BZW admits pounds 20m loss

Barclays will reveal a "black hole" of around pounds 20m in the trading operations of its investment banking subsidiary BZW when it reports its interim figures to the City next Thursday.

Martin Taylor, chief executive of Barclays, is expected to make a statement clarifying BZW's losses on complex derivative contracts that have been adversely affected by the ending of tax breaks on investment bank trading operations and the removal of relief on advance corporation tax by the Chancellor in his 2 July Budget.

While the losses occurred after the end of the first half of the bank's financial year, they are expected to be recorded after the bank took advice from its accountants Price Waterhouse.

The estimated hole of pounds 20m is chiefly attributed to losses arising from long-term fixed income contracts with building societies, which in turn sell them on as fixed-income bonds to individuals.

BZW is a big player in this market, which has grown in recent years as more individual investors have opted for the good returns and comparative safety of a high-yield bond.

Under the contracts, BZW takes on the risk of providing this guaranteed income stream in return for a fee, and then hedges its risk in the market using a portfolio of FT-SE 100 stocks and more complex financial instruments.

These contracts suddenly became loss making for the bank when its tax- exempt status on trading operations was removed and the dividend stream on its investments was cut by the removal of ACT relief. BZW is also believed to have incurred some trading losses in the volatile market created by the efforts of itself and other banks selling similar instruments to cover their positions in the days following the Budget. Mr Taylor is believed to be anxious to play down the scale of the losses, which were rumoured to be in the hundreds of millions, with the total bill for all market- makers involved estimated at one point to be pounds 1bn.

He is also keen to avoid any comparison with the pounds 90m derivatives loss revealed by NatWest Markets earlier this year, which led to the departure of a number of senior investment bankers from the company, including NatWest Markets managing director Martin Owen, and caused takeover rumours to swirl about its parent, National Westminster Bank.

As a result of a review of the investment banking business following the loss, NatWest announced on Friday that it was splitting NatWest Markets in two and appointing a new chief executive, Konrad "Chip" Kruger, but the moves did little to dampen negative market sentiment about NatWest.

Mr Taylor is expected to highlight the BZW loss as a pre-emptive strike at the rumour mill and to point out that the losses will be offset by improved revenue performance in other parts of BZW in the second half.

However, the bank remains acutely conscious of attempts to compare it with NatWest Markets, for fear of opening itself up to shareholder criticism over the wisdom of retaining a merchant banking operation when rivals such as Lloyds TSB, are making bumper profits.

Analysts believe that any loss will not hit the bank's full year profits, which are forecast by Kleinwort Benson to be pounds 2.39bn.