Barclays announced their interim results today and did a good snow job to the extent that the BBC's reporters bought the line about just under £3 billion pre-tax profits and started talking abount bankers' pay.
The truth is not so rosy. Profitability was down in every business department except Barclaycard (up 1%) and Barclays Capital (up 100%). Amounts lent to individuals and businesses were cnsiderably lower than 12 months ag despite early morning spin about new lending (not net increases in lending).
So was it a great performance boosting the bank to £2,984 million profits from £2,754 last year?
Well, not quite. The Barclays Capital increase is explained by the acquisition of a substantial part of Lehman in late 2008, and with income increasing 60% but expenses increasing 100%, that doesn't necessarily look too healthy.
Worse than that, much of the profits actually arose under the following line under Head Office: "Other income increased £1,111m to £1,135m (2008: £24m). This reflects the gain made on debt extinguishment." Indeed, "£1,192m of gains on debt buy-backs and extinguishment" contributed to the bottom line.
Or in other words, 35% of Barclays profits came from the fact that their credit had deteriorated so badly that they were able to redeem some of their borrowings at a discount to book value. Easy to see what happened there. A large dollop of Middle Eastern cash in the frm of new equity subscriptions gave Barclays the ability to buy in some of their old debt for no better reason than that they could book a quick profit on it. At some point in the future Barclays will have to issue more debt at a higher coupon than on the retired debt so future profits will be reduced by about the same amount.
None of the analysts picked up on the point, which tells you all you ned to know about city analysts.