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Thursday, 26 April 2012

Rough Diamond

Barclays have an AGM coming up so it is just as well for Bob Diamond that they announced an increase in basic earnings per share to 13.6p from 10.7p, although they held their interim dividend at 1p. After all, Mr Diamond is going to face a lot of criticism over his £11 million pay package for 2011, and that figure excludes a lot of tax liabilities the bank assumed on his relocation. Apparently another £7 million.

However, things are not so rosy in the Barclays cap because the £2.4 billion that is being reported to shareholders omits two big chunks of dosh.

First, the bank put aside another £300 million to meet the cost of mis-sold PPI (payment protection insurance) policies. This comes on top of £1 billion already set aside to pay compensation to swindled borrowers. Funny how the bank booked the PPI sales as ordinary income in the past, but when it comes to pay compensation this is not part of its reported trading profits.

 In the same vein there is an even bigger biggie, a loss of more than £2.6 billion on the fair value of their own debt. We have covered this before. When the credit rating of banks deteriorates, they claim that the fair value of the debt they have already issued reduces because a higher discount rate is applied to value that debt, so they book a profit.

Similarly when the creditworthiness of the bank improves and the spread on their debt tightens, they will suffer a loss. To my mind there is nothing wrong with saying that there is an extraordinary loss. The prior debt was always going to be repaid so I would happily forget this fair value charade. However, in the first nine months of 2011, Barclays' results were flattered by a £3 billion gain in the value of its own debt, so I see no reason why this figure is not also included in ordinary profits.

Taking these two figures into account, Barclays actually lost £475 million before tax, compared with a profit before tax of £1.7 billion last year.

Some people might think that makes them worth £11 million. Shine on you crazy, Diamond.

1 comment:

Demetrius said...

I mentioned this in my Friday blog and it has been picked up elsewhere. In 1971 I recall the use of a faulty calculator in doing the estimates for the coming financial year. It caused all sorts of trouble.