Barclays plans to sell assets to boost capital after loans and other investments soured

TO BE NOTED: From Bloomberg:

"Barclays Maroons Secret of Stable Banking in Suburb (Update1)

Share | Email | Print | A A A

By Simon Clark

April 9 (Bloomberg) -- Hidden in a blue warehouse on an industrial park 200 miles (320 kilometers) northwest of London, Barclays Plc stashes historic documents that provide a lesson for bankers nursing record losses.

For most of the British bank’s 319 years, financial statements put balancing assets and liabilities before showing profit growth. Some investors say banks such as Barclays would be in better financial health if that were still the case.

“The historic switch in focus to the income statement from the balance sheet helped hide the asset bubble and bust,” said Neil Dwane, who helps oversee $83 billion as chief investment officer for Europe at Allianz Global Investors’ RCM unit in London. “We must refocus attention on the balance sheet.”

The credit crisis is proving a painful reminder of why it’s important to constrain assets and liabilities. Profit at London- based Barclays more than tripled to 4.38 billion pounds ($6.45 billion) in the 10 years through 2008, while its balance sheet swelled more than ninefold to 2.05 trillion pounds, exceeding the size of the U.K. economy.

Barclays plans to sell assets to boost capital after loans and other investments soured, pushing the bank’s shares down 66 percent in the past 12 months. The London-based bank today agreed to sell its iShares exchange-traded funds unit to private equity firm CVC Capital Partners Ltd. for 3 billion pounds. The bank has so far avoided tapping government funds, unlike Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

Balance Book

In Manchester, documents on 1 1/2 miles of shelving at the Barclays archive show finance was different in the 18th century, when author Daniel Defoe was a client of the bank and writing the tale of marooned sailor Robinson Crusoe.

In the 1700s and 1800s, bankers “simply needed to know where the money was coming from and where it was going to and how much they were able to allocate to themselves as profit after everything else was balanced,” said Barclays archivist Nicholas Webb, his fingers black with the Victorian-era soot that clings to some records.

Barclays’s earliest surviving “balance book,” from 1733, contains 20 yellow pages of creditors and debtors written in brown iron gall nut ink from a quill pen. By contrast, the first pages of Barclays’s 2008 annual report focus on profit at its units and include a table of income statement highlights.

Primary Statement

“The balance sheet was seen as the primary financial statement,” said Stephen Walker, professor of accounting at Cardiff Business School. “In a context where shareholders and especially creditors were concerned about the risk of insolvency, it was important to show that the company had sufficient assets to meet its liabilities.”

Bank balance sheets expanded in the credit bubble as money was borrowed to make new loans and investments. When capital markets froze in 2007, customer deposits weren’t sufficient to fund a bank’s business.

Barclays Chief Executive Officer John Varley acknowledged in March to members of the U.K.’s House of Lords, the upper chamber of Parliament, that Barclays had lost its balance in the debt-fueled boom years.

“There was an asymmetrical growth of assets versus liabilities over the course of the last years,” Varley said.

Ribbon-bound documents at RBS’s archive in Edinburgh tell a similar story to Barclays. Stephen Hester, CEO at the Scottish bank, told shareholders on April 3 that the company lost its way by focusing too much on income.

‘Borrowed too Much’

“We have to make profit, but it has to be seen in a long- term sustainable” formula, Hester said, “which we did not succeed in doing,” he added. “We borrowed too much and then lent too much.”

RBS lost 24.1 billion pounds in 2008, the biggest loss reported by a British company. The bank’s balance sheet boomed 2,685 percent to 2.22 trillion pounds during the past decade as it increased lending, trading and acquisitions.

U.K. bank lending exceeded customer deposits last year by 700 billion pounds, making the lenders dependent on foreign capital for funding, data compiled by the Bank of England show. In 2001, total lending to customers roughly equaled deposits.

“Profit growth at banks like Barclays distracted attention from balance sheet growth,” RCM’s Dwane said. “We’re all paying a price for that now.”

Balance sheets have been a key measure of financial health since at least 1494, when Luca Pacioli, an Italian mathematician, Franciscan friar and friend of Leonardo da Vinci codified balanced book-keeping in Renaissance Venice.

Luncheons, Sherry

In the Barclays storeroom, visited by 77 people last year, 19th century balance books are supplemented by green-covered, hand-written ledgers of partners in the then-private bank. The books detail thousands of pounds spent on luncheons, French wine and sherry, and investments ranging from Anglo American Telegraph Cos. shares to Birmingham Canal debentures and donations to Leicester Square Soup Kitchen, Asia Minor Famine Relief Fund and London’s Royal Free Hospital.

Barclays first printed a financial statement in 1896, when it combined with 19 other banks. The following year, it reported a net profit figure for the first time in a 10-line report opposite the balance sheet, the archive shows. In 1914, Barclays published a profit and loss account for the first time, beneath the balance sheet. The account took up about two-fifths of a page. In 1958, the profit and loss account was first printed ahead of the balance sheet, and it still is today.

Barclays’s 326-page report for 2008 “bears testament” to the bank’s balance sheet disclosure and analysis, spokeswoman Gemma Abbott said.

Mass Shareholding

The income statement became more prominent as banks like Barclays attracted increasing numbers of public shareholders who focus mainly on earnings and dividends, said Walker of Cardiff Business School.

“This was a result of mass shareholding and the consequent importance attached to delivering returns for investors and the emphasis placed on profit generation as a way of gauging the performance of managers,” Walker said.

Alexander Hoare, CEO of his family’s 337-year-old bank, said bankers can benefit from history lessons.

C. Hoare & Co., which funds itself from profits and has increased deposits during the credit crunch, keeps an archive in its London headquarters.

“An institutional memory helps avoid repeating elementary banking errors,” Hoare said. “The balance sheet is the all important measure.”