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SECURITIES AND EXCHANGE COMMISSION

FORM 20-F/A

     
o   Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
or
     
þ   Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, for the fiscal year ended December 31, 2004
or
     
o   Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
     
    For the transition period from          to          .
     
Commission file numbers:   Barclays PLC          0-13790
Barclays Bank PLC 2-71497-01

BARCLAYS PLC          BARCLAYS BANK PLC

(Exact names of registrants as specified in their charters)

ENGLAND
(Jurisdictions of incorporation)

54 LOMBARD STREET, LONDON, EC3P 3AH, ENGLAND
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:
         
    Title of each class   Name of each exchange on which registered
Barclays PLC  
25p ordinary shares
American Depositary Shares, each representing
four 25p ordinary shares
  New York Stock Exchange*

New York Stock Exchange
   
 
   
Barclays Bank PLC  
7.4% Subordinated Notes 2009
  New York Stock Exchange

*   Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuers’ classes of capital or common stock as of the close of the period covered by the annual report.

         
Barclays PLC   25p ordinary shares
£1 staff shares
  6,453,561,180
875,000
Barclays Bank PLC   £1 ordinary shares
£1 preference shares
100 preference shares
  2,309,360,515
1,000
100,000

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports) and (2) have been subject to such filing requirements for the past 90 days.

Yes          þ                    No          o

Indicate by check mark which financial statement item the registrants have elected to follow.

Item 17          o                    Item 18          þ

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrants have filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes          o                    No          þ



 


 

EXPLANATORY NOTE

This Form 20-F/A amends and restates Items 5 and 11 of the annual report on Form 20-F filed jointly by Barclays PLC and Barclays Bank PLC on March 24, 2005 (the “Form 20-F”) to correct certain amounts and graphics included in those Items in the Form 20-F. These corrections are necessary due to certain typographical errors that occurred primarily in the preparation of the final electronic version of the Form 20-F prior to the transmission of the Form 20-F to the Securities and Exchange Commission via the EDGAR system. This Form 20-F/A makes no changes to the financial statements of Barclays PLC or Barclays Bank PLC as contained in the Form 20-F.

This Form 20-F/A consists of a cover page, this explanatory note, the answers (as amended) to Items 5 and 11 of the Form 20-F, the signature page and the required certifications of the principal executive officer and the principal financial officer of Barclays PLC and Barclays Bank PLC. While the answers (as amended) to Items 5 and 11 of the Form 20-F have been restated in full as required by Rule 12b-15 under the Securities Exchange Act of 1934, no changes have been made to such answers except those described above.

Other than as set forth above, this Form 20-F/A does not, and does not purport to, amend, update or restate the information in any other Item of the Form 20-F or reflect any events that have occurred after the Form 20-F was filed on March 24, 2005.

The page numbers reflect those of the Annual Report, previously filed on Form 20-F and follow the sequence of the items refiled in the Form 20-F/A.

This document contains certain forward-looking statements within the meaning of Section 21E of the US Securities Exchange Act of 1934, as amended, and Section 27A of the US Securities Act of 1933, as amended, with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition and performance. These forward-looking statements can be identified by the fact that they do not relate only to historical or current facts. Forward-looking statements sometimes use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “believe”, or other words of similar meaning. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, including, but not limited to, the further development of standards and interpretations under IFRS applicable to past, current and future periods, evolving practices with regard to the interpretation and application of standards under IFRS and pending tax elections with regards to certain subsidiaries, as well as UK domestic and global economic and business conditions, market related risks such as changes in interest rates and exchange rates, the policies and actions of governmental and regulatory authorities, changes in legislation, the outcome of pending and future litigation and the impact of competition — a number of which factors are beyond the Group’s control. As a result, the Group’s actual future results may differ materially from the plans, goals, and expectations set forth in the Group’s forward-looking statements. Any forward-looking statements made by or on behalf of Barclays speak only as of the date they are made. Barclays does not undertake to update forward-looking statements to reflect any changes in Barclays expectations with regard thereto or any changes in events, conditions or circumstances on which any such statement is based. The reader should, however, consult any additional disclosures that Barclays has made or may make in documents it has filed or may file with the SEC.

 


 

Financial review

Overview


Introduction
Barclays is a major global financial services provider engaged in retail and commercial banking, credit cards, investment banking, wealth management and investment management services. We are one of the largest financial services companies in the world by market capitalisation. Operating in over 60 countries and employing over 78,000 people, we move, lend, invest and protect money for over 18 million customers and clients worldwide.

Our business is affected by global economic conditions generally and particularly by conditions in the UK. The UK economy was stronger in 2004 than 2003, with the economy growing at more than 3%. There was some repositioning away from the consumer towards corporate investment and government spending. The US economy sustained strong growth in 2004 whilst the Eurozone economy achieved some recovery in its rate of growth from its level of 2003.

As a financial services group domiciled in the UK, the majority of our earnings arise from the UK. Nonetheless with our global businesses and our international activities we believe that our diverse portfolio provides a broad spread of earnings capabilities and offers greater resilience against exogenous events in any single business or geography.

The profitability of Barclays businesses could be adversely affected by a worsening of general economic conditions in the UK or abroad. Factors such as the liquidity of the global financial markets, the level and volatility of equity prices and interest rates, investor sentiment, inflation, and the availability and cost of credit, could significantly affect the activity level of customers. A continued market downturn would likely lead to a decline in the volume of transactions that Barclays executes for its customers and, therefore, lead to a decline in the income it receives from fees and commissions. In addition, changes in interest rate levels, yields curves and spreads may affect the interest rate margin realised between lending and borrowing costs.

Continuous focus on improvements in productivity provides the ability to respond flexibly to any pressure to income growth, which would help offset the impact on overall profitability.

Key drivers underpinning the financial performance are detailed in the subsequent pages of the ‘Financial review’ section. These include, for net interest income, the volume and rate of growth of asset and liability balances, together with the margin on these balances. Non-interest income is driven primarily by net fees and commissions, although it also includes dealing profits and other operating income.

The principal drivers of expenses are staffing levels and their associated costs, including performance related expenditure, and the level of strategic investment spend.

Provisions are driven by the quantity and quality of lending and reflect the condition of the credit environment.

In addition to the risk factors outlined on pages 28 and 29, other potential impacts on Barclays profitability are the consequences of potential regulation or legislation.

Goals
Barclays primary focus is to deliver superior value to its shareholders. To achieve this we use an operating philosophy, the principles of value-based management (VBM), to develop strategy, allocate resources and manage performance.

In applying VBM principles, Barclays has developed a disciplined fact-based approach to strategy development and business planning, which aims to build sustainable competitive advantage. Individual businesses generate alternative business strategies to facilitate the selection of the most appropriate value-maximising option, in order to achieve profitable growth in all our businesses.

We use performance goals as an integral part of our VBM disciplines. These are designed to stretch the thinking and ambition of our businesses. Goals have been set for four-year periods to align with the planning processes described above. In 2004, we announced new performance cycle goals for the 2004 to 2007 period.

The primary goal remains to achieve top quartile total shareholder return (TSR) relative to a peer group of 11 other UK and international financial services institutions. TSR is defined as the value created for shareholders through share price appreciation, plus reinvested dividend payments.

The TSR peer group is reviewed annually to ensure it aligns with our business mix and the scale of our ambition. The peer group for 2004 was: ABN Amro, BBVA, BNP Paribas, Citigroup, Deutsche Bank, HBOS, HSBC, JP Morgan Chase, Lloyds TSB, Royal Bank of Scotland and UBS. For 2005 the peer group is unchanged.

For the first year of the new goal period, from 31st December 2003 to 31st December 2004, Barclays was positioned first within its peer group, thereby achieving its primary goal of top quartile TSR performance.

In addition, a secondary goal of economic profit (EP) is used to support the pursuit of top quartile TSR. The strategies we follow and the actions we take are aligned to value creation for all stakeholders. Since the introduction of VBM, Barclays has used EP as its key internal financial measure, to support the achievement of our primary top quartile TSR goal. Barclays uses EP, a non-GAAP measure, as a key indicator of performance because it believes that it provides important discipline in decision making. Barclays believes that EP encourages both profitable growth and the efficient use of capital. More information on the reconciliation of EP to profit before tax can be found on page 226.

We believe that, given current and expected market conditions, a compound annual growth rate in EP in the range of 10% to 13%, which would translate into cumulative EP generation of £7.3bn to £7.8bn, will be required to deliver top quartile TSR over the 2004-2007 goal period. In the first year of the new performance goal period, from 31st December 2003 to 31st December 2004, EP amounted to £1.9bn, and was well ahead of plan.

We will continue to report progress against goals on a regular basis.



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Barclays PLC Annual Report 2004 

Financial Performance 20041
The Group’s profit before tax in 2004 increased 20% (£758m) to £4,603m (2003: £3,845m). Operating income increased 12% (£1,534m) to £13,945m (2003: £12,411m) whilst operating expenses rose 15% (£1,091m) to £8,350m (2003: £7,253m). Restructuring costs amounted to £199m (2003: £209m). Goodwill amortisation was £299m (2003: £265m). Provisions for bad and doubtful debts fell 19% to £1,091m (2003: £1,347m). Earnings per share rose 21% to 51.2p (2003: 42.3p). Dividends per share rose 17% to 24p (2003: 20.5p). Return on average shareholders’ funds was 19%. Economic profit was up 32%, well ahead of our goal and a reflection of tight capital management as well as good business performance.

Non-performing loans decreased by £320m to £3,985m. Potential problem loans decreased by £571m to £756m. Coverage of non-performing loans decreased from 71.5% to 70.4% while the coverage of potential credit risk loans increased from 54.6% to 59.2%.

Our capital position remained healthy. Shareholders’ funds increased by £1,043m primarily due to profit retention. Total assets increased by £79bn to £522bn. Weighted risk assets increased by £30bn (16%) up to £219bn. The tier 1 capital ratio decreased from 7.9% to 7.6% and the Total risk asset ratio decreased from 12.8% to 11.5%.

Business Performance
There was good growth in profit before tax across all our business divisions with momentum in the core UK businesses and in our global product businesses. Our increasingly diverse and distinctive business mix is well positioned for future growth.

UK Banking grew profit before tax by 9%, driven primarily by a very strong performance in UK Business Banking, where profit before tax was up 19%, and broadly flat profit before tax performance in UK Retail Banking.

UK Business Banking performed strongly with good income growth, up 8%, tight cost management and very good risk management accentuated by one large recovery.

In UK Retail Banking the focus in 2004 was on restructuring the business which included adding additional customer facing staff, upgrading branch management and investing in technology. There were encouraging signs of progress in 2004 with good balance growth in current accounts, premier and small business but a weaker contribution from mortgages where the effect of a decline in the back book, rising base rates and a fall in early redemption income impacted performance. Costs increased 3% with almost half of the increase attributable to the new regulatory environment, particularly in the mortgage and general insurance businesses. Provisions fell 44%, reflecting the overall quality of the loan portfolio but also the release of provisions in the mortgage business.

Profit before tax in Private Clients and International was up 60%. The improved performance in this division reflected the benefits of prior year investments (organic and non-organic) helped by stronger markets. This included a significantly improved performance from the closed life assurance activities.

Profit before tax in Private Clients, for the ongoing business, increased 42% benefiting from strong income growth and good cost control. The integrations of Charles Schwab Europe and the Gerrard business progressed well. In International, profit before tax increased by 14%. This represented good progress across all geographies: Africa; Spain; Portugal; France; Italy; and the Caribbean. The merging of Banco Zaragozano with Barclays Spain to create one Spanish business is well ahead of schedule and there has been a very good response amongst the Banco Zaragozano network to Barclays products.

Barclaycard delivered profit before tax growth of 5% in a year where volume growth more than compensated for the impact of successive interest rate rises and intense competition. Income growth was 6%. There was a high level of investment in both the UK business and internationally, managed within cost growth of 6%. Performance was strong in our multi-branded business such as Monument and First Plus. Barclaycard International delivered a profit of £8m (2003: £4m) despite absorbing significant ongoing investment. The acquisition of Juniper was an important strategic move into the US credit card market.

Barclays Capital had another record year, with profit before tax up 25%. Income grew by 24%, reflecting the return on investment in prior years. Client activity was up sharply, leading to good volume growth in both primary and secondary markets. A significant level of investment for future revenue growth was funded by the business and reflected in costs which grew 37%. Approximately 50% of the cost base is variable and despite accelerating the pace of growth, income per head remained broadly flat.

Barclays Global Investors (BGI) had another excellent year with profit before tax up 85%. Profits have more than quadrupled during the last three years. Income grew 33% and assets under management were £709bn (2003: £598bn). BGI continued to diversify its product range and in particular made significant advances in the exchange traded funds (iShares) where it is the market leader.

Capital Strength
Our capital position and strong credit rating are sources of competitive advantage. At the end of 2004, our risk asset ratio was 11.5%, and our tier 1 capital ratio was 7.6%. This strong capital position enhances our ability to pay dividends and invest confidently in business growth. When we look at the balance sheet, we focus capital management on five areas: maintaining our double A credit rating; generating sufficient capital to support weighted risk asset growth in the business; financing corporate activity, delivering dividend growth; and using share buy-backs to manage any excess capital. In 2004 we bought back almost £700m of stock.



1   The analysis of results by business includes goodwill amortisation. This differs from the announcement of results dated 10th February 2005, where the analysis of results by business excludes goodwill amortisation.

79


 

Financial review

Critical accounting estimates


Critical Accounting Estimates
UK accounting standards require that the Group adopt the accounting policies and estimation techniques that the Directors believe are most appropriate in the circumstances for the purpose of giving a true and fair view of the Group’s state of affairs, profit and cash flows. However, different policies, estimation techniques and assumptions in critical areas could lead to materially different results. The accounting policies and estimation techniques to be used in the 2005 consolidated accounts will be impacted by the conversion to International Financial Reporting Standards, as discussed on pages 115 and 116.

The following are estimates which are considered to be the most complex and involve significant amounts of management valuation judgements, often in areas which are inherently uncertain.

Bad and Doubtful Debts
The estimation of potential credit losses is inherently uncertain and depends upon many factors, including general economic conditions, changes in individual customer’s circumstances, structural changes within industries that alter competitive positions, and other external factors such as legal and regulatory requirements and other governmental policy changes.

Specific provisions are raised when the Group considers that the creditworthiness of a borrower has deteriorated such that the recovery of the whole or part of an outstanding advance is in serious doubt.

For larger accounts this is usually done on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account, for example, the business prospects for the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability of customer information and the likely cost and duration of the work-out process. Subjective judgements are made in this process that may vary from person to person and team to team. Furthermore, judgements change with time as new information becomes available or as workout strategies evolve, resulting in frequent revisions to the specific provisions as individual decisions are taken, case by case.

Within the retail and small businesses portfolios which are comprised of large numbers of small homogeneous assets, statistical techniques are used to raise specific provisions on a portfolio basis, based on historical recovery rates. These statistical analyses use as primary inputs the extent to which accounts in the portfolio are in arrears and historical information on the eventual losses encountered from such delinquent portfolios. There are many such models in use, each tailored to a product, line of business or customer category. The models are updated from time to time. However, experience suggests that the models are reliable and stable, stemming from the very large numbers of accounts from which the model building information is drawn. These models do not contain judgemental inputs, but judgement and knowledge is needed in selecting the statistical methods to use when the models are developed or revised.

General provisions are raised to cover losses which are known from previous historical experience to be present in loans and advances at the balance sheet date, but which have not yet been specifically identified. These provisions are adjusted at least half-yearly by an appropriate charge or release of general provision based on statistical analyses, other information about customers and judgements by management and the Board.

In outline, the statistical analyses are performed on a portfolio basis as follows: For larger accounts, gradings are used to rate the credit quality of borrowers. Each grade corresponds to an expected default frequency and is calculated by using statistical methodologies and expert judgement. To ensure that the result is as accurate as possible, several different sources may be used to rate a borrower (e.g. internal model, external vendor model, ratings by credit rating agencies and the knowledge and experience of the credit officers). The general provision also takes into account the expected severity of loss at default, i.e. the amount outstanding when default occurs that is not subsequently recovered. Recovery is usually substantial and depends, for example, on the level of security held in relation to each loan, and the Bank’s position relative to other claimants. Also taken into account is the expected exposure at default. Both loss given default and exposure at default are statistically derived values.

For the large numbers of retail accounts, the approach is in principle the same as for the corporate and business accounts. However, individual consideration of accounts is not practicable, and statistical methodologies are used to assess the loss in portfolios of accounts.

The general provision also includes a specifically identified element to cover country transfer risk calculated on a basis consistent with the overall general provision calculation.

In establishing the level of the general provision, management judgement is applied to the results of the statistical analyses. This is applied at business level where management takes account of the quality of the statistical analyses and the relevance of historical data used in the analyses to individual or groups of customers, current information, and the general economic and environmental factors mentioned above.

Further information on credit risk provisioning is set out on page 43.

Fair Value of Financial Instruments
Some of the Bank’s financial instruments are carried at fair value, including derivatives and debt securities held for trading purposes.

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

Financial instruments entered into as trading transactions, together with any associated hedging, are measured at fair value and the resultant profits and losses are included in dealing profits, along with interest and dividends arising from long and short positions and funding costs relating to trading activities. Assets and liabilities resulting from gains and losses on derivative and foreign exchange contracts are reported gross in other assets or liabilities, reduced by the effects of qualifying netting agreements with counterparties.



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Barclays PLC Annual Report 2004 

Financial instruments are either priced with reference to a quoted market price for that instrument or by using a valuation model. Where the fair value is calculated using financial markets pricing models, the methodology is to calculate the expected cash flows under the terms of each specific contract and then discount these values back to a present value. These models use as their basis independently sourced market parameters including, for example, interest rate yield curves, equities and commodities prices, option volatilities and currency rates. Most market parameters are either directly observable or are implied from instrument prices. However, where no observable price is available then instrument fair value will include a provision for the uncertainty in the market parameter based on sale price or subsequent traded levels.

The calculation of fair value for any financial instrument may require adjustment of quoted price or model value to reflect the cost of credit risk (where not embedded in underlying models or prices used), hedging costs not captured in pricing models and adjustments to reflect the cost of exiting illiquid or other significant positions. The process of calculating fair value on illiquid instruments or from a valuation model may require estimation of certain pricing parameters, assumptions or model characteristics. These estimates are calibrated against industry standards, economic models and observed transaction prices. Changes to assumptions or estimated levels can potentially impact the fair value of an instrument as reported. The valuation model used for a particular instrument, the quality and liquidity of market data used for pricing, other fair value adjustments not specifically captured by the model, market data and assumptions or estimates in these are all subject to internal review and approval procedures and consistent application between accounting periods. Under US GAAP the unrealised gain or loss at the inception of a derivative contract is not recognised in the profit and loss account unless obtained using observable market data.

Certain financial instruments which are held on an accruals basis under UK GAAP are required to be measured at fair value under US GAAP. The Group does not manage its business with regard to reported trends on a US GAAP basis. Fair value adjustments to net income or other comprehensive income under US GAAP in current or past periods are not necessarily indicative of the magnitude or direction of such adjustments in subsequent periods.

The fair value of financial instruments is provided in Note 38 on pages 166 and 167.

Goodwill
Determining the period over which to amortise goodwill, where amortisation is applicable under GAAP, requires the assessment of its useful economic life. This assessment involves making judgements over the nature of the acquired business, the economic environment in which it operates and the period of time over which the value of the business is expected to exceed the values of net assets. As a starting point, businesses acquired which operate in more volatile economic environments, such as emerging markets, are considered to have a useful economic life of five years, in other cases 20 years is generally used.

Management also have to consider at least annually whether the current carrying value of goodwill is impaired. This is particularly important under US GAAP where goodwill is not being amortised. The first step of the impairment review process requires the identification of independent operating units, by dividing the Group business into as many largely independent income streams as is reasonably practicable. The goodwill is then allocated to these independent operating units. The first element of this allocation is based on the areas of the business expected to benefit from the synergies derived from the acquisition. The second element reflects the allocation of the net assets acquired and the difference between the consideration paid for those net assets and their fair value. This allocation is reviewed following business reorganisation. The carrying value of the operating unit, including the allocated goodwill, is compared to its fair value to determine whether any impairment exists. Detailed calculations may need to be carried out taking into consideration changes in the market in which a business operates (e.g. competition activity, regulatory change) into consideration. In the absence of readily available market price data this calculation is usually based upon discounting expected cash flows at the Group’s cost of equity, the determination of both of which requires the exercise of judgement.

Pensions
The Group provides pension plans for employees in most parts of the world. Arrangements for staff retirement benefits vary from country to country and are made in accordance with local regulations and customs. For defined contribution schemes, the pension cost recognised in the profit and loss account represents the contributions payable to the scheme. The majority of UK staff are members of The Barclays Bank UK Retirement Fund (the UK Fund) which comprises four sections. These are a defined benefit scheme (the 1964 Pension Scheme) and a defined contribution scheme (the Retirement Investment Scheme), which are both now closed to new members, a hybrid scheme, afterwork, and a defined contribution scheme, the Pension Investment Plan. The pension cost for these schemes is assessed in accordance with the advice of a qualified actuary, using the projected unit method. Variations from the regular cost are allocated over the expected average service lives of current employees. Provisions for pensions arise when the profit and loss account charge exceeds the contribution to the scheme as a result of actuarial valuations. These provisions will be eliminated over the estimated service lives of the employees.

In determining this cost the actuarial value of the assets and liabilities of the scheme are calculated, modelling their future growth, based on key assumptions agreed by management. The main financial assumptions used in the actuarial valuations, as the basis of calculation of the 2004 pension charge/credit relate to inflation, rate of increase in salaries, rate of increase for pensions in payment and deferred pensions, and rate used to discount scheme liabilities. There is an acceptable range in which these assumptions can validly fall. If different assumptions within that range had been chosen, the cost recognised in the accounts could be significantly altered. The approach taken to calculating the pension charge in the accounts for the 1964 Pension Scheme is to take assets and liabilities at market value with effect from 1st January 2004.



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Financial review
Critical accounting estimates



The principal financial assumptions used to derive the pensions charge for 2004 were as follows:

         
 
Price inflation
    2.75 %
Pension increases
    2.75 %
Earnings growth
    4.25 %
afterwork Credit Account revaluation rate
    3.75 %
Return on future investments:
       
1964 Scheme
    7.0 %
afterwork
    6.75 %
Discount rate for assessing accrued liabilities:
       
1964 Scheme
    6.6 %
afterwork
    6.75 %
 

In calculating the pension expense for the UK schemes and in determining the expected rate of return, the Group uses the value of assets at the start of the year. The UK Schemes’ assets were allocated 48% to equities, 12% to corporate bonds, 18% to UK gilts, 10% to property and 12% to other investments at 31st December 2004 and 49% to equities, 11% to corporate bonds, 20% to UK gilts, 9% to property and 11% to other investments at 31st December 2003. The year-end allocations are within the schemes’ target ranges.

Shareholders’ Interest in the Retail Long-term Assurance Fund
Changes in the net present value of the profits inherent in the in-force policies of the retail long-term assurance fund are included in the profit and loss account. In estimating the net present value of the profits inherent in the in-force policies, the calculations use assumed economic parameters (future investment returns, expense inflation and risk discount rate), taxation, mortality, persistency, expenses and the required levels of regulatory and solvency capital. The returns on fixed interest investments are set to market yields at the period end. The returns on UK and overseas equities and property are set relative to fixed interest returns. The expense inflation assumption reflects long-term expectations of both earnings and retail price inflation.

The risk discount rate is set to market yields on Government securities plus a margin to allow for the risks borne. The mortality, persistency and expense assumptions are chosen to represent best estimates of future experience and are based on current business experience. As with the pension calculation, there is an acceptable range in which these estimates can validly fall, and the income recognised in the accounts could be significantly altered if different estimates had been chosen.

