Jeremy Warner's Outlook: Surely some mistake. Bank shares are on the rise again. What's going on?

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The Independent Online

Has the stock market started believing Barclays on impairment charges, or is the sharp rebound in the share price in recent weeks more down to hedge funds unwinding their "long of commodities, short of banks" trading positions than anything else? Well, perhaps it is a bit of both, but certainly the investment rotation which some analysts have long predicted, out of commodities and oils and back into banks, seems finally to be asserting itself.

How long it will last depends on the prognosis for the credit crunch, but the over-riding message to be taken from yesterday's 122-page door-stopper of an interim statement from Barclays (is this a new all-time record for paper consumption on an interim report?) is a relatively positive one.

The worry with Barclays has long been that it was adopting a less vigorous approach than peers on writing down its £30bn plus of credit market exposures, and that it had therefore raised less new capital than it really needs. Yesterday's statement only partially allays those fears.

In the half year, Barclays sold £6.3bn of credit market securities at prices all well within the mark which Barclays has adopted for its remaining exposures. On the very limited exposure Barclays has to the same securities that Merrill Lynch sold at 22 cents in the dollar the other week – regarded by many as an extreme act of capitulation – Barclays has an even lower valuation of just 17 cents in the dollar. Barclays argues that the superior quality of its structured credit portfolio allows it in the round to take less of a writedown than others. Where there is credit of similarly poor quality, it has taken even more of a haircut.

With some securities, such as Alltel debt, Barclays has been able to sell at higher prices than book, though in this particular instance it might have more to do with the fact that Alltel was recently taken over by Verizon than renewed confidence in the leveraged loan market.

The gripe among peers is that Barclays has been notably less cautious than others on monoline writedowns and has been able to avoid mark to market impairment charges entirely on some of its leveraged loan portfolio simply by taking the loans directly on to its balance sheet with the apparent intention of holding them to maturity. Profits have thereby been flattered.

But neither John Varley, the chief executive, nor the head of Barclays Capital, Bob Diamond, were having any of it yesterday. Barclays could hardly have been more open, they insisted, in either its accounting or level of disclosure. Impairment charges were eventually struck at £2.5bn, but a drop in the ocean compared with what Royal Bank of Scotland is expected to announce today. Here the charges are likely to be so big that they might completely wipe out the profits.

As for Barclays, is yesterday's one-third fall in pre-tax profits to £2.8bn as bad as it gets? Unfortunately, that cannot yet be said with any certainty. With the economy heading south, the new bogey is that the structured credit problem will over the next few years be eclipsed by conventional bad debt experience.

Mr Varley is making no predictions, but nevertheless insists that credit risk is much better diversified today than it has been heading into previous downturns. In the recession of the early 1990s, bad debt experience peaked at 2.3 per cent of the loan book.

Annualising yesterday's impairment charges, Barclays is still at just 99 basis points, against 71 for 2007. It will require a much deeper and more prolonged recession than currently seems likely for Barclays to get back to the dire position it was in in 1992. That's not to say it won't happen, but the recent rebound in financial stocks supports the contention that it's not the way to bet.

In the meantime, Barclays is continuing to grow its book, particularly in mortgages, where it is helping to fill the gap left by Northern Rock. This process really is one of the most farcical I've seen in many a long year, as Northern Rock is selling its mortgages so as to pay back £20bn of Government loans.

Meanwhile, the Government is lending the banking system through the Special Liquidity Scheme the money it needs to buy these mortgages and accepting them or others like them as security. In essence, the Government is paying itself back with its own money.

Still, that's not Barclays' concern. Along with others, it stands to make a bundle out of the process. The dislocation in credit markets is far from over, yet it may be that we have hit bedrock and are now bouncing along the bottom. Barclays had better hope so, in any case, for it remains quite poorly capitalised by the standards of European peers. There's not much room for error.