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Barclays Profit Sinks on Tough Market Conditions

Profits at Barclays, Britain's third biggest bank, were well below those of a year earlier in the first quarter after its investment bank and fund management arms were hit by tough financial market conditions.

In comments released before the bank's annual shareholder meeting on Thursday, the bank said profits at Barclays Capital and Barclays Global Investors were "well below" the strong profits of a year ago, but both businesses were profitable.

Barclays said this would include any writedowns it needed to make, but did not comment on whether it has taken or will take any more hits, amid concern it faces billions more in losses after rivals have written down the value of their risky assets.

Credit Suisse announced a $5 billion writedown for the first quarter on Thursday and Royal Bank of Scotland has said it could take a hit of nearly $12 billion.

By 8:30 a.m. London time, Barclays shares were down 2.3 percent at 445 pence in a weak UK bank sector, extending their fall this week to 10 percent.

Alex Potter, analyst at Collins Stewart, said the update constituted a profit warning, with that he called "dire" conditions in March indicating average 2008 earnings forecasts are too high.

"If current credit market conditions persist, the (earnings) miss is already double digit and likely growing fast," Potter said in a note, cutting his rating to "sell" from "buy." Other analysts were more reassured in terms of earnings, but said the update lacked detail.

The indication that any writedown for BarCap would be modest was positive, but it would include the gains on debt BarCap carries on its books, they said.

Barclays Chief Executive John Varley said current market turbulence meant it was a time for banks to have strong capital ratios, and he was targeting a Tier 1 equity ratio of 5.25 percent "in time," from 5.1 percent at the end of 2007.

Writedowns to Come?

Speculation that Barclays and UK peers such as HBOS will be forced to announce new big writedowns and may launch rights issues to rebuild capital intensified after RBS tapped investors for a record 12 billion pounds.

Barclays is due to release a full Q1 trading statement on May 15.

It wrote down the value of its risky assets by 1.6 billion pounds last year, but capital markets deteriorated sharply again in March.

This prompted RBS to slash the value of its investments in below-prime Alt-A mortgages and collateralized debt obligations in particular, which analysts said left other banks vulnerable.

Collins Stewart's Potter said RBS's markdown could translate to a 6.2 billion pound writedown at Barclays, but Deutsche Bank estimated it would be nearer 3.7 billion.

Barclays said in February its assets were of better quality than rivals. Varley said Q1 profits in its global retail and commercial banking unit were ahead of 2007. The private banking unit Barclays Wealth was profitable in the quarter, he said.

"The second half of 2007 was as hard a six-month period as I can remember, and conditions in some markets in 2008 have remained difficult," Varley said. "But, given that, I'm quite pleased with the way in which we've started the year." The bank's strategy to diversify -- 65 percent of profits came from outside UK banking last year -- had underpinned a resilient performance and left it well placed, he said.

Barclays is expected to report 2008 profit near flat from last year's 7.1 billion pounds, according to average forecasts.

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