Tax
The taxation charge in the accounts for amounts due to fiscal authorities in the various territories in which the Group operates includes estimates based on a judgement of the application of law and practice in certain cases to determine the quantification of any liability arising. In arriving at such estimates, management assesses the relative merits and risks of the tax treatment assumed taking into account statutory, judicial and regulatory guidance and, where appropriate, external advice.

All of the Group’s significant accounting policies, including those mentioned above, and information about the estimation techniques used to enable the accounting policies to be applied, are set out on pages 110 to 116.



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Barclays PLC Annual Report 2004 

Financial review

Results by nature of income and expense


Results by Nature of Income and Expense

Comparative figures have been restated as a result of the changes in accounting policy and accounting presentation as set out on pages 115 and 117.

(BAR CHART)

Net interest income

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Interest receivable
    13,665       12,427       12,044  
Interest payable
    (6,823 )     (5,823 )     (5,839 )
 
 
    6,842       6,604       6,205  
 

Group net interest margin(a)

                         
 
    2004     2003     2002  
    %     %     %  
 
Group
    2.59       2.61       2.75  
Domestic
    3.48       3.64       3.61  
International
    0.81       0.77       0.96  
 

Note

(a)   Domestic business is conducted primarily in the UK in Sterling. International business is conducted primarily in foreign currencies. In addition to the business carried out by overseas branches and subsidiaries, some international business is transacted in the UK. Interest margin is net interest income as a percentage of average interest earning assets.
 
    The margins shown above exclude non-margin related items, including profits and losses on the repurchase of loan capital and the unwinding of the discount on vacant leasehold property provisions.
 
    Group net interest income increased 4% (£238m) to £6,842m (2003: £6,604m), reflecting growth in balances which more than offset a 2 basis points fall in the Group net interest margin to 2.59%.

The Group net interest margin of 2.59% (2003: 2.61%) includes 0.42% (2003: 0.48%) arising from the benefit of free funds. A component of the benefit of free funds is the structural hedge against short-term interest rate movements. The contribution of the structural hedge has decreased to 0.12% (2003: 0.19%) largely due to the impact of higher short-term interest rates.

Group average interest earning assets increased £11bn to £264bn (2003: £253bn). Domestic average interest earning assets increased £14bn to £176bn (2003: £162bn). This reflected increases across the businesses. International average interest earning assets remained broadly stable at £88bn (2003: £90bn).

The domestic net interest margin fell 16 basis points to 3.48% (2003: 3.64%). This was attributable to the margin pressure in the mortgage business, the impact of base rate rises during the year, higher funding costs, increased promotional balance transfer activity in the cards business and the impact of the structural hedge. This was partially offset by increased margins in retail savings, Business Banking loans and Barclays Capital banking activities. Margins in other areas remained broadly stable.

The international net interest margin increased by 4 basis points to 0.81% (2003: 0.77%) largely due to a change in the mix of both assets and liabilities in Barclays Capital banking activities.

The Group net interest margin was impacted by the factors described above with the reduction largely mitigated by an increase in the proportion of domestic interest earning assets.

Net interest income in 2003 increased by 6% to £6,604m (2002: £6,205m), reflecting growth in the average interest earning assets by 12% to £253bn. This was primarily due to a £4bn increase in UK mortgage balances and £18bn increase in debt securities holdings.

In 2003, overall banking margins were 14 basis points down on 2002 to 2.61%. The adverse impact on the margin was largely due to an increase in higher quality assets in Barclays Capital, the conversion to associate status of the Caribbean business, a change in the currency mix of the portfolio and the general fall in global interest rates.

Prevailing average interest rates

                         
 
    2004     2003     2002  
    %     %     %  
 
United Kingdom:
                       
Barclays Bank PLC base rate
    4.38       3.69       4.00  
London Inter-Bank Offered Rate (LIBOR):
three-month Sterling
    4.64       3.74       4.06  
three-month US dollar
    1.62       1.21       1.80  
United States prime rate
    4.34       4.12       4.68  
 


83


 

Financial review

Average balance sheet


Average balance sheet and net interest income (year ended 31st December)

                                                                         
 
    2004     2003     2002  
    Average             Average     Average             Average     Average             Average  
    balance     Interest     rate     balance     Interest     rate     balance     Interest     rate  
    £m     £m     %     £m     £m     %     £m     £m     %  
 
Assets
                                                                       
Treasury bills and other eligible bills:
                                                                       
in offices in the United Kingdom
    1,786       68       3.8       4,048       121       3.0       4,496       158       3.5  
in offices outside the United Kingdom
    1,988       63       3.2       1,222       66       5.4       960       66       6.9  
Loans and advances to banks:
                                                                       
in offices in the United Kingdom
    18,431       691       3.7       14,012       574       4.1       12,560       561       4.5  
in offices outside the United Kingdom
    3,689       93       2.5       4,272       108       2.5       5,535       161       2.9  
Loans and advances to customers:
                                                                       
in offices in the United Kingdom
    143,643       8,801       6.1       135,373       7,804       5.8       126,306       7,712       6.1  
in offices outside the United Kingdom
    28,486       1,262       4.4       26,323       1,136       4.3       25,896       1,132       4.4  
Lease receivables:
in offices in the United Kingdom
    5,562       252       4.5       4,520       215       4.8       4,245       209       4.9  
in offices outside the United Kingdom
    369       21       5.6       265       19       7.2       222       15       6.8  
Debt securities:
in offices in the United Kingdom
    51,508       2,077       4.0       58,435       2,174       3.7       40,115       1,790       4.5  
in offices outside the United Kingdom
    8,624       337       3.9       4,267       210       4.9       4,843       240       5.0  
 
Average assets of banking business
    264,086       13,665       5.2       252,737       12,427       4.9       225,178       12,044       5.3  
Average assets of trading business
    295,304       7,195       2.4       189,446       5,001       2.6       160,647       4,372       2.7  
 
Total average interest earning assets
    559,390       20,860       3.7       442,183       17,428       3.9       385,825       16,416       4.2  
Provisions
    (2,907 )                     (2,796 )                     (2,808 )                
Non-interest earning assets
    68,396                       53,428                       46,753                  
 
Total average assets and interest income
    624,879       20,860       3.3       492,815       17,428       3.5       429,770       16,416       3.8  
 
Percentage of total average assets in offices outside the United Kingdom
    27.8 %                     26.6 %                     27.2 %                
 
Average interest earning assets and net interest income:
                                                                       
Banking business
    264,086       6,844       2.6       252,737       6,606       2.6       225,178       6,188       2.7  
Trading business
    295,304       (219 )     (0.1 )     189,446       68             160,647       75        
Non margin interest
            (2 )                   (2 )                   17        
 
Total average interest earning assets and net interest income
    559,390       6,623       1.2       442,183       6,672       1.5       385,825       6,280       1.6  
 
Total average interest earning assets related to:
                                                                       
Interest income
            20,860       3.7               17,428       3.9               16,416       4.2  
Interest expense
            (14,235 )     (2.5 )             (10,754 )     (2.4 )             (10,153 )     (2.6 )
Adjustment for non margin interest
            (2 )                   (2 )                   17        
 
 
            6,623       1.2               6,672       1.5               6,280       1.6  
 

84


 

Barclays PLC Annual Report 2004 

Average balance sheet and net interest income (year ended 31st December)

                                                                         
 
    2004     2003     2002  
    Average             Average     Average             Average     Average             Average  
    balance     Interest     rate     balance     Interest     rate     balance     Interest     rate  
    £m     £m     %     £m     £m     %     £m     £m     %  
 
Liabilities and shareholders’ funds
                                                                       
Deposits by banks:
                                                                       
in offices in the United Kingdom
    46,669       1,225       2.6       40,959       993       2.4       31,880       987       3.1  
in offices outside the United Kingdom
    16,610       310       1.9       10,100       184       1.8       8,908       200       2.2  
Customer accounts – demand deposits:
                                                                       
in offices in the United Kingdom
    20,829       310       1.5       18,788       170       0.9       16,260       164       1.0  
in offices outside the United Kingdom
    3,317       31       0.9       3,497       48       1.4       1,846       27       1.5  
Customer accounts – savings deposits:
                                                                       
in offices in the United Kingdom
    47,583       1,325       2.8       45,565       999       2.2       41,722       982       2.4  
in offices outside the United Kingdom
    1,117       21       1.9       813       26       3.2       1,262       32       2.5  
Customer accounts – other time deposits – retail:
                                                                       
in offices in the United Kingdom
    34,518       1,306       3.8       35,228       1,171       3.3       40,075       1,303       3.3  
in offices outside the United Kingdom
    4,526       118       2.6       3,678       103       2.8       5,479       139       2.5  
Customer accounts – other time deposits – wholesale:
                                                                       
in offices in the United Kingdom
    58,023       1,798       3.1       57,364       1,634       2.8       35,607       1,175       3.3  
in offices outside the United Kingdom
    13,262       342       2.6       8,193       247       3.0       7,959       231       2.9  
Debt securities in issue:
                                                                       
in offices in the United Kingdom
    32,303       1,052       3.3       34,811       949       2.7       28,596       1,061       3.7  
in offices outside the United Kingdom
    17,218       336       2.0       11,906       244       2.0       11,728       339       2.9  
Dated and undated loan capital and other subordinated liabilities principally in offices in the United Kingdom
    12,740       692       5.4       12,312       684       5.6       11,012       645       5.9  
Internal funding of trading business
    (72,291 )     (2,045 )     (2.8 )     (58,436 )     (1,631 )     (2.8 )     (42,626 )     (1,429 )     (3.4 )
 
Average liabilities of banking business
    236,424       6,821       2.9       224,778       5,821       2.6       199,708       5,856       2.9  
Average liabilities of trading business
    305,869       7,414       2.4       191,240       4,933       2.6       162,858       4,297       2.6  
 
Total average interest bearing liabilities
    542,293       14,235       2.6       416,018       10,754       2.6       362,566       10,153       2.8  
Interest free customer deposits:
                                                                       
in offices in the United Kingdom
    15,351                       13,819                       11,614                  
in offices outside the United Kingdom
    1,294                       1,260                       2,132                  
Other non-interest bearing liabilities
    48,613                       45,392                       38,184                  
Minority and other interests and shareholders’ funds
    17,328                       16,326                       15,274                  
 
Total average liabilities, shareholders’ funds and interest expense
    624,879       14,235       2.3       492,815       10,754       2.2       429,770       10,153       2.4  
 
Percentage of total average non-capital liabilities in offices outside the United Kingdom
    26.7 %                     23.1 %                     25.5 %                
 
Notes
(a)   Loans and advances to customers and banks include all doubtful lendings, including non-accrual lendings. Interest receivable on such lendings has been included to the extent to which either cash payments have been received or interest has been accrued in accordance with the income recognition policy of the Group.
 
(b)   Average balances are based upon daily averages for most UK banking operations and monthly averages elsewhere.
 
(c)   The average balance sheet does not include the retail life-fund assets attributable to policyholders nor the related liabilities.
 
(d)   Interest payable on average liabilities of banking business excludes non-margin interest.

85


 

Financial review
Average balance sheet



Changes in net interest income – volume and rate analysis

The following tables allocate changes in net interest income between changes in volume and changes in interest rates for the last two years. Volume and rate variances have been calculated on the movement in the average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. Where variances have arisen from changes in both volumes and interest rates, these have been allocated proportionately between the two.

                                                 
 
    2004/2003 Change due     2003/2002 Change due  
    to increase/(decrease) in:   to increase/(decrease) in:
    Total                     Total              
    change     Volume     Rate     change     Volume     Rate  
    £m     £m     £m     £m     £m     £m  
 
Interest receivable
                                               
Treasury bills and other eligible bills:
                                               
in offices in the United Kingdom
    (53 )     (80 )     27       (37 )     (15 )     (22 )
in offices outside the United Kingdom
    (3 )     31       (34 )           16       (16 )
 
 
    (56 )     (49 )     (7 )     (37 )     1       (38 )
 
Loans and advances to banks:
                                               
in offices in the United Kingdom
    117       169       (52 )     13       62       (49 )
in offices outside the United Kingdom
    (15 )     (15 )           (53 )     (34 )     (19 )
 
 
    102       154       (52 )     (40 )     28       (68 )
 
Loans and advances to customers:
                                               
in offices in the United Kingdom
    997       492       505       92       536       (444 )
in offices outside the United Kingdom
    126       95       31       4       19       (15 )
 
 
    1,123       587       536       96       555       (459 )
 
Lease receivables:
                                               
in offices in the United Kingdom
    37       48       (11 )     6       13       (7 )
in offices outside the United Kingdom
    2       6       (4 )     4       3       1  
 
 
    39       54       (15 )     10       16       (6 )
 
Debt securities:
                                               
in offices in the United Kingdom
    (97 )     (270 )     173       384       718       (334 )
in offices outside the United Kingdom
    127       178       (51 )     (30 )     (28 )     (2 )
 
 
    30       (92 )     122       354       690       (336 )
 
Total banking business interest receivable:
                                               
in offices in the United Kingdom
    1,001       359       642       458       1,314       (856 )
in offices outside the United Kingdom
    237       295       (58 )     (75 )     (24 )     (51 )
 
 
    1,238       654       584       383       1,290       (907 )
 
Total trading business interest receivable
    2,194       2,605       (411 )     629       764       (135 )
 
Total interest receivable
    3,432       3,259       173       1,012       2,054       (1,042 )
 

86


 

Barclays PLC Annual Report 2004 

Changes in net interest income – volume and rate analysis

                                                 
 
    2004/2003 Change due     2003/2002 Change due  
    to increase/(decrease) in:     to increase/(decrease) in:  
    Total                     Total              
    change     Volume     Rate     change     Volume     Rate  
    £m     £m     £m     £m     £m     £m  
 
Interest payable
                                               
Deposits by banks:
                                               
in offices in the United Kingdom
    232       146       86       6       246       (240 )
in offices outside the United Kingdom
    126       121       5       (16 )     25       (41 )
 
 
    358       267       91       (10 )     271       (281 )
 
Customer accounts – demand deposits:
                                               
in offices in the United Kingdom
    140       20       120       6       24       (18 )
in offices outside the United Kingdom
    (17 )     (2 )     (15 )     21       23       (2 )
 
 
    123       18       105       27       47       (20 )
 
Customer accounts – savings deposits:
                                               
in offices in the United Kingdom
    326       46       280       17       87       (70 )
in offices outside the United Kingdom
    (5 )     8       (13 )     (6 )     (13 )     7  
 
 
    321       54       267       11       74       (63 )
 
Customer accounts – other time deposits – retail:
                                               
in offices in the United Kingdom
    135       (24 )     159       (132 )     (161 )     29  
in offices outside the United Kingdom
    15       22       (7 )     (36 )     (49 )     13  
 
 
    150       (2 )     152       (168 )     (210 )     42  
 
Customer accounts – other time deposits – wholesale:
                                               
in offices in the United Kingdom
    164       19       145       459       638       (179 )
in offices outside the United Kingdom
    95       135       (40 )     16       7       9  
 
 
    259       154       105       475       645       (170 )
 
Debt securities in issue:
                                               
in offices in the United Kingdom
    103       (72 )     175       (112 )     203       (315 )
in offices outside the United Kingdom
    92       104       (12 )     (95 )     5       (100 )
 
 
    195       32       163       (207 )     208       (415 )
 
Dated and undated loan capital and other subordinated liabilities principally in offices in the United Kingdom
    8       23       (15 )     39       73       (34 )
 
Internal funding of trading businesses
    (414 )     (392 )     (22 )     (202 )     (469 )     267  
 
Total banking business interest payable:
                                               
in offices in the United Kingdom
    694       (234 )     928       81       641       (560 )
in offices outside the United Kingdom
    306       388       (82 )     (116 )     (2 )     (114 )
 
 
    1,000       154       846       (35 )     639       (674 )
 
Total trading business interest payable
    2,481       2,795       (314 )     636       734       (98 )
 
Total interest payable
    3,481       2,949       532       601       1,373       (772 )
 
Movement in net interest income
                                               
Increase/(decrease) in interest receivable
    3,432       3,259       173       1,012       2,054       (1,042 )
(Decrease)/increase in interest payable
    (3,481 )     (2,949 )     (532 )     (601 )     (1,373 )     772  
 
 
    (49 )     310       (359 )     411       681       (270 )
Movement in non-margin interest
                          (19 )                
 
 
    (49 )                     392                  
 

87


 

Financial review

Results by nature of income and expense


(BAR CHART)

Net fees and commissions

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Fees and commissions receivable
    5,672       4,896       4,454  
Less: fees and commissions payable
    (706 )     (633 )     (529 )
 
 
    4,966       4,263       3,925  
 

Group net fees and commissions increased 16% (£703m) to £4,966m (2003: £4,263m), reflecting good growth across all businesses.

Fees and commissions receivable rose 16% (£776m) to £5,672m in 2004 (2003: £4,896m) driven by increases in: Barclays Global Investors, reflecting strong income generation across both the active and index businesses; Barclays Capital, with good contributions from origination and advisory activities; and Private Clients, as a result of stronger business volumes and the acquisition of Gerrard. Good growth was also achieved in UK Banking and in Barclaycard.

In 2003, net fees and commissions increased by £338m to £4,263m primarily driven by increases in: Barclays Global Investors, reflecting growth of investment management fees; Barclaycard as a result of higher cardholder activity and good volume growth within the merchant acquiring business and Barclays Capital, with good performances across the Credit businesses.

Dealing profits

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Rates related business
    1,141       909       876  
Credit related business
    352       145       (43 )
 
 
    1,493       1,054       833  
 

Almost all the Group’s dealing profits are generated in Barclays Capital.

Dealing profits increased 42% (£439m) to £1,493m (2003: £1,054m), with very strong performances in both the Rates and Credit businesses. This reflected higher volumes of client led activity throughout the year across a broad range of products and the continued benefit of headcount investments to broaden product depth and geographical reach. The very strong growth in the Rates businesses was across equity related activities, foreign exchange and fixed income. The very strong performance in the Credit businesses reflected an increase in the contribution from credit derivatives.

Total foreign exchange income was £520m (2003: £498m) and consisted of revenues earned from both retail and wholesale activities. The foreign exchange income earned on customer transactions by UK Banking, Private Clients and International and Barclaycard, both externally and within Barclays Capital, is reported in those business units, within fees and commissions.

Dealing profits in 2003 grew 27% to £1,054m (2002: £833m) driven by significant growth in client transaction volumes, particularly in continental Europe. There were strong performances in the Credit business and good contributions from Rates.

Other operating income

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net premium income on insurance underwriting
    211       264       178  
Gain on disposal of investment securities
    181       73       58  
Income/loss from the long-term assurance business
    58       (33 )     (51 )
Property rentals
    9       15       20  
Dividend income from equity shares
    17       6       7  
Other income
    168       165       152  
 
 
    644       490       364  
 

Other operating income increased 31% (£154m) to £644m (2003: £490m).

Net premium income on insurance underwriting decreased 20% (£53m) to £211m (2003: £264m), primarily due to a provision relating to the early termination of contracts.

Gain on disposal of investment securities rose by £108m to £181m (2003: £73m), predominantly due to a number of realisations in the private equity business within Barclays Capital.

Virtually all the Group’s long-term assurance activity is based in the UK and was the main component of the £58m contribution. This included costs of redress for customer claims in respect of endowment policies of £97m (2003: £95m).

Dividend income increased by £11m to £17m (2003: £6m) as a result of a significant dividend received from an investment.

Other income was flat at £168m (2003: £165m). This reflected a reduction of £98m in income, primarily in UK Retail Banking, from the revision of estimated amounts expected to be repaid on banking liabilities. This was offset by realisations on structured capital market transactions.

Other operating income in 2003 increased by 35% (£126m) to £490m (2002: £364m). This was primarily due to premium income on insurance underwriting which rose by £86m to £264m as a result of a good increase from consumer lending activities, a favourable claims experience and a one-off income gain of £43m from an adjustment to insurance reserves.

In addition, profits on disposal of investment securities rose by £15m primarily reflecting realisations in the private equity business within Barclays Capital.



88


 

Barclays PLC Annual Report 2004 

Administrative expenses – staff costs

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Salaries and accrued incentive payments
    4,043       3,441       3,159  
Social security costs
    339       278       240  
Pension costs
    160       180       (27 )
Post-retirement health care
    22       19       15  
Other staff costs
    434       377       368  
 
 
    4,998       4,295       3,755  
 

Staff costs
Staff costs increased by 16% (£703m) to £4,998m (2003: £4,295m).

Salaries and accrued incentive payments rose by 17% (£602m) to £4,043m (2003: £3,441m) principally reflecting increased performance related payments primarily within Barclays Capital and Barclays Global Investors, increased headcount, and the impact of the businesses acquired in 2003.

Pension costs comprise all UK and international pension schemes. Included in the costs is a charge of £103m (2003: £128m) in respect of the Group’s main UK pension schemes.

Staff costs in 2003 were 14% higher than 2002. Salaries and accrued incentive payments increased by 9% reflecting increased performance related payments primarily within Barclays Capital and Barclays Global Investors. Pension costs in 2002 reflected a £72m credit in respect of the Group’s main UK pension schemes.

Staff numbers

                         
 
    2004     2003     2002  
 
By class of business
                       
UK Banking
    41,800       41,000       43,900  
UK Retail Banking
UK Business Banking
      34,400
7,400
        34,000
7,000
        36,300
7,600
 
Private Clients & International
    19,300       19,000       16,900  
Private Clients
International
      7,200
12,100
        6,900
12,100
        6,400
10,500
 
Barclaycard
    6,700       6,200       5,600  
Barclays Capital
    7,800       5,800       5,600  
Barclays Global Investors
    1,900       2,000       2,000  
Head office functions and other operations
    900       800       700  
 
Total Group permanent and contract staff worldwide
    78,400       74,800       74,700  
Temporary and agency staff worldwide
    4,300       4,100       3,700  
 
Total including temporary and agency staff
    82,700       78,900       78,400  
 
By geographic segments
                       
United Kingdom
    60,000       58,000       59,000  
Non-United Kingdom
    18,400       16,800       15,700  
 
 
    78,400       74,800       74,700  
 

Staff numbers are shown on a full-time equivalent basis UK permanent and contract staff.

During 2004, staff numbers permanent and contract staff increased by 3,600. The implementation of restructuring programmes resulted in a decrease of 2,100 staff, but this was more than offset by the recruitment of additional staff throughout the Group and 400 staff from the acquisition of Juniper. Significant areas of recruitment were Barclays Capital to support the expansion of their business, and Barclaycard through the growth of Barclaycard International and the addition of front-office staff to improve customer service in Barclaycard UK; and UK Banking, mostly from the recruitment of frontline staff in both UK Retail Banking and UK Business Banking.

Head office functions and other operations includes staff undertaking activities which support and provide central information technology services and their costs are predominantly passed on to the businesses.

In 2003, Private Clients and International staff numbers increased by 3,500 as a result of the acquisition of Charles Schwab Europe, Banco Zaragozano and Gerrard. This increase was partially offset by restructuring initiatives.

UK Retail Banking staff numbers decreased in 2003 by 2,300. 1,400 of this decrease was a result of a number of productivity initiatives.

Administrative expenses – other

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Property and equipment expenses
                       
Hire of equipment
    9       8       12  
Property rentals
    197       184       180  
Other property and equipment expenses
    835       793       725  
 
 
    1,041       985       917  
Other administrative expenses
                       
Stationery, postage and telephones
    324       311       294  
Advertising and market promotion
    264       237       238  
Travel, accommodation and entertainment
    174       145       136  
Subscriptions and publications
    130       91       86  
Sundry losses, provisions and write-offs
    185       128       121  
Consultancy fees
    67       56       85  
Professional fees
    234       159       161  
Other expenses
    339       292       274  
 
 
    1,717       1,419       1,395  
 
 
    2,758       2,404       2,312  
 

In 2004, administrative expenses – other rose by 15% (£354m) to £2,758m (2003: £2,404m).



