 was likely to be “difficult and challenging” but he felt that action taken in the US meant the downturn “could be shallower and shorter than consensus.”

Mr Varley said the bank’s diversification had paid off and now two-thirds of profits were made outside the UK banking business.

Mr Varley said 40 per cent of the [credit] cards issued now were outside the UK.

He also highlighted the performance of the Asian business, where profits more than doubled and now contributed 9 per cent of the group total, compared with 1 per cent five years ago.

The group had set itself new targets to generate a total economic profit ... annual rate of increase of 5 to 10 per cent.

FT - Lex
http://www.ft.com/cms/s/1/287f5300-decf-11dc-91d4-0000779fd2ac.html

On the basis of Barclays’ 2007 results, there appear few reasons why it cannot be aggressive. Numbers were more or less in-line and sub-prime related writedowns were tame versus the explosions at some rivals. With a forward price/earnings ratio of just 6.5 times, investors, however, are sceptical. But that is the same across the industry, with many banks trading at least as cheaply. That makes all-share deals possible even if conditions worsen. Either Barclays backs itself and goes for it, or rivals may move first.

The Canadian Press
http://www.blogger.com/post-edit.g?blogID=7307405163503936190&postID=672224387782583872

John Varley said the company's writedown had been "prudently marked" but he couldn't rule out further losses due to the credit market crisis.
"We've been able to absorb writedowns of 1.6 billion pounds and still generate profit in 2007 in Barclays Capital, ahead of the record profit of 2006," he added.

FT - Peter Thal Larsen
http://www.ft.com/cms/s/0/9c80317a-df56-11dc-91d4-0000779fd2ac.html

... footnote 18, where the bank spelled out its continuing exposure to the securities most affected by the credit market turmoil.
... first, that investors are not convinced banks have recognised all the pain they have suffered in the past seven months in their profit statements. Second, investors are concerned there may be more to come.

The bank yesterday reported writedowns of £1.635bn ($3.2bn). However, this included a £658m gain on the carrying value of the bank's own debt - an accounting sleight-of-hand widely used in the financial sector in recent months.

...£7.37bn of loans to private equity groups stuck on its balance sheet. So far, Barclays has written off fees of £130m and taken a £58m loss on its portfolio - much less than some of its rivals. This is in spite of many leveraged loans now changing hands at less than 90 per cent of their original face value.

Barclays insists that its accounting is prudent. Executives believe the bank deserves praise for managing its risks more effectively than some rivals. "The risk exposure and the way in which banks have managed their risk is not generic," John Varley, Barclays' chief executive, said yesterday.

... Bob Diamond ... signalled the bank would take advantage of the disarray among some of its competitors to expand its operations in the US. Mr Diamond also voiced his belief that the downturn in the US would be "shorter and shallower" than suggested by forecasts.

If the monoline bond insurers were to collapse entirely - an outcome few think likely - Barclays would have to write off an additional £1.3bn.

The strongest signal of Barclays' caution is the bank's new long-term growth targets. It is aiming to achieve growth in economic profit - a risk-weighted measure of profit used for internal purposes - of 5-10 per cent a year until 2011, compared with growth of 16 per cent since 2004.

Forbes
http://www.forbes.com/markets/feeds/afx/2008/02/19/afx4669568.html

[Bob Diamond] added that BarCap was preparing for 'very challenging' conditions in the first half of 2008, although he stressed that the climate might improve in the second half if US economic growth accelerates.

The Stockmarket Reporter

Barclays said it expected 2008 economic growth in the UK and the US to be below the trend of recent years and it would respond by demonstrating discipline in its risk management and adopt a rigorous approach to lending. Chief Executive John Varley added, “Our experience of 2007 gives us confidence, and we enter 2008 with a strong capital base, a consistent strategic direction, a well diversified set of businesses and significant opportunities for growth in the medium term”.

Guardian - Fiona Walsh
http://www.guardian.co.uk/business/2008/feb/19/barclaysbusiness.creditcrunch

Varley said he believes the gloom has been "somewhat overstated" in the media and that Barclays has continued to increase its share of the UK mortgage market. "You get the impression that banks have stopped lending. But this bank has certainly not stopped lending," he said.

The Scotsman - Peter Macmahon
http://thescotsman.scotsman.com/business/Barclays-promises-tougher-approach-to.3794096.jp

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

The Herald
http://www.theherald.co.uk/business/news/display.var.2056016.0.Barclays_reveals_1_6bn_credit_crunch_hit.php
Arrears and defaults within its retail banking and Barclaycard arm "significantly" improved, down 7% to £2.01 billion, according to the group.

