Barclays warns on costs, but insists it will hit profit forecasts

Barclays' surprise announcement that costs will rise faster than expected next year as it beefs up its key investment bank and credit card division sent its shares lower yesterday.

Concern about rising costs triggered a 4.2 per cent decline in the shares, which have risen 12.5 per cent this year to make Barclays the top performer on the FTSE 350 banks index. Naguib Kheraj, the finance director, said he expected 2005 income growth and cost growth to be higher than analysts had forecast. They had estimated revenue would rise by 6 per cent and costs by 5 per cent in 2005, he said. The bank will also set aside more money for bad debts next year, after provisions fell this year.

Cost growth outpaced revenues in the third quarter thanks to acquisitions, higher regulatory costs and hiring at Barclays Capital, the investment banking unit, which took on 800 people. That expansion will continue next year, Mr Kheraj said, while rivals such as Deutsche Bank and Commerzbank are cutting jobs.

James Leal at Teather & Greenwood said he now expects income and costs to rise by 10 per cent next year. He thought concern about higher costs was overdone. "The new income and cost guidance indicates ambitious organic expansion plans, particularly in Barclays Capital and Barclaycard, and appears bullish."

John Varley, the chief executive, said Barclays is on track to meet the market consensus forecast of £4.5bn in full-year pre-tax profits. However, Barclays also warned that margins in its mortgage and credit card businesses were under pressure from rising interest rates.

The UK retail bank has had a flat performance, with pressures within the mortgage business offsetting growth in customer deposits. Consumer appetite for debt has cooled after five interest rate hikes, which increased borrowing costs by one-third. Figures from the British Bankers' Association showed yesterday that the number of approvals for house-purchase loans fell 35 per cent in October from a year ago.

Higher interest rates are also adding to pressure on Barclaycard, which is suffering from the increased cost of promotional offers amid fierce competition. The bank's shares closed the day down 15.5p at 545p.