Barclays PLC moved Thursday to end speculation over the size of its exposure to the subprime mortgage crisis, disclosing GBP1.3 billion of write-downs at its Barclays Capital unit.
The figure was lower than many analysts had expected. At 1050 GMT, Barclays shares were up 1 pence, or 0.2%, at 534 pence, after having opened up 6%. Analysts attributed the later weakness to broader market conditions rather than to the Barclays update.
The bank said October had been particularly difficult and that it had booked GBP800 million in net charges and write-downs in that month alone.
Barclays President Bob Diamond told a conference call that the bank's overall strong income performance, despite recent market difficulties, helped it to absorb the impact of the write-downs. However, he said the market needs much more time to get over recent subprime issues.
"Subprime will be in work-out for a couple of years - there's no doubt about it," Diamond said.
He said that for Barclays, there was no risk of further write-downs of its residential mortgage-backed securities CDOs as these had been written down to zero, as had all its second-lien collateral. Barclays declined to say if it could make additional write-downs from exposure in other parts of its business.
In the 10 months to the end of October, Barclays Capital made pretax profit of GBP1.9 billion after booking credit, mortgage and leveraged-finance related charges. The figure is higher than in the same period a year earlier, the bank said.
"The October charges and write-downs reflected the impact of rating agency downgrades on a broad range of CDOs and the subsequent market downturn," the bank said.
The statement came two weeks ahead of the bank's scheduled Nov. 27 trading update.
It followed a period of extreme volatility in Barclays shares as investors feared the U.K. bank was sitting on huge undisclosed losses linked to its exposure to the U.S. subprime mortgage meltdown.
Trading in Barclays stock was halted briefly last Friday and the bank issued a statement denying speculation that it was about to announce GBP10 billion of write-downs.
"Today's extensive disclosure demonstrates the strength and resilience of our performance during the year and in particular during the turbulent month of October," Barclays said in its statement Thursday.
Barclays Capital's involvement in the U.S. subprime sector comprises liquidity facilities to CDOs and other structures, now held as ABS CDO Super Senior exposure, the bank said.
It said other exposure consists of warehouse lines provided to third-party originators, whole loan purchases, and ABS and CDO trading positions.
At Oct. 31, Barclays Capital's high-grade exposure net of hedges and subordination had fallen to GBP3.8 billion from GBP5.8 billion at the end of June after charges and write-downs.
The unit's mezzanine exposure net of hedges and subordination was GBP1.2 billion at the end of October compared with GBP1.6 billion at the end of June, after charges and write-downs.
Diamond said there had been some improvement in the leveraged-loan market since the summer with firmer prices. "We do feel that, going into 2008 the prospects for the new issue pipeline are pretty good," possibly as early as the first quarter, he said.
Diamond said Barclays had seen the strongest income growth from interest-rate swaps, government bonds and foreign exchange - all products that are helped by increased market volatility. Barclays Capital had fared especially well in Asia recently, Diamond said.
"There are advantages to being a universal bank," he said.
Collins Stewart analyst Alex Potter said the GBP1.3 billion write-down was lower than expected, though the bank's pretax profit figures showed growth had slowed since the first half.
"Profits for the 10 months to end-October are GBP1.9 billion (pretax) which, although ahead of last year, is a material slowdown after the GBP1.69 billion posted in the first-half," he said.
He rates the shares at buy with a 893 pence target.
Landsbanki's Ian Poulter said most analysts had revised down their Barclay's write-down estimates this week after the bank denied rumors the figure could top GBP10 billion.
"It was still better than some had thought, but the key thing is that the bank has communicated with the market. Under current circumstances, any kind of clarity is welcomed," he said.
The Barclays announcement followed another advance update Wednesday from HSBC Holdings PLC. It took a higher-than-expected impairment charge on bad debts at its HSBC Finance unit in the third quarter, but said revenue growth across the bank's global operations "more than offset" the $3.4 billion charge.
HSBC shares initially rallied as much as 5% after the bank said it was setting aside less than some analysts had expected against future losses on mortgages at HSBC Finance, the bank's U.S. consumer lending business.