Alex Potter, analyst at Collins Stewart, said "The prospect of further write-downs cannot be discounted but a dividend increase and the 'confident' outlook gives us comfort."

The Sun - Ian King
http://www.thesun.co.uk/sol/homepage/news/money/city/article244711.ece

BARCLAYS yesterday pledged to out-gun Wall Street in 2008 like never before.
Britain’s No 3 bank said current market turmoil presented a golden opportunity to out-grow the might of GOLDMAN SACHS, CITIGROUP and MERRILL LYNCH.
Bob Diamond, head of investment banking arm Barclays Capital, said: “The single biggest opportunity is in the US. Look at the players who are pulling back — that’s a great opportunity for Barclays.
“I don’t want to look back in two or three years time and say we had the opportunity to develop in the US and I flinched. I won’t say that.”

The Times - Christine Seib
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3399497.ece

Analysts praised the plan to enter the US in areas of business such as commodities, which BarCap specialised in. “It makes sense - you’re not going to get a chance like that often,” one analyst said.

Telegraph - Philip Aldrick
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/20/cnbarclays120.xml

"Only two or three investment banks finished 2007 better than 2006," Mr Diamond added. "We are one. That gives us the license to grow."

Profits improved at Goldman Sachs and JP Morgan but Citi, Merrill Lynch, Bear Stearns and Morgan Stanley all needed cash injections after sub-prime writedowns decimated their balance sheets. Mr Diamond, who is on target for a £15m pay package, wants BarCap beating Wall Street's finest on their home turf within a few years.

He has already built Europe's top commodities, foreign exchange and interest rates businesses and wants to replicate that success in the US, which accounts for less than 40pc of BarCap's revenues. An acquisition is "very unlikely", Mr Diamond said, but Barclays will recruit talent from rivals

"The maintenance of our policy of growing dividends... reflects the board's confidence," [Varley] said

Barclays retains significant exposure to the credit markets, with its total exposure remaining at £29.1bn and "potential credit risk loans" doubling to £11.4bn last year. However, Mr Diamond insisted the £1.64bn writedown amounted to 70pc of affected assets

The Times - Damian Reece
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/02/20/ccom120.xml

...a raft of changes made by Varley in 2006, including the appointment of Frits Seegers to run retail and commercial banking globally. Excluding South Africa, where the rand fell 12pc, his division saw income rise 28pc. This includes Deanna Oppenheimer's improving UK performance (another 2006 intake). Others revitalising Barclays include Anthony Jenkins at Barclaycard and Tom Kalaris at wealth management. The bank probably has more talent now than at any time in the past

Optimism from Bob Diamond

2008-01-25T05:32:00.000-08:00

Extracts from Reuters 25 Jan 08

By Clara Ferreira-Marques
DAVOS, Switzerland (Reuters) - Barclays sees tougher market conditions in the next year as an opportunity for its investment banking arm to grow and invest, particularly in the United States, the bank's president said.

"2008 brings one very important change to our priority list, and that's the United States. It is difficult to get into the home market of the U.S bulge-bracket firms, but as we go into 2008, so many of them are retrenching," said Bob Diamond, president of Barclays and head of its investment banking arm.
"I am determined that in two, three or four years' time we don't look back and say this was the market opportunity to move up into the top tier and we flinched," he said on Friday.

Barclays' investment banking arm has seen strong growth in its Asian and commodities business, and Diamond said he saw that trend continuing, even if oil and other commodity prices come off the boil in 2008.

...announcing a writedown of $2.7 billion (1.4 billion pounds) in November for losses on securities linked to the subprime crisis.
Diamond said any major change from that would have had to have been announced to the market.
BarCap remained committed to its 15-20 percent long-term growth target through the cycle, but "2008 will be at the tough end of that," he said.

"We've seen the worst. We are bound to see one or two surprises, but I don't think they will be major," he said.
"I think we are going to see a workout situation for all of the firms for probably 2 or 3 years, the excesses of the market were so large."

Full article at
http://uk.reuters.com/article/businessNews/idUKL2545362320080125?feedType=nl&feedName=ukdailyinvestor&pageNumber=3&virtualBrandChannel=0

Press 27/11/07

2007-11-28T02:04:00.000-08:00

Extracts below. Click on links for full articles.

FT - Chris Hughes

http://www.ft.com/cms/s/0/10771374-9d2a-11dc-af03-0000779fd2ac.html

John Varley needs the bank's non-investment banking business to step up a gear if he is to address Barclays' embarrassingly low stock market valuation.

