Barclays 2006 Annual Report Download - page 39

Barclays PLC
Annual Report 2006 35
Operating review
1
2006/05
Barclays Capital delivered record profit before tax and net income. Profit
before tax increased 55% (£785m) to £2,216m (2005: £1,431m). This
was the result of a very strong income performance, driven by higher
business volumes, continued growth in client activity and favourable
market conditions. Net income increased 42% (£1,831m) to £6,225m
(2005: £4,394m). Profit before tax for Absa Capital was £71m (2005(a):
£39m). Excluding Absa Capital, profit before tax increased 54%.
Income increased 39% (£1,762m) to £6,267m (2005: £4,505m) as a
result of very strong growth across the Rates, Credit and Private Equity
businesses. Income increased in all geographic regions with significant
contributions outside the UK from the US, continental Europe and Asia.
The top line performance reflected returns from past investments and
the strength of the global client franchise. Average DVaR increased
16% to £37.1m (2005: £32.0m) significantly below the rate of
income growth.
Secondary income, comprising principal transactions (net trading
income and net investment income) and net interest income, is mainly
generated from providing client financing and risk management
solutions. Secondary income increased 43% (£1,584m) to £5,293m
(2005: £3,709m).
Net trading income increased 60% (£1,331m) to £3,562m (2005:
£2,231m) with very strong contributions across the Rates and Credit
businesses, in particular, commodities, fixed income, equities, credit
derivatives and emerging markets. The performance was driven by
higher volumes of client led activity and favourable market conditions.
Net investment income increased 39% (£160m) to £573m (2005:
£413m) driven by investment realisations, primarily in Private Equity,
offset by reduced contributions from credit products. Net interest
income increased 9% (£93m) to £1,158m (2005: £1,065m) driven by
a full year contribution from Absa Capital. Corporate lending remained
flat at £40.6bn (2005: £40.1bn).
Primary income, which comprises net fee and commission income
from advisory and origination activities, grew 23% (£176m) to £952m
(2005: £776m). This reflected higher volumes and continued market
share gains in a number of key markets, with strong contributions from
issuances in bonds, European leveraged loans and convertibles.
Impairment charges of £42m (2005: £111m), including impairment
on available for sale assets of £83m (2005: £nil), were 62% lower than
prior year reflecting recoveries and the continued benign wholesale
credit environment.
Operating expenses increased 35% (£1,046m) to £4,009m (2005:
£2,963m), reflecting higher performance related costs, increased levels
of activity and continued investment across the business. The cost:net
income ratio improved to 64% (2005: 67%) and the compensation to
net income ratio improved to 49% (2005: 51%). Performance related
pay, discretionary investment spend and short-term contractor
resource costs represented 50% of operating expenses (2005: 46%).
Amortisation of intangible assets principally relates to mortgage service
rights obtained as part of the purchase of HomEq, a US mortgage
servicing business acquired on 1st November 2006.
Total headcount increased 3,300 during 2006 to 13,200 (2005: 9,900)
and included 1,300 from the acquisition of HomEq. Organic growth was
broadly based across all regions and reflected further investments in the
front office, systems development and control functions to support
continued business expansion.
2005/04
Profit before tax increased 25% (£289m) to £1,431m (2004: £1,142m).
Net income increased 29% (£982m) to £4,394m (2004: £3,412m).
Income increased 28% (£987m) to £4,505m (2004: £3,518m).
Income by asset category and geography was broadly based. Areas
of investment in 2004, such as commodities, commercial mortgage
backed securities and equity derivatives, performed well, delivering
significant income growth. Market risk was well controlled with average
DVaR falling 7% to £32.0m (2004: £34.3m) as a result of increased
diversification across asset classes.
Secondary income increased 31% (£876m) to £3,709m (2004:
£2,833m).
Net trading income increased 52% (£768m) to £2,231m (2004:
£1,463m). Net investment income increased 37% (£111m) to £413m
(2004: £302m), driven by realisations from credit products. Net interest
income was flat at £1,065m (2004: £1,068m), reflecting flattening yield
curves and the impact of IAS 32 and IAS 39.
Primary income grew 16% (£106m) to £776m (2004: £670m).
Impairment charges of £111m (2004: £106m) were in line with the
prior year reflecting the stable wholesale credit environment.
Operating expenses increased 31% (£693m) to £2,963m (2004:
£2,270m), reflecting higher business volumes and the ongoing costs
associated with staff hired during 2004 and 2005 as part of the business
expansion plan. Performance related costs increased due to the strong
profit performance. Investment expenditure, primarily in the front office,
continued to be significant although less than 2004 as headcount
growth slowed. The cost:net income ratio remained stable at 67%.
Note
(a) For 2005, this reflects the period from 27th July until 31st December 2005.