Barclays' results cheer investors but not analysts

Barclays delivers on its promise to beat analysts' consensus estimates, posting a $9 billion profit, but with a substantial contribution from one-time gains.

UK bank Barclays managed to contain its profit decline in 2008 to 14% year-on-year with the help of a number of one-time gains. Investors can also take comfort from the fact that in some parts of the bank, at least, business continues as normal, with a 6% profit increase in retail and commercial banking and emerging markets delivering solid growth.

Barclays Group posted a profit for the year of £6.1 billion ($9.1 billion), down 14% on 2007. This includes £2.4 billion worth of one-time gains on acquisitions, comprising primarily £2.3 billion related to Barclays' takeover of Lehman Brothers' North American business.

The good news for investors is that Barclays' core retail and commercial banking business grew, with top line income up 17%. Emerging markets also registered growth. Top-line income in this division was up 91%, driven by retail expansion in India and entry into new markets such as Pakistan among other factors, and profit before tax improved by 34%, albeit on a small base.

Not surprisingly, revenues within Barclays Capital, which comprises investment banking and investment management, fell 19% and profit before tax was down 44% to £1.3 billion despite a £2.3 billion gain on the Lehman Brothers takeover.

Barclays took £5.6 billion of write-downs for residential mortgages in 2008 and also wrote down almost £1.5 billion of commercial real estate and mortgage assets.

Compensation for bankers is becoming a large issue the world over. This is an especially sensitive topic for Barclays as the management of the bank has been riddled with criticism for raising very expensive capital from investors in the Middle East in the last quarter of 2008, rather than accepting a bailout package from the UK government. Disgruntled investors and media have suggested that the decision of Barclays' management was driven by a desire to continue to pay themselves large bonuses rather than the best interests of the UK bank.

In yesterday's earnings presentation, Barclays' group CEO John Varley referred obliquely to the decision to raise capital from external investors and retain independence saying: "To create good returns we must preserve strategic and operational choice". Varley also said the bank had an objective of ensuring the cost of the capital raised late last year was "covered many times over by the benefits of pursuing our strategy".

Barclays' chairman Marcus Agius also focused on the issue of compensation in his address, commenting that incentive payments for 2008 were significantly less than in 2007, given that the total return on equity shares was negative during the course of 2008 and the bank was not paying shareholders a final dividend. He also said that a significant portion of bonus payouts for senior staff would be staggered and executive directors would not be receiving any bonus for 2008.

Late last month investor sentiment turned further bearish on Barclays following a spate of bad news from other British banks and specifically the largest ever corporate loss in Britain declared by the Royal Bank of Scotland. To contain further share price losses, Agius and Varley took an unusual decision on January 26. The duo sent shareholders a letter advising that the announcement of its 2008 results would be brought forward by a week to February 9. The letter also indicated that last year's performance had been better than the market speculation and specifically that profit before tax would be ahead of consensus analyst estimates.

Shareholders bought into the reassurance causing the share price to stabilise, but it was a short respite for Barclays. On February 2, Moody's Investors Service downgraded Barclays' long-term debt rating to Aa3 from Aa1 and the bank's financial strength rating to C with a negative outlook, from B. The rating change followed a review of the British bank which had been underway since September. Moody's said: "Barclays' profitability and capitalisation will continue to be pressured by the ongoing need to implement further write-downs and build larger loan-loss reserves."

Indeed, after the results announcement some analysts, while commenting favourably on Barclays' 2008 numbers, cautioned that the firm was not yet out of the woods. Further markdowns on assets could be required and, in the face of recessionary conditions globally, the outlook for banks remains questionable.

But investors' enthusiasm could not be dampened yesterday and Barclays' share price gained 10.9% to £1.16 by the end of London trading, as shareholders cheered the bank's profits.

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