Even after bouncing off its recent low, the stock is priced at a 35% discount to the UK stock market when valued on the P/E ratio for 2008 according to forecasts by Credit Suisse, Barclays' company broker. That is at the lower end of its historic trading range.

To be fair, Barclays is certainly making progress in its businesses outside Barcap. For starters, retail customers appear to be coping well with higher interest rates. Problem loans are falling in Barclaycard and the UK retail bank, and are growing at a slower pace in the business bank. Meanwhile, mortgage bad debts are "negligible".

Moreover, income growth is strong in Barclays' international banking and wealth management businesses. The same goes for the BGI fund management unit, even though its revenues are largely dollar denominated. And Barclaycard's US business is now expected to be profitable this year, when it was previously targeting only break-even. The only fly in the ointment overseas is the impact that the depreciating rand has had on the contribution from Absa...

The snag is that these positive points do not add up to a convincing antidote to the uncertainty surrounding Barcap.

But the good news for Barclays shareholders is that if this is as bad as it gets, then some expect the shares will rally before long.

FT - Maggie Urry

http://www.ft.com/cms/s/0/39c7b1e2-9d53-11dc-af03-0000779fd2ac.html

Chris Lucas, finance director, also revealed Barclays expected to make a gain of about £400m from buying back shares to neutralise the effect of issuing shares to China Development Bank and Temasek...The shares were issued at a price of 720p. Barclays has bought back about 280m at an average price of 603p.

Reuters - Steve Slater

http://uk.reuters.com/article/businessNews/idUKWLB368620071127?feedType=nl&feedName=ukdailyinvestor&sp=true

Barclays is on track to meet analysts' expectations for earnings growth of 4 percent this year and said diversification had provided some shield from recent turbulence in capital markets. ...it should deliver a 2007 pretax profit of 7.1 billion pounds, up from underlying profit of 6.8 billion in 2006.

"The market should be relieved that there were no further BarCap risks announced and trading elsewhere is in line with expectations," said James Hutson, analyst at Keefe, Bruyette & Woods.

Barclays said its liquidity remained strong and it continued to see good inflows of deposits. Its performance in the first nine months of this year was underpinned by "good" profit growth in retail after the impact of refunds on bank charges and at asset manager Barclays Global Investors. It reported "strong" profit growth at its Barclaycard credit card unit excluding one-off items, "very strong" income growth in its international businesses outside South Africa, and "excellent" profit growth at Barclays Wealth. Bad debts at Barclaycard and for unsecured lending continued to improve, it said. The bank had already said its Barclays Capital investment bank unit would take a 1.3 billion pound writedown for losses on securities linked to the U.S. subprime housing crisis, but the unit's profits for the 10 months to the end of October were still up on the year before at 1.9 billion pounds. Barclays said its UK Banking business should cut the ratio of costs to income to 50 percent this year, excluding the impact of refunds on charges, from 52 percent in 2006. UK business banking profits had also shown good growth in income and profits, it said. Depreciation in the South African rand would leave Absa's profit contribution down on the year in sterling terms, despite strong growth in local currency terms. BGI's profit growth in sterling would also be dampened by the weak U.S. dollar. Earnings should come in near the 68.8 pence per share currently forecast by analysts, up from underlying EPS of 66.8p a year ago, it said.

Citywire - Charlie Parker

http://www.citywire.co.uk/News/NewsArticle.aspx?VersionID=98976&re=2119&ea=91427&XDU=11bc4b75-04dd-4a14-8074-63580af87edd&XDS=O&XDNG=True&XDKL=0&XDURL=http%3a%2f%2fwww.citywire.co.uk%2fNews%2fNewsArticle.aspx%3fVersionID%3d98976%26re%3d2119%26ea%3d91427

Brokers Collins Stewart reacted by rating Barclays a buy and putting a price target of 893p for the Bank. Analyst Alex Potter said: 'UK retail and commercial businesses both saw strong income growth with the tailwind of higher rates clearly helping' Potter also said that the downgrade due to accommodate the writedowns at Barclays Capital were really very modest. KBW was more measured in its praise giving the stock a 'market perform' rating with a price target of 660p.

Telegraph - Philip Aldrick

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/11/28/cnbarc128.xml

Finance director Chris Lucas said 83pc of the buyback was complete and there would be a small credit in the annual figures.
[My note: The "credit in the annual figures" probably refers to the surplus of the break fees re ABN-Amro over costs and not as a result of the buyback.]

