Barclays 2007 Annual Report Download - page 52

Financial review
Results by nature of income and expense
50 Barclays PLC Annual Report 2007
Impairment charges (continued)
2006/05
Total impairment charges increased 37% (£583m) to £2,154m
(2005: £1,571m).
Impairment charges on loans and advances and other credit provisions
increased 32% (£501m) to £2,068m (2005: £1,567m). Excluding Absa,
the increase was 26% (£395m) and largely reflected the continued
challenging credit environment in UK unsecured retail lending through
2006. The wholesale and corporate sectors remained stable with a low
level of defaults.
The Group impairment charges on loans and advances and other credit
provisions as a percentage of year-end total loans and advances of
£316,561m (2005: £303,451m) increased to 0.65% (2005: 0.52%).
Retail
Retail impairment charges on loans and advances and other credit
provisions increased to £1,809m (2005: £1,254m), including £99m
(2005 a: £10m) in respect of Absa. Retail impairment charges on loans
and advances amounted to 1.30% (2005 b: 0.93%) as a percentage of
year-end total loans and advances of £139,350m (2005b: £134,420m),
including balances in Absa of £20,090m (2005: £20,836m).
In the UK retail businesses, household cash flows remained under
pressure leading to a deterioration in consumer credit quality. High debt
levels and changing social attitudes to bankruptcy and debt default
contributed to higher levels of insolvency and increased impairment
charges. In UK cards and unsecured consumer lending, the flows of new
delinquencies and the levels of arrears balances declined in the second
half of 2006, reflecting more selective customer recruitment, limit
management and improved collections.
In UK Home Finance, delinquencies were flat and amounts charged-off
remained low. The weaker external environment led to increased credit
delinquency in Local Business, where there were both higher balances on
caution status and higher flows into delinquency, which both stabilised
towards the year end.
Wholesale and corporate
In the wholesale and corporate businesses, impairment charges on loans
and advances and other credit provisions decreased to £259m (2005:
£313m), including £27m (2005 a: £10m) in respect of Absa. The fall was
due mainly to recoveries in Barclays Capital as a result of the benign
wholesale credit environment. This was partially offset by an increase in
Barclays Commercial Bank, reflecting higher charges in Medium Business
and growth in lending balances.
The wholesale and corporate impairment charge was 0.15% (2005 b:
0.19%) as a percentage of year-end total loans and advances to banks
and to customers of £177,211m (2005b: £169,031m), including balances
in Absa of £9,299m (2005: £9,731m).
In Absa, impairment charges increased to £126m (2005 b: £20m)
reflecting a full year of business and normalisation of credit conditions
in South Africa following a period of low interest rates.
Impairment on available for sale assets
The total impairment charges in Barclays Capital included losses of £83m
(2005: £nil) on an available for sale portfolio where an intention to sell
caused the losses to be viewed as other than temporary in nature. These
losses in 2006 were primarily due to interest rate movements, rather than
credit deterioration, with a corresponding gain arising on offsetting
derivatives recognised in net trading income.
Operating expenses
2007 2006 2005
£m £m £m
Staff costs (refer to page 51) 8,405 8,169 6,318
Administrative expenses 3,978 3,980 3,443
Depreciation 467 455 362
Impairment loss – property and
equipment and intangible assets 16 21 9
Operating lease rentals 414 345 316
Gain on property disposals (267) (432) –
Amortisation of intangible assets 186 136 79
Operating expenses 13,199 12,674 10,527
2007/06
Operating expenses grew 4% (£525m) to £13,199m (2006: £12,674m).
The increase was driven by growth of 3% (£236m) in staff costs to
£8,405m (2006: £8,169m) and lower gains on property disposals.
Administrative expenses remained flat at £3,978m (2006: £3,980m)
reflecting good cost control across all businesses.
Operating lease rentals increased 20% (£69m) to £414m (2006: £345m),
primarily due to increased property held under operating leases.
Operating expenses were reduced by gains from the sale of property of
£267m (2006: £432m) as the Group continued the sale and leaseback
of some of its freehold portfolio, principally in UK Banking.
Amortisation of intangible assets increased 37% (£50m) to £186m
(2006: £136m) primarily reflecting the amortisation of mortgage servicing
rights relating to the acquisition of HomEq in November 2006.
The Group cost:income ratio improved two percentage points to 57%
(2006: 59%).
2006/05
Operating expenses increased 20% (£2,147m) to £12,674m (2005:
£10,527m). The inclusion of Absa contributed operating expenses of
£1,496m (2005 a: £664m). Group operating expenses excluding Absa
grew 13%, reflecting a higher level of business activity and an increase
in performance related pay.
Administrative expenses increased 16% (£537m) to £3,980m (2005:
£3,443m). The inclusion of Absa contributed administrative expenses of
£579m (2005 a: £257m). Group administrative expenses excluding Absa
grew 7% principally as a result of higher business activity in UK Banking
and Barclays Capital.
Operating lease rentals increased 9% (£29m) to £345m (2005: £316m).
The inclusion of Absa contributed operating lease rentals of £73m
(2005 a: £27m), which more than offset the absence of double occupancy
costs incurred in 2005, associated with the Head office relocation to
Canary Wharf.
Operating expenses were reduced by gains from the sale of property of
£432m (2005: £nil) as the Group took advantage of historically low yields
on property to realise gains on some of its freehold portfolio.
Amortisation of intangible assets increased 72% (£57m) to £136m
(2005: £79m) primarily reflecting the inclusion of Absa for the full year.
The Group cost:income ratio improved to 59% (2005: 61%). This reflected
improved productivity. The Group cost:net income ratio was 65%
(2005: 67%).
Notes
aFor 2005, this reflects the period from 27th July until 31st December 2005.
bIn 2005 the analysis of loans and advances to customers between retail business
and wholesale and corporate business has been reclassified to reflect enhanced
methodology implementation.