89


 

Financial review
Results by nature of income and expense



Other administrative expenses increased by 21% (£298m) to £1,717m (2003: £1,419m). This increase reflects increased business activity. Professional costs have increased due to business growth within Barclays Capital, integration of acquisitions and increased outsourcing costs. Increase in subscriptions and publications, travel, accommodation and entertainment primarily reflect business growth across the businesses. Other expenses increased due to new outsourced contracts signed in 2004.

Property and equipment expenses increased by 6% (£56m) to £1,041m (2003: £985m) as a result of increased information technology costs and property repairs and maintenance. Also included is a £23m cost increase relating to the relocation of Barclays headquarters to Canary Wharf.

In 2003, administrative expenses – other rose by 4% (£92m) to £2,404m (2002: £2,312m). This increase reflected increased outsourced processing costs, partially offset by reduced consultancy spend.

Depreciation and amortisation

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Depreciation
                       
Property depreciation
    86       93       93  
Equipment depreciation
    209       196       210  
 
 
    295       289       303  
 
Amortisation
                       
Goodwill amortisation
    299       265       254  
 

Provisions for bad and doubtful debts

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Specific charge
    1,301       1,320       1,486  
General (release)/charge
    (210 )     27       (2 )
 
 
    1,091       1,347       1,484  
 

The credit environment both in retail and in corporate and wholesale businesses was relatively benign in 2004. This led to a lower level of potential problem and non-performing loans and lower provision charges.

Overall, the Group provision charge declined 19% to £1,091m (2003: £1,347m). This resulted from a substantial decrease in the corporate and wholesale provisions charge, while the retail provisions charge was steady. As a percentage of average banking loans and advances, the provisions rate fell to 0.54% (2003: 0.73%).

In the corporate and wholesale businesses, non-performing and potential problem loans in total fell by 29% to £2,062m from £2,920m in 2003, reflecting the continuing strong corporate credit environment. The corporate and wholesale provisions charge declined to £284m (2003: £543m). The reduction in the provisions charge included an exceptional recovery of £57m in UK Business Banking.

In retail, non-performing loans and potential problem loans remained steady at £2,679m (2003: £2,712m). The provisions charge in the retail businesses was also steady at £807m (2003: £804m). The provisions charge increased in Barclaycard (the card and unsecured consumer lending business) due to volume growth and the maturation of new customer recruitment. The provisions charge included a release of £40m associated with the UK mortgage business, following a review of the portfolio and the current loss experience.

In 2003 provisions fell 9% (£137m) to £1,347m. Provisions, excluding the impact of Transition Businesses, fell £36m to £1,324m. As a ratio of average banking loans and advances, the Group’s provisions charge improved significantly to 0.73% from 0.85% in 2002.

Business Banking provisions increased broadly in line with portfolio growth. Provisions fell in Barclays Capital reflecting the ongoing improvement in the loan book and the continued recovery in the large corporate credit environment.

Provisions fell in the UK Retail businesses with an improvement in the quality of the loan portfolio and improved risk management. The reduction occurred in the unsecured lending portfolio. Provisions for mortgages remained at a very low rate. Barclaycard provisions increased in line with continued portfolio growth.

Profit/(loss) from joint ventures and associated undertakings

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
(Loss)/profit from joint ventures
    (3 )     1       (5 )
Profit/(loss) from associated undertakings
    59       28       (5 )
 
 
    56       29       (10 )
 

In 2004 and 2003, the profit from associated undertakings primarily relates to the investment in FirstCaribbean.

The profit from FirstCaribbean reflects good operating performance and includes a gain of £28m on the disposal of shares held in Republic Bank Limited.

Exceptional items

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Profit on disposal of Group and associated undertakings
    45       4       8  
Loss on termination of Group activities
                (11 )
 
 
    45       4       (3 )
 

The profit on disposal relates mainly to the disposal of its shareholding in Edotech, an investment in a management buy-out of the former Barclays in-house statement printing operation.



90


 

Barclays PLC Annual Report 2004 


Tax
The overall tax charge is explained in the following table:

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Tax charge at average United Kingdom corporation tax rate of 30% (2003: 30%; 2002: 30%)
    1,381       1,153       961  
Prior year adjustments
    (12 )     (21 )     (25 )
Effect of change in non-allowable general provisions
    2       2       (2 )
Effect of non-allowable property write-downs and depreciation
    20       13       12  
Net effect of differing tax rates overseas
    (110 )     (95 )     (70 )
Net effect of overseas losses not available for relief in the United Kingdom
    24       (12 )     (40 )
Other non-allowable expenses
    (5 )     (28 )     8  
Gains covered by capital losses brought forward
    (51 )     (44 )     (3 )
Goodwill
    71       74       69  
Other items
    (31 )     34       45  
 
Overall tax charge
    1,289       1,076       955  
 
Effective tax rate %
    28.0       28.0       29.8  
 

The charge for the year is based upon a UK corporation tax rate of 30% for the calendar year 2004 (2003: 30%). The effective rate of tax for 2004 was 28% (2003: 28%). This is lower than the standard rate primarily due to the beneficial effects of lower tax on overseas income and certain non-taxable gains offset by the absence of tax relief on goodwill.

UK GAAP compared with US GAAP
The Group also provides results on the basis of accounting principles generally accepted in the United States (US GAAP). The impact on net income and shareholders’ equity of applying US GAAP is set out below. The individual UK/US GAAP adjustments are discussed in Note 52 on pages 182 to 208.

Attributable profit (UK GAAP)/Net income (US GAAP)

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Barclays PLC Group
                       
Attributable profit (UK GAAP)/
                       
Net income (US GAAP)
                       
UK GAAP
    3,268       2,744       2,230  
US GAAP
    3,032       1,740       2,476  
 
Barclays Bank PLC Group
                       
Attributable profit (UK GAAP)/
                       
Net income (US GAAP)
                       
UK GAAP
    3,279       2,744       2,228  
US GAAP
    3,137       1,842       2,578  
 

Shareholders’ funds (UK GAAP)/Shareholders’ equity (US GAAP)

                         
 
    2004     2003          
    £m     £m          
 
Barclays PLC Group
                       
Shareholders’ funds (UK GAAP)/
                       
Shareholders’ equity (US GAAP)
                       
UK GAAP(a)
    17,417       16,374          
US GAAP
    16,953       16,830          
 
Barclays Bank PLC Group
                       
Shareholders’ funds (UK GAAP)/
                       
Shareholders’ equity (US GAAP)
                       
UK GAAP
    18,271       16,485          
US GAAP
    19,594       18,646          
 
Note
(a)  Figures for 2003 have been restated to reflect the adoption of UITF
       Abstract 38 (UITF 38), ‘Accounting for ESOP trusts’.

The Group does not manage its business with regard to reported trends on a US GAAP basis. Consequently the level of adjustment from the application of US GAAP in current or past periods is not necessarily indicative of the magnitude or direction of such adjustment in subsequent periods.



91


 

Financial review

Analysis of results by business


Analysis of Results by Business

The following section analyses the Group’s performance within the businesses. Inter-business activities are included within these figures. The total income and expenditure for the businesses therefore does not necessarily equate to the amounts reported in the Group’s results.

The analysis of results by business includes goodwill amortisation. This differs from the announcement of results dated 10th February 2005, where the analysis of results by business excludes goodwill amortisation.

UK Banking

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    3,466       3,301       3,226  
Net fees and commissions
    1,930       1,807       1,708  
Other operating income
    250       397       291  
 
Operating income
    5,646       5,505       5,225  
Goodwill amortisation
Other operating expenses
    (176
  (3,019
)
)
    (172
  (2,903
)
)
    (184
  (2,811
)
)
Operating expenses
    (3,195 )     (3,075 )     (2,995 )
 
Operating profit before provisions
    2,451       2,430       2,230  
Provisions for bad and doubtful debts
    (199 )     (326 )     (324 )
 
Operating profit
    2,252       2,104       1,906  
Profit from associated undertakings
    4       10       3  
Exceptional items
    42       (11 )     (5 )
 
Profit on ordinary activities before tax
    2,298       2,103       1,904  
 

UK Banking managed its portfolio of businesses to deliver good profit growth in a year of extensive business reorganisation. UK Banking profit before tax increased 9% (£195m) to £2,298m (2003: £2,103m) as a result of a very strong performance from UK Business Banking and a broadly flat contribution from UK Retail Banking.

UK Banking profit before tax in 2003 increased 10% to £2,103m (2002: £1,904m).

Operating income increased 5% to £5,505m (2002: £5,225m), whilst operating expenses increased 3% to £3,075m (2002: £2,995m).

UK Retail Banking

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    2,059       2,000       1,979  
Net fees and commissions
    1,117       1,074       1,036  
Other operating income
    239       365       292  
 
Operating income
    3,415       3,439       3,307  
Goodwill amortisation
Other operating expenses
 
(158
  (2,270
)
)
    (158
  (2,188
)
)
    (158
  (2,082
)
)
Operating expenses
    (2,428 )     (2,346 )     (2,240 )
 
Operating profit before provisions
    987       1,093       1,067  
Provisions for bad and doubtful debts
    (60 )     (107 )     (138 )
 
Operating profit
    927       986       929  
Profit from associated undertakings
          7       5  
Exceptional items
    42       (10 )     (11 )
 
Profit on ordinary activities before tax
    969       983       923  
 

UK Retail Banking profit before tax decreased 1% (£14m) to £969m (2003: £983m).

Operating income was broadly flat at £3,415m (2003: £3,439m). There were strong performances in current accounts and UK Premier. The performance in the mortgage business was impacted by margin pressure. Net revenue (operating income less provisions) was also broadly flat at £3,355m (2003: £3,332m).

Net interest income increased 3% (£59m) to £2,059m (2003: £2,000m). Growth was driven by higher customer deposit balances particularly in Personal Customer current accounts and UK Premier deposits, together with an increase in the retail savings margin. This growth was partially offset by a reduced contribution from the mortgage business. The favourable impact of higher average UK mortgage balances was more than offset by margin pressure, due to a fall in the proportion of the mortgage portfolio on the standard variable rate, the impact of successive base rate increases and a reduction in early redemption income.

UK residential mortgage balances ended the period at £61.7bn (2003: £59.8bn). Gross advances were £17.5bn (2003: £18.3bn) and net lending was £1.9bn (2003: £2.0bn). The loan to value ratio within the mortgage book on a current valuation basis averaged 35% (2003: 40%).

Average overdraft balances within Personal Customers increased by 9%. Average customer deposit balances increased 5% to £68.5bn (2003: £65bn). Personal Customer average current account balances increased 10%. There was strong growth in UK Premier with average deposits up 15%, and in Small Business where average deposit balances were 7% higher. Retail average savings balances increased by 1% in a highly competitive market.



92


 

Barclays PLC Annual Report 2004 


Net fees and commissions increased 4% (£43m) to £1,117m (2003: £1,074m), driven by strong growth in value added fee-based current account income.

Other operating income decreased 35% (£126m) to £239m (2003: £365m). The majority of the decrease was attributable to a reduction of £89m in income from the revision of estimated amounts expected to be repaid on banking liabilities. There was also lower net premium income on insurance underwriting due to a provision relating to the early termination of contracts.

Operating expenses rose 3% (£82m) to £2,428m (2003: £2,346m). Almost half of the cost increase (£40m) was attributable to preparations for a new regulatory environment, particularly in the mortgage and general insurance businesses. There was significant investment in the business infrastructure and restructuring costs were incurred in reorganising the business. This included adding 1,000 customer-facing staff, an upgrade in branch management capability and investment in new technology.

Provisions decreased 44% (£47m) to £60m (2003: £107m). The quality of the loan portfolio improved and mortgage balances in arrears remained at a low level. The reduction in the provisions charge included a release of £40m associated with the UK mortgage business following a review of the portfolio and the current loss experience.

The exceptional item of £42m was predominantly in respect of the profit on the sale of a shareholding in Edotech, a former Barclays in-house statement printing operation.

UK Retail Banking profit before tax in 2003 was £983m (2002: £923m).

Operating income increased 4% to £3,439m (2002: £3,307m).

Net interest income rose by 1% to £2,000m (2002: £1,979m). There was an increase in the spread on new mortgage business whilst the margin for Personal Customers retail savings remained stable. Net fees and commissions in 2003 were 4% higher at £1,074m (2002: £1,036m).

Other operating income increased by 25% to £365m (2002: £292m). This resulted from a strong performance in general insurance, reflecting increased sales of payment protection insurance products, a more favourable claims experience and a one off gain of £43m arising from an adjustment to insurance reserves.

Operating costs increased 5% to £2,346m (2002: £2,240m), with a major contributor to growth being an increase in pension costs.

Provisions fell by 22% to £107m (2002: £138m), reflecting the overall quality of the lending portfolio and improvements to risk management processes.

UK Business Banking

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    1,407       1,301       1,247  
Net fees and commissions
    813       733       672  
Other operating income
    11       32       (1 )
 
Operating income
    2,231       2,066       1,918  
Goodwill amortisation
    (18 )     (14 )     (26 )
Other operating expenses
      (749 )       (715 )       (729 )
Operating expenses
    (767 )     (729 )     (755 )
 
Operating profit before provisions
    1,464       1,337       1,163  
Provisions for bad and doubtful debts
    (139 )     (219 )     (186 )
 
Operating profit
    1,325       1,118       977  
Profit from associated undertakings
    4       3       (2 )
Exceptional items
          (1 )     6  
 
Profit on ordinary activities before tax
    1,329       1,120       981  
 

UK Business Banking profit before tax increased 19% (£209m) to £1,329m (2003: £1,120m), as a result of good income growth, a continued focus on cost management and a significantly reduced provision charge. Both Larger Business and Medium Business performed well.

Operating income increased 8% (£165m) to £2,231m (2003: £2,066m). Net revenue (operating income less provisions) increased 13% (£245m) to £2,092m (2003: £1,847m).

Net interest income increased 8% (£106m) to £1,407m (2003: £1,301m), as a result of strong balance sheet growth. Average lending balances increased 11% to £44.6bn (2003: £40.2bn); the quality of the new lending was good and the overall credit profile of the portfolio was maintained. Average deposit balances increased 9% to £41.5bn (2003: £37.9bn). There was an improvement in the lending margin and a modest decline in the deposit margin. There was a lower contribution from the structural hedge.

Net fees and commissions increased 11% (£80m) to £813m (2003: £733m), driven by significantly higher lending related fees.

Operating expenses increased 5% (£38m) to £767m (2003: £729m), reflecting higher business volumes and increased expenditure on frontline staff and marketing. The cost of regulatory compliance programmes also increased.

Provisions decreased 37% (£80m) to £139m (2003: £219m). The provisions performance was driven by the impact of significantly lower potential problem loans and non-performing loans and the benefit of a single recovery of £57m.



93


 

Financial review
Analysis of results by business



UK Business Banking profit before tax increased strongly in 2003 to £1,120m (2002: £981m), despite the negative impact on income from the Competition Committee Inquiry remedies.

Operating income grew 8% to £2,066m (2002: £1,918m). Net interest increased 4% to £1,301m (2002: £1,247m), benefiting from higher average balances. Net fees and commissions increased by 9% to £733m (2002: £672m), with lending fees rising strongly.

Operating costs fell 3% to £729m (2002: £755m) with business as usual costs reduced as cost savings achieved more than offset higher pension costs, together with a lower goodwill charge.

Provisions increased 18% to £219m (2002: £186m).

Private Clients and International

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    836       749       698  
Net fees and commissions
    850       683       751  
Other operating income
    47       36       26  
 
Operating income
    1,733       1,468       1,475  
Goodwill amortisation
Other operating expenses
 
(64
  (1,304
)
)
    (42
  (1,096
)
)
    (29
  (1,054
)
)
Operating expenses
    (1,368 )     (1,138 )     (1,083 )
 
Operating profit before provisions
    365       330       392  
Provisions for bad and doubtful debts
    (30 )     (36 )     (40 )
 
Operating profit – ongoing business
    335       294       352  
Profit/(loss) from associated undertakings
    49       17       (8 )
Exceptional items
          7       (2 )
 
Profit on ordinary activities before tax
– ongoing business
    384       318       342  
Contribution from closed life assurance
activities
    (4 )     (80 )     (93 )
 
Profit on ordinary activities before tax
    380       238       249  
 

Private Clients and International profit before tax increased 60% (£142m) to £380m (2003: £238m).

The improved performance reflected good momentum in the businesses with strong income growth in both the Private Clients and International businesses. This was supported by improved market conditions together with the benefits from the acquisitions made in 2003 and the return on the prior investments in improving the client experience.

There was a significantly improved performance from the closed life assurance activities.

Private Clients

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    302       288       281  
Net fees and commissions
    529       394       485  
Other operating income
    8       4       3  
 
Operating income
    839       686       769  
Goodwill amortisation
Other operating expenses
 
(40
  (696
)
)
    (30
  (585
)
)
    (28
  (575
)
)
Operating expenses
    (736 )     (615 )     (603 )
 
Operating profit before provisions
    103       71       166  
Provisions for bad and doubtful debts
    1       (3 )     (2 )
 
Operating profit – ongoing business
    104       68       164  
Exceptional items
          5       (2 )
 
Profit on ordinary activities before
tax – ongoing business
    104       73       162  
Contribution from closed life assurance
activities
    (4 )     (80 )     (93 )
 
Profit on ordinary activities before tax
    100       (7 )     69  
 

The comparison with the prior period is impacted by the acquisitions of the Gerrard business in mid December 2003 and the retail stockbroking business of Charles Schwab Europe at the end of January 2003.

Private Clients profit before tax for the ongoing business increased 42% (£31m) to £104m (2003: £73m). There was a significantly improved performance from the closed life assurance activities.

Operating income increased 22% (£153m) to £839m (2003: £686m).

Net interest income increased 5% (£14m) to £302m (2003: £288m). Total average loans increased 31% to £3.8bn (2003: £2.9bn). Total average customer deposits increased 4% to £21.4bn (2003: £20.6bn). Good income growth from offshore corporate deposits and loans in International and Private Banking reflected the benefit of investment in relationship managers and internet-based offerings, partially offset by adverse exchange rate movements. Deposit margins improved slightly and were partially offset by lower lending margins.

Net fees and commissions increased 34% (£135m) to £529m (2003: £394m). Excluding the contribution from Gerrard, net fees and commissions increased 8%. Business volumes improved as higher average equity market levels contributed to increased sales of investment products and higher fund management fees. The average level of the FTSE 100 Index was 12% higher at 4,522 (2003: 4,051). Stockbroking fee income increased 6% reflecting the benefits of the integration of Charles Schwab Europe as well as improved market conditions. Although headline average daily deal volumes in UK retail stockbroking decreased to 7,800 (2003: 8,200), a more favourable product mix, including an increase in higher margin deals, more than compensated for the lower volume. Fee income in Private Banking increased 13%, reflecting the impact of additional private bankers and new product launches.



94


 

Barclays PLC Annual Report 2004 


Operating expenses increased 20% (£121m) to £736m (2003: £615m). Excluding the Gerrard business, operating expenses remained broadly flat. Cost savings resulting from reduced restructuring costs and cost synergies from Charles Schwab Europe enabled increased investment in product development and customer service in International and Private Banking and in Wealth Solutions.

Total customer funds, comprising customer deposits and assets under management, increased to £77bn (2003: £75bn). Growth in new business and the impact of the rising stock market were partly offset by adverse exchange rate movements. In October 2004, a multi-manager product was launched, which had £1.6bn of assets under management at the year-end.

The contribution from the closed life assurance activities was a loss of £4m (2003: loss of £80m). The impact of stronger stock markets, improved investment performance and better persistency levels largely offset the costs of £97m (2003: £95m) relating to redress for customers in respect of sales of endowment policies. The loss of £4m is reflected in the Group’s results as a gain of £49m (2003: loss of £40m) within other operating income offset by a reduction of £53m (2003: £40m) within net interest income.

Private Clients profit before tax for the ongoing business in 2003 fell 55% to £73m (2002: £162m).

Net interest income in 2003 increased 3% to £288m (2002: £281m).

Net fees and commissions from the ongoing business in 2003 decreased 19% to £394m (2002: £485m). This reflected the impact of lower average equity market levels in 2003 on sales of investment products and on fund management fees. The average level of the FTSE 100 Index was 12% lower than in the prior year at 4,051 (2002: 4,599). Fee income improved significantly in the second half of 2003, reflecting volume growth and the recovery in equity markets towards the year-end. Average daily deal volumes in UK retail stockbroking, including the Charles Schwab Europe business acquired in January 2003, increased to 8,200 (2002: 6,300).

Operating expenses in 2003 increased 2% to £615m (2002: £603m). This was mainly due to the inclusion of costs relating to the Charles Schwab Europe business, including related integration costs, plus additional pensions costs in 2003. Offsetting this was the impact of lower sales volumes and savings resulting from tight management control of costs. Operating expenses included goodwill amortisation of £30m (2002: £28m).

International

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    534       461       417  
Net fees and commissions
    321       289       266  
Other operating income
    39       32       23  
 
Operating income
    894       782       706  
Goodwill amortisation
Other operating expenses
 
(24
  (608
)
)
    (12
  (511
)
)
    (1
  (479
)
)
Operating expenses
    (632 )     (523 )     (480 )
 
Operating profit before provisions
    262       259       226  
Provisions for bad and doubtful debts
    (31 )     (33 )     (38 )
 
Operating profit
    231       226       188  
Profit from associated undertakings
    49       17       (8 )
Exceptional items
          2        
 
Profit on ordinary activities before tax
    280       245       180  
 

The comparison with the prior period is impacted by the acquisition of Banco Zaragozano in July 2003.

International profit before tax increased 14% (£35m) to £280m (2003: £245m) reflecting good growth in all businesses.

Operating income increased 14% (£112m) to £894m (2003: £782m). Net revenue (operating income less provisions) increased 15% (£114m) to £863m (2003: £749m).

Net interest income increased 16% (£73m) to £534m (2003: £461m) as a result of the inclusion of Banco Zaragozano and good balance growth in Spain, Africa and Italy.

Total average customer deposits increased 18% to £9.4bn (2003: £8bn), resulting from both the inclusion of Banco Zaragozano and strong organic growth in Spain and Africa.

Total average loans increased 48% to £18.3bn (2003: £12.4bn), reflecting strong growth across the portfolio and the inclusion of Banco Zaragozano for a full year in 2004. Mortgage balance growth in Europe was very strong with balances up 39%. Average lending balances in Africa increased 25%. Overall lending margins reduced mainly due to the impact of mortgage growth on the product mix.

Net fees and commissions increased 11% (£32m) to £321m (2003: £289m), with the majority of the increase reflecting the inclusion of Banco Zaragozano. There was a strong performance in France and Spain from increased fund management related fees. Spain’s total assets under management increased by 27%.

Operating expenses increased 21% (£109m) to £632m (2003: £523m) with the majority of the increase attributable to the inclusion of Banco Zaragozano. Investment in the development of new products and in enhancing the customer experience remained high across the portfolio.



95


 

Financial review
Analysis of results by business



Provisions decreased 6% (£2m) to £31m (2003: £33m).

Barclays Spain (including Banco Zaragozano) profit before tax declined 2% overall, after accounting for integration costs of 62m (2003: 12m) and goodwill of 32m (2003: 15m), with the increase in goodwill between 2003 and 2004 reflecting the first full year of charge. The retention rate of Banco Zaragozano customers has been high and Barclays products were successfully introduced to the customer base. The integration is well ahead of schedule.