Times - Patrick Hosking and Miles Costello

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2957499.ece

Barclays declined to elaborate on the latest trading at BarCap, except to say that its confident group-wide forecast was based on the latest prices of securities held on BarCap’s books.

Chris Lucas, the finance director of Barclays, cautioned that recent performance at the retail bank had been “a mixed story”. Amid increasing indications that an economic downturn is looming, he said: “Mortgages, savings and current accounts are performing well in line with the first half. Unsecured lending and payment protection insurance – both of these have been performing less strongly, as a result of the stance we have taken to risk.” Mr Lucas said that revenues at Barclays’ retail bank most probably would grow at a slower rate in the second half than in the first. Revenues in the first six months of the year grew by 5 per cent, and profits increased by 9 per cent.
He said: “Like all banks, we are not immune to changes in market conditions. However, taking into account everything that we know today, we still expect our earnings to be broadly in line with consensus.”

Although analysts said that a 4 per cent profit increase would be a very creditable performance in the present market, it still would bring an end to the galloping growth of the past four years.
It also raises doubts over whether Barclays will be able to lift the dividend as fast as recently. Last year it was boosted by 17 per cent. John Varley, the chief executive, said two weeks ago that there was no change to the bank’s progressive dividend policy, but, with headline earnings per share likely to fall fractionally this year, Barclays is predicted to leave the total dividend unchanged at 34.3p. Even then, the yield is 6.5 per cent.

The bank revealed that it had spent £1.7 billion so far on its share buyback, paying an average price of 603p over the past few months.

Sandy Chen, the Panmure Gordon analyst, raised fresh questions about a further £10.4 billion of exposure at BarCap to structured credit markets. He said that Barclays could suffer hits of £5 billion to its structured asset-backed securities portfolio and £5.4 billion to its sub-prime mortgage book.

Keefe, Bruyette & Woods analysts said: “The market should be relieved that there were no further BarCap risks announced and trading elsewhere is in line with expectations.”
Alex Potter, the Collins Stewart banks analyst, said: “Doubts around this business are likely to persist until the finals in late February, but we take comfort from management’s stance on BarCap’s prospects.”

Barclays said that its retail banking business in the UK would shake off customer settlements on overdraft fees to deliver “good growth” in pretax profits over the full year to the end of November.

The bank was on course to improve its cost-to-income ratio by 2 per cent this year, Barclays said.

Bad-debt charges at Barclaycard continue to improve and the division’s American arm is set to move into profits this year, it said.

Independent - Sean Farrell

http://news.independent.co.uk/business/news/article3201607.ece

A fund manager said Barclays' statement "gives a degree of comfort" but said the UK's banks needed debt markets to reopen to avert a big hit to earnings and the economies that feed their growth.

Chris Lucas, the bank's finance director, told analysts 2008 would bring "a greater range of uncertainty".

Citywire - Douglas Bence

http://www.citywire.co.uk/News/NewsArticle.aspx?VersionID=98989&re=2124&ea=91427

While uncertainties remain about the current performance of Barclays Capital, analysts are taking the view that Britain's number three bank will lead the eventual recovery in the sector.

Collins Stewart analyst Alex Potter believes 'Barclays will be a key recovery play in the UK banks.'

But there were no details in the trading of Barclays Capital trading this month and none were revealed in an hour long conference call with analysts.

the group still expects it to grow by around 15-20% over the medium term.

'Bar Cap is a surprisingly diverse business model and appears to have stuck more resolutely than some peers to an "originate and distribute" model,' added Potter.
'Doubts around this business are likely to persist until the finals in late February, but we take comfort from management's stance on its prospects.'

The bank continues to take a cautious approach to personal loans, but these are likely to increase in the coming months, but on those certain areas where the risks of default are low.

Guardian - Graeme Wearden

http://www.guardian.co.uk/business/2007/nov/27/barclaysbusiness.banking

On the retail side, it has been hit by the cost of repaying customers who had been penalised for exceeding their overdraft limit.
Barclays paid out £87m in settlements in the first half of the year. Like other banks, it suspended repayments at the end of July until a test case is held in 2008 to determine if such charges are illegal.

Alex Potter of Collins Stewart said doubts over Barclays Capital were likely to linger until the full results for 2007 are published in February, but said he was encouraged that the company was sticking with its target of 15-20% annual growth for the unit.

