Barclays 2008 Annual Report Download - page 61

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Business review
Barclays PLC Annual Report 2008 59
2007/06
Barclays Capital delivered profits ahead of the record results achieved in
2006 despite challenging trading conditions in the second half of the year.
Profit before tax increased 5% (£119m) to £2,335m (2006: £2,216m).
There was strong income growth across the Rates businesses and
excellent results in Continental Europe, Asia and Africa demonstrating the
breadth of the client franchise. Net income was slightly ahead at £6,273m
(2006: £6,225m) and costs were tightly managed, declining slightly year
on year. Absa Capital delivered very strong growth in profit before tax to
£155m (2006: £71m).
The US sub-prime driven market dislocation affected performance in
the second half of 2007. Exposures relating to US sub-prime were actively
managed and declined over the period. Barclays Capital’s 2007 results
reflected gross losses of £2,999m (2006: £nil) due to the dislocation of
credit markets. These losses were partially offset by income and hedges
of £706m (2006: £nil) and gains of £658m (2006: £nil) from the general
widening of credit spreads on structured notes issued by Barclays Capital.
The gross losses comprised £2,217m (2006: £nil) against income and
£782m (2006: £nil) in impairment charges.
Income increased 14% (£852m) to £7,119m (2006: £6,267m) as a
result of very strong growth in interest rate, currency, equity, commodity
and emerging market asset classes. There was excellent income growth
in continental Europe, Asia, and Africa. Average DVaR increased 13% to
£42m (2006: £37.1m) in line with income.
Secondary income, comprising principal transactions (net trading
income and net investment income), is mainly generated from providing
client financing and risk management solutions. Secondary income
increased 11% (£578m) to £5,871m (2006: £5,293m).
Net trading income increased 5% (£177m) to £3,739m (2006:
£3,562m) with strong contributions from fixed income, commodities,
equities, foreign exchange and prime services businesses. These were
largely offset by net losses in the business affected by sub-prime
mortgage related write-downs. The general widening of credit spreads
that occurred over the course of the second half of 2007 also reduced the
carrying value of the £40.7bn of structured notes issued by Barclays
Capital held at fair value on the balance sheet, resulting in gains of £658m
(2006: £nil). Net investment income increased 66% (£380m) to £953m
(2006: £573m) as a result of a number of private equity realisations,
investment disposals in Asia and structured capital markets transactions.
Net interest income increased 2% (£21m) to £1,179m (2006: £1,158m),
driven by higher contributions from money markets. The corporate
lending portfolio increased 29% to £52.3bn (2006: £40.6bn), largely due
to an increase in drawn leveraged finance positions and a rise in drawn
corporate loan balances.
Primary income, which comprises net fee and commission income
from advisory and origination activities, grew 30% (£283m) to £1,235m
(2006: £952m), with good contributions from bonds and loans.
Impairment charges and other credit provisions of £846m included
£722m against ABS CDO Super Senior exposures, £60m from other credit
market exposures and £58m relating to drawn leveraged finance
underwriting positions. Other impairment charges on loans and advances
amounted to a release of £7m (2006: £44m release) before impairment
charges on available for sale assets of £13m (2006: £86m).
Operating expenses decreased 1% (£36m) to £3,973m (2006:
£4,009m). The cost:net income ratio improved to 63% (2006: 64%) and
the compensation cost:net income ratio improved by two percentage
points to 47% (2006: 49%). Performance related pay, discretionary
investment spend and short term contractor resources represented 42%
(2006: 50%) of the cost base. Amortisation of intangible assets of £54m
(2006: £13m) principally related to mortgage service rights.
Total headcount increased 3,000 during 2007 to 16,200 (2006: 13,200)
including 800 from the acquisition of EquiFirst. The majority of organic
growth was in Asia Pacific.
Barclays Capital
2008 2007 2006
£m £m £m
Income statement information
Net interest income 1,724 1,179 1,158
Net fee and commission income 1,429 1,235 952
Net trading income 1,506 3,739 3,562
Net investment income 559 953 573
Principal transactions 2,065 4,692 4,135
Other income 13 13 22
Total income 5,231 7,119 6,267
Impairment charges and other credit provisions (2,423) (846) (42)
Net income 2,808 6,273 6,225
Operating expenses excluding amortisation of intangible assets (3,682) (3,919) (3,996)
Amortisation of intangible assets (92) (54) (13)
Operating expenses (3,774) (3,973) (4,009)
Share of post-tax results of associates and joint ventures 635 –
Gain on acquisition 2,262 ––
Profit before tax 1,302 2,335 2,216
Balance sheet information
Total assets £1,629.1bn £839.9bn £657.9bn
Performance ratios
Return on average economic capital 20% 33% 41%
Cost:income ratio 72% 56% 64%
Cost:net income ratio 134% 63% 64%
Compensation:net income ratio 82% 47% 49%
Other financial measures
Risk Tendency £415m £140m £95m
Economic profit £825m £1,172m £1,181m
Risk weighted assetsa£227.4bn £178.2bn £137.6bn
Average DVaR (95%)b£53.4m £32.5m £37.1m
Average net income generated per member of staff (’000) £151 £410 £565
Corporate lending portfolio £76.6bn £52.3bn £40.6bn
Notes
aRisk weighted assets for 2008 and 2007 are calculated under Basel II. 2006 is calculated under Basel I.
bAverage DVaR for 2007 and 2006 are calculated with a 98% confidence level.