Profits at Barclays are hit by credit squeeze

Apr 25 2008 by Iain Laing, The Journal

BARCLAYS has said that profits fell at the start of this year after the credit squeeze brought a reversal of fortunes at its investment banking arm.

The group said the first quarter downturn reflected the fact that Barclays Capital – the powerhouse of the business – would be “well down” on 2007.

In a statement issued ahead of its annual meeting in London, chief executive John Varley said overall trading during January and February had been flat, with “tougher” conditions in March bringing the quarter down. The bank’s retail and commercial arms came in ahead of 2007, he said.

Although there were no detailed numbers, the update heightened nerves in the banking sector and sent Barclays shares down 2%.

Asked by a shareholder at the AGM if there would be a rights issue, Barclays chairman Marcus Agius said raising new capital was “an option”.

He said the bank was seeking to improve its capital position over time, but that its relatively better performance compared with some rivals gave directors more options. These included retaining profits, managing the balance sheet and asking investors for a cash injection.

Collins Stewart banking analyst Alex Potter warned the group may have made little profit last month when the financial markets were rocked by the bailout of US investment bank Bear Stearns. He has downgraded the stock from buy to sell, saying: “Barclays has performed well in the year to date relative to Royal Bank of Scotland and domestic banks, but we now feel it is time to cut positions for safety.”

Barclays has been tipped to follow the lead of rival Royal Bank of Scotland (RBS) and raise new capital from investors to bolster its balance sheet amid hefty credit crunch writedowns.

RBS asked shareholders for a £12bn cash boost this week after revealing an extra £5.9bn of investment write-downs for this year. Mr Potter forecast that Barclays could be forced to ask investors for £8bn. Mr Varley made no explicit statements about the need for extra funding but said: “We will remain active managers both of our balance sheet, and of our capital ratios.”

Barclays investment banking arm contributed a third of the group’s £7bn profits last year. It saw the division’s supremo Bob Diamond pick up a pay package worth more than £21m for the year, and the issue could face tough questions during today’s AGM.

Barclays has performed well in the year to date ... but we now feel it is time to cut positions for safety.