Barclays kicks off banking season with £5.3bn profit

The country's third-biggest bank - after HSBC and Royal Bank of Scotland - notched up pre-tax profits of almost £5.3bn in 2005, some 15 per cent better than in the previous year.

Over the next few weeks, rivals across the sector are expected to follow the Barclays example, enraging consumer groups, if not the City, with another year of record profits despite persistent concerns over the housing market and bad debts.

Barclays' improvement came after a surprisingly muscular performance from a UK banking business widely seen as struggling, and more predictably impressive showings from its Barclays Capital investment bank and Barclays Global Investors, its asset management operation.

Barely two months after Roger Davis was squeezed out as the head of UK banking in the midst of his turnaround plan, the division reported pre-tax profits of almost £2.5bn, 8 per cent better than in 2004.

Within UK banking, pre-tax profits from business banking grew faster than retail, improving 10 per cent over the year to £1.4bn on the back of burgeoning demand for finance from medium-sized companies. Part of the growth at home was dug from 3 per cent of cost cuts, while revenues were 4 per cent better at £3.6bn.

Barclays' encouraging performance here failed to mask a dismal showing by Woolwich, the mortgage lender it bought for £5.4bn in 2000.

The former building society, which historically is responsible for 6 per cent of British home loans, actually lent 3 per cent less in a year when the market grew 10 per cent as it lost business to rivals including HBOS and Northern Rock.

Ian Gordon, a banking analyst at Dresdner Kleinwort Wasserstein, said: "When Barclays' lending declined in absolute terms in the first half of the year, that was extraordinary. To repeat the feat is quite appalling."

Experts reckoned that Barclays has struggled to integrate Woolwich into the group, profit margins are pressured, and the bank made the wrong call in withdrawing from the lucrative buy-to-let market in 2003.

John Varley, the chief executive of Barclays, said: "We're a big player in the UK mortgage market but our share of flow in 2005 was disappointing. I want to put that right in 2006."

Deanna Oppenheimer, an American retail banking expert, was brought in partly to revive mortgage lending. New products have been launched, home loans are once again serviced in-house and Barclays is making itself more attractive to mortgage brokers.

"The early signs are that the business is responding to the measures we have taken," Mr Varley said. "But I stress: the signs are early."

Another cause for concern was the big jump in bad debt at Barclaycard, which is still the country's biggest credit card operation. Pre-tax profits were thumped 19 per cent to £687m there as customers struggling with higher energy costs and mortgage repayments failed to service balances run up on their plastic.

Gary Hoffman, who runs Barclaycard, denied he had been lending irresponsibly. Lending criteria has been tightened and Barclaycard turns down as many applicants as it approves, he said.

Across the group, bad debts still surged 24 per cent over the year. Taking into account new customers garnered from foreign acquisitions, that figure soared to an eye-watering 44 per cent.

Overseas forays may have bumped up the number of defaulters, but they provided a tonic to earnings growth. Absa, the South African bank in which Barclays took a majority stake last year for about £2.5bn, contributed £335m to group earnings.

Some 40 per of Barclays' earnings now come from outside the UK, and Mr Varley plans to grow that to 50 per cent over the next three years. He insisted he could hit this target without recourse to major acquisitions.

Meanwhile, Bob Diamond was £15m better off last night after the head of Barclays Capital pocketed a maximum bonus on the back of another year of stellar growth. Pre-tax profits here were 25 per cent better at £1.3bn thanks to strong performances by its commodities, foreign exchange, and credit and derivatives businesses. BGI, also run by Mr Diamond, did better still. Pre-tax profits leapt 61 per cent to £542m.

Despite hefty bonuses and an increase in the number of BarCap employees from 6,000 at the end of to 2003 to 9,000 now, profits grew faster than costs.

David Williams, UK banking analyst at Morgan Stanley, said: "Overall, these results were solid enough but without any fireworks. Barclays' financial strength was reassuring, and concerns have been substantially downplayed over a possible major overseas acquisition. On the downside, we had hoped that Barclays Capital would blow the lights out. It did not."

Barclays set the tone for the reporting season. Next is Lloyds TSB, a perennial subject of bid speculation. The Black Horse bank looked bound for the knacker's yard but management under Eric Daniels is now running a much fitter nag.

Shareholders expect pre-tax profits to be steady at £3.49bn on Friday but should be cheered by healthy growth in its wholesale banking business. They are unlikely to hear any fresh plans for Scottish Widows, the struggling life and pensions business bought for £5.8bn at the top of the market in March 2000.

RBS and its arch-rival HBOS report on consecutive days the following week. Sir Fred Goodwin, it is said, has been more than a little miffed about the treatment meted out to his Royal Bank by the City's big investors.

The tumultuous applause that greeted his audacious takeover of a flabby NatWest in 2000 has long since turned into a slow hand clap. Pre-tax profits north of £8bn alone are unlikely to win over the disaffected. Investors want a firm commitment from Sir Fred to a share buy-back programme and his reassurances (he can't say it too often) that no major overseas acquisitions are on the cards.

The following day, "Boy Wonder" Andy Hornby is likely to insist it will be business as usual in July when he takes over as chief executive of HBOS, the country's biggest mortgage lender. The City will cock its ear for the slightest hint of a change in strategic thinking. Expect pre-tax profits of almost £4.8bn.

And HSBC is slated to deliver record profits of £11.6bn on 6 March. Analysts want to hear the views of Europe's biggest bank on the effect of rising interest rates on Americans and news on its backfiring investment bank.

John Studzinski, the former Morgan Stanley rainmaker given the task of building an all-singing, all-dancing, investment bank from scratch, was recently shifted upstairs.

Yesterday, Barclays shares edged only 1.5p higher to 645.5p. The City, it seems, now expects Britain's big banks to deliver more than record profits alone.