Profits up, lending up too?

Barclays sought to fend off criticism yesterday that it is failing to respond to the help given to Britain's financial system by the taxpayer. John Varley was speaking as the bank unveiled first-half profits of £2.98bn, up 8 per cent, on record income of £16.2bn, up 37 per cent.

The barnstorming figures – particularly when compared to the partially state-owned banks Royal Bank of Scotland and Lloyds TSB which are set to report more huge losses later this week – failed to detract attention from the two biggest issues facing banks today – bonuses and lending to small business.

Chief executive John Varley made an attempt to get on the front foot on the latter issue. He stressed that Barclays had advanced £17bn to personal and business clients in the UK for the half year – more than the £11bn for the whole of the previous year. Around half of that was loaned to business clients, with the remainder going to personal customers.

It follows the carpeting banks received from the Chancellor Alistair Darling for failing to help out small businesses despite the £1.2trillion the state has pumped in to prop up Britain's financial system. However, smaller businesses, received only £561m of that and no net lending figure was given. Nor was any comparison provided to last year's numbers.

The net mortgage lending figure was provided and it put the gross number in a less favourable light – with net mortgage lending down to £2.2bn from £7.8bn the previous year.

Mr Varley, however, angrily rejected accusations that Barclays was not doing enough. "We advanced more in the first half of this year than the whole of last year. Those are the facts," he said.

He argued that the net lending figure was much lower than the gross because customers were increasingly looking to pay back overdrafts while businesses were proving wary of taking out new credit. "It is a function of the economy."

That showed in the figures – Barclays success was driven by Barclays Capital, its investment bank, which took on most of the assets of bankrupt US investment bank Lehman Brothers. Profits there doubled to £1.04bn, while Barclays Global Investors also performed well, although the bank is selling it to US fund manager Black Rock for $13bn in cash and shares. Barclays will retain an interest of 19 per cent stake in the enlarged Black Rock business.

But the UK retail business performed less well. Profits fell by more than half to £268m while impairment charges came in at £469m against £288m in the first half of last year.

"We see retail and wholesale banking remaining difficult even in a recovery," said Mr Varley who, nonetheless, wants to see global retail and commercial banking accounting for two-thirds of profits long term.

Barclays Commercial Bank also performed poorly making £404m against £702m last time while impairment charges were rising sharply at £467m against £148m.

Despite the rise in overall loan impairments to £4.5bn, somewhat worse than analysts had expected, the shares reacted favourably, closing at 322.55p, up 20.25p. But those loan losses remain an issue. Barclays had its head of risk on the top table at its results presentation, something Sir David Walker, the City grandee asked to shake up banking governance, would approve of given the fact that he wants this role to be given far greater clout at Brtiain's banks. He expects the full-year figure to come in between £9bn and £9.5bn. Barclays has not taken any cash from the state, although it has benefited from the massive amount of cash that the Government has injected into Britain's banking system.

It does appear to be lending to small business and larger businesses. But given the level of loan impairment losses Barclays is facing, many would consider Mr Varley foolhardy if he went on a lending spree.

What yesterday's figures ultimately illustrated is the difficult balancing act banks face.

If they lend too aggressively to businesses which are themselves struggling, and find they are unable to pay their loans they the taxpayer will be asked to pay up (bad debts can only rise as unemployment rises and increasing numbers of business fail). Given the state of Britain's public finances, that is something no one wants to see.