Impairments rise at Barclays and Lloyds

Impairments rise at Barclays and Lloyds
By Adam Jones
Copyright The Financial Times Limited 2009
Published: May 7 2009 07:59 | Last updated: May 7 2009 15:01
http://www.ft.com/cms/s/0/d2406566-3acf-11de-ba91-00144feabdc0.html


Profits at the retail and commercial banking arm of Barclays almost halved in the first three months of 2009 as British consumers and businesses struggled to maintain loan repayments.

Lloyds Banking Group, the rival UK bank, also said on Thursday that it expected its impairment charges on corporate loans to rise by more than half in 2009 as a result of economic weakness.

The disclosures come amid concern that banks’ activities in the “real economy” might displace investment banking as a source of woe this year.

Barclays, which had previously announced a strong start to 2009, said first-quarter pre-tax profit rose 15 per cent to £1.37bn. Income increased 42 per cent to a record £8.15bn.

Analysts at Credit Suisse said pre-tax profit was “a little less than we had hoped for”, but added that they were nonetheless minded to increase their 2010 profit forecast for the financial services group.

Barclays shares, which had plummeted to little more than 50p in January, continued their upward trajectory, rising 1¼p to 289¼p in afternoon trading, but Lloyds plunged 6.8 per cent to 105½p.

Barclays’ first-quarter profit increase was driven, as expected, by strong growth at Barclays Capital, its investment banking arm, where pre-tax profit rose 361 per cent to £907m, partly because of the acquisition of Lehman Brothers’ US arm, which accounted for about one-third of BarCap’s income over the period.

However, BarCap’s strong profit performance was offset by the commercial and retail banking arm, whose profits fell 45 per cent to £586m, even though income rose 16 per cent.

The profit decline was partly due to higher impairment charges linked to increased delinquency on consumer loan and overdraft payments in the UK. Impairment charges also rose sharply in its commercial banking operations, “tracking trends in corporate performance”, as Barclays put it.

They also surged at its Barclaycard credit card unit, where credit limits have been cut and new borrowing refusals have increased.

Across the group as a whole, impairment charges were £2.3bn, up from £1.3bn in the first quarter of 2008, although Barclays said this was not unexpected. To a large extent, the rise reflected ongoing credit market writedowns, increased lending and currency movements.

In February, Barclays had said that it expected an annualised loan loss rate for 2009 equivalent to between 1.3 per cent and 1.5 per cent of its portfolio, compared with 0.95 per cent in 2008. It said it now expected the eventual 2009 figure to be at the higher end of this range.

In its own, much-briefer trading update, Lloyds blamed ”rising unemployment, reduced corporate cash flows, the continuing impact of lower house prices and falls in the value of commercial real estate” for the significant rise in impairment levels in its lending portfolios.

It anticipated further corporate defaults during the rest of the year, notably in British and Irish commercial real estate. It also reiterated that it expected to report a pre-tax loss for 2009.

Alex Potter, a Collins Stewart analyst, said that Lloyds could conceivably be loss-making for the coming 18-24 months.

Barclays’ profits included an accounting gain of £279m that actually arose from a decrease in the traded value of its own debt. However, this was less than the £703m it booked in this fashion in the first quarter of 2008.

Trading in April had been generally in line with February and March as opposed to the exceptionally-good performance in January, Barclays added