Openplan in Spain continued its successful growth and it has been popular with the customers of Banco Zaragozano: total customer numbers at the end of 2004 were 47,000 (2003: 35,000), mortgage balances were 7.8bn (2003: 4.8bn) and savings balances were 1.5bn (2003: 1bn). Openplan also continued to grow in Portugal, with 8,900 customers at 31st December (2003: 6,200) and total balances up 44% to 1.3bn (2003: 0.9bn). This was supported by ongoing investment in new branches. In October 2004, Openplan was launched in France.

Profit before tax in Africa and the Middle East increased 13% to £126m (2003: £112m) driven by strong growth in corporate balances, particularly in South Africa, together with reduced restructuring costs.

The profit from associated undertakings reflected the contribution from FirstCaribbean. The improved performance reflected the delivery of synergies arising from the merger which created FirstCaribbean, together with good underlying growth in customer activity. The results of FirstCaribbean included a gain of £28m on the sale of shares held in Republic Bank Limited.

International profit before tax in 2003 increased by 36% to £245m (2002: £180m).

On 11th October 2002, the Caribbean businesses of Barclays and Canadian Imperial Bank of Commerce were combined to form FirstCaribbean International Bank Ltd, and the interest in FirstCaribbean has been accounted for as an associated undertaking thereafter.

Net interest income in 2003 increased by 11% to £461m (2002: £417m), mainly reflecting the success of Openplan in Spain, growth in lending and deposit volumes together with the acquisition of BNPI Mauritius in Africa, and the inclusion of income relating to Banco Zaragozano, acquired in July 2003. These factors more than offset the absence of the contribution from the Caribbean business in 2003.

Net fees and commissions in 2003 increased by 9% to £289m (2002: £266m). This was due to balance sheet growth in Spain and Africa in addition to the contributions from BNPI Mauritius and Banco Zaragozano.

Operating expenses in 2003 increased by 9% to £523m (2002: £480m). This reflected the inclusion of costs relating to Banco Zaragozano, and additional costs in Africa relating to increased infrastructure investment, further development of the business and costs of relocating the Head office to Johannesburg. Partially offsetting this was the absence of costs relating to the Caribbean in 2003.

Provisions in 2003 decreased by 13% to £33m (2002: £38m), mainly reflecting the impact of the Caribbean transaction.

Barclaycard

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    1,600       1,555       1,354  
Net fees and commissions
    764       673       585  
Other operating income
                1  
 
Operating income
    2,364       2,228       1,940  
Goodwill amortisation
Other operating expenses
 
(41
  (806
)
)
    (38
  (761
)
)
    (26
  (636
)
)
Operating expenses
    (847 )     (799 )     (662 )
 
Operating profit before provisions
    1,517       1,429       1,278  
Provisions for bad and doubtful debts
    (761 )     (708 )     (663 )
 
Operating profit
    756       721       615  
Profit/(loss) from joint ventures
    4       2       (4 )
Exceptional items
                2  
 
Profit on ordinary activities before tax
    760       723       613  
 

Barclaycard profit before tax increased 5% (£37m) to £760m (2003: £723m).

Operating income increased 6% (£136m) to £2,364m (2003: £2,228m). Net revenue (operating income less provisions) increased 5% (£83m) to £1,603m (2003: £1,520m). A high level of recruitment of UK retail card customers continued at 1.33m (2003: 1.55m).

Net interest income increased 3% (£45m) to £1,600m (2003: £1,555m) reflecting growth in UK average extended credit balances, up 11% to £8.2bn (2003: £7.4bn) and higher UK average loan balances, up 11% to £9.4bn (2003: £8.5bn). Margins in the consumer lending business remained broadly stable whereas margins in UK cards decreased, reflecting higher funding costs and the impact of increased balance transfer activity at promotional rates.

Net fees and commissions increased 14% (£91m) to £764m (2003: £673m) as a result of the continued growth in the credit card and consumer lending businesses and good volume growth within the merchant acquiring business.

Operating expenses rose 6% (£48m) to £847m (2003: £799m). The increase reflected investment in Barclaycard International and brand related investment in the UK.

Provisions increased 7% (£53m) to £761m (2003: £708m). This increase was lower than the growth in assets and reflected the continued benefit of improved collections activity. Non-performing loan balances increased but at a significantly lower rate than the growth in assets. Delinquency levels as a percentage of outstandings for both Barclaycard branded credit cards and for Barclayloan were stable.

In the UK, particularly strong performances from the Monument and FirstPlus businesses, together with Barclaycard Business, more than offset the margin pressure and brand investment in the Barclaycard branded card activities.



96


 

Barclays PLC Annual Report 2004 


Barclaycard International made good progress with its growth strategy. Profit before tax increased to £8m (2003: £4m). Income increased 30% due to the growth in average extended credit balances, up 28% to £882m (2003: £689m). The number of Barclaycard International cards in issue rose to 2.9m (2003: 1.7m). Barclaycard established a presence in the US credit card market through the acquisition of the Juniper Financial Corporation in December 2004. Juniper is a US credit card issuer with US$1.4bn in receivables and 1 million cards in issue. In 2004, Juniper contributed a loss of £2m, for the month of December, in line with expectations at the time of the acquisition.

Barclaycard profit before tax in 2003 increased 18% to £723m (2002: £613m).

Net interest income in 2003 increased 15% to £1,555m (2002: £1,354m). This was mainly due to good growth in average UK extended credit balances, up 14% to £7.4bn (2002: £6.5bn).

Net fees and commissions in 2003 increased 15% to £673m (2002: £585m), as a result of higher cardholder activity and good volume growth within the merchant acquiring business.

Operating expenses in 2003 increased by 21% to £799m (2002: £662m). The increase reflected higher business volumes and greater marketing spend coupled with increased strategic investment spend as Barclaycard enhanced operational capability. Included in operating expenses was goodwill of £38m (2002: £26m).

Provisions in 2003 increased 7% to £708m (2002: £663m).

Barclays Capital

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    1,006       1,024       939  
Dealing profits
    1,469       1,042       828  
Net fees and commissions
    611       551       481  
Other operating income
    295       109       78  
 
Operating income
    3,381       2,726       2,326  
Goodwill amortisation
Other operating expenses
 

  (2,237

)
   
  (1,638

)
    (2
  (1,345
)
)
Operating expenses
    (2,237 )     (1,638 )     (1,347 )
 
Operating profit before provisions
    1,144       1,088       979  
Provisions for bad and doubtful debts
    (102 )     (253 )     (334 )
 
Operating profit
    1,042       835       645  
Profit from associated undertakings
          1       1  
 
Profit on ordinary activities before tax
    1,042       836       646  
 

Barclays Capital profit before tax increased 25% (£206m) to £1,042m (2003: £836m), as a result of very strong operating income growth and the continued improvement in the credit environment. The very strong performance was driven by growth in business volumes and client activity levels. Net revenue (operating income less provisions) increased 33% (£806m) to £3,279m (2003: £2,473m).

Operating income increased 24% (£655m) to a record £3,381m (2003: £2,726m) as a result of strong growth across most of the product areas in Rates and Credit. Income by product continued to diversify with the strongest growth delivered by credit products and equity related products. Regional growth was broadly based with particularly strong results in the US and Asia. Average DVaR increased to £34m (2003: £26m). Period end DvaR was £32m (2003: £37m).

Secondary income, comprising dealing profits and net interest income, is mainly generated from providing client risk management solutions. This increased 20% (£409m) to £2,475m (2003: £2,066m).

Dealing profits increased 41% (£427m) to £1,469m (2003: £1,042m), with very strong performances in both the Rates and Credit businesses. This reflected higher volumes of client led activity across a broad range of products and the continued benefit of recent headcount investments in product depth and geographic reach. Net interest income fell 2% (£18m) to £1,006m (2003: £1,024m) driven by lower contributions from money markets due to the reduced size of the book.

Primary income, comprising net fees and commissions from advisory and origination activities, grew 11% (£60m) to £611m (2003: £551m). Securitisation, structured bonds and leveraged finance grew significantly, more than offsetting lower market activity by corporates. Net fees and commissions included £63m (2003: £89m) of internal fees for structured capital markets activities arranged by Barclays Capital.

Other operating income increased to £295m (2003: £109m) as a result of a number of private equity realisations and structured capital markets transactions.

Operating expenses increased 37% (£599m) to £2,237m (2003: £1,638m) due to the execution of the business expansion plan and an increase in performance related pay. Business as usual costs increased significantly, reflecting higher volumes and the growth in staff numbers. Revenue related costs increased due to the strong profit performance. The recruitment of staff to expand product, client coverage and distribution capabilities resulted in significantly higher strategic investment costs. The ratio of total costs to net revenue and staff costs to net revenue both increased by 2% to 68% and 55% respectively. Approximately half of the total costs comprised performance related pay, discretionary investment spend and short-term contractor resource.

Total headcount increased by 2,000 to 7,800 (2003: 5,800). Almost a third were in the front office, mainly in Europe and the US. Approximately half of the increase was directed at strengthening the back office and control functions. The remainder related to contract staff, mainly in technology, which ensured that the support platform could be developed whilst maintaining flexibility. Barclays Capital accelerated targeted investments in revenue generating capabilities together with a strengthening of the control and support environment. This investment has expanded the scope of the product offering, building new income streams from commercial and residential mortgage backed securities and home equity loans. Existing offerings in commodities trading and equity related products were extended to the US and client channels continued to be extended in Europe, the US and Asia.



97


 

Financial review
Analysis of results by business



Provisions fell 60% (£151m) to £102m (2003: £253m), reflecting the significant decline in non-performing and potential problem loan balances as a result of a more stable wholesale credit environment.

Profit before tax in 2003 increased 29% to £836m (2002: £646m), due to very strong operating income growth and an improving credit environment. Revenue related costs increased with the strong performance.

Operating income increased 17% to £2,726m (2002: £2,326m) reflecting broadly based growth across most products in Rates and Credit. Secondary income increased 17% to £2,066m (2002: £1,767m) driven by strong growth in dealing profits. Primary income grew 15% to £551m (2002: £481m) with good performances across the Credit businesses.

Operating expenses grew 22% to £1,638m (2002: £1,347m) reflecting increased revenue related costs due to the strong financial performance and growth in BAU costs associated with higher business volumes and front-office hiring.

Provisions fell 24% to £253m (2002: £334m) reflecting ongoing improvements in the quality of the loan book and the recovery in the large corporate credit environment.

Barclays Global Investors

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Net interest income
    5       9       9  
Net fees and commissions
    882       662       538  
Other operating income
    6       1        
 
Operating income
    893       672       547  
Goodwill amortisation
Other operating expenses
 
(18
  (545
)
)
    (13
  (480
)
)
    (13
  (439
)
)
Operating expenses
    (563 )     (493 )     (452 )
 
Operating profit
    330       179       95  
 
Loss from joint ventures
    (2 )     (1 )     (1 )
Exceptional items
    1              
 
Profit on ordinary activities before tax
    329       178       94  
 

Barclays Global Investors (BGI) delivered another year of record performance. Profit before tax increased 85% (£151m) to £329m (2003: £178m) reflecting substantial income growth and continued discipline in cost management. Foreign exchange movements impacted growth in income and costs. Approximately 55% of income is generated in the US and 31% in the UK and continental Europe.

Net fees and commissions increased 33% (£220m) to £882m (2003: £662m), with strong income generation across both the active and index businesses and particularly in investment management fees. These resulted from strong net new sales, growth in sales of higher margin products and stronger global equity markets, partially offset by adverse foreign exchange movements. Securities lending income growth was also very strong, benefiting from increased volumes.

Successful income generation continued across a diverse range of products, distribution channels and geographies and active product investment performance remained strong. BGI’s commitment to

innovation continued as a number of iShare (Exchange Traded Funds) products were launched during 2004. There was significant growth in global iShares with assets under management up 88% to US$130bn at the year-end.

Operating expenses increased 14% (£70m) to £563m (2003: £493m) primarily as a result of higher performance based expenses and benefited from foreign exchange movements.

Total assets under management increased 19% (£111bn) to £709bn (2003: £598bn). The growth included the significant generation of net new assets of £65bn. An increase of £97bn attributable to market movements was partially offset by £51bn of adverse exchange rate movements.

Barclays Global Investors profit before tax in 2003 increased 89% (£84m) to £178m (2002: £94m) and reflected very strong top-line income growth and good control of costs.

Net fees and commissions in 2003 increased 23% (£124m) to £662m (2002: £538m), reflecting good income generation across a diverse range of products, distribution channels and geographies. The increase was largely driven by growth of investment management fees. These resulted from strong net new sales, growth in the sales of higher margin products, good investment performance and the recovery of equity markets towards the year end, which more than compensated for the adverse impact of foreign exchange translation movements.

Operating expenses in 2003 increased by 9% (£41m) to £493m (2002: £452m) due to higher revenue related costs, partly offset by the impact of foreign exchange translation movements.

Head office functions and other operations

                         
 
    2004     2003 (a)   2002 (a)
    £m     £m     £m  
 
Head office functions and central items
    (201 )     (192 )     (155 )
Transition businesses
    7       (25 )     (125 )
Restructuring costs
    (12 )     (16 )     (21 )
 
Loss on ordinary activities before tax
    (206 )     (233 )     (301 )
 
Note
(a)   Comparative figures have been restated to reflect the aggregation of Head office functions and other operations, which were formerly reported separately.

Head office functions and central items costs increased 5% (£9m) to a loss of £201m (2003: loss £192m). Central items included internal fees charged by Barclays Capital for structured capital market activities of £63m (2003: £89m).

The improved performance of Transition Businesses, from a loss of £25m to a profit of £7m, primarily reflected provisions released in the current year.

Head office functions and central items costs increased in 2003 by 24% (£37m) to a loss of £192m (2002: loss £155m).

The improved performance of Transition Businesses, from a loss in 2002 of £125m to a loss in 2003 of £25m, primarily reflected a reduced provisions charge in respect of various South American Corporate Banking exposures.



98


 

Barclays PLC Annual Report 2004 

Financial review

Total assets and liabilities and capital resources


Total Assets and Liabilities

(TOTAL ASSETS AND LIABILITIES BAR CHART)

Total Assets and Weighted Risk Assets
The Group’s balance sheet increased 18% (£78.8bn) to £522.1bn (2003: £443.3bn). Weighted risk assets increased 16% (£29.6bn) to £218.6bn (2003: £189bn).

UK Banking total assets increased 8% to £122.4bn (2003: £113.7bn). Weighted risk assets increased 9% to £91.9bn (2003: £84.5bn).

UK Retail Banking total assets increased 3% to £71.6bn (2003: £69.7bn) and weighted risk assets increased 4% to £37.1bn (2003: £35.8bn). This was mainly attributable to growth in the UK residential mortgage portfolio, up 3% to £61.7bn (2003: £59.8bn).

UK Business Banking total assets increased 15% to £50.8bn (2003: £44bn) and weighted risk assets increased 13% to £54.8bn (2003: £48.6bn). This reflected strong growth in lending balances.

Private Clients and International total assets (excluding the assets of the closed life assurance activities) increased 14% to £31bn (2003: £27.2bn), and weighted risk assets increased 28% to £23.3bn (2003: £18.2bn). This was mainly attributable to growth in customer loans in Spain, Italy and Africa.

Barclaycard total assets increased 14% to £23.4bn (2003: £20.6bn) reflecting growth in the credit card and consumer lending business and the acquisition of Juniper. Weighted risk assets increased 10% to £20.2bn (2003: £18.3bn).

Barclays Capital total assets increased 24% to £332.6bn (2003: £268.7bn) due to increases in debt securities and fully collateralised reverse repos as the expansion of the business continued. Total weighted risk assets increased 23% to £79.9bn (2003: £65.1bn), reflecting increased business volumes and the expansion of credit trading, credit derivatives and residential and commercial mortgage backed securities to meet client demands.

Capital Resources
The Group manages both its debt and equity capital actively. The Group’s authority to buy-back equity was renewed at the 2004 AGM to provide additional flexibility in the management of the Group’s capital resources.

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Barclays PLC Group
                       
Shareholders’ funds
    17,417       16,374       15,146  
Minority interests: non-equity
    690              
Minority interests: equity
    211       283       156  
 
    18,318       16,657       15,302  
Undated loan capital
    6,149       6,310       6,678  
Dated loan capital
    6,128       6,029       4,859  
 
Total capital resources
    30,595       28,996       26,839  
 

Total capital resources increased in the year by £1,599m.

Shareholders’ funds increased by £1,043m, reflecting profit retentions of £1,730m, net proceeds of share issues of £114m and gains arising from transactions with third parties which are reflected in the statement of recognised gains and losses of £13m; offset by share repurchases of £699m, an increase in treasury and ESOP shares of £53m, exchange rate losses of £58m.

Non-equity minority interests reflected the issue by Barclays Bank PLC of 1bn (£688m) of non-cumulative preference shares on 8th December 2004 and an additional £2m of profits attributable to these non-equity minority interests at the year-end.

Loan capital decreased by £62m reflecting raisings of £774m, more than offset by redemptions of £611m, exchange rate movements of £224m and amortisation of issue expenses of £1m.

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Barclays Bank PLC Group
                       
Shareholders’ funds: equity
    17,581       16,485       15,205  
Shareholders’ funds: non-equity
    690              
Minority interests: equity
    211       283       156  
 
    18,482       16,768       15,361  
Undated loan capital
    6,149       6,310       6,678  
Dated loan capital
    6,128       6,029       4,859  
 
Total capital resources
    30,759       29,107       26,898  
 

Capital resources for Barclays Bank PLC Group differ from Barclays PLC Group by £164m (2003: £111m).



99


 

Financial review
Total assets and liabilities and capital resources



Capital ratios
Capital adequacy and the use of regulatory capital are monitored by the Group, employing techniques based on the guidelines developed by the Basel Union on Banking Supervision (the Basel Committee) and European Union Directives, as implemented by the Financial Services Authority (FSA) for supervisory purposes.

These techniques include the risk asset ratio calculation, which the FSA regards as a key supervisory tool. The FSA sets ratio requirements for individual banks in the UK at or above the internationally agreed minimum of 8%. The ratio calculation involves the application of designated risk weightings to reflect an estimate of credit, market and other risks associated with broad categories of transactions and counterparties. Regulatory guidelines define three ‘Tiers’ of capital resources. Tier 1 capital, comprising mainly shareholders’ funds and including Reserve Capital Instruments and Tier One Notes, is the highest tier and can be used to meet trading and banking activity requirements. Tier 2 includes perpetual, medium-term and long-term subordinated debt, general provisions for bad and doubtful debts and fixed asset revaluation reserves. Tier 2 capital can also be used to support both trading and banking activities. Tier 3 capital also comprises short-term subordinated debt with a minimum original maturity of two years. The use of tier 3 capital is restricted to trading activities only and it is not eligible to support counterparty or settlement risk. The aggregate of tiers 2 and 3 capital included in the risk asset ratio calculation may not exceed tier 1 capital.

The following tables set out the calculated capital ratios and the weighted risk assets and regulatory capital resources on which they were based as at 31st December:

                                                 
 
Capital ratios                                      
    2004     2003     2002  
    Barclays     Barclays     Barclays     Barclays     Barclays     Barclays  
    PLC     Bank PLC     PLC     Bank PLC     PLC     Bank PLC  
    Group     Group     Group     Group     Group     Group  
    %     %     %     %     %     %  
 
Capital ratios
                                               
Tier 1 ratio
    7.6       7.6       7.9       7.9       8.2       8.2  
Risk asset ratio
    11.5       11.5       12.8       12.8       12.8       12.8  
 
                                                 
 
            2004             2003             2002  
            £m             £m             £m  
 
Weighted risk assets
                                               
Banking book
                                               
on-balance sheet
            148,621               133,816               128,691  
off-balance sheet
            26,741               22,987               21,999  
Associated undertakings and joint ventures
            3,020               2,830               3,065  
 
Total banking book
            178,382               159,633               153,755  
 
Trading book
                                               
Market risks
            22,106               13,861               7,988  
Counterparty and settlement risks
            18,113               15,503               11,005  
 
Total trading book
            40,219               29,364               18,993  
 
Total weighted risk assets
            218,601               188,997               172,748  
 

100


 

Barclays PLC Annual Report 2004 

                                                 
 
    2004     2003     2002  
    Barclays     Barclays     Barclays     Barclays     Barclays     Barclays  
    PLC     Bank PLC     PLC     Bank PLC     PLC     Bank PLC  
    Group     Group     Group     Group     Group     Group  
Capital resources (as defined for regulatory purposes)   £m     £m     £m     £m     £m     £m  
 
Tier 1
                                               
Called up share capital
    1,614       2,316       1,642       2,302       1,645       2,293  
Eligible reserves
    15,670       15,656       14,657       13,997       13,405       12,757  
Minority interests
                                               
– non-equity
    688                                
– equity
    575       575       637       637       522       522  
Reserve Capital Instruments(a)
    1,627       1,627       1,705       1,705       1,771       1,771  
Tier One Notes(a)
    920       920       960       960       1,019       1,019  
Less: goodwill
    (4,432 )     (4,432 )     (4,607 )     (4,607 )     (4,158 )     (4,158 )
 
Total qualifying tier 1 capital
    16,662       16,662       14,994       14,994       14,204       14,204  
 
                                                 
 
            2004             2003             2002  
            £m             £m             £m  
 
Tier 2
                                               
Revaluation reserves
            25               25               25  
General provisions
            564               795               737  
Qualifying subordinated liabilities(b)
                                               
Undated loan capital
            3,573               3,636               3,854  
Dated loan capital
            5,647               5,652               4,573  
Other(c)
            2               2               2  
 
Total qualifying Tier 2 capital
            9,811               10,110               9,191  
 
Tier 3: short-term subordinated liabilities(b)
            286               280               203  
 
Less: supervisory deductions
                                               
Investments not consolidated for supervisory purposes(d)
            (1,047 )             (979 )             (1,288 )
Other deductions
            (496 )             (182 )             (119 )
 
Total deductions
            (1,543 )             (1,161 )             (1,407 )
 
Total net capital resources
            25,216               24,223               22,191  
 
Notes
(a)   Reserve Capital Instruments (RCIs) and Tier One Notes (TONs) are included in undated loan capital in the consolidated balance sheet.
 
(b)   Subordinated liabilities are included in Tiers 2 or 3, subject to limits laid down in the supervisory requirements. Barclays retains significant capacity to raise additional capital within these limits.
 
(c)   Comprises revaluation reserves attributable to minorities £2m (2003: £2m, 2002: £2m).
 
(d)   Includes £610m (2003: £478m, 2002: £867m) of shareholders’ interest in the retail life-fund.

Net capital resources grew by 4.1% (£1bn). Tier 1 capital rose by £1.7bn with retained profits of £1.7bn and the issue of £0.7bn of preference shares being offset by share repurchases of £0.7bn. Tier 2 capital fell by 3% (£0.3bn) and tier 3 capital remained broadly as reported at 31st December 2003. Supervisory deductions increased by £0.4bn.

The overall growth in weighted risk assets of £29.6bn comprised trading book weighted assets growth of 37% (£10.9bn) and banking book weighted assets of 11.7% (£18.7bn).

The risk asset ratio was 11.5% (2003: 12.8%). The tier 1 ratio was 7.6% (2003: 7.9%).

