Barclays 2006 Annual Report Download - page 20

Barclays PLC
Annual Report 2006
16
Financial review
collections throughout 2006 and, as a consequence, believes we have
passed the worst in Barclaycard UK impairment in the second half of
2006. There has also been a review of some partnership businesses and
lending to higher risk customers. An operational review is also under
way, to improve efficiency and enhance Barclaycard’s ability to provide
the best service to customers, wherever they are in the world.
We continued to invest in Barclaycard US. Since we bought the
business in December 2004, outstandings have grown from US$1.4bn
to US$4.0bn, and cards in issue have increased from 1.1 million to
4.2 million. Income grew 73% in 2006. We are on track to become
profitable in 2007.
International Retail and Commercial Banking achieved a step
change in profitability to £1,270m (2005: £633m), reflecting the
inclusion of Absa for a full year, the impact of corporate development
activity and growth in key geographies.
International Retail and Commercial Banking – excluding Absa
achieved a profit before tax of £572m (2005: £335m), including a
gain of £247m from the disposal of our interest in FirstCaribbean
International Bank. Excluding this gain, profit before tax was £325m
(2005: £335m). Good organic growth in the businesses across
continental Europe was offset by incremental investment in distribution
capacity and technology across the businesses in 2006. We expect to
double the rate of investment in infrastructure and distribution in 2007.
International Retail and Commercial Banking – Absa contributed
£698m profit before tax in the first full year of ownership and is
performing well ahead of our acquisition business case. Absa Group
Limited achieved year on year growth in profit before tax of 24% in
Rand terms, reflecting very strong growth in mortgages, credit cards
and commercial property finance. The benefits of Barclays ownership
are evident in 46% attributable earnings growth in both Absa Card and
Absa Capital (reported in Barclays Capital), with total synergy benefits
well ahead of plan.
Barclays Capital produced an outstanding performance with profit
before tax rising 55% to £2,216m. Income growth of 39% was driven
by doing more business with new and existing clients and was broadly
based across asset classes and geographies. Growth was particularly
strong in areas where we have invested in recent years, including
commodities, equity products and credit derivatives. Profit growth
was accompanied by improvements in productivity: income and
profits grew significantly faster than Daily Value at Risk, risk weighted
assets, economic capital, regulatory capital and costs. The ratio of
compensation costs to net income improved two percentage points
to 49% and the cost:net income ratio improved three percentage points
to 64%. We continued to invest for future growth, increasing headcount
3,300 including 1,300 from the acquisition of HomEq, a US mortgage
servicing business.
Barclays Global Investors delivered excellent results, with profit
before tax up 32% to £714m. Income growth of 26% was attributable
to increased management fees, particularly in the iShares and active
businesses. Assets under management grew US$301bn to US$1.8trn,
including net new assets of US$68bn, reflecting very strong inflows in
iShares and active assets. The cost:income ratio improved two
percentage points to 57%.
Group financial performance
The Group’s profit before tax in 2006 increased 35% (£1,856m) to
£7,136m (2005: £5,280m). Income increased 25% (£4,262m) to
£21,595m (2005: £17,333m) whilst operating expenses rose 20%
(£2,147m) to £12,674m (2005: £10,527m). Impairment charges
rose 37% (£583m) to £2,154 (2005: £1,571m).
Earnings per share rose 32% to 71.9p (2005: 54.4p), diluted earnings
per share rose 33% to 69.8p (2005: 52.6p). Dividends per share rose
17% to 31p (2005: 26.6p). Return on average shareholders’ funds was
25% (2005: 21%). Economic profit was up 54% (£952m) to £2,704m
(2005: £1,752m).
Business performance
In UK Banking we made significant strides towards our strategic priority
of building the best bank in the UK. Strong growth in income enabled us
to increase our profit before tax 17% to £2,578m. The improvement in
the cost:income ratio was four percentage points in headline terms to
52% (2005: 56%). Excluding the impact of property gains and
accelerated investment, the improvement in the cost:income ratio was
three percentage points making a cumulative total for 2005-2006 of
six percentage points. This means that we have achieved our target of
a six percentage point improvement over the period 2005-2007, one
year ahead of schedule. We continue to target a further two percentage
point improvement in the cost:income ratio for 2007 to 51%.
UK Retail Banking delivered a 17% profit before tax increase to
£1,213m. This was driven by broadly based income growth of 7%, with
particularly strong performances in savings, Local Business and UK
Premier and good growth in current accounts. Our mortgage market
share and processing capacity also increased strongly leading to a net
market share of 4% for the second half of the year. We doubled
investment across the business. We focused on upgrading distribution
capabilities, transforming the performance of the mortgage business,
revitalising product offerings, and improving core operations and
processes. The additional investment substantially offset the impact of
property gains, leading to broadly flat costs. In 2007 we expect to make
further significant investment, including the restructuring of the branch
network and the migration of Woolwich customers.
UK Business Banking delivered very strong growth in profit before tax
of 18% to £1,365m. Strong growth in loans and deposits drove income
growth of 11%. Profit before business disposals grew 11%. UK Business
Banking maintained its competitive position and also funded significant
investment in improving its infrastructure and customer service.
At Barclaycard profit before tax fell 40% to £382m. Good income
growth of 8%, driven by very strong momentum in Barclaycard
International, was more than offset by a further rise in impairment
charges, principally in the UK lending portfolios, and by higher costs,
mainly as a result of continued investment in Barclaycard US. In the UK,
high debt levels and changing attitudes to bankruptcy and debt default
contributed to increased impairment charges. As the consumer lending
market in the UK changes, Barclaycard is repositioning its business to
achieve sustainable, profitable growth. Higher borrowing by UK
consumers, lower disposable household incomes and a tougher
regulatory environment have seen Barclaycard take a number of actions.
The business focused on tighter lending criteria and improved