Barrons: 19/11/07

2007-11-20T06:06:00.000-08:00

http://online.barrons.com/article/SB119525655251896301.html?mod=googlenews_barrons

Extracts:

There are a few areas that could still see hits. One is the bank's £10 billion exposure to the commercial-mortgage-backed-securities market, about 40% of which is in the U.S. Barclays hasn't yet taken any write-offs in this area, and there is anecdotal evidence the commercial-property market is weakening. A lot of the bank's commercial-mortgage-backed portfolio dates to 2005 and 2006, and even earlier. So write-downs, if any, may be lower than those of participants who got into the market this year.
In the leveraged-finance arena, Barclays has £7.3 billion of unsold underwriting positions. Unlike its U.S. peers, BarCap doesn't mark to market these loans but uses its own analysis. It has written down £190 million so far.
One worry will be the slowdown in revenue from credit products, which were responsible for nearly £1.2 billion in the first six months of this year. But BarCap's target of 15% to 20% revenue growth in the medium term means that it is bullish on other businesses like rates, foreign exchange, equities, commodities and currencies. One key will be the extent to which it relies on its relationships in China, since China Development Bank is an investor in Barclays.
The bank is due to come out with its detailed trading statement later this year. As long as its capital-adequacy ratios remain intact, Barclays may be up for a re-rating.

Press 16/11/07

2007-11-16T03:48:00.000-08:00

Extracts from the newspapers on 16/11/07:

Financial Times - The Lex Column

Barclays appears to have got off lightly relative to its US investment banking peers. But they all share two big risks. First the threat that a prolonged US housing slump moves the crisis from subprime loans to other mortgages. The second is the effect of a global economic slowdown on other investment banking activities such as equities, commodities and leveraged finance. For now, these businesses are still fizzing at Barclays. That its shares are trading on a forward earnings multiple of only 7.5 times suggests that investors are less sure this effervescence will last much longer.

Financial Times - Peter Thal Larsen

The immediate question posed by Barclays' announcement is its exposure to a further downturn
in the credit markets.

Despite the write downs, Barclays Capital's exposures to CDOs is £5bn. Its loan and trading book is valued at £5.4bn, of which £2.6bn is in Equifirst, the US subprime mortgage originator that Barclays bought earlier this year. The bank also still has £7.3bn in unsold private equity loans.

[Bob Diamond] sees the downturn as an opportunity to expand Barclays Capital's operations, particularly in the US, where it can take advantage of the distress of some of its rivals.

More fundamentally, he believes the business model of acting as an intermediary in the capital markets will prevail.

"We have a serious situation around subprime as an asset class. There were extremes in origination," he said. "But the financial markets live on innovation. I wouldn't bet that the originate and distribute model is anything other than enforced by this."

The Times - John Harding

The troubles at Barclays Capital, the investment bank, have been exaggerated by a market of skittish investors and calculating short-sellers. BarCap has reported improved profits in the first ten months of the year and reduced its exposure to risky credit products and structured investment vehicles (SIVs).
The losses, nonetheless, are large and a long way from over. The statement then set out three baskets of potential future losses:
1) Superior senior exposure worth about £5 billion. Roughly two-thirds of this, Barclays said, is secured by hedges or other instruments. So, £1.75 billion there is still at risk.
2) US sub-prime mortgages worth £5.4 billion. Just under £3 billion of that is in mortgages originated by Barclays and considered relatively safe. So, £2.5 billion there is in doubt.
3) Leveraged finance worth £7.3 billion. Judging from the relatively modest sums in writedowns in this area, the sums at risk in the future run “only” into the hundreds of millions of pounds.
In sum, Barclays has written down £1.7 billion in the past four months and there is more than £4 billion at some serious risk in the months ahead. The statement should have read: “We have had a difficult summer, an awful October and there may well be more bad news to come. Overall, though, the situation is still a lot better than the Barclays bears expected.”

Independent - Sean Farrell

Mr Varley said: "We do feel confident about that [Barclays Capital's growth]. It is not unusual in an investment banking business to have some areas that are hot and some that are cold. The sub-prime area, which has not historically been a big area for us, is cold at the moment. We have other areas that are hot."
"Hot" areas such as currencies, commodities and equity derivatives helped Barclays Capital achieve £1.9bn of pre-tax profit for the first 10 months of the year, ahead of the record figure for the year-earlier period, Mr Varley said.
Barclays Capital has been the main driver of Barclays' profit in recent years as the debt-focused business tapped into the credit boom. Mr Varley defended Barclays Capital against charges that it had expanded into risky areas such as collateralised debt obligations (CDOs) and structured investment vehicles (SIVs).
"Is the business model working well? Is the risk management working well? Is there diversification by geography and asset class? The answer is in the numbers," he said.

