Barclays Profit Drops After $1.95 Billion Writedown

British bank Barclays said profits fell by an undisclosed amount in the first quarter and refused to rule out a rights issue after a 1 billion pound ($1.95 billion) writedown on assets tarnished by the credit crunch.

That was less than the hit taken by many other banks but its capital cushion remains thin compared with rivals, especially after Royal Bank of Scotland and HBOS unveiled big rights issues.

Sang Tan

Barclays, Britain's third-biggest bank, said on Thursday the writedown for its investment bank arm Barclays Capital (BarCap) was net of a 700 million pound gain on the fair valuation of debt it carries on its own books.

Barclays shares ended lower by 2.5 percent at 416.75 pence, alongside a weak UK bank sector.

The bank expects its core tier-1 capital ratio to be slightly lower at the end of June than the 5.1 percent it reported at the end of 2007, but intends to lift this to 5.25 percent "in time." Finance Director Chris Lucas said Barclays was keeping its options open in regard to boosting capital.

When asked if that meant it could launch a rights issue, he said: "We are clear that all options remain available ... we are not going to rule in or rule out anything." Lucas said the bank did not intend to follow the lead of several rivals by paying its dividend in shares to save cash.

"Our view on scrip dividends is they are not really a dividend, and therefore are not attractive to us," he told reporters on a conference call.

Other options to lift capital are by retaining earnings and slower lending. Lucas said risk-weighted asset growth would be lower this year than in 2007. Analysts say Barclays is also likely to be seeking to sell stakes to outside investors.

Alex Potter, analyst at Collins Stewart, said the low capital position was sustainable but could drag on the shares.

"Do you bite the bullet now, recapitalise and, though you may have day one dilution, give yourself a better footing to generate growth? Or do you leave it as an overhang over the business?" Potter said.

"Hats off to them for being in a position where they are not forced into this, but nonetheless the bar has been raised."

Solid Mortgage Foundation

Barclays said last month its first-quarter profits would fall from a year ago as earnings at BarCap and its Barclays Global Investors fund management unit had been hit by financial market turmoil, but it has not disclosed the extent of the fall.

It said BarCap stayed profitable in the first four months of the year, despite in April reversing 500 million pounds of the gains it made on the valuation of the debt it carried. The bank's profits in April, excluding BarCap, were above a year ago, it said.

Barclays, through its Woolwich brand, grabbed some 20 percent of net UK mortgage lending in the first quarter as it benefited from rivals retreating from a slowing housing market.

Profits in UK retail banking "increased strongly," excluding the impact of lower property credits.