Barclays to buy back its shares

Barclays is set to be the first UK high street bank to buy back some of its shares to cream off excess capital and return increased value to shareholders.

But Barclays shares dropped 21p to 726p yesterday as the City reacted nervously - not to the buy-back, but to a 7 per cent rise in underlying costs.

"Barclays appears to be soft on costs now and staff numbers are going up. That gives cause for scepticism," said Terry Smith of brokers Collins Stewart.

Martin Taylor, Barclays' chief executive said a large element in the cost increase resulted from staff training, and he stressed Barclays' determination to invest in improving customer service. Barclays investment banking arm, BZW, saw its first half operating profit fall by 28 per cent to pounds 130m, hit by the fall-off in demand for derivative products early this year.

Despite the current rise in staff numbers, Barclays said the longer-term trend remains downwards, though not on the scale of cutbacks of the early Nineties.

Institutional investors welcomed the share buy-back announcement. "Banks are becoming more frugal with their capital, which is good news. They are not being forced by excess capital into doing irrational deals," said David Rough, group investment director at Legal & General.

The announcement came yesterday as Barclays revealed a healthy 9 per cent increase in pre-tax profits to pounds 1.1bn, helped by big gains on business disposals and a further drop in bad debt provisions. The dividend was increased by 19 per cent to 9.5p, reflecting a strong UK banking performance.

Mr Taylor said the current strong earnings are pushing Barclays' capital ratio "above the top end, so let's cream it off... Introducing a little touch of financial tension into an organisation is no bad thing."

Mr Taylor gave no details on the timing of the buy-back, but indicated that it would be a staged process: "We do not want people to think in terms of immense, one-off sums of money."

The group's Tier One capital ratio, a key indicator of the bank's capital adequacy, had risen to 7.8 per cent, and was expected to go above 8 per cent.

He added that the proposed buy-back effectively ruled out acquisitions for the foreseeable future following the recent purchase of Wells Fargo Nikko, the US asset managers.

Andrew Buxton, Barclays chairman, said the Chancellor should keep interest rates unchanged for the moment in the light of poor consumer confidence and a flat housing market.

"I cannot see that a rise in interest rates would improve that situation," he said, warning the Chancellor against generous Budget tax cuts. "Any tax cuts should be within the scenario of stable interest rates and stable inflation - that is difficult to do."

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