Sub-prime spotlight falls on Barclays

The bank will this week unveil its most important set of results in years, as the City waits to hear whether it will be forced to put aside more cash to cover losses from 'toxic debt'
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The Independent Online

On Tuesday, Barclays will reveal whether or not it will have to put aside more cash provisions to cover toxic debt lurking on its balance sheet, amid City fears that there is more pain to come from the John Varley-led bank.

The announcement will come in the wake of the revelation by the UK's biggest buy-to-let lender, Bradford & Bingley, last week of a worse than expected £226m set-aside to cover its own sub-prime debt losses and one-off charges.

Analysts believe if Barclays uses the same accounting techniques as B&B, its writedowns will be sharply increased.

Alex Potter, analyst at Collins Stewart, says what affected B&B so badly was a new approach to dealing with so-called "synthetic collateralised debt obligations" – one of a number of debt vehicles banks have invested in. This made the provisions at B&B much higher than the City had expected and caused its shares to tumble, dragging the sector down with them.

"The problem is," says Mr Potter, "we just don't know whether they will account in the same way. Banks such as Barclays and Royal Bank of Scotland have not been talking about it. It may be that this is just the interpretation KPMG [B&B's auditor] has put on dealing with the issue. If that is the case then only HBOS and HSBC would be affected. They are the other KPMG clients. But if it goes wider, then Barclays' provisions will be higher."

That could be a real issue for Barclays. The problem of sub-prime debt, packaged up into investment vehicles and sold off, has cast a pall over Barclays, and Barclays Capital in particular.

The debt specialist investment bank was the key driver in the spectacular growth in profits that Barclays has shown over the past few years. So important has it been that the £20m-plus salary packages paid to the charismatic chief executive of Barclays Capital, Bob Diamond, have passed with relatively little adverse comment, despite the media obsession with "fat-cat" pay. If there were to be a nasty surprise in Barclays Capital's results, that could change.

Shareholders are not yet at the stage of calling for change openly, but they are getting restive. Said one, who declined to be named: "During the current crisis it's like stepping through a minefield. We're doing that very carefully ... When we hear presentations from Bob Diamond he is relentlessly upbeat. You get the impression that he's ploughing through smiling, saying everything is fine, follow me, follow me. It makes you nervous he will step on something he hasn't seen."

Hence the concerns about those provisions and the B&B accounting treatment. The shareholder also said that Mr Varley tended to be much more circumspect when he presented.

Sources close to Barclays have long denied rumours of tension between the two men, who were both candidates to take over from Matt Barrett as chief executive. One said: "Look, they've worked together for 10 years happily. You don't think they would have done that if there were problems with the relationship, do you?"

Shareholders see Mr Varley as an effective steward, and it is notable that he has managed the bank's politics cleverly, promoting Mr Diamond to bank "president" and expanding his role and prestige, while appointing Frits Seegers from Citi as chief executive global retail and commercial banking. This appointment created a counterweight to Mr Diamond, although Barclays has insisted Mr Diamond was involved in the recruitment.

For the moment, at least, all parts of the bank are singing from the same hymn sheet. There has been no repetition of the situation a few years ago when the Barclays Capital press office and the Barclays Group press office put diametrically opposing spins on the same story (those involved are no longer at the bank).

But then, during the current troubled times, keeping your head down and presenting a unified face is vital. There were rumours late last week that the provisions might not be as bad as feared. Barclays shares have suffered far less than the likes of UBS or Citi, and the failed attempt to acquire ABN Amro, stymied by a Royal Bank of Scotland-led consortium, looks like a lucky break, given what has happened to the markets.

Nonetheless this set of results remains Barclays' most important for years, not just for the bank but for the UK stock market.

David Buik, from financial bookie Cantor AlphaBet, notes that the company's market value has tumbled from £45bn last September to around £29bn. He offers a bearish 4-1 against the share price rising above 525p by close of business on 30 June. It ended the week on Friday at 427.5p, down 3.2 per cent on the day.

As Credit Suisse said in a note: "The focus at Barclays is clear – the extent of the writedowns in Barclays Capital, in particular whether the group increases the charge it disclosed to the market in November. At that time, it said it would take a £1.7bn pre-tax writedown relating to its US sub-prime, SIV and LBO positions. These were calculated to the end of October, and since then things have deteriorated."

Barclays has declined to comment.