101


 

Financial review

Deposits and short-term borrowings


Deposits

                         
 
    Average: year ended 31st December  
    2004     2003     2002  
    £m     £m     £m  
 
Deposits by banks
                       
Offices in the United Kingdom
    46,835       41,034       31,966  
Offices outside the United Kingdom:
                       
Other European Union
    3,511       2,696       1,894  
United States
    946       597       2,213  
Rest of the World
    12,170       6,815       4,909  
 
 
    63,462       51,142       40,982  
 
Customer accounts
                       
Offices in the United Kingdom
    176,137       170,689       145,192  
Offices outside the United Kingdom:
                       
Other European Union
    8,485       6,935       5,418  
United States
    6,447       3,671       3,964  
Rest of the World
    8,568       6,827       9,188  
 
 
    199,637       188,122       163,762  
 

Average deposits (excluding trading balances) are analysed by type in the average balance sheet on page 85 and are based on the location of the office in which the deposits are recorded.

‘Demand deposits’ in offices in the UK are mainly current accounts with credit balances, obtained through the UK branch network.

‘Savings deposits’ in offices in the UK are also obtained through, and administered by, the UK branch network. Interest rates are varied from time to time in response to competitive conditions. These deposits are not drawn against by cheque or similar instrument.

‘Other time deposits – retail’ in offices in the UK are interest bearing and also are not drawn against by cheque or similar instrument. They are generally distinguished from savings deposits by having fixed maturity requirements and from wholesale deposits by being collected, in the main, through the UK branch network.

‘Other time deposits – wholesale’ in offices in the UK are obtained through the London money market and are booked mainly within the Group’s money market operations. These deposits are of fixed maturity and bear interest rates which relate to the London inter-bank money market rates.

‘Other time deposits’ includes commercial paper and inter-bank funds.

Although the types of deposit products offered through offices located outside the UK are broadly similar to those described above, they are tailored to meet the specific requirements of local markets.

A further analysis of Deposits by banks and Customer accounts is given in Note 23 and Note 24 to the accounts on page 143.

Short-term Borrowings
Short-term borrowings include Deposits by banks as reported in ‘Deposits’, Commercial paper and negotiable certificates of Deposit.

Deposits by banks (excluding trading business)
Deposits by banks are taken from a wide range of counterparties and generally have maturities of less than one year.

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Year-end balance
    74,211       57,641       48,751  
Average balance
    63,279       51,059       40,788  
Maximum balance
    93,809       77,195       56,414  
Average interest rate during year
    2.4%       2.3%       2.9%  
Year-end interest rate
    2.9%       2.5%       2.6%  
 

Commercial paper
Commercial paper is issued by the Group, mainly in the United States, generally in denominations of not less than $100,000, with maturities of up to 270 days.

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Year-end balance
    8,688       4,426       5,192  
Average balance
    6,828       3,288       4,818  
Maximum balance
    9,381       6,284       5,234  
Average interest rate during year
    1.8%     1.1%       2.0%  
Year-end interest rate
    2.2%       1.6%       1.6%  
 

Negotiable certificates of deposit
Negotiable certificates of deposits are issued mainly in the UK and US, generally in denominations of not less than $100,000.

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
Year-end balance
    37,213       28,536       30,045  
Average balance
    35,409       33,013       27,111  
Maximum balance
    44,934       40,274       36,780  
Average interest rate during year
    2.2%       2.2%       3.3%  
Year-end interest rate
    2.8%       2.1%       2.8%  
 


102


 

Barclays PLC Annual Report 2004 

Financial review

Securities


Securities
The following table analyses the book value and valuation of securities.

                                                 
 
    2004     2003     2002  
    Book value     Valuation     Book value     Valuation     Book value     Valuation  
    £m     £m     £m     £m     £m     £m  
 
Investment securities
                                               
Debt securities:
                                               
United Kingdom government
    19       19       565       621       1,465       1,496  
Other government
    11,858       12,051       16,347       16,772       18,963       19,564  
Other public bodies
    21       21       78       79       17       17  
Mortgage-backed securities
    6,563       6,537       3,074       3,077       4,693       4,704  
Corporate issuers
    15,765       15,796       13,826       13,966       12,601       12,666  
Other issuers
    5,531       5,547       3,691       3,695       2,529       2,530  
Equity shares
    1,293       1,513       954       1,134       505       509  
 
    41,050       41,484       38,535       39,344       40,773       41,486  
Other securities
                                               
Debt securities:
                                               
United Kingdom government
    2,567       2,567       2,084       2,084       1,025       1,025  
Other government
    37,438       37,438       28,011       28,011       25,385       25,385  
Other public bodies
    8,177       8,177       4,513       4,513       2,438       2,438  
Bank and building society certificates of deposit
    7,063       7,063       5,796       5,796       12,027       12,027  
Other issuers
    32,426       32,426       19,408       19,408       13,086       13,086  
Equity shares
    10,873       10,873       6,905       6,905       2,624       2,624  
 
    139,594       140,028       105,252       106,061       97,358       98,071  
 

Investment debt securities include government securities held as part of the Group’s treasury management portfolio for asset and liability, liquidity and regulatory purposes and are for use on a continuing basis in the activities of the Group. In addition, the Group holds as investments listed and unlisted corporate securities. Investment securities are valued at cost, adjusted for the amortisation of premiums or discounts to redemption, less any provision for diminution in value.

Other securities comprise dealing securities which are valued at market value.

Bank and building society certificates of deposit are freely negotiable and have original maturities of up to five years, but are typically held for shorter periods.

A further analysis of the book value and valuation of securities is given in Notes 16 and 17 to the accounts on pages 137 and 138.

103


 

Financial review
Securities



In addition to UK government securities shown above, at 31st December 2004 and 2003 the Group held the following government securities which exceeded 10% of shareholders’ funds.

                                 
 
    2004     2003  
    Book value     Valuation     Book value     Valuation  
    £m     £m     £m     £m  
 
United States government securities
    14,334       14,349       10,155       10,203  
Japanese government securities
    8,494       8,512       9,802       9,806  
Italian government securities
    6,900       6,930       5,770       5,835  
German government securities
    6,215       6,229       4,468       4,504  
French government securities
    3,035       3,035       2,674       2,697  
Spanish government securities
    2,597       2,631       2,594       2,650  
 

Maturities and yield of investment debt securities

                                                                                 
 
    Maturing within     Maturing after one but     Maturing after five but     Maturing after                
    one year:     within five years:     within ten years:     ten years:                
                                                                            Total  
    Amount     Yield     Amount     Yield     Amount     Yield     Amount     Yield     Amount     yield  
    £m     %     £m     %     £m     %     £m     %     £m     %  
 
Government
    2,271       3.1       5,660       3.5       3,609       3.9       337       0.8       11,877       3.5  
Other public bodies
    9             12                                     21        
Other issuers
    9,080       3.7       13,883       2.8       670       4.4       4,226       3.7       27,859       3.3  
 
Total book value
    11,360       3.6       19,555       3.0       4,279       4.0       4,563       3.5       39,757       3.3  
 
Total valuation
    11,379               19,660               4,346               4,586               39,971          
 

The yield for each range of maturities is calculated by dividing the annualised interest income prevailing at 31st December 2004 by the book value of securities held at that date. Yields on certain US securities, which are exempt from tax, have been calculated using interest income adjusted to reflect a taxable equivalent basis.

104


 

Barclays PLC Annual Report 2004 

Financial review

Life assurance business


Life Assurance business

The Group has life businesses operating in the UK and through its French and Spanish subsidiaries in Spain, Portugal and France. The UK company has ceased to accept new business applications and did not write with profits contracts previously. The French and Spanish subsidiaries offer a diverse range of insurance products. As discussed in the section on Future UK accounting developments on page 115, the Group is expanding its disclosure in respect of the life business, in line with the Memorandum of Understanding entered into by the Accounting Standards Board, together with the Association of British Insurers and major insurers and bancassurers in the banking industry, following the publication of FRS 27 in December 2004.

Options and Guarantees

The Group’s life contracts do not contain options or guarantees that could confer material risk upon the company.

Capital position statement

         
 
Available capital resources for life business:   £m  
 
Total shareholders’ funds in the life business
    276  
Fund for Future Appropriations (FFA) and other sources of capital
     
Conversion to regulatory basis
    8  
 
Total available capital resources
    284  
Less: surplus
    (154 )
 
Capital resource requirement
    130  
 
         
 
Reconciliation of capital resources:   £m  
 
Shareholder capital available for life business (see above table)
    284  
Shareholders’ funds attributed to other businesses
    17,133  
 
Total shareholders’ funds (see Note 33 on page 153)
    17,417  
 
FFA and other capital resources available for life business (see above table)
     
Other capital resources attributable to other businesses
    13,178  
 
Total other capital resources
    13,178  
 
Total capital resources
    30,595  
 

Capital management and constraints on the transfer of capital

Capital resource requirements are assessed at company level in accordance with local laws and regulations. However, the aim is that each life fund should be able to meet its own liabilities. In the event that this should not be the case, shareholders’ funds attributed to businesses other than Life Insurance are available to meet liabilities of life business to the extent that they otherwise cannot be met. Conversely, there are some constraints in moving capital out of the life funds.

During 2003, Barclays restructured its UK retail life assurance businesses. This resulted in the transfer of Barclays Life to Woolwich Life, subsequently renamed Barclays Life, and the establishment of a reinsurance arrangement with Barclays Reinsurance Dublin Limited, a new subsidiary of Barclays Life. Under this arrangement Barclays Reinsurance Dublin Limited raised finance via a contingent loan which was ultimately funded partly by investors external to the Group and partly by the Group.

The capital management objective is to ensure that sufficient capital is in place to meet liabilities as they fall due. This is supported by risk management policies designed to manage key risks to the life business:

  Credit risk;
  Market risk;
  Liquidity risk;
  Operational risk; and
  Insurance risk.

In managing risk, management considers the impact of key assumptions. Included in the capital management policies are the requirements to:

  manage credit risk by adopting prudent parameters as constraints for investment managers and by diversifying reinsurance amongst a selection of well capitalised providers; and
  hold a suitably diversified portfolio of admissible assets of a value sufficient to cover technical provisions and of appropriate currency, term, safety and yield to ensure that cash inflows from those assets will be sufficient to meet expected cash flows from its insurance liabilities as they fall due.

Although there are a number of factors influencing the capital position of the life business, the key factors include equity risk, inflation risk, mortality shock, and morbidity shock.

Liabilities are sensitive to a downturn in the economy and the investment market, such as increased mortgage protection claims, policy lapses and surrenders at a time when it is difficult to liquidate assets. Barclays has a policy to choose assets to match the nature and the term of the liability and this policy would continue to be applied to any changes in market conditions.



105


 

Financial review

Off balance sheet arrangements


Off Balance Sheet Arrangements

In the ordinary course of business and primarily to facilitate client transactions, the Group enters into off balance sheet arrangements with unconsolidated entities. These arrangements include the provision of guarantees on behalf of the Group’s customers, retained interests in assets which have been transferred to an unconsolidated entity and obligations arising out of variable interests in an unconsolidated entity.

Guarantees

In the normal course of business, the Group issues guarantees on behalf of its customers. In the majority of cases, Barclays will hold collateral against the exposure, have a right of recourse to the customer or both. In addition, Barclays issues guarantees on its own behalf.

The main types of guarantees provided are financial guarantees given to banks and financial institutions on behalf of customers to secure loans, overdrafts and other banking facilities, including stock borrowing indemnities and standby letters of credit. Other guarantees provided include performance guarantees, advance payment guarantees, tender guarantees, guarantees to Customs and Excise and retention guarantees.

Further details on these guarantees are provided in Note 52 on page 207.

Special purpose entities

The off balance sheet arrangements entered into by the Group typically involve the use of special purpose entities (SPEs).

These are entities that are set up for a specific purpose and generally would not enter into an operating activity nor have any employees. The most common form of SPE involves the acquisition of financial assets that are funded by the issuance of securities to external investors, which have cash flows different from those of the underlying instruments. The repayment of these securities is determined by the performance of the assets acquired by the SPE. These entities form an integral part of many financial markets, and are important to the development of the securitisation markets and functioning of the US commercial paper market.

The consolidation approach to the SPEs is different under UK and US GAAP.

UK GAAP treatment

Under UK GAAP the financial statements are required to present a true and fair view, which includes reflecting the substance of the transactions and arrangements and not just the legal form.

Accordingly, the substance of any transaction with an SPE forms the basis for the treatment in the Group’s financial statements. When a Group company has transferred assets into an SPE, these assets should only be derecognised when the criteria within Financial Reporting Standard (FRS) 5 (Reporting the substance of transactions) are fully met.

An SPE is consolidated by the Group either if it meets the criteria of FRS 2 (Accounting for subsidiaries), or if the risk and rewards associated with the SPE reside with the Group, such that the substance of the relationship is that of a subsidiary. Financial data relating to entities consolidated on this latter basis is given in Note 47 on page 173.

US GAAP treatment

Under US GAAP, the Group determines whether it has a controlling financial interest in an entity by initially evaluating whether the entity is a variable interest entity (VIE), voting interest entity, or a qualifying special purpose entity (QSPE).

As defined in FASB interpretation (FIN) 46-R (Consolidation of Variable Interest Entities), VIEs are entities which lack one or more of the characteristics of a voting interest entity described below. FIN 46-R states that a controlling financial interest in an entity is present where an enterprise has a variable interest, or a combination of variable interests, that will absorb the majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both. The enterprise with a controlling financial interest is the primary beneficiary under FIN 46-R. Accordingly, the Group consolidates all VIEs in which it is the primary beneficiary, as described in Note 52.

Voting interest entities are entities in which the total equity investment at risk is sufficient to enable each entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the rights to receive residual returns and the right to make decisions about the entity’s activities. Voting interest entities are evaluated for consolidation in accordance with Accounting Research Bulletin (ARB) 51. ARB 51 states that the usual condition for a controlling financial interest in an entity is ownership of a majority voting interest.

In accordance with SFAS 140 (Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities), the Group does not consolidate QSPEs. QSPEs are passive entities that hold financial assets transferred to them by the Group and are commonly used in mortgage and other securitisation transactions.

The Group, in the ordinary course of business, and primarily to facilitate client transactions, has helped establish SPEs in various areas which are described below, along with their UK and US GAAP treatment:

Commercial paper conduits

The Group provides its clients with access to liquidity through the use of asset backed commercial paper programmes. These programmes involve the sale of financial assets by clients to entities which are, in effect, commercial paper conduits that then issue commercial paper to fund the purchases. The financial assets held by the conduits, which totalled £12,404m (2003: £12,650m) at 31st December 2004, normally take the form of consumer or trade receivables. Of the above amount, assets held by the conduits which have been originated by the Group amounted to £68m (2003: £192m) and have been reported on the Group’s balance sheet under UK GAAP. The remainder represents client assets in which the Group has no interest and which are not reported on the Group’s balance sheet at 31st December 2004. Certain administrative activities and the provision of liquidity and credit facilities to the programmes are performed by the Group under arm’s-length contracts that it, or the conduit’s independent board of directors, can terminate. Net fees received by the Group for performing these services amounted to £53m (2003: £58m). Under US GAAP these conduits are consolidated by the Group. This has minimal impact on net income, although assets increase by £12,336m (2003: £2,845m). The commitments to provide liquidity to these vehicles are a maximum of £16,296m, which would be required to be provided in the event of the conduits’ access to funding markets being restricted.

Further details of these transactions are provided in Note 52 on pages 202 and 203.

Credit structuring business

The Group structures investments with specific risk profiles which are attractive to investors. This business involves the sale by the Group of credit exposures based on an underlying portfolio of assets into SPEs,


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Barclays PLC Annual Report 2004 


often using credit derivative contracts. The assets are funded by issuing securities with varying terms. In accordance with UK GAAP, the Group does not recognise the assets and liabilities of these entities in its balance sheet once the securities that represent substantially all the risks and rewards associated with the SPE have been sold to third parties. Otherwise these are recognised in full. Under UK GAAP, as at 31st December 2004, the Group had consolidated gross assets of £2,024m (2003: £2,793m) in respect of these transactions. The Group’s net income for 2004 included an £8m profit (2003: £38m) generated by the relationship with these entities. Under US GAAP, as at 31st December 2004, the Group had consolidated gross assets of £2,343m (2003: £2,877m). The summarised results of these entities under UK GAAP are given in Note 47 on page 173.

Asset securitisations

The Group assists companies with the formation of asset securitisations. These entities have minimal equity and rely on funding in the form of notes to purchase the assets for securitisation. The Group provides financing in the form of senior notes and/or junior notes and may also provide derivatives to the SPE. The Group has also used SPEs to securitise part of its originated and purchased retail and commercial lending portfolios and credit card receivables. Following the sale of these assets to the securitisation vehicles, the Group may retain servicing rights and an interest in the residual income of the SPEs.

Under UK GAAP, the SPEs are consolidated as quasi-subsidiaries where the Group has the risks and rewards of the transaction. Under UK GAAP, as at 31st December 2004, gross assets of £7,168m (2003: £6,717m) were consolidated. Where junior notes and certain derivative contracts are provided by the Group, the Group may be the primary beneficiary under FIN 46-R and would be required to consolidate these SPEs. Under US GAAP, as at 31st December 2004, the Group had consolidated gross assets of £3,925m (2003: £7,178m) in respect of these transactions in which the Group is determined to be the primary beneficiary. Certain of the entities used are QSPEs in accordance with SFAS 140 and, where this is the case, the securitised assets are deemed to have been sold and consolidation of the QSPE is not required. This results in the derecognition of assets of £7,660m as at 31st December 2004 (2003: £2,350m).

Further details are included in Notes 14 and 47 on pages 133 and 173.

Asset realisations

The Group establishes SPEs to facilitate the recovery of banking facilities in circumstances where the borrower has suffered financial
loss. Under US GAAP, as at 31st December 2004, the Group had recognised assets of £68m (2003: £nil) in respect of the transactions. These entities are not consolidated under UK GAAP.

Client intermediation

The Group is involved in structuring transactions as a financial intermediary to meet investor and client needs. These transactions involve entities structured by either the Group or the client and they are used to modify cash flows of third party assets to create investments with specific risk or return profiles or to assist clients in the efficient management of other risks. The Group also invests in lessor entities specifically to acquire assets for leasing.

Client intermediation also includes arrangements to fund the purchase or construction of specific assets (most common in the property industry).

Where the Group has the risks and rewards, the SPEs are consolidated either as quasi-subsidiaries under UK GAAP or as VIEs under US GAAP, with assets of £216m as at 31st December 2004 (2003: £5,740m). Certain entities that are consolidated in accordance with FRS 2 under UK GAAP are deconsolidated under US GAAP where the Group is not the primary beneficiary. The impact on the Group’s total assets is a reduction of £2,699m (2003: £43m).

Fund management

The Group provides asset management services to a large number of investment entities on an arm’s-length basis and at market terms and prices. The majority of these entities are investment funds that are owned by a large and diversified number of investors.

In addition, there are various partnerships, funds and open-ended investment companies that are used by a limited number of independent third parties to facilitate their tailored private equity, debt securities or hedge fund investment strategies. These entities have assets under management of £284m (2003: £290m). The Group has acquired interests in these entities, which are included within debt securities or equity shares, but the entities are not consolidated under UK or US GAAP because the Group does not own either a significant portion of the equity, or the risks and rewards inherent in the assets. Some £4m (2003: £2m) of net income relates to transactions with these entities.

The gross assets of the SPEs described above, which would require consolidation before the impact of intercompany eliminations under UK and US GAAP, are included in the table below.



                                 
 
    2004     2003  
    Assets     Assets     Assets     Assets  
    consolidated     consolidated     consolidated     consolidated  
    under UK GAAP     under US GAAP     under UK GAAP     under US GAAP  
    £m     £m     £m     £m  
 
Commercial paper conduits
    68       12,404       192       12,650  
Credit structuring
    2,024       2,343       2,793       2,877  
Asset securitisations
    7,168       3,925       6,717       7,178  
Asset realisations
          68              
Client intermediation(a)
    216       216       5,740       5,740  
 
Note
(a)   Certain entities which are consolidated in accordance with FRS 2 under UK GAAP are deconsolidated under US GAAP where the Group is not the primary beneficiary. The impact on the Group’s total assets is a reduction of £2,699m (2003: £43m).

Further disclosure of the Group’s involvement with entities of this and similar nature under US GAAP are given in Note 52 on pages 202 and 203.

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Risk management

Risk management and control – overview


Introduction

At Barclays the identification and management of risk is a high priority and is integral to the execution of our banking activity and strategy. Our approach is built on formal governance processes, relies on individual responsibility and collective oversight, uses advanced analyses, and is informed by comprehensive reporting.

Responsibility for risk resides at all levels of management, from the Board down through the organisation to individuals in offices around the world. Each business manager is accountable for managing risk in his or her business area, assisted, where appropriate, by risk specialists.

We measure the key risks and understand the viability of transactions after taking risk into account. There are defined appetites for the most important risks and we consider the risk and return on individual transactions as well as their effect on the Bank’s overall portfolio.

From a credit risk perspective, 2004 was a benign year, without the large corporate defaults of the recent past. In our consumer portfolios, the growth in credit losses was consistent with our portfolio growth and risk appetite. Risk taking in our trading activities remained within our Group market risk parameters at all times.

These favourable conditions are reflected in the provisions for bad and doubtful debts which declined from a peak of £1,484m in 2002 to £1,091m, a decline over two years of 26%. During the same period, our portfolio increased by 24%. This good outcome benefited from a much lower corporate provisions charge as well as some recovery of amounts written-off in earlier years, trends that are characteristic of the recovery phase of a credit cycle.

Barclays is growing in our product breadth, our client base and in our domestic and international markets. With this growth and with regulatory changes upon us – the US Sarbanes-Oxley Act, the Basel II Accord and the new International Financial Reporting Standards – we are making continued, significant investments in risk management and risk systems.

In 2004 we further developed our methodology for defining and setting our risk appetite, introducing new formal measurements and governance which are described later in this section. We also strengthened risk management and governance by implementing an enhanced Group Internal Control and Assurance Framework, which provides definitive guidance on governance requirements throughout the Group. Both of these were evolutionary improvements of already sound risk management.

Our aim will continue to be to grow shareholder value through taking risks that are consistent with our risk appetite and commensurate with the associated returns.

Robert Le Blanc
Risk Director

Risk Management

The pages that follow describe our approach to risk management. This first section deals with the overall approach – applicable to all risks. It is followed by material covering individual types of risk.

The narrative contains quantitative information mainly in graphical format. In most cases the same data appear in tables in a statistical section beginning on page 58.

Risk Management Process

Barclays applies a five-step approach to risk management.
     
 
  Responsibilities
 
   
Direct
Understand the principal risks to achieving Group strategy.
Establish risk appetite.
Establish and communicate the risk management framework including responsibilities, authorities and key controls.
 
   
Assess
Establish the process for identifying and analysing business-level risks.
Agree and implement measurement and reporting standards and methodologies.
 
   
Control
Establish key control processes and practices, including limit structures, provisioning criteria and reporting requirements.
Monitor the operation of the controls and adherence to risk direction and limits.
Provide early warning of control or appetite breaches.
Ensure that risk management practices are appropriate for the control environment.
 
   
Report
Interpret and report on risk exposures, concentrations and risk-taking outcomes.
Interpret and report on sensitivities and Key Risk Indicators.
Communicate with external parties.
 
   
Manage and Challenge
Review and challenge all aspects of the Group’s
risk profile.
Assess new risk-return opportunities.
Advise on optimising the Group’s risk profile.
Review and challenge risk management practices.
 


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Barclays PLC Annual Report 2004 

Risk Responsibilities

The principal responsibilities extend throughout the organisation.

