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The Investment Column: Barclays keeps a grip on costs

Martin Taylor, Barclays' chief executive, said yesterday's half- year figures from the bank got better the more you looked at them. Certainly the market seemed to find more to cheer about than was immediately apparent from an underlying 8 per cent rise in profits to pounds 1.27bn, raising the share price by 120p to an all-time high of pounds 14.475.

What appeared to please the analysts was better cost control than they had expected and lower provisions against bad debts.

BZW, the investment banking operation that was such an embarrassment only six months ago, appears to be on the mend and investors are to get pounds 700m in share buy-backs this year, rather than the pounds 500m investors had been promised last February.

The methodology Mr Taylor used to calculate how much of Barclays' capital is surplus to requirements is well beyond ordinary mortals.

But it needs no rocket science to understand a total of pounds 1.75bn of value handed back to shareholders in the past two years. It is little wonder the shares have more than doubled since the start of last year.

Banking in the UK led the charge, with profits showing a healthy 30 per cent improvement. Personal banking and the corporate side, the powerhouse of the group, did well, despite a squeeze in margins in all areas except mortgages.

BZW's profits of pounds 124m were three times higher than the disastrous second half of 1996 and the investment bank's return on capital rose from 8 per cent to a more respectable 12 per cent. That is still barely above BZW's cost of capital, but it is at least moving in the right direction.

The question is whether the stock market is putting too much faith in the current return on equity of 24 per cent being sustainable.

After yesterday's sharp increase, the shares trade on around 12 times Salomon Brothers' expected earnings per share of 128p for next year, assuming profits of pounds 2.7bn.

That puts it in the middle of the pack, above NatWest and the Scottish banks, but below Lloyds TSB, HSBC and Halifax.

The leaders have better growth prospects and Barclays' rating is now about right.