There has been concern about Barclays' liquidity and capital position during the summer because of its exposure to SIVs that it set up for clients. The bank said yesterday it had added deposits and gained increased credit lines from counterparties during the credit crunch.

Telegraph - Philip Aldrick

The trading update did provide the detail on Barclays' position investors have been demanding, but it could not restore confidence. Barclays still has £10.4bn of "toxic" collateralised debt obligation (CDO) and sub-prime exposure on its books.
No matter how secure chief executive John Varley and Barclays Capital boss Bob Diamond claim that is, fears of further write-downs will persist.
Jonathan Pierce, an analyst at Credit Suisse, summed up the reaction, saying: "We applaud the disclosure but believe there could be worse to come for the bank sector as a whole." Intriguingly, he noted that, far from the "conservative" approach to the numbers that Mr Varley described, Barclays' write-downs were only in line with other European banks and far less "conservative" than its US peers.
In the case of CDOs, he calculated that Barclays' write-offs equated to 18pc of its exposure - "quite low versus the other investment banks that have disclosed information so far". He added: "Applying the write-down seen at Merrill Lynch and Morgan Stanley… would imply a total write-off of nearer £3.3bn."
Barclays stressed its remaining sub-prime exposure is high quality. Just £2.5bn of its CDOs is directly sub-prime, with the rest in other collateral. Barclays also originated £5bn of its remaining sub-prime exposure itself with a relatively secure average loan-to-value ratio of 82pc.
Analysts also welcomed the hair-shirt approach Barclays took to some of its more extreme sub-prime collateral, which was written off completely.
In Mr Diamond's opinion, what's left should "not be a source of worry but treated like normal times". As he said, banking is "the business of risk".

Mr Diamond and Mr Varley have put their reputations on the line by arguing that the write-downs are conservative, which should provide some comfort.
But Barclays still has considerable exposure if things get worse.

Telegraph - Tom Stevenson

More important is the nagging doubt that the write-off is not conservative enough. At around 12pc of Barclays' exposure, it is in line with European peers but a fraction of the 30pc or so that the big American banks like Merrill Lynch and Morgan Stanley have owned up to.
The worry is that there might be more to come. Of the £1.3bn hit, £500m came in the third quarter from July to September while £800m was in October alone. Barclays admits that it still has an exposure to sub-prime toxicity of around £10bn. Conditions have not improved in the first half of November so no-one really knows when it's all going to end.
But sub-prime aside, Barclays Capital is in pretty good shape. The £1.9bn it generated in the first 10 months means it won't be too far off last year's full year return unless things go completely pear shaped over the next six weeks. Barclays says October was the best fourth quarter month ever in the rest of its business.
There is also a price for everything and Barclays, and indeed the whole financial sector, looks like it's not far from it. There's another investment rule of thumb which says that when a company's dividend yield is greater than the multiple of earnings on which its shares trade, you should buy it. Barclays yields 7.1pc and you can buy its shares for 7.2 times earnings. How much blood do we need?

Telegraph - Philip Aldrick

Details of its position prompted credit rating agency Fitch to lower its outlook for Barclays to negative from stable, indicating a rating downgrade is likely in the next one to two years. It said: "The revision reflects our concerns that the continuing expansion of Barclays Capital might expose the group to greater risks and earnings volatility."

Mr Varley reiterated that "through time" BarCap and Barclays Global Investors will deliver growth of 15pc-25pc, adding: "BarCap is built to last." Exane BNP Paribas forecasts a 6pc fall in BarCap profits in 2008.

Guardian - Graeme Wearden

Bob Diamond, the president of Barclays Capital, warned this morning that the group had an ongoing exposure to the sub-prime market, in which loans were made to people with poor credit histories and who now cannot repay their debts.
"We expect sub-prime to be in workout conditions for at least another year or two," Diamond explained.

Barclays Capital also wrote off £190m from its £7.3bn-worth of unsold underwritten leveraged loans. Diamond said that demand for leveraged loans had dropped in the current market climate, but was hopeful that the market would pick up in early 2008.

"Against the total of £18.4bn of exposures to US sub-prime and leveraged finance the company has outlined today, this is a 7% write-off level, well ahead of investment banking peers in the range of 3-5%," he said.
Potter also pointed out that Barclays Capital's profits had slowed considerably in the second half of this year.