  The Board requires that management maintains an appropriate system of internal control and reviews its effectiveness. The Board approves risk appetite and monitors the Group’s risk profile against this appetite.
  Business leaders are responsible for the identification and management of risk in their businesses.
  The Risk Director, under delegated authority from the Group Chief Executive and Group Finance Director, has responsibility for ensuring effective risk management and control.
  Risk Type Heads and their teams in Central Support are responsible for risk oversight and policy.
  Business risk teams, each under the management of a Business Risk Director, are responsible for assisting business leaders in the identification and management of their business risk profiles and for implementing appropriate risk management processes.
  Internal Audit is responsible for the independent review of the control environment.

Matrix of risk responsibilities at Barclays

(FLOWCHART)

The internal control framework at Barclays is aligned with the internationally accepted standard Internal Control – Integrated Framework published by the Committee of Sponsoring Organisations of the Treadway Commission (COSO). The Group’s principal risks are the subject of Board Governance Standards, which set out Board approved risk control requirements. Board Governance Standards exist for the following risks:

     
 
   
Brand Management
  Liquidity
Capital Planning
  Market
Corporate Responsibility
  Operations
Credit
  People
Financial Crime
  Regulatory Compliance
Financial Reporting, Taxation and Budgeting
  Change
Legal
  Strategic Planning

Detailed discussion of our risk management of certain risks follows, starting with credit risk on page 35.

The management of risk at Barclays is guided and monitored by a number of committees. Each has specific functions as shown in the chart on the Governance Structure at Group Level on the next page.

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Risk management
Risk management and control – overview



Governance Structure at Group Level

(FLOWCHART)

In addition to the committees shown in the chart, the Board established a Brand and Reputation Committee in 2004.

These committees are informed by regular and comprehensive reports. The Board Risk Committee receives a quarterly report covering all significant risk types. The Board Audit Committee receives quarterly reports on control issues of significance and half-yearly provisions and regulatory reports. Both committees also receive reports dealing in more depth with specific issues relevant at the time. The proceedings of both committees are reported to the full Board, which also receives a concise quarterly risk report.

When the new Basel II Accord is introduced, Barclays aims to achieve advanced status under all risk categories. The Group considers that the investment required to attain this status is warranted by the internal risk management improvements that will follow, the reputational benefits and the potential for greater capital efficiency.

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Barclays PLC Annual Report 2004 

Risk Appetite

In 2004, Barclays adopted an improved approach to the setting of risk appetite across the Group, using a more formal, quantitative methodology based on advanced risk analytics. Risk Appetite is the Group’s chosen balance of return and risk employed as we implement our business plans, recognising a range of possible outcomes. This framework, approved by the Board Risk Committee, builds on the analytical capability developed and used within Barclays since the mid 1990s.

The objectives of the risk appetite framework are to:

  help protect the Group’s performance;
  enable unused risk capacity to be identified and thus profitable opportunities to be highlighted;
  improve management confidence and debate regarding our risk profile; and
  help executive management improve control and co-ordination of risk-taking across businesses.

The Risk Appetite framework considers credit, market and operational risk and is applied using two perspectives: ‘earnings volatility’ and ‘mandate and scale’.

Earnings volatility: This takes account of the potential volatility around our forecast financial performance each year. The portfolio’s risk is measured at four representative levels:

  expected performance (including the average credit losses based on measurements over many years);
  a moderate stress level of loss that is likely to occur only infrequently and is meant to correspond to a macroeconomic cycle;
  a severe stress which is much less likely but within a reasonable possibility;
  an extreme but highly improbable level of stressed loss which is used to determine the Group’s Economic Capital.

These ascending but increasingly less likely levels of loss are illustrated in the following chart.

(GRAPH)

At 31st December 2004, the Group’s expected credit loss in one year was £1,395m (see page 58). The Economic Capital (i.e. the loss in one year under extreme stress) for all risk types was £12.6bn, estimated with a probability of 1 in 5,000 years.

Mandate and Scale: This second perspective enables the setting of limits to control against unacceptable levels of loss that may arise as a result of portfolio concentration. It is our objective that unexpected losses remain within the scope of our communicated strategy and are of a scale that is appropriate for our Group. This perspective uses simple, descriptive measures and limits for relevant exposure types.

Overall, the Risk Appetite framework provides a basis for the allocation of risk capacity to each business. Since the level of loss at each level of probability is dependent on the portfolio of exposures in each business, the statistical measurement for each key risk category gives the Group clearer sight and better control of risk-taking throughout the enterprise.

The Risk Appetite framework is designed to be:

  simple and practical to apply by measurement and monitoring of exposures;
  geared to risk/return where capacity is directly related to opportunity;
  based on a top-down capacity for earnings volatility;
  based on bottom-up identification of risk factors in each business;
  relevant, recognising the impact and likelihood of losses;
  aggregated across businesses where appropriate.

Stress Testing

The Risk Appetite numbers are validated by estimating our sensitivity to macroeconomic events using stress testing and scenario analysis. Changes in certain macroeconomic variables represent environmental stresses which may reveal systemic credit and market risk sensitivities in our retail and wholesale portfolios. The stresses considered include, for example, the following sensitivities:

  Gross Domestic Product weaker;
  employment weaker;
  interest rates higher or lower;
  interest rate curve shifts;
  equity prices lower;
  property prices weaker;
  credit spreads wider;
  country exposure stressed;
  industry exposure stressed;
  sterling stronger.

More complex scenarios, such as recessions, can be represented by combinations of variables. These scenarios allow senior management to gain a better understanding of how the Group is likely to react to changing economic and geo-political conditions. Insights gained are fully integrated into the management process and the Risk Appetite framework. These analyses and insights and the close involvement of management also provide the basis for fulfilling the stress testing requirements of the new Basel II Accord.



33


 

Risk management
Risk management and control – overview



The Application of Economic Capital

Barclays manages both its capital supply and demand for capital in order to optimise capital efficiency.

The management of the supply of capital occurs via the Group’s shareholders’ capital and statutory capital ratios as discussed on pages 99 and 100. See also the management of capital risk on page 51.

The Group assesses the internal demand for capital using its own proprietary economic capital methodology developed and refined over more than a decade. We estimate the capital needed to survive an extreme but highly improbable level of stressed loss. The calculation is based on the historical volatility of losses. Capitalisation occurs to a level sufficient to provide a high level of confidence in the Group, with the level of confidence consistent with the Group’s AA rating.

Economic capital is estimated primarily for the risks listed under Board Governance Standards on page 31 as well as insurance risk, risk associated with fixed assets, and risk in private equity investments. The Group computes and assigns economic capital by the risk categories to all operating units. This enables the Group to apply a common, consistent and additive metric to ensure that returns throughout the Group are commensurate with the associated risks. An asset attracts the same cost of capital wherever it is acquired across the Group.

Barclays estimates the correlation between risk types and calculates a diversification benefit which results in a reduction in allocated economic capital for the Group and each of the businesses.

Economic capital is fully embedded in the management culture of the Group via risk adjusted performance management (e.g. economic profit), effective targeting of resources to value creating areas, pricing tools, compensation and remuneration schemes and is integral to the Risk Appetite framework. The economic capital framework will be an important part to the Group’s implementation of the Basel II Accord.

In 2004, UK Retail Banking economic capital allocation decreased £50m to £2,200m with the impact of continued growth more than offset by the sale in 2003 of non-core assets that had previously been acquired with the Woolwich. UK Business Banking economic capital allocation decreased £50m to £2,450m as a consequence of a general improvement in the credit quality of counterparties and improved risk assessment of complex transactions.

The economic capital allocated to Private Clients (including the closed life assurance business) increased by £50m to £400m following the acquisition of Gerrard and growth of the business. International economic capital allocation increased by £200m to £1,000m reflecting the inclusion of Banco Zaragozano for a full year and growth in the Spanish business.

Barclaycard economic capital allocation increased by £250m to £2,450m due to growth in outstandings and the acquisition of Juniper.

Barclays Capital economic capital decreased by £50m to £2,100m as a result of improved wholesale credit conditions more than offsetting the increase in market risk capital driven by growth of the business.



(BAR CHART)

(BAR CHART)

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Barclays PLC Annual Report 2004 

Risk management

Credit risk management


Credit Risk Management

Credit risk is the risk that the Group’s customers, clients or counterparties will not be able or willing to pay interest, repay capital or otherwise to fulfil their contractual obligations under loan agreements or other credit facilities. Credit risk also arises through the downgrading of counterparties whose credit instruments the Group may be holding, causing the value of those assets to fall. Furthermore, credit risk is manifested as country risk where difficulties experienced by the country in which the exposure is domiciled may impede payment or reduce the value of the asset or where the counterparty may be the country itself. Settlement risk is another special form of credit risk which is the possibility that the Group may pay a counterparty – for example, a bank in a foreign exchange transaction – and fail to receive the corresponding settlement in return.

Credit risk is the Group’s largest risk and considerable resources, expertise and controls are devoted to managing it. The importance of credit risk is illustrated by noting that nearly two-thirds of risk-based economic capital is allocated to businesses for credit risks. Credit exposures arise principally in loans and advances and in irrevocable commitments to lend as shown in the following chart. During 2004, the total exposure increased to £652bn (2003: £555bn; 2002: £501bn).

(BAR CHART)

Note
(a)   OTC derivatives means derivatives traded bilaterally with counter parties and not through an exchange, commonly called over-the-counter derivatives. LME refers to the London Metal Exchange.

Credit Risk Management Responsibility

In managing credit risk, the Group applies the five-step risk management process and internal control framework described previously (page 30). The credit risk management teams in each business are accountable to the Business Risk Directors in those businesses who, in turn, report to the heads of their businesses and also to the Risk Director.

The Credit Risk function, led by the Credit Risk Director, provides Group-wide direction of credit risk-taking. This functional team manages the resolution of all significant credit policy issues and administers the Credit Committee which approves major credit decisions.

The principal committees that review credit risk management are the Risk Oversight Committee and the Board Risk Committee. The Board Audit Committee reviews and approves provisioning decisions.

Credit Risk Measurement

Barclays has been in the forefront of the development and use of advanced credit risk systems. These systems assist the bank in front-line credit decisions on new commitments and in managing the portfolio of existing exposures. They enable the application of consistent risk measurement across all credit exposures, retail and wholesale. The key building blocks in the measurement system, which are described below, are the probability of customer default (expressed through an internal risk rating), exposure in the event of default, and severity of loss-given-default. Using these, Barclays builds the analyses that lead to its decision support systems in the Risk Appetite context described previously.

Probability of Default: Internal Risk Ratings

Barclays assesses the credit quality and assigns an internal risk rating to all borrowers and other counterparties, including retail customers. Each internal rating corresponds to the statistical probability of a customer in that rating class defaulting within the next 12-month period. Multiple rating methodologies may be used to inform the rating decision on individual large credits. For smaller credits, a single source may suffice such as a rating model result. The table below shows the expected ranges of annual default probabilities associated with Barclays internal ratings, and an approximate relationship to certain external ratings.

Barclays Internal Credit Ratings

                                         
 
  Barclays   Annual probability of default     S&P     Moody’s  
  Internal   Minimum     Mid Point     Maximum     Equivalent     Equivalent  
  Rating   %     %     %     Rating*     Rating*  
 
 
1.2
    0.02       0.025       0.04     AAA/AA+/AA     Aaa/Aa/A1
 
 
 
1.5
    0.05       0.075       0.09     AA-/A+       A2  
 
 
 
1.8
    0.10       0.125       0.14       A/A-       A3  
 
 
 
2.1
    0.15       0.175       0.19     BBB+     Baa1  
 
 
 
2.5
    0.20       0.225       0.24     BBB+     Baa1  
 
 
 
2.8
    0.25       0.275       0.29     BBB     Baa2  
 
 
 
3
    0.30       0.450       0.59     BBB-     Baa3  
 
 
 
4
    0.60       0.900       1.19     BB+/BB/BB-     Ba1/Ba2  
 
 
 
5
    1.20       1.850       2.49       B+/B     Ba3  
 
 
 
6
    2.50       3.750       4.99       B-       B1  
 
 
 
7
    5.00       7.500       9.99     CCC+/CCC-       B2/B3  
 
 
 
8
    10.00       15.000           CC/C     Caa/Ca/C  
 
 
*   Approximate alignment with Barclays and each other.

Exposure in the event of Default

Exposure in the event of default represents the expected level of usage of the credit facility when default occurs. At default the customer may not have drawn the loan fully or may already have repaid some of the principal, so that exposure is typically less than the approved loan limit. When the Group evaluates loans, it takes exposure at default into consideration, using its extensive historical experience. It recognises that customers may make heavier than average usage of their facilities as they approach default.

For derivative instruments, exposure in the event of default is the estimated cost of replacing contracts with a positive value if counterparties should fail to perform their obligations.



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Barclays PLC Annual Report 2004 

Risk management
Credit risk management



Severity of Loss-given-default

When a customer defaults, much of the amount outstanding on its loan or loans is usually recovered. The part that is not recovered, the actual loss, is called the loss-given-default (LGD). The severity of the loss is measured as a percentage of the amount outstanding when the default occurs.

From historical information, the Group can estimate how much is likely to be lost, on average, for various types of loans. To illustrate, loss-given-default is low for residential mortgages because of the property pledged as collateral. In contrast, LGD is about 70% for unsecured personal lending.

The level of LGD depends on the type of collateral (if any); the seniority or subordination of the exposure; the industry in which the customer operates (if a business); the jurisdiction applicable and work-out expenses. The outcome is also dependent on economic conditions that may determine, for example, the prices that can be realised for assets or whether businesses can readily be refinanced. Individual defaults show a wide range of outcomes, varying from full to nil recovery and all points in between.

Expected Loss: Risk Tendency

The three components described above – the credit rating, exposure at default and loss given default – are building blocks used in credit analysis across the entire portfolio in a variety of applications. One of those is to determine a measure of expected loss called Risk Tendency (RT).

Risk Tendency is a measure of the modelled loss for the performing loan portfolio for the forthcoming 12 months, taking into account its current composition, size and risk characteristics and previous experience over a long period with similar credit exposures.

The Risk Tendency of a loan is estimated as the product of the probability of default derived from the rating with the other components discussed above:

Risk Tendency of a loan = probability of default × expected exposure at default × loss given default.

The RT’s of individual loans are summed to produce the Risk Tendencies of the various sub-portfolios in the Group and ultimately for the whole Group. It is thus a ‘bottom-up’ measure of the inherent loss in the Group’s credit exposures. RT provides insight into the credit quality of the portfolio and assists management in tracking risk changes as the Group’s stock of credit exposures evolves in the course of business.

Many models are used in the estimation of the three components of RT in each of the Group’s businesses. The majority of the models are internally developed using Barclays own historical data and other external information. We also use externally developed models and rating tools. These are validated for use within Barclays before they are introduced. All models are validated annually to ensure their applicability to the current portfolios and credit conditions.

In interpreting Risk Tendency, the following should be borne in mind:

  At the individual loan level many of the models take current conditions into account while others are based on conditions over several years. RT is thus to a considerable degree a point-in-time risk measure. This contrasts with a through-the-credit-cycle measure which would provide an estimate of the average loss expected over a whole cycle.
  Risk Tendency is not a forecast of bad debt provisions. It is rather a statistical measure that gives insight into the size and quality of the loan portfolio:

    Risk Tendency covers only the performing loans at the date of estimation and does not make allowance for subsequent growth or change in the composition of the loan book.
    As it only considers the performing portfolio, the often significant additional charges, write-backs and recoveries arising during the year from impaired loans are not included. These items can materially affect the provisions charge to the profit and loss account.
    The actual credit provisions charge arising from new defaults in any one year from loans that are performing at the start of the year vary significantly around the RT value. This can be due to changes during the year in the economic environment or in the business conditions in specific sectors or countries and from unpredictable or unexpected events. This applies especially in wholesale portfolios where the default of a small number of large exposures can have a significant effect on the outcome. For retail portfolios, consisting of a very large number of small exposures, the variation from RT is usually much smaller.
    For these reasons, RT does not equate to the Group’s budget or internal forecast of provisions in the coming year.

Risk Tendency is equivalent to the Expected Loss measure that all banks who wish to qualify for the Advanced Internal Ratings Based Approach will have to disclose from 2008 under the forthcoming Basel II Accord. Barclays has published RT since its 1997 results and is the only British bank and one of the few international banks to do so.

Risk Tendency is used by the Group to inform a range of decisions, such as establishing the desired aggregate exposure levels to individual sectors, and determining pricing policy. It has also been a factor in determining the level of the general provision for loan losses. Going forward, the measurement of credit losses will be governed by IFRS (IAS 39) which will result in the reporting of specific impairment.

In 2004, Risk Tendency remained steady at £1,395m (2003: £1,390m) (see chart on next page).

RT declined in the corporate and wholesale businesses as the corporate and wholesale credit environments continued to improve and as potential problem loans declined significantly.

In International, RT decreased £5m (7%) to £65m (2003: £70m) as the Group developed a better understanding of the risks in the Banco Zaragozano portfolio acquired in 2003.

Barclaycard RT increased 11% to £860m (2003: £775m) due to growth in the portfolio and the acquisition of Juniper.



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Barclays PLC Annual Report 2004 

(BAR CHART)

Credit Risk Mitigation

Barclays employs a range of policies and practices to mitigate credit risk. The most traditional of these is the taking of security for funds advanced which is common practice. See the discussion of loan-to-value ratios for mortgages on page 40.

Barclays manages the diversification of its portfolio to avoid unwanted credit risk concentrations. This takes several dimensions. Maximum exposure guidelines are in place relating to the exposures to any individual counterparty. These permit higher exposures to highly rated borrowers than to lower rated borrowers. They also distinguish between types of counterparty, for example between sovereign governments, banks and corporations. Excesses are considered individually at the time of credit sanctioning, are reviewed regularly, and are reported to the Risk Oversight Committee and the Board Risk Committee. Similarly the Country Risk policy specifies risk appetite by country and avoids excessive concentrations of credits in individual countries. Finally, there are policies that limit lending to certain industries, for example commercial real estate.

Barclays actively manages its credit exposures. When weaknesses in exposures are detected – either in individual exposures or in groups of exposures – it takes action to mitigate the risks. These include steps to reduce the amounts outstanding (in discussion with the customers, if appropriate), the use of credit derivatives and, sometimes, the sale of the loan assets. Credit derivatives are traded for profit and used for managing non-trading credit exposures. Details of these activities may be found in the statistical section (page 64) and Note 37 to the Accounts (page 157).

The Group securitises loans such as credit card receivables. The manner in which these transactions have been structured to date has reduced credit risk only to a small degree because the motivation has generally not been the mitigation of risk. Instead the transactions have served other purposes, such as widening the Group’s sources of funds and addressing regulatory capitalisation in specific geographies. Securitisation remains an avenue of risk mitigation available to Barclays.

The value of assets originated by the Group that were securitised in 2004 was £0.8bn (2003: £2.3bn).



37


 

Risk management

Loans and advances



Loans and advances are the largest component of the Group’s credit exposures and contain more than half of the credit risk as shown on page 35. They increased over the year by £41bn (14%) to £332.9bn at 31st December 2004 (2003: £291.8bn, 2002: £263.6bn).

Wholesale customers remain the largest customer category.

(BAR CHART)

(See also Table 2 on page 58.)

The drawn balances shown above are before deduction of provisions and interest in suspense. The information in the chart is based on the business unit in which the loans are booked. Loans in those businesses that deal primarily with personal customers, such as Barclaycard and UK Retail Banking, are included in retail customers even though a small percentage may be to business customers. Similarly, loans in businesses that deal primarily with corporate, institutional and sovereign clients are included in wholesale customers, even though they may have some personal customers.

(BAR CHART)

(See also Table 3 on page 58.)

The banking book comprises loans and advances that are intended to be held to maturity or until repayment by the customer. In contrast the loans and advances on the trading book are held for sale. Losses that may arise in the trading book – including credit losses – are absorbed in trading profits and are regarded as market risk, the management of which is described later. The next part of the credit section is thus devoted to exposures on the banking book, particularly customer exposures. For details of exposures to banks refer to the statistical information on page 59.

 



38


 

Barclays PLC Annual Report 2004 

Risk management

Loans and advances to customers on the banking book


Geographical Analysis and Country Risk

Loans and advances to customers on the banking book amounted to £193bn at the year end (2003: £171bn, 2002: £160bn). The geographical analysis shown in the chart below is based on the location of the office recording the transaction. The UK exposure shown includes some major loans to customers in other countries that were booked in London, and thus includes some international risk.

(BAR CHART)

(See also Table 6 on page 60.)

The loans and advances to customers on the banking book booked through the Group’s operations in Iberia were £12bn at 31st December 2004, 6.2% of the Group total. They were comprised of £5.8bn in residential mortgages (48%) and £6.2bn (52%) in other loans.

Barclays exposure limits to sub-investment grade countries are shown in the chart below (largest 15 exposure limits).

(BAR CHART)

The country exposures shown are the sum of customer limits and unused but available product limits. Both domestic and cross-border exposures are included.

Loans and advances to borrowers in currencies other than the currencies of the borrowers are shown in the tables on page 63.

Risk Profile of Customer Loans and Advances

The chart below shows Barclays wholesale loan profile by internal risk grade (See page 35 for a description of the rating system). It is important to note that Barclays prices loans for risk. Thus higher risk loans will usually have higher interest rates or fees or both. A portfolio of higher risk loans may therefore be as profitable as, or more profitable than, a portfolio of lower risk loans.

(BAR CHART)

Notes
(a)   Excludes non-performing and potential problem loans

Industry Analysis

An industry analysis of customer loans is shown in the chart below. These classifications have been prepared at the level of the borrowing entity. This means that a loan to the subsidiary of a major corporation is classified by the industry in which the subsidiary operates, even though the parent’s predominant business may be in a different industry. Loans to customers domiciled outside the country where the office recording the transaction is located are shown in the chart under ‘Overseas Customers’ and not by industry.


39


 

Risk management
Loans and advances to customers on the banking book



(BAR CHART)

(See also Note 14 on pages 133 to 134.)

The chart shows that Barclays largest sectoral exposures are to home loans, other personal loans and business and other services. These categories are comprised of small loans, have low volatility of credit risk outcomes, and are intrinsically highly diversified.

The loan-to-value ratios on the Group’s UK home loan portfolio are indicated in the next chart.

(BAR CHART)

The valuations in the chart are those which applied at the last credit decision on each loan, i.e. when the customer last requested an increase in the limit or, if there has been no increase, at inception of the loan. Since house prices have risen rapidly in recent years to mid-2004, most loan-to-value ratios would be considerably lower if updated to current market values.

Barclays loan loss rates have remained stable in other personal loans (consumer loans and credit cards) despite the increased levels of household indebtedness and higher interest rates in the UK.

Maturity Analysis

The analysis by contractual maturity, shown in the chart below, indicates that a third of loans to customers have a maturity of more than five years, the majority of which are mortgages. The maturity profile remained broadly steady.

(BAR CHART)

(See also Table 4 on page 59.)


40


 

Barclays PLC Annual Report 2004 

Risk management

Other credit risks


In addition to drawn loans and advances, Barclays is exposed to other credit risks as indicated in the chart on page 35 at the beginning of the discussion on credit risk. These exposures comprise loan commitments, contingent liabilities, debt securities and other exposures arising in the course of trading activities. The risks are managed in a similar way as those in Loans and Advances, and are subject to the same or similar approval and governance processes.

The nature of the credit risks among these exposures differ considerably.

  Loan commitments may become loans and the risks are thus similar to loans.
  Contingent liabilities (guarantees, assets pledged as security, acceptances and endorsements, etc) historically experience low loss rates.
  Losses arising from exposures held for trading (derivatives, debt securities) are accounted for as trading losses, rather than credit charges, even though the fall in value causing the loss may be attributable to credit deterioration.

Further details of these exposures are shown in Note 36 to the Accounts (page 155).

