Investment arm drags down profit figures for Barclays

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BARCLAYS reported a three per cent fall in 2011 pre-tax profits to £5.9bn and warned it will miss a key profit target after its investment bank arm reported its worst quarter for three years.

Profits came in below analysts’ forecasts of £6.1bn, although investors were encouraged by a decent performance in retail banking, which reported a one-third fall in bad loans to £3.8bn.

Income at investment bank arm BarCap fell to £1.8bn in the fourth quarter, down 19 per cent on the previous three months and almost half of its level a year ago.

A slump in bond trading income due to the euro zone debt crisis dragged down profits, prompting chief executive Bob Diamond, pictured right, to push back a return on equity (RoE) target of 13 per cent he set less than a year ago. Return on equity is a measure of profitability.

In retail banking, Mr Diamond hailed Barclays’ business lending record in 2011 as it beat the Project Merlin targets drawn up between Britain’s top five banks and the Government.

Barclays delivered £43.6bn of gross new lending to UK businesses, including £14.7bn to small and medium-sized enterprises, exceeding its Merlin target by 13 per cent.

“We really got on our horses to get businesses going,” Mr Diamond said. “We don’t need Project Merlin – lending is what we do.”

But overall the UK banks narrowly missed targets for lending to smaller businesses in 2011 by more than £1bn.

The five banks, Barclays, Lloyds Banking Group, Royal Bank of Scotland, Santander and HSBC, loaned £74.9bn to small and medium-sized enterprises (SMEs) in 2011, the British Bankers’ Association said.

They had agreed with the Government in the Project Merlin talks to make £76bn of lending available.

However, the banks loaned a total £214.9bn to UK businesses, exceeding their target of £190bn.

It is understood that RBS is the culprit for the shortfall in SME lending although it will not report its performance until full-year results later this month.

The BBA said the overall lending figure demonstrated the banks’ commitment to help UK businesses and pointed to Bank of England data that showed SMEs’ demand for credit had fallen in three out of the last four quarters.

A spokesman for the Merlin banks said: “The banks’ efforts to encourage customers to come forward with borrowing proposals are set against this overall challenging economic environment. The business demand for credit remains weak.”

Barclays’ improved lending figures came as the business revealed income growth in every division but BarCap.

The UK retail and business banking division, where customers increased by three per cent to 760,000, saw pre-tax profits increase 60 per cent to £1.4bn, after stripping out the division’s £400m charge for mis-selling payment protection insurance (PPI).

The bank slashed its bad debts by 33 per cent and cut its debt exposure to struggling eurozone countries Portugal, Italy, Ireland, Greece and Spain by 14 per cent to £7.1bn.

The number of current accounts increased by two per cent to 11.9m and savings accounts were up five per cent to 15.1m.

Total staff costs fell four per cent to £11.4bn from a year earlier.

The bank, which employs around 3,000 staff in Yorkshire, cut 6,400 jobs during the year.

Mr Diamond said the bank will cut annual costs by £2bn under his revamp plan, which also includes shaking out underperforming areas and shrinking loans.

The economic and regulatory environment will “continue to be challenging” this year, he said.

He said Barclays had not taken any of the cheap, three-year cash offered to lenders by the European Central Bank in December, but said it had been a “terrific” move to help banks.

At BarCap Mr Diamond did not abandon his RoE target but said: “13 per cent remains absolutely the right target and is very achievable, but we may not achieve it in 2013 given the impact of the external environment.”

He said the bank’s return on equity of 5.8 per cent was unacceptable.

This was down from 7.2 per cent in 2010 and well below its cost of capital of about 11.5 per cent.

Alex Potter, analyst at Berenberg Bank, said: “The idea of 13 per cent is pie in the sky and even getting to 10 per cent is a long way away.”

A slump in bond trading and advisory work hammered all banks late last year and BarCap fared worse than some United States rivals, but not as badly as the likes of Credit Suisse.

Barclays’ shares fell in early trading but bounced back and closed up 1p at 234p.

ros.snowdon@ypn.co.uk

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