Barclays 2006 Annual Report Download - page 47

Barclays PLC
Annual Report 2006 43
Operating review
1
2006/05
Head office functions and other operations loss before tax decreased
£64m to £259m (2005: loss £323m).
Net interest income decreased £80m to £80m (2005: £160m) reflecting
a reduction in net interest income in Treasury following the acquisition
of Absa Group Limited. Treasury’s net interest income also included the
hedge ineffectiveness for the period, which together with other related
Treasury adjustments amounted to a gain of £11m (2005: £18m) and
the cost of hedging the foreign exchange risk on the Group’s equity
investment in Absa, which amounted to £71m (2005: £37m).
Group segmental reporting is performed in accordance with Group
accounting policies. This means that inter-segment transactions are
recorded in each segment as if undertaken on an arms-length basis.
Adjustments necessary to eliminate the inter-segment transactions
are included in Head office functions and other operations.
The impact of such inter-segment adjustments reduced £72m to
£147m (2005: £219m). These adjustments related to internal fees for
structured capital market activities of £87m (2005: £67m) and fees
paid to Barclays Capital for capital raising and risk management advice
of £16m (2005: £39m), both of which reduce net fees and commission
income. In addition the impact of the timing of the recognition of
insurance commissions included in Barclaycard and UK Retail Banking
reduced to £44m (2005: £113m). This reduction was reflected in a
decrease in net fee and commission income of £242m (2005: £258m)
and an increase in net premium income of £198m (2005: £145m).
Principal transactions decreased £51m to £42m (2005: £93m). 2005
included hedging related gains in Treasury of £80m. 2006 included
£55m (2005: £nil) in respect of the economic hedge of the translation
exposure arising from Absa foreign currency earnings.
The impairment charge improved £12m to a release of £11m (2005:
£1m charge) as a number of workout situations were resolved.
Operating expenses decreased £78m to £269m (2005: £347m)
primarily due to the expenses of the 2005 Head office relocation to
Canary Wharf not recurring in 2006 (2005: £105m) and the gains
of £26m (2005: £nil) from the sale and leaseback of property offset
by increased costs, principally driven by major project expenditure
including work related to implementing Basel II.
2005/04
Head office functions and other operations loss before tax increased
£166m to £323m (2004: loss £157m), reflecting the elimination of
inter-segment transactions and increased operating expenses.
The increase in inter-segment consolidation adjustments of £150m to
£219m (2004: £69m) mainly arises from the timing of the recognition
of insurance premiums included in Barclaycard and UK Banking
amounting to £113m (2004: £nil). In 2004 and prior years, Barclaycard
dealt with third-party underwriters but from the start of 2005 this
activity was undertaken with the captive insurance operation within
UK Banking.
In addition, there were two other significant consolidation adjustments
in 2005: internal fees for structured capital markets activities arranged
by Barclays Capital of £67m (2004: £63m); and the fees paid to Barclays
Capital for capital raising and risk management advice of £39m (2004:
£nil). Previously, capital raising fees were amortised over the life of the
capital raising and taken as a charge to net interest income. Under IFRS
they are recognised as a cost in the year of issue.
Net trading income of £85m (2004: £21m) primarily arose as a result
of hedging related transactions in Treasury. The hedge ineffectiveness
from 1st January 2005, together with other related Treasury
adjustments, amounted to a gain of £18m (2004: £nil) and was
reported in net interest income. The cost of hedging the foreign
exchange risk on the Group’s investment in Absa amounted to £37m
(2004: £nil) and was deducted from net interest income.
Other income primarily comprised property rental income.
Impairment reflected recoveries made on loans previously written off
in the transition businesses.
Operating expenses rose £156m to £347m (2004: £191m) and
included non-recurring costs relating to the Head office relocation to
Canary Wharf of £105m (2004: £32m) and a charge to write-down
capitalised IT related assets held centrally of £60m (2004: £nil).