Barclays is also exposed to settlement risk in its dealings with other financial institutions. These risks arise for example in foreign exchange transactions when Barclays pays its side of the transaction to another bank or other counterparty before receiving payment from the other side. The risk is that the counterparty may not meet its obligation. While these exposures are of short duration, they can be large. In recent years settlement risk has been reduced by several industry initiatives that have enabled simultaneous and final settlement of transactions to be made (such as payment-versus-payment through Continuous Linked Settlement and delivery-versus-payment in central bank money). Barclays has worked with its peers in the development of these arrangements. Increasingly the majority of high value transactions are settled by such mechanisms. Where these mechanisms are not available, the risk is further reduced by dealing predominantly with highly rated counterparties, holding collateral and limiting the size of the exposures according to the rating of the counterparty, with smaller exposures to those of higher risk.

 



41


 

Risk management

Loan impairment: potential credit risk loans


Potential credit risk loans (PCRLs) comprise non-performing loans (NPLs) and potential problem loans (PPLs). NPLs are loans where the customers have failed to meet their commitments, either in part or in whole. PPLs are loans where payment of principal and interest is up-to-date and the loans are therefore fully performing, but where serious doubt exists as to the ability of the borrowers to continue to comply with repayment terms in the near future.

Non-performing loans and potential problem loans

(BAR CHART)

(BAR CHART)

(See also Table 17 on page 65 and Table 18 on page 65).

The amounts are shown before deduction of the value of security held, the specific provisions carried or interest suspended, all of which might reduce the impact of an eventual loss, should it occur.

Potential problem loans declined sharply for several reasons: the inflow to this category fell as fewer customers encountered new difficulties, some customers recovered sufficiently to be restored to normal status and others were reclassified as non-performing. The deterioration of some potential problem loans to non-performing explains, in part, why non-performing loans fell much less than the potential problem loans. Both categories improved as a proportion of total loans and advances on the banking book as shown in the following charts.

Non-performing loans and potential problem loans as a percentage of Loans and Advances (Gross Banking Book)

(BAR CHART)

(BAR CHART)



42


 

Barclays PLC Annual Report 2004 

Risk management

Provisions for bad and doubtful debts


Barclays policy is to provide for credit losses when it considers that recovery is doubtful. Risk managers continuously review the quality of the exposures and make provisions where necessary, based on their knowledge of the customer or counterparty, developments in the industry and country of operation.

The estimation of potential credit losses is inherently uncertain and depends upon many factors, including general economic conditions, possible future deterioration in credit quality, structural changes within industries that alter competitive positions, and other external factors such as legal and regulatory requirements.

Total provisions are comprised of two components, specific provisions and general provisions.

Specific Provisions are raised when the Group considers that the creditworthiness of a borrower has deteriorated such that recovery of the whole or part of an outstanding advance is in serious doubt.

  Within the retail businesses, where the portfolio comprises large numbers of homogeneous assets, statistical techniques are used to raise specific provisions for each product portfolio, based on delinquency data and historical recovery rates. These provisions are updated monthly.
  Small business accounts with straightforward loans contracts up to about £15,000 are similarly treated on a product portfolio basis using statistical methods.
  For larger and/or more complex accounts, specific provisioning is done on an individual basis and all relevant considerations that have a bearing on the expected future cash flows are taken into account. The considerations include the business prospects of the customer, the realisable value of collateral, the Group’s position relative to other claimants, the reliability and comprehensiveness of customer information and the likely cost and duration of the work-out process. These provisions are formally reviewed quarterly and revised as new information becomes available in the course of each work-out.

Treatment of interest on debts that have specific provisions – If the collection of interest is doubtful, it is credited to a suspense account and excluded from the interest income in the profit and loss account. Although interest continues to be charged to the customer’s account, the amount suspended is netted against the relevant loan. Loans on which interest is suspended are not reclassified as accruing interest until interest and principal payments are up-to-date and future payments are reasonably assured. If the collection of interest is considered remote, interest is no longer applied.

Treatment of collateral assets acquired in exchange for advances – Assets acquired in exchange for advances in order to achieve an orderly realisation continue to be reported as advances. The assets acquired are recorded at the carrying value of the original advance as at the date of the exchange and any impairment is accounted for as a specific provision.

General Provisions reflect losses that, although not specifically identified, are known from experience to be present in the lending portfolio at the balance sheet date. These provisions are adjusted at least half yearly by an appropriate charge or release.

General provisions are also created with respect to the recoverability of assets arising from off-balance sheet exposures and country transfer risk, all prepared in a manner consistent with the general provisioning methodology.

Write-off occurs when, and to the extent that, the whole or part of a debt is considered irrecoverable.

See also page 80 (Critical Accounting estimates) and page 112 (Accounting policies: loans and advances) for a description of relevant terms and policies.

(BAR CHART)

(See also Analysis of results by business on page 92.)

The credit environment both in retail and in corporate and wholesale businesses was relatively benign in 2004. This led to a lower level of potential problem and non-performing loans and lower provision charges.

Overall, the Group provision charge declined 19% to £1,091m (2003: £1,347m). This resulted from a substantial decrease in the corporate and wholesale provisions charge, while the retail provisions charge was steady. As a percentage of average banking loans and advances, the provisions rate fell to 0.54% (2003: 0.73%).

In the corporate and wholesale businesses, non-performing and potential problem loans in total fell by 29% to £2,062m from £2,920m in 2003, reflecting the continuing strong corporate credit environment. The corporate and wholesale provisions charge declined to £284m (2003: £543m). The reduction in the provisions charge included an exceptional recovery of £57m in UK Business Banking.

In retail, non-performing loans and potential problem loans remained steady at £2,679m (2003: £2,712m). The provisions charge in the retail businesses was also steady at £807m (2003: £804m). The provisions charge increased in Barclaycard (the card and unsecured consumer lending business) due to volume growth and the maturation of new customer recruitment. The provisions charge included a release of £40m associated with the UK mortgage business, following a review of the portfolio and the current loss experience.



43


 

Risk management
Provisions for bad and doubtful debts



The chart below shows provisions charges over the last ten years. The charge has fallen from its peak in 2002 even though the loan book has grown substantially.

Provisions charges over ten years



(BAR CHART)

(BAR CHART)

(See also Table 20 on page 66 and Table 21 on page 66.)

(BAR CHART)

(See also Table 20 on page 66.)

During 2004, £198m was transferred from the general provisions stock to specific provisions stock. These transfers are included in the release of general provisions and increase the new and increased specific provisions. The transfers reflect enhancements to provisioning models and the resolution of an individual large corporate exposure. The transfers had no effect on the net provisions charge.



44


 

Barclays PLC Annual Report 2004 

(BAR CHART)

(See also Table 22 on page 67.)

Total provision balances declined 9% (£262m) over the prior year.

While the specific provisions balance has remained broadly flat during 2004, the year-end general provision stock decreased by 29% (£231m) to £564m (2003: £795m) as explained on the previous page.

An analysis of the movements in the provision balances is shown in the following chart.



(BAR CHART)

Note
(a)   Includes effects of acquisitions and exchange rate movements. (See also Table 24 on page 67.)

Coverage Ratios
The coverage of non-performing loans by the Group’s stock of provisions and interest in suspense decreased from 71.5% at 31st December 2003 to 70.4% at 31st December 2004. Over the same period, coverage of potential credit risk loans (i.e. NPLs and PPLs) increased from 54.6% to 59.2%.



45


 

Risk management
Provisions for bad and doubtful debts



Provisions coverage of non-performing loans and potential credit risk loans (NPLs and PPLs)

(BAR CHART)

(BAR CHART)

(See also Table 32 on page 70.)

Another way of assessing provision balances is to recognise that specific provisions are created to cover non-performing loans, whereas general provisions relate to as yet unidentified losses on performing loans. This is shown in the next two charts.

Specific provisions coverage of non-performing loans and general provisions coverage of performing loans

(BAR CHART)

(BAR CHART)

(See also Table 33 on page 71.)

Performing loans comprise gross loans and advances less non-performing loans. The ratio of general provisions to performing loans has declined since 2000 following the acquisition of Woolwich Plc whose portfolio needs comparatively low general provisions as it consists predominantly of secured residential mortgage loans. It declined further in 2004 following transfers to specific provisions.

Write-offs
Debts are written off to the extent that there is no realistic prospect of a change in the customers’ condition, or where local conditions dictate, and the whole or part of the debt is considered irrecoverable.

Total write-offs increased to £1,595m (2003: £1,474m).

Provisioning under International Financial Reporting Standards
From 2005, the Group will prepare its accounts in accordance with the International Financial Reporting Standards (IFRS) published by the International Accounting Standards Board (IASB) as required under European Commission Regulation 1606/2002. This standard does not differentiate between specific and general provisions for bad and doubtful debts. Instead, provisions are replaced by an allowance for impairment. Thus the Group will not show distinct specific and general provisioning information in future reports but will report on the allowance for impairment instead.



46


 

Barclays PLC Annual Report 2004 

Risk management

Market risk management


Market Risk is the risk that the Group’s earnings or capital, or its ability to meet business objectives, will be adversely affected by changes in the level or volatility of market rates or prices such as interest rates, credit spreads, foreign exchange rates, equity prices, and commodity prices.

The main market risks arise from the Group’s trading activities. Barclays is also exposed to non-trading market risks relating to the pension fund and, to a lesser extent, asset and liability management.

Categorisation of Market Risk
To facilitate the management, control, measurement and reporting of market risk, Barclays has grouped market risk into three broad categories:

  Trading market risk
These risks arise in trading transactions where Barclays acts as principal with clients or with the market. The Group’s policy is that market risks arising from trading activities are concentrated in Barclays Capital.
  Asset and Liability risk
These risks arise from banking activities, including those incurred on non-trading positions such as capital balances, demand deposits and customer originated transactions and flows.
  Other market risks
The Group also incurs market risks that do not fit into the above categories. The principal risks of this type are defined benefit pension scheme risk and asset management structural market risk (including the risk in Barclays Life Fund).

Market Risk Management and Control Responsibilities
The Board Risk Committee approves the market risk appetite for all types of market risk. The Market Risk Director is responsible for the Group’s market risk control framework and, under delegated authority from the Risk Director and the Risk Oversight Committee, sets a limit framework within the context of the approved market risk appetite.

The Market Risk Director is assisted by a central market risk management team (Market Risk) and by risk management departments in the Group’s businesses. A daily market risk report summarises the Group’s market risk exposures against agreed limits. This daily report is sent to the Risk Director, the Market Risk Director, the Group Finance Director and the appropriate Business Risk Directors.

The Head of each business, assisted by the business risk management team, is accountable for identifying, measuring and managing all market risks associated with its activities. In managing market risk, businesses also consider liquidity risk where relevant.

In Barclays Capital, the Head of Market Risk is responsible for the market risk governance and control framework. Day-to-day responsibility for market risk lies with the senior management of Barclays Capital, supported by the Global Market Risk Management team that operates independently of the trading areas. Daily market risk reports are produced for the main Barclays Capital business areas covering the five main risk factor categories, namely interest rate, credit spread, foreign exchange, equity and commodity risk. A more detailed trading market risk presentation is discussed at Barclays Capital’s Traded Products Risk Review meeting, held fortnightly. The attendees at this meeting include the senior managers from Barclays Capital and Market Risk.

Outside Barclays Capital, Treasury manages treasury market risk, strategic interest rate risk and structural interest rate risk. Retail market risk, a consequence of the UK banking operations, is managed by the Retail Market Risk team. In the Group’s non-UK banking operations, market risk is managed mainly by local treasuries supported by Market Risk. The chart overleaf gives an overview of the business control structure.



47


 

Risk management
Market risk management


Managing market risk – organisational overview

(FLOWCHART)

Market Risk Measurement
The measurement techniques used to measure and control market risk include:

  Daily Value at Risk;
  Stress Tests;
  Annual Earnings at Risk;
  Economic capital.

Daily Value at Risk (DVaR)
DVaR is an estimate of the potential loss which might arise from unfavourable market movements, if the current positions were to be held unchanged for one business day, measured to a confidence level of 98%. Daily losses exceeding the DVaR figure are likely to occur, on average, twice in every 100 business days.

In Barclays Capital, DVaR is an important market risk measurement tool. DVaR is calculated using the historical simulation method with a historical sample of two years. Barclays Capital’s interest rate DVaR methodology allows the measurement process to discriminate between the market risk of holding bonds of differing credit quality, for example AAA grade securities as against BBB grade securities. This is achieved by incorporating eight interest rate credit categories, these being government, interest rate swaps and six credit grades for non-government exposures. We have initiated an extension to this model to incorporate issuer specific risk. Outside Barclays Capital, DVaR is calculated using a simplified approach.

The effectiveness of the DVaR model is assessed principally by back-testing which counts the number of days when trading-related losses are bigger than the estimated DVaR figure. Back-testing results are shown on page 50.

Stress Tests
Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by Barclays Capital include risk factor stress testing where stress movements are applied to each of the five risk categories, namely interest rates, credit spreads, foreign exchange rates, and equity and commodity prices; emerging market stress testing where emerging market portfolios are subject to stress movements; and ad-hoc stress testing, which includes applying possible stress events to specific positions or regions e.g. the stress outcome to a region following a currency peg break.

If the potential stress loss exceeds the trigger limit, the positions captured by the stress test are reviewed and discussed by Capital Market Risk and the respective Business Head(s). The minutes of the discussion, including the merits of the position and the appropriate course of action, are then sent to the Market Risk Director for review.



48


 

Barclays PLC Annual Report 2004 

Outside Barclays Capital, stress testing is carried out by the business centres and is reviewed by the senior management and business-level asset and liability committees. The stress testing is tailored to the business and is typically scenario analysis and historical stress movements applied to respective portfolios.

Annual Earnings at Risk (AEaR)
AEaR measures the sensitivity of annual earnings to shocks in market rates at the 99th percentile for change over a one year period. This shock is consistent with the standardised interest rate shock recommended by the Basel II framework for assessing banking book interest rate risk.

AEaR is used to measure structural interest rate market risk and Asset Management structural risk (see the Other Market Risks section (page 50) for more details).

Economic Capital
Economic capital methodologies are used to calculate risk sensitive capital allocations for businesses incurring market risk. Consequently, the businesses incur capital charges related to their market risk.

Trading Market Risk
The Group’s policy is to concentrate trading activities in Barclays Capital. This includes transactions where Barclays Capital acts as principal with clients or with the market. For maximum efficiency, Barclays manages client and market activities together. In Barclays Capital, trading risk occurs in both the trading book and the banking book as defined for regulatory purposes.

In anticipation of future customer demand, the Group maintains access to market liquidity by quoting bid and offer prices with other market makers and carries an inventory of capital market and treasury instruments, including a broad range of cash, securities and derivatives. Trading positions and any offsetting hedges are established as appropriate to accommodate customer or Group requirements.

Derivatives entered into for trading purposes include swaps, forward rate agreements, futures, credit derivatives, options and combinations of these instruments. For a description of the nature of derivative instruments, see page 57.

Analysis of Trading Market Risk Exposures
The table below shows the DVaR statistics for Barclays Capital’s trading activities (trading book and banking book).



Barclays Capital DVaR: Summary table for 2004 and 2003

                                                 
 
    Twelve months to     Twelve months to  
    31st December 2004     31st December 2003  
    Average     High(a)     Low(a)     Average     High(a)     Low(a)  
    £m     £m     £m     £m     £m     £m  
 
Interest rate risk
    25.0       53.6       15.1       21.0       34.1       13.6  
Credit spread risk
    22.6       32.9       16.0       16.2       29.2       8.9  
Foreign exchange risk
    2.4       7.4       0.9       2.3       5.0       1.0  
Equities risk
    4.2       7.9       2.2       2.6       4.9       1.5  
Commodities risk
    6.0       14.4       2.2       4.4       7.0       2.2  
Diversification effect
    (25.9 )     n/a       n/a       (20.6 )     n/a       n/a  
 
Total DVaR(b)
    34.3       46.8       24.0       25.9       38.6       17.6  
 
Notes
(a)   The high (and low) DVaR figures reported for each category did not necessarily occur on the same day as the high (and low) DVaR reported as a whole. Consequently, a diversification effect number for the high (and low) DVaR figures would not be meaningful and is therefore omitted from the table.
(b)   The year-end Total DVaR for 2004 was £31.9m (2003: £37.2m).

49


 

Risk management
Market risk management


Barclays Capital’s market risk exposure, as measured by average total Daily Value at Risk, increased in 2004. This was due mainly to interest rate opportunities taken in the first half of 2004 and an increase in credit spread positions. The latter increase was primarily the result of growing client flows in corporate bonds and credit derivatives. The increase in total DVaR is consistent with Barclays Capital’s business expansion.

The graph below shows the history of total DVaR on a daily basis for 2003 and 2004.

(LINE GRAPH)

Analysis of Trading Revenue
The histograms below show the distribution of daily trading revenue for Barclays Capital in 2004 and 2003. It includes dealing profits, net interest income and net fees and commissions relating to primary trading. The average daily revenue in 2004 was £12.5m (2003: £10.0m) and there were 246 positive revenue days out of 254 (2003: 244 positive revenue days out of 254).

(BAR GRAPH)

(BAR GRAPH)

DVaR Back-testing
Barclays recognises the importance of assessing the effectiveness of its DVaR model. The main approach employed is the technique known as back-testing, which counts the number of days when trading losses are bigger than the estimated DVaR figure. The regulatory standard for back-testing is to measure DVaR assuming a one day holding period with a 99% level of confidence. For Barclays Capital’s regulatory trading book, there were no instances in 2004 or 2003, of a daily trading revenue loss exceeding the corresponding back-testing DVaR.

Asset and Liability Market Risk
Interest rate exposures arising from mismatches of fixed rate assets and liabilities in UK banking operations are passed to Treasury. Treasury aggregates these positions and then passes the net position to the market via Barclays Capital. Due mainly to timing considerations, market risk can arise when some of the net position stays with Treasury. Similarly, market risk can arise due to the impact of interest rates on customer behaviour. The latter risk is managed and measured by the Retail Market Risk team using behavioural models. The positions are converted into wholesale swap or option exposures, passed to Treasury and managed by the process described above.

Structural interest rate risk arises from the variability of income from non-interest bearing products, managed variable rate products and the Group’s capital. This risk is managed by Treasury, assisted by the Retail Market Risk team.

Market risk is also taken in overseas treasuries in support of customer activity. In Group terms the risk is modest. The market risks are managed by local treasury functions and local asset and liability committees. Market Risk maintains regular contact with the businesses on treasury issues and oversees a comprehensive financial risk reporting framework.

Other Market Risks
Defined benefit pension scheme risk
Barclays maintains a number of defined benefit pension schemes for past and current employees. The ability of the pension fund to meet the projected pension payments is maintained through investments. Market risk arises because the estimated market value of the pension fund assets might decline or their investment returns might reduce or because the estimated value of the pension liabilities might increase. In these circumstances, Barclays might be required or might choose to make extra contributions to the pension fund. Financial details of the pension fund are on page 126.

Asset management structural market risk
Asset management structural market risk is the risk that fee and commission income is affected by a change in equity market levels. It affects Barclays Private Clients, Barclays Life and Barclays Global Investors. The risk is controlled and managed by the respective businesses and Barclays Market Risk.



50


 

Barclays PLC Annual Report 2004 

Risk management

Capital and liquidity risk management


The Board Risk Committee has approved Board Governance Standards for capital and liquidity risk management that are high level statements of the controls required to meet the Group’s strategic objectives.

The Treasurer has established risk control frameworks and a policy and assurance structure to ensure that capital and liquidity risks are managed in accordance with the requirements of the Board Standards. Policies are set by the Treasury Committee which is chaired by the Group Finance Director.

Capital Risk Management

See page 99 in the Financial Discussion for information on the Group’s capital position.

Capital risk is the risk that the Bank fails to comply with FSA mandated regulatory requirements, resulting in a breach of its minimum capital ratios and the possible suspension or loss of its banking licence. Capital risk also includes the risk that the capital base is not managed in a prudent manner thereby endangering the Group’s credit rating.

Barclays views its strong credit rating as a source of competitive advantage. A solid capital position, together with a diverse portfolio of activities, an increasingly international presence, consistent profit performance, prudent risk management and a focus on value creation, underpins that rating.

The Group’s capital management will continue to maximise shareholder value through optimising both the level and mix of its capital resources, seeking to:

  meet the individual capital ratios required by our regulators;
  maintain an AA credit rating;
  generate sufficient capital to support asset growth and corporate activity;
  manage the currency exposure to its overall Sterling Risk Asset ratio.

Over the past four years, the Group’s tier 1 ratio has averaged 7.9%. The Group’s Risk Asset ratio has averaged 12.5% which compares favourably to the minimum requirements of our regulators.

(BAR CHART)

Note
(a)   Less supervisory deductions.

Liquidity Risk Management

Liquidity risk is the risk that the Group is unable to meet its payment obligations when they fall due and to replace funds when they are withdrawn, the consequence of which may be the failure to meet obligations to repay depositors and fulfil commitments to lend.

Liquidity management within the Group has several strands. The first is day-to-day funding, managed by monitoring future cash flows to ensure that requirements can be met. This includes replenishment of funds as they mature or are borrowed by customers. The Group maintains an active presence in global money markets to enable that to happen. The second is maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any unforeseen interruption to cash flow. Finally, the ability to monitor, manage and control intraday liquidity in real time is recognised by the Group as a mission critical process: Any failure to meet specific intraday commitments would be a public event and may have an immediate impact on the Group’s reputation.

In overseas markets, day-to-day liquidity is the responsibility of local treasury management in each territory within the parameters set by Treasury and subject to regular reports to Treasury in order to maximise the benefits of knowledge gained. Local asset and liability management committees review liquidity management. These committees are comprised of senior local executives and – when warranted by the size and complexity of the operation – representatives of Treasury.

The ability to raise funds is in part dependent on maintaining the bank’s credit rating. The funding impact of a credit downgrade is regularly estimated. Whilst the impact of a single downgrade may affect the price at which funding is available, the effect on liquidity is not considered material in Group terms.



51


 

Risk management
Capital and liquidity risk management



Liquidity Risk Measurement

Monitoring and reporting take the form of cash flow measurement and projections for the next day, week and month as these are key periods for liquidity management. This is based on principles agreed by the UK Financial Services Authority.

In addition to cash flow management, Treasury also monitors unmatched medium-term assets and the level and type of undrawn lending commitments, the usage of overdraft facilities and the impact of contingent liabilities such as standby letters of credit and guarantees.

Treasury develops and implements the process for submitting the Group’s projected cash flows to stress scenarios. The output of stress testing informs the Group’s contingency funding plan. This is maintained by Treasury and is aligned with the Group and country business resumption plans to encompass decision-making authorities, internal and external communication and, in the event of a systems failure, the restoration of liquidity management and payment systems.

Sources of liquidity are regularly reviewed to maintain a wide diversification by currency, geography, provider, product and term. Whilst 2004 saw relatively stable markets, with no significant consequences for the Group’s liquidity, significant market events over recent years including corporate scandals contributed to a short-term flight to quality in financial markets from which Barclays benefited.

An important source of structural liquidity is provided by our core retail deposits in the UK and Europe, mainly current accounts and savings accounts. Although current accounts are repayable on demand and savings accounts at short notice, the Group’s broad base of customers – numerically and by depositor type – helps to protect against unexpected fluctuations. Such accounts form a stable funding base for the Group’s operations and liquidity needs.

To avoid reliance on a particular group of customers or market sectors, the distribution of sources and the maturity profile of deposits are also carefully managed. Important factors in assuring liquidity are competitive rates and the maintenance of depositors’ confidence. Such confidence is based on a number of factors including the Group’s reputation, the strength of earnings and the Group’s financial position.

