View from City Road: Barclays pays for smug smiles

STILL Britain's largest bank, Barclays turned in the smallest half-year profits of the big four clearing banks.

Bad debt provisions, at more than pounds 1bn, were the largest for a six-month period by any UK bank. The message from Sir John Quinton, the outgoing chairman, was that there is scant improvement to come in the second half. Barclays has learned the hard way that biggest is not necessarily best.

Yet the shares closed 10p higher at 334p as the stock market focused on the unexpected 16 per cent increase in operating profits. These were helped by improved cost control, with Barclays' cost-to-income ratio falling faster than at most competitors.

But banks are in the business of lending, and it is lending that went wrong at Barclays.

The bank has been consistently over-optimistic about its bad debt performance and is now paying for its smug smiles over the past few years when other banks reported huge provisions. Its admission that some of the problems were of its own making did little to reassure investors.

Andrew Buxton, the incoming chief executive who will controversially become chairman as well, promises the bank will study each loan's risk-reward ratio. Surely it was already doing just that. If not, why not?

Given its greater exposure to property and construction in its loan book, backed by forecasts of continuing recession, Barclays' bad debts are likely to stay higher for longer than those of its rivals.

Barclays is also doing poorly in the US and Europe, despite significant investment in those businesses. It warned of higher European provisions in the second half.

With a maintained dividend, Barclays' yield is higher than that of National Westminster Bank. A lot of yesterday's buying represented switching into Barclays from NatWest.

Investors will tire of many more seasons of pre-tax profits around this level. Stockbrokers' analysts were busily slashing their 1992 profits forecasts for Barclays to around pounds 350m, which is still far from impressive.

Investors sold Barclays shares before the results, anticipating the big property lending hit. Despite a bounce yesterday the shares look less attractive than others in the sector such as Lloyds or Bank of Scotland.

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