City in no mood to forgive Barclays gloom

MATT Barrett, chief executive of Barclays Bank, must try harder. He admitted that his half-term report, which revealed a 7% fall in profits to £1.749bn for the first six months, had fallen short of his own 'high standards'.

Barclays took a caning from bad debts, with total provisions up 43% to £713m, including £100m to cover its exposure to crisis-riven Argentina. Bad debts also ballooned at investment banking arm Barclays Capital, after it lent millions to the likes of WorldCom and Enron.

The bank has also been hit by woes sweeping the life assurance sector. Its £8bn life funds, which closed to new business last year, chalked up a loss of £37m because of falling stock markets, compared with a £94m gain last time.

Barrett was keeping mum about merger talks with Bradford & Bingley, which have been put on ice because of stock market turmoil. Understandably, he is not keen to take on any more risks than necessary.

Barclays' shares plunged 42p on the bad news, to close at 447p. Royal Bank of Scotland lost 155p to 1525p on fears it is suffering similar debt troubles and HSBC and Lloyds TSB followed suit.

The City is in no mood to be forgiving at the moment, and the gloom over Barclays may be a little overdone. Without Argentina and the life assurance losses, operating profits would have been up 8%.

Its core businesses performed soundly, with a 26% increase in profits at Barclaycard to £313m. Retail banking profits rose 5% to £500m, and small and medium business banking was up 10% to £640m. But the fact remains that Barrett is falling short of his self-imposed target of doubling the total value of an investment in Barclays shares in the four years to the end of 2003.

The well-rewarded banker recently signed a new three-year performance-linked contract that could be worth £15m - but he will have to do much better if he is to reap the full benefit.

Balancing act

THE Bank of England opted for the lesser of two evils in leaving interest rates unchanged at 4% for the ninth month in a row. Clearly, it felt the risks of rampant house-price inflation were outweighed by signs of weakness in the economy.

A Chartered Institute of Purchasing & Supply's report yesterday suggested manufacturing is likely to contract further. It follows data from the CBI indicating that the High Street spending boom may be running out of steam, and a recent European Commission survey pointed to a dip in British consumers' confidence.

A rate rise always looked pretty unlikely against a background of free-falling stock markets, and many economists now believe we will not see an increase this year.

New housing market figures from the Nationwide, are however, somewhat alarming for the Bank, which has already issued several warnings this year. They showed house prices rising at an annual rate of 21%, their fastest for 13 years.

It is true that the monthly rate of inflation slowed from 3.3% to 2.2% in July, and that increases are tailing off in London and the South East, the most over-hyped regions. But the longer interest rates stay low, the greater the chances of imprudent borrowers being hurt by a housing market bubble.

Aviva cheers

AVIVA, the life assurer formerly known as CGNU, may have swapped one name for another, but it provided much-needed cheer amid yesterday's misery. The group, which owns the Norwich Union brand, reassured the market that it is strong enough to survive further stock market falls, despite widespread worries over the solvency of the UK life industry. Its half-year profits were flat at £979m.

The dividend dropped 40% to 8.75p. But the good news is its free asset ratio, which measures the financial strength of its £48bn with-profit funds, is a healthy 14.1%. Excluding £2bn of 'implicit items' such as future profits used to flatter the figures, it is still a robust 10.1%.

Aviva shares - which along with BA and Kingfisher were among just three risers in the FTSE 100 - responded by gaining 40p to 465p.

The comfort from Aviva is welcome. But with analysts at Dresdner Kleinwort Wasserstein issuing a warning that the European insurance industry is facing one of its biggest-ever crises, the outlook is dire for its weaker brethren.