The British bank’s gross profits fell by a third after recording $5.5 billion in credit-related write-downs..
credit crunch continues to take its toll on UK banks . On August 7, Barclays revealed that its first-half gross profit fell by a third to $5.4 billion after incurring $5.5 billion in credit-related write-downs. Describing the bank’s performance as “extremely disappointing”, CEO John Varley almost apologized for the company’s share price decline over the past year: “Our shareholders have had to put up with a lot”.
Barclays also revealed a sharp increase in uncertain claims. Over the first six months to last June, total subprime loans increased by 155% compared to last year: subprime mortgages and other credit investments whose values fell, reached now $4.7 billion. In addition, investment bank Barclays Capital, which many analysts believe is likely to fall victim to the credit crunch, posted net losses of $4 billion.
Bad news, but these are hardly disastrous figures in view of those published by many of Barcap’s competitors such as UBS or Merrill Lynch. Although Barcap’s profits fell nearly 70% in the first half, the value unit is still profitable, with revenue of more than $1 billion.
ANALYSTS EXPECTED WORSE
With the exception of Barclays Global Investors, the fund management arm, which reported $517 million in profits, materializing a 32% drop, the rest of the business of the third-largest bank in Britain – from credit cards to retail banking – is doing well.
Many analysts had expected much worse results for Barclays, believing that management was too optimistic in evaluating its investments. After all, Barclays hasn’t exposed itself to rotten US subprime mortgages as heavily as many of its competitors on both sides of the Atlantic. In May, the value of the bank’s complex debt securities depreciated by $3.3 billion; a fraction of that of many of its competitors. At the time, most analysts assumed that Barclays was simply carrying out daily earnings reports.
Now, with impairments still much lower than expected, many are wondering if Barclays has really managed to avoid the toxic stuff held by other banks. For example, Merrill Lynch was forced to sell CDOs worth $6.7 billion, for a meager return of 22 cents on the dollar. Some analysts think Barclays is much better positioned. “Barclays’ CDOs are of a slightly older vintage than Merrill’s,” explains Leigh Goodwin, banking analyst at Fox-Pitt Kelton in London. “And they [Barclays] did better in their coverage.”
BAD NEWS FORECAST FOR RBS
Relatively decent figures from Barclays are likely to be at odds with Royal Bank of Scotland (RBS), which announces its half-year results on August 8th. If analysts are correct, the world’s fifth largest bank – after its purchase of ABN-Amro – is expected to fall from a profit of $10 billion in the first six months of 2007 to a potential loss of $3 billion. dollars for the same period in 2008. If so, it will be the biggest loss for a UK bank and the first for RBS in 40 years.
Blame it on the rise in risky debt in the United States and Great Britain. In April, RBS suffered an impairment of nearly $12 billion related primarily to US mortgages, credit derivatives, and leveraged loans. At the time, RBS’s consumer banking business – owning Citizens Financial Group in Providence, which accounts for 15% of RBS’s profit – saw a sharp rise in loan losses within its mortgage brokerage business. Additionally, analysts estimate that RBS has more than $1.5 billion in bad loans in its UK portfolios.
To cope with the rapid deterioration in the value of its assets, RBS raised capital through the markets and through the sale of assets. In June, the bank raised $24 billion through a massive rights issue. And more recently, the bank sold its stake in Tesco Personal Finance to British retailer Tesco for $1.9 billion.
DOUBTS ABOUT LEADERS
With shareholders unhappy about writedowns and the rights issues record, some suspect that big institutional investors will want to impose new leaders at the helm of RBS. With no previous experience in bank finance, chairman Tom McKillop, the former CEO of British drugmaker AstraZeneca, is seen by some as potentially too inexperienced to lead the bank through its toughest time yet. There are even concerns that CEO Fred Goodwin, who orchestrated the $100 billion takeover of Dutch bank ABN-Amro last year, could also be vulnerable.
