Press 16/11/07

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.
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