"Profits for the 10 months to the end of October of £1.9bn, although ahead of last year, is a material slowdown after the £1.69bn posted in the first half," he said.

Times - Peter Hosking

the positive mood evaporated on closer reading of its trading statement and because of souring sentiment over banks generally.

There was also concern about the steepness of the slide in loan quality in recent weeks – £1 billion of the write-offs came in October alone, compared with a £700 million deterioration over the previous three months.

In some cases, securities secured on US sub-prime mortgages had been written down to zero, he said. Second-lien mortgages - home loans where Barclays has only second claim on the collateral – had also been written off.

Collateralised debt obligations – the investment vehicles in which many of the sub-prime mortgages are contained – have been hard to value because there has been little or no trading of them to set a market price. Even after the writedowns, Barclays still has total exposure to US sub-prime loans of about £10.8 billion.

Barclays also gave details of its exposure to warehoused leveraged buyout debt – loans given or promised to company buyers but no longer wanted by syndicated buyers because of the credit crunch.
Barclays said it now had £7.3 billion of such debt, down from £9 billion in September, and that it had written down the loans’ value by £190 million. After taking account of £130 million of fees, the loss was likely to be only £60 million.
Jonathan Pierce, a Credit Suisse analyst, applauded the level of disclosure, but questioned whether the sub-prime writedowns were enough. At 12 per cent of the exposure, net of tax, they were in line with other European banks, but not as conservative as Merrill Lynch and Morgan Stanley, which have written down about 30 per cent, he said.

Fitch, the rating agency, downgraded Barclays’ outlook score from “stable” to “negative”. It said expansion of BarCap might expose the bank to greater risks.

Associated Press - Maldon Read

Banks appear to be erring on the side of caution, said S&P bank analyst Scott Sprinzen. "But one thing to keep in mind, under accounting rules, you can't deliberately build in a downside cushion."
Barclays Capital chief executive Bob Diamond said there was no risk of further write-downs of Barclays' residential mortgage-backed CDOs, but declined to say if it would make additional write-downs from exposure in other parts of its business.
Banks can hedge, but not all techniques are successful. A recent estimate of the S&P 500 financial services sector showed a net drop in third-quarter profits of 33 percent.
Banks are generally not selling their distressed securities to cut losses, because they're betting that eventually, demand will return and the portfolios will rebound, which may lead to a windfall.
_____________________________________________

In a separate blog, I am writing a series of articles regarding investments in general. These are meant more to help novice investors avoid commonly made costly mistakes rather than become the next Warren Buffett. Presently, it is still work-in-progress but I hope to add many more articles when I have time. Go to http://mythoughts-mohan.blogspot.com/ if you are interested,

Bought @ 489.25p

2007-11-08T13:42:00.000-08:00

Bought at 489.25p because, at this price, even the historic yield is over 6%.

The price is so low because of uncertainty about the amount that Barclays will have to write off for its exposure to the sub prime market fall out. However, I think the market's fears are excessive because:

Barclays continues to buy back its own shares
The directors have bought heavily recently
Barclays has not issued a profits warning.

Barclays has survived several major crises in its history and it is likely to survive this crisis, even if it is one. Moody's and S&P continue to give it AA1 and AA ratings respectively and both consider the outlook as stable. John Varley and Bob Diamond have indicated even very recently that Barclays continues to trade profitably.

The yield is higher than that which can be obtained from most banks and building societies. With market and customer confidence and top jobs at risk, I do not think that Barclays will cut the dividend. If there is a requirement for large provisions, this will probably be spread over a number of years - Barclays will have this leeway by marking to model rather than market.Even if the dividend is only maintained for the next couple of years, it will probably resume growth after that.

Positives

2007-11-07T13:25:00.000-08:00

One of the few banks that can serve big business in the UK. (Bigger UK competitors are HSBC and RBS.) A toll keeper.

S&P AA rating. Moody’s AA1 rating. Both with stable outlook.

9th largest bank in world by market capitalisation.

Scope for improving profits through cost cutting and IT efficiency improvement.

Seems to be more prudent in lending in the current house price inflation and high borrowing climate.

Innovative, e.g. Barclays Global Investors has become the biggest index trackers in the world.

