Barclays: Investors have realised that Barclays was cheap. Having traded at a modest 0.9 times forecast 2010 book value, the shares leapt 10 percent following interim results. The bank is removing the reasons to be cautious.

Sure, the recession is hurting. The share of Barclays' loans more than three months in arrears jumped from 3 percent in December to 4.2 percent now. Barclays doesn’t expect the loan-loss trends will worsen during the rest of the year, although it has removed its prediction that the loss ratio will stay inside the range of 130-150 basis points. And losses were bigger than expected in India and the UAE.

But pre-tax profits were 8 percent higher than the same period last year. And Barclays Capital, the investment bank run by Bob Diamond, is on the rampage. Revenues almost doubled, helped by the acquisition of some of Lehman Brothers’ operations, as did pretax profits.

Capital doesn’t look like a problem either. The core Tier 1 ratio is 8.8 percent after the sale of the Barclays Global Investors asset management arm. That’s not far below the ratios for Royal Bank of Scotland and Lloyds Banking Group, UK rivals which are partly owned by the government. And Barclays is cutting risk – risk-weighted assets have fallen 6 percent since December and gross leverage has fallen from 28 times capital to 20 times.

Barclays may be suffering from a similar affliction to Deutsche Bank, another investment banking-heavy institution trading at a discount. Both have gained from avoiding state aid yet have been held back by the caution of investors nervy about structured-credit exposure. But Barclays has bolstered its credibility by selling a big chunk of its leveraged loan portfolio for the par value they said they were worth.

Even the threat of higher required capital cushions doesn’t look too severe. If the ratio of capital to trading assets were tripled, the effect on Barclays’ risk-weighted assets, the key variable for calculating total capital needs, would be minor: a 10-15 percent increase, according to a person familiar with the situation.

Assuming investors think Diamond’s men can keep galloping, Barclays’ discount could soon turn into a premium.


Context News
Barclays posted interim pre-tax profits up 8 percent to £3 billion, driven by a strong performance by its Barclays Capital investment banking unit.

Pre-tax profits at Barclays Capital rose 100 percent to £1.5 billion, helped by the acquisition of the US operations of Lehman Brothers following the Wall Street bank's collapse in September 2008.

Impairments rose slightly ahead of most analysts' expectations, with the total impairment charge up 86 percent year-on-year at £4.6 billion. The figure included a £1.1 billion charge against structured credit exposures.

The bank reduced its gross leverage – total assets against capital – from 28 times at the end of 2009 to 20, after adjusting for the disposal of its asset management arm, Barclays Global Investors.

Risk-weighted assets were down 6 percent from £433 billion to £406 billion. The core Tier 1 ratio, a common measure of financial strength, was at 8.8 percent adjusting for the sale of BGI.

Shares in Barclays jumped 10.2 percent to 333p in morning trading on August 3.

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