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'STRONG' BARCLAYS TAKES A £1.9BN HIT

Barclays was accused of being in 'denial' about its financial strength

Friday May 16,2008

By Andrew Johnson, Associate City Editor

BARCLAYS was yesterday accused of being “in denial” about its financial strength after announcing a £1.9billion credit crunch hit during the first quarter.

Finance director Chris Lucas refused to rule out following Royal Bank of Scotland and HBOS in launching multi-billion rights issue, but refuted the charge made by Citigroup analysts.

Bradford & Bingley stunned investors with a £300million rights issue on Wednesday, a month after denying it was considering such a move.

Lucas insisted Barclays had no need to raise cash at the moment, either to bolster its balance sheet or finance future growth because the bank was profitable and “performing really well”.

Shares in Barclays, led by chief executive John Varley, fell 8dp to 418fp, prompting one analyst to comment that banks “were damned if you do, damned if you don’t” when it came to fundraising.

Credit market gains of £700million and paper writedowns of £200million meant Barclays’ credit-crunch losses, which hit its fast-growing investment banking division, amounted to £1billion.

However, the bank said investment banking still made a profit in the three months to March and the total group profits were buoyed by a “strong” performance in retail and business banking.

The bank added there were signs the credit crunch was beginning to ease.

Barclays is generating concern in the City because its capital reserves are much lower than those of other banks and they are also below levels regulators and investors are looking for. It could raise cash by cutting back investment, selling assets or seeking new funds.

Barclays’ capital ratio, a measure of its financial strength, is 5.1 per cent. Its target is 5.25 per cent and the City and watchdogs would like to see it above 6 per cent.

“It is one of those mysteries why 6 per cent is right,” said Lucas. “All banks are different. Sometimes we will be below our target, sometimes above.”

He insisted the bank was not complacent and was not postponing a rights issue in the hope that the economic climate would improve.