Good growth in past few year likely to continue into the future. Quotes from John Varley's Oct 07 presentation:
1 We have consistently talked about our expectation that, through time, both BarCap and BGI will be capable of generating compound profit growth of between 15% and 20%. Nothing that’s happened over the course of the last months causes us to change that growth outlook for the future.
2 The privatisation of welfare provision; wealth generation and wealth transfer; explosive growth in demand for financial products in emerging markets; significant growth in the utilisation of credit cards for payments and borrowing; the securitisation of financing; the derivativisation of risk management; and the demands placed on the capital markets to finance infrastructure development throughout the developed and developing world.
3 We are investing heavily in our retail and commercial banking businesses in Western Europe – Italy, Spain and Portugal – and in Emerging Markets – India, Egypt, and the United Arab Emirates. Some 180 branches were opened outside the United Kingdom during the first half of this year (mostly in Emerging Markets), and we expect that this number will have risen to over 350 by year end. We are confident of achieving strong growth rates – with our Western Europe business growing at an emerging market rate during the first half of this year, with profit up 17% and, in the Emerging Markets business itself, by 25%.

Good and growing yield
1 Barclays has not cut its dividend since 1992 (that’s as far back as Sharescope shows) and has increased its dividend every year since 1993 (dividend history in pence from 1993 to 2006 = 3.79, 5.25, 6.50, 7.88, 9.25, 10.75, 12.50, 14.5, 16.63, 18.38, 20.50, 24.00, 26.60, 31.00).

Buying back own shares at big “profit” in Sep / Nov 07 compared to sales of its shares in Aug 07.
1 Sold £2.5bn worth of shares @ £7.20 each to China Development Bank and Tamasek Holdings in August 2007.
2 Buying back those shares from the market at prices well below that thus enhancing shareholder value.

Directors bought shares at higher market prices recently.
02-Nov-07 Frederik Seegers 551.00p 72,000 £396,720
22-Oct-07 Sir Nigel Rudd 584.50p 16,500 £96,442
28-Sep-07 Frederik Seegers 594.00p 50,000 £297,000
03-Aug-07 Leigh Clifford 689.50p 6,000 £41,370
02-Aug-07 John S Varley 682.00p 70,000 £477,400
02-Aug-07 Frederik Seegers 680.00p 140,000 £952,000
02-Aug-07 Sir Nigel Rudd 679.50p 15,000 £101,925
02-Aug-07 Chris Lucas 682.00p 35,000 £238,700
02-Aug-07 Andrew Likierman 685.00p 1,000 £6,850
02-Aug-07 Gary Hoffman 680.00p 70,000 £476,000
02-Aug-07 Robert E Diamond Jr 674.00p 140,000 £943,599
02-Aug-07 Fulvio Conti 682.00p 6,000 £40,920

Emphasis on risk management, including diversification of income sources and markets. Quotes from John Varley's Oct 07 presentation:
1 Over the course of the last 18 months, three in every four new Barclaycards issued to customers have been issued to customers outside the United Kingdom
2 Self evidently, how well we manage risk dictates at what pace (and sometimes whether) we grow.
3 Emerging markets carry their own risks. But we understand these risks well and we have built a team under Frits which has very significant experience in developing these businesses.
4 There are many in this room who will look to commercial banking businesses in the United Kingdom over the course of the last 30 years as the sources of cyclical value destruction. But in Barclays Business Banking, we have a good example of where the drum beat has to be one of strong risk adjusted growth. There has been a massive progress in the quality of risk management in this area of our business. What I want here, as elsewhere, is safe growth. And that means being prepared to take a point of view. Property and construction as a percentage of our corporate loan book in the United Kingdom represents 14%. We have studiously avoided risk concentration here.
5 We have spread our business risk by consciously striving to generate a more diverse income base. As a result, the proportion of non-interest income has risen to 60% of our total income up from 45% in 2003

Negatives

2007-11-06T13:37:00.000-08:00

Slowing revenue growth and increasing costs.

Profits in the next few years likely to suffer due to slowing housing market, reduction in trading in derivatives, fewer opportunities for creating new products, etc.

Fierce competition in personal banking and lending from building societies and smaller banks like Abbey National.

Vulnerable to recessions. But about 49% of costs comprise performance related (36%), new investments (9%) and contractor costs (4%) that can be reduced when income reduces.

Risk of major acquisition or other major decision going wrong.

Increasing contribution of Barcap to profits but higher risk.

Enron litigation – how much will the unprovided charge be?

Integration of Woolwich was badly managed.

Unknowns

2007-11-05T13:40:00.000-08:00

Is Barclays being cautious in mortgage lending or are competitors taking market share that Barclays will not be able to recapture?

Are costs going out of control or are they increasing because of investment to expand?

Is the strong growth in Barcap & BGI sustainable?

Complex accounts.

Barcap exposures to derivatives, etc.