Securitisation represents a relatively modest proportion of the Group’s current funding profile, but provides additional flexibility. The Group has a large residential mortgage portfolio which could be securitised and hence forms a large – and as yet untapped – source of liquidity.

For further details see contractual cash obligations and commercial commitments of the Group on page 53.



52


 

Barclays PLC Annual Report 2004 





Table A: Contractual Obligations

                                         
 
    Payments due by period  
    Less than     One to     Four to     After     Total  
    one     three     five     five        
    year     years     years     years        
    £m     £m     £m     £m     £m  
 
Long-term debt
    46,101       9,841       8,472       9,520       73,934  
Capital lease obligations
    100       93       121       39       353  
Operating lease obligations
    243       416       366       1,657       2,682  
Purchase obligations
    296       493       193       103       1,085  
Other long-term liabilities
    352                         352  
 
Total
    47,092       10,843       9,152       11,319       78,406  
 

Table B: Other Commercial Commitments

                                         
 
    Amount of commitment expiration per period  
    Less than     One to     Four to     After     Total  
    one     three     five     five     amounts  
    year     years     years     years     committed  
    £m     £m     £m     £m     £m  
 
Acceptances and endorsements
    294       9                   303  
Guarantees and assets pledged as collateral security
    24,614       2,088       1,744       1,565       30,011  
Other contingent liabilities
    6,227       1,156       379       483       8,245  
Arising out of sale and option to resell transactions
    1                         1  
Documentary credits and other short-term trade related transactions
    506       13       1       2       522  
Forward asset purchases and forward forward deposits placed
    9                   46       55  
Undrawn formal standby facilities, credit lines and other commitments to lend
    97,710       14,688       17,762       3,313       133,473  
 

53


 

Risk management

Management of operational risk and business risk


Operational and business risks are inherent in Barclays operations and are typical of any large enterprise.

Operational Risk is the risk of direct or indirect losses resulting from inadequate or failed internal processes or systems, human factors, or from external events. Major sources of operational risk include: operational process reliability, IT security, outsourcing of operations, dependence on key suppliers, implementation of strategic change, integration of acquisitions, fraud, error, customer service quality, regulatory compliance, recruitment, training and retention of staff, and social and environmental impacts.

Business Risk is the risk of adverse outcomes resulting from a weak competitive position or from poor choice of strategy, markets, products, activities or structures. Major potential sources of business risk include: revenue volatility due to factors such as macro-economic conditions; inflexible cost structures; uncompetitive products or pricing; and structural inefficiencies.

Barclays is committed to the advanced management of operational and business risks. In particular, we are implementing advanced management and measurement approaches for operational risk to strengthen control, improve customer service and minimise operating losses.

It is not cost effective to attempt to eliminate all operational and business risks and in any event it would not be possible to do so. Events of small significance are expected to occur and are accepted as inevitable; events of material significance are rare and the Group seeks to reduce the risk from these in a framework consistent with its agreed risk appetite.

Responsibility for and Control of Operational Risk

Barclays has a Group Operational Risk Framework, which is consistent with and part of the Group Internal Control and Assurance Framework. Board Governance Standards have been established for all key areas of identified risk. These Standards are high-level articulations of the Board’s risk control requirements. The Standards applicable to operational and business risks are: Brand Management, Capital Planning, Corporate Responsibility, Financial Crime, Financial Reporting, Tax and Budgeting, Legal, Operations, People Management, Regulatory Compliance, Change and Strategic Planning.

Responsibility for implementing and overseeing these policies is to be found throughout the organisation as follows:

  The prime responsibility for the management of operational risk and the compliance with Board Governance Standards rests with the business and functional units where the risk arises. Front-line risk managers are widely distributed throughout the Group in business units. They service and support these areas assisting line managers in managing these risks.
  Business Risk Directors in each business are responsible for overseeing the implementation of and compliance with Group policies.

  Governance and Control Committees in each business monitor control effectiveness. The Governance and Control Committee receives reports from the committees in the businesses and considers Group-wide control issues and their risk mitigation.
  A Standard Owner agrees responsibility for each Board Governance Standard, agrees policy and provides advice to business managers Group-wide. Each monitors and reports upon the application of their Standard.
  In the corporate centre, the Operational Risk Director oversees the range of operational risks across the Group in accordance with the Group Operational Risk Framework.
  The Internal Audit function provides assurance for operational risk control across the organisation and reports to the Board and senior management.

The Management and Measurement of Operational Risk
Risk Assessment
– A consistent approach to the identification and assessment of key risks and controls is undertaken across all business units. Scenario analysis and self-assessment techniques are widely used by business management for risk identification and for evaluation of control effectiveness and monitoring capability. Business management determines whether particular risks are effectively managed within business risk appetite and otherwise take remedial action. The risk assessment process is consistent with COSO principles.

Risk Event Data Collection and Reporting – A standard process is used Group-wide for the recognition, capture, assessment, analysis and reporting of risk events. This process is used to identify where process and control requirements are needed to reduce the recurrence of risk events. Risk events are loaded onto a central database and reported monthly to the Risk Oversight Committee.

Barclays also uses a database of external public risk events to assist in risk identification and assessment.

Reporting – Business units are required to report on both a regular and an event-driven basis. The reports include a profile of the key risks to their business objectives, control issues of Group-level significance, and operational risk events. Specific reports are prepared on a regular basis for the Risk Oversight Committee, the Board Risk Committee and the Board Audit Committee. In particular the Group Operational Risk Profile Report is provided quarterly to the Risk Oversight Committee.

Economic Capital – Methodologies are used for both operational and business risks to calculate risk sensitive capital allocations. These are allocated to business units which incur risk-based capital charges, as a consequence, providing an incentive to manage the risk within appetite levels. Additional investment is being made to enhance the Operational Risk Capital model to improve risk sensitivity and to obtain approval to apply the Advanced Measurement Approach (AMA) under the Basel II Accord when that option first becomes available in 2008.



54


 

Barclays PLC Annual Report 2004 

Risk management

Disclosures about certain trading activities including
non-exchange traded contracts


The Group delivers a fully integrated service to clients for base metals, precious metals, oil and oil-related products, power and gas and other commodities.

The Group offers both over the counter (OTC) and exchange traded derivatives in these commodities. The base and precious metals business also enters into outright metal purchase and sale transactions, while the power and gas business trades both physical forwards and derivative contracts.

The Group does not maintain any physical exposures in oil or oil-related products. The Group also develops and offers a range of commodity-related structured products.

The Group’s commodity business continues to expand, as market conditions allow, through the addition of new products and markets.

The Group’s principal commodity related derivative contracts are swaps, options, forwards and futures, which are similar in nature to such non-commodity related contracts. Commodity derivatives contracts include commodity specification and delivery location as well as forward date and notional value.

The fair values of commodity physical and derivative positions are determined through a combination of recognised market observable prices, exchange prices and established inter-commodity relationships. In common with all derivatives, the fair value of OTC commodity derivative contracts is either determined using a quoted market price or by using valuation models. Where a valuation model is used, the fair value is determined based on the expected cash flows under the terms of each specific contract, discounted back to present value. The expected cash flows for each contract are either determined using market parameters such as commodity price curves, commodity volatilities, commodity correlations, interest rate yield curves and foreign exchange rates, or derived from historical or other market prices.

Fair values generated by models are independently validated with reference to market price quotes, or price sharing with other institutions. However, where no observable market parameter is available then instrument fair value will include a provision for the uncertainty in that parameter based on sale price or subsequent traded levels.

Discounting of expected cash flows back to present value is achieved by constructing discount curves from the market price of observable interest rate products, such as deposits, interest rate futures and swaps. In addition, the Group maintains fair value adjustments reflecting the cost of credit risk (where this is not embedded in the fair value), and the cost of trading out of a position (all positions are marked to mid-market and hence some bid/offer transaction cost would be incurred).

The tables on page 56 analyse the overall fair value of the commodity derivative contracts by movement over time and source of fair value. Additionally, the positive fair value, adjusted for the impact of netting, of such contracts is analysed by counterparty credit risk rating.



55


 

Risk management
Disclosures about certain trading activities including non-exchange traded contracts



The following tables analyse the overall fair value of the commodity derivative contracts by movement over time and source of fair value. As at 31st December 2004 this reflects a gross positive fair value of £4,955m (31st December 2003: £1,982m) and a gross negative fair value of £4,780m (31st December 2003: £2,088m). Realised and unrealised profits related to physical commodity and commodity derivative activities are included with dealing profits. Physical commodity positions are held at fair value and reported with other assets in Note 21 on page 142.

Movement in fair value of commodity derivative positions

                 
 
    Total     Total  
    2004     2003  
    £m     £m  
 
Fair value of contracts outstanding at the beginning of the year
    (106 )     40  
Contracts realised or otherwise settled during the year
    171       (8 )
Fair value of new contracts entered into during the year
    313       (101 )
Other changes in fair value
    (203 )     (37 )
 
Fair values of contracts outstanding at the end of the year
    175       (106 )
 

Source of commodity derivative fair values

                                         
 
    Fair value of contracts at 31st December 2004  
    Maturity     Maturity     Maturity     Maturity     Total  
    less than     one to     four to     over     fair  
    one year     three years     five years     five years     value  
    £m     £m     £m     £m     £m  
 
Prices actively quoted
    (38 )     86       16       17       81  
Prices provided by other external sources
    (8 )                       (8 )
Prices based on models and other valuation methods
    (5 )     63       23       21       102  
 
Total
    (51 )     149       39       38       175  
 

The following table analyses the positive fair value, adjusted for the impact of netting, arising on commodity derivative contracts. As at 31st December 2004, this reflects a gross positive fair value of £4,955m (31st December 2003: £1,982m) adjusted for the Group’s ability to net amounts due to the same counterparties (31st December 2004: £3,198m, 31st December 2003: £864m).

Analysis of net positive commodity derivative fair value by counterparty credit risk rating

                 
 
    Total     Total  
    value     value  
    2004     2003  
    £m     £m  
 
A- to AAA
    1,004       792  
BBB- to BBB+
    538       280  
BB+ and below
    215       46  
 
Total
    1,757       1,118  
 

All credit exposures are actively managed by the Group. Refer to page 35 for more information on the Group’s approach to credit risk management. In particular, at 31st December 2004, 69% of all of the commodities credit exposure was to counterparties with cross asset class netting agreements, that is, netting agreements allowing exposure on commodities products to be reduced by amounts owed to the same counterparties in other asset classes. This percentage is consistent across the credit ratings applying to BBB+ and below as well as higher rated counterparties.

Additionally, collateral agreements are held with a majority of these same counterparties that allow collateral to be called against commodity exposures. All non-collateralised exposures are subject to credit limits, and credit or risk tendency reserves are created against these exposures if appropriate.

56


 

Barclays PLC Annual Report 2004 

Risk management

Derivatives


The use of derivatives and their sale to customers as risk management products is an integral part of the Group’s trading activities. These instruments are also used to manage the Group’s own exposure to fluctuations in interest and exchange rates as part of its asset and liability management activities.

Barclays Capital manages the trading derivatives book as part of the market risk book. This includes foreign exchange, interest rate, equity, commodity and credit derivatives. The policies regarding market risk management are outlined in the market risk management section on pages 47 to 50.

The policies for derivatives that are used to manage the Group’s own exposure to interest and exchange rate fluctuations are outlined in the treasury asset and liability management section on page 50.

Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices defined in the contract. They include swaps, forward rate agreements, futures, options and combinations of these instruments and primarily affect the Group’s net interest income, dealing profits, commissions received and other assets and liabilities. Notional amounts of the contracts are not recorded on the balance sheet.

The Group participates both in exchange traded and OTC derivatives markets.

Exchange Traded Derivatives

The Group buys and sells financial instruments that are traded or cleared on an exchange, including interest rate swaps, futures and options on futures. Holders of exchange traded instruments provide margin daily with cash or other security at the exchange, to which the holders look for ultimate settlement.

Over the Counter Traded Derivatives (OTC)

The Group also buys and sells financial instruments that are traded over the counter, rather than on a recognised exchange.

These instruments range from commoditised transactions in derivative markets, to trades where the specific terms are tailored to the requirements of the Group’s customers. In many cases, industry standard documentation is used, most commonly in the form of a master agreement, with individual transaction confirmations. The existence of a signed master agreement is intended to give the Group protection in situations where a counterparty is in default, including the ability to net outstanding balances where the rules of offset are legally enforceable. For further explanation of the Group’s policies on netting, see Accounting policies on page 114.

Foreign Exchange Derivatives

The Group’s principal exchange rate related contracts are forward foreign exchange contracts, currency swaps and currency options. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency, usually on a specified future date at an agreed rate. A currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest periodically until the principal amounts are re-exchanged on a future date.

Currency options provide the buyer with the right, but not the obligation, either to purchase or sell a fixed amount of a currency at a specified exchange rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives a premium at the start of the option period.

Interest Rate Derivatives

The Group’s principal interest rate related contracts are interest rate swaps, forward rate agreements, basis swaps, caps, floors and swaptions. Included in this product category are transactions that include combinations of these features.

An interest rate swap is an agreement between two parties to exchange fixed rate and floating rate interest by means of periodic payments based upon a notional principal amount and the interest rates defined in the contract. Certain agreements combine interest rate and foreign currency swap transactions, which may or may not include the exchange of principal amounts. A basis swap is a form of interest rate swap, in which both parties exchange interest payments based on floating rates, where the floating rates are based upon different underlying reference indices. In a forward rate agreement, two parties agree a future settlement of the difference between an agreed rate and a future interest rate, applied to a notional principal amount. The settlement, which generally occurs at the start of the contract period, is the discounted present value of the payment that would otherwise be made at the end of that period.

Equity Derivatives

The Group’s principal equity related contracts are equity and stock index swaps and options (including warrants, which are equity options listed on an exchange). An equity swap is an agreement between two parties to exchange periodic payments, based upon a notional principal amount, with one side paying fixed or floating interest and the other side paying based on the actual return of the stock or stock index. An equity option provides the buyer with the right, but not the obligation, either to purchase or sell a specified stock, basket of stocks or stock index at a specified price or level on or before a specified date.

Credit Derivatives

The Group’s principal credit derivative related contracts include credit default swaps and total return swaps. A credit derivative is an arrangement whereby the credit risk of an asset (the reference asset) is transferred from the buyer to the seller of protection.

A credit default swap is a contract where the protection seller receives premium or interest related payments in return for contracting to make payments to the protection buyer upon a defined credit event. Credit events normally include bankruptcy, payment default on a reference asset or assets, or downgrades by a rating agency.

A total return swap is an instrument whereby the seller of protection receives the full return of the asset, including both the income and change in the capital value of the asset. The buyer in return receives a predetermined amount.

A description of how credit derivatives are used within the Group is provided on page 37.

A description of the impact of derivatives under US GAAP is set out on page 201.

Commodity Derivatives

The Group’s principal commodity related derivative contracts are swaps, options, forwards and futures. The main commodities transacted are oil, base metals, precious metals, US and UK natural gas, and UK electricity.

A description of commodity derivatives is provided on page 55.



57


 

Risk management

Statistical information


Statistical and Other Risk Information
This section of the report contains supplementary information that is more detailed or contains longer histories than the data presented in the discussion. For commentary on this information, please refer to the preceding text (pages 28 to 57).

Credit Risk Management

Table 1: Risk Tendency by Business Cluster

                 
 
    2004     2003  
    £m     £m  
 
 
               
UK Banking
    375       385  
UK Retail Banking
UK Business Banking
    150
225
      150
235
 
Private Clients and International
    70       75  
Private Clients
International
    5
65
      5
70
 
Barclaycard
    860       775  
Barclays Capital
    70       135  
Transition Businesses
    20       20  
 
Total
    1,395       1,390  
 

(Also see chart on page 37.)

Table 2: Loans and advances

                         
 
    2004     2003     2002  
    £m     £m     £m  
 
 
                       
Retail businesses
                       
Banks
Customers
 
 
 
 
1,424
111,074
 
 
 
 
 
 
1,495
100,774
 
 
 
 
 
 
1,748
90,625
 
 
Total retail businesses
    112,498       102,269       92,373  
Wholesale businesses
                       
Banks
Customers
    73,713
146,672
      60,445
129,106
      56,508
114,767
 
Total wholesale businesses
    220,385       189,551       171,275  
 
Total
    332,883       291,820       263,648  
 

(Also see chart on page 38.)

Table 3: Loans and advances by banking and trading books

                         
 
    2004  
    Customers     Banks     Total  
    £m     £m     £m  
 
 
                       
Banking book
    192,647       24,992       217,639  
Trading book
    65,099       50,145       115,244  
 
Total
    257,746       75,137       332,883  
 
                         
 
    2003  
    Customers     Banks     Total  
    £m     £m     £m  
 
 
                       
Banking book
    170,919       17,270       188,189  
Trading book
    58,961       44,670       103,631  
 
Total
    229,880       61,940       291,820  
 

58


 

Barclays PLC Annual Report 2004 

Table 4: Maturity analysis of loans and advances to banks

                                                 
 
                    Over three     Over one              
                    months     year but              
            Not more     but not     not more              
            than three     more than     than five     Over        
    On demand     months     one year     years     five years     Total  
At 31st December 2004   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
    733       5,510       1,067       10,533       3,508       21,351  
Other European Union
    177       540       204       268             1,189  
United States
    25       725       3                   753  
Rest of the World
    275       819       479       123       3       1,699  
 
Total banking business
    1,210       7,594       1,753       10,924       3,511       24,992  
Total trading business
    1,500       44,289       4,356                   50,145  
 
Total
    2,710       51,883       6,109       10,924       3,511       75,137  
 
                                                 
 
                    Over three     Over one              
                    months     year but              
            Not more     but not     not more              
            than three     more than     than five     Over        
    On demand     months     one year     years     five years     Total  
At 31st December 2003   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
    629       4,299       586       5,127       3,674       14,315  
Other European Union
    116       1,525       28       12       21       1,702  
United States
    23       57       10       20             110  
Rest of the World
    295       605       192       48       3       1,143  
 
Total banking business
    1,063       6,486       816       5,207       3,698       17,270  
Total trading business
    830       39,660       4,180                   44,670  
 
Total
    1,893       46,146       4,996       5,207       3,698       61,940  
 

Table 5: Interest rate sensitivity of loans and advances to banks

                                                 
 
    2004     2003  
    Fixed     Variable             Fixed     Variable        
    rate     rate     Total     rate     rate     Total  
At 31st December   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
    14,561       6,790       21,351       7,221       7,094       14,315  
Other European Union
    1,012       177       1,189       1,523       179       1,702  
United States
    682       71       753       17       93       110  
Rest of the World
    1,347       352       1,699       781       362       1,143  
 
Total banking business
    17,602       7,390       24,992       9,542       7,728       17,270  
Total trading business
    23,575       26,570       50,145       25,607       19,063       44,670  
 
Total
    41,177       33,960       75,137       35,149       26,791       61,940  
 

59


 

Risk management
Statistical information

Table 6: Interest rate sensitivity of loans and advances to customers

                                                 
 
    2004     2003  
    Fixed     Variable             Fixed     Variable        
    rate     rate     Total     rate     rate     Total  
At 31st December   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
    40,515       118,579       159,094       35,998       107,811       143,809  
Other European Union
    2,754       17,639       20,393       4,159       14,868       19,027  
United States
    1,915       6,069       7,984       1       3,572       3,573  
Rest of the World
    3,080       2,096       5,176       2,738       1,772       4,510  
 
Total banking business
    48,264       144,383       192,647       42,896       128,023       170,919  
Total trading business
    30,743       34,356       65,099       26,587       32,374       58,961  
 
Total
    79,007       178,739       257,746       69,483       160,397       229,880  
 

Table 7: Loans and advances to customers booked in offices in the UK – banking business

                                         
 
    2004     2003     2002     2001     2000  
At 31st December   £m     £m     £m     £m     £m  
 
 
                                       
Financial institutions
    11,947       7,721       6,158       5,616       4,215  
Agriculture, forestry and fishing
    1,947       1,766       1,747       1,626       1,689  
Manufacturing
    6,282       5,967       6,435       6,766       7,573  
Construction
    2,476       1,883       1,825       1,779       1,666  
Property
    7,933       6,341       5,695       5,600       5,130  
Energy and water
    936       1,286       1,290       1,153       1,120  
Wholesale and retail distribution and leisure
    9,751       8,886       7,858       7,571       7,531  
Transport
    2,275       2,579       2,366       1,894       1,353  
Communications
    454       476       694       368       180  
Business and other services
    14,281       12,030       11,693       10,581       9,894  
Home loans
    64,481       61,905       58,436       50,945       47,235  
Other personal
    23,313       21,905       21,357       19,678       18,200  
Overseas customers
    7,612       5,477       6,201       6,472       5,024  
 
 
    153,688       138,222       131,755       120,049       110,810  
Finance lease receivables
    5,406       5,587       4,145       4,205       4,504  
 
Total
    159,094       143,809       135,900       124,254       115,314  
 

(See also chart on page 40.)

The category ‘other personal’ includes credit cards, personal loans and personal overdrafts.

The industry classifications in tables 7-9 have been prepared at the level of the borrowing entity. This means that a loan to the subsidiary of a major corporation is classified by the industry in which the subsidiary operates, even though the parent’s predominant business may be in a different industry. Loans to customers domiciled outside the country where the office recording the transaction is located are shown in the table under ‘Overseas customers’ and not by industry.

60


 

Barclays PLC Annual Report 2004 

Table 8: Loans and advances to customers booked in offices in other European Union countries – banking business

                                         
 
    2004     2003     2002     2001     2000  
At 31st December   £m     £m     £m     £m     £m  
 
 
                                       
Financial institutions
    822       1,205       371       500       436  
Agriculture, forestry and fishing
    156       147       165       240       303  
Manufacturing
    1,154       1,275       1,422       1,317       1,420  
Construction
    710       609       314       298       261  
Property
    169       346       137       241       182  
Energy and water
    337       409       367       282       372  
Wholesale and retail distribution and leisure
    502       426       215       283       140  
Transport
    481       566       252       318       172  
Communications
    47       40       173       185       83  
Business and other services
    2,339       1,251       1,648       1,679       1,284  
Home loans
    10,920       10,334       6,243       3,871       4,436  
Other personal
    2,283       1,769       721       661       582  
Overseas customers
    143       438       384       685       381  
 
 
    20,063       18,815       12,412       10,560       10,052  
Finance lease receivables
    330       212       167       148       151  
 
Total
    20,393       19,027       12,579       10,708       10,203  
 

See note under table 7.

Table 9: Loans and advances to customers in offices in the United States – banking business

                                         
 
    2004     2003     2002     2001     2000  
At 31st December   £m     £m     £m     £m     £m  
 
 
                                       
Financial institutions
    1,510       919       1,036       1,053       616  
Agriculture, forestry and fishing
          1       3              
Manufacturing
    394       341       842       1,553       1,123  
Construction
    111       2       31       24        
Property
    371       1       15       21       30  
Energy and water
    946       1,358       2,229       1,567       1,440  
Wholesale and retail distribution and leisure
    353       77       141       160       214  
Transport
    379       468       1,248       931       580  
Communications
    138       153       46       66       88  
Business and other services
    715       220       441       901       2,174  
Home loans
    2,214                         1  
Other personal
    58                   267       6  
Overseas customers
    767             62       23       56  
 
 
    7,956       3,540       6,094       6,566       6,328  
Finance lease receivables
    28       33       44       48       48  
 
Total
    7,984       3,573       6,138       6,614       6,376  
 

See note under table 7.

Table 10: Loans and advances to customers booked in offices in the rest of the world – banking business

                                         
 
    2004     2003     2002     2001     2000  
At 31st December   £m     £m     £m     £m     £m  
 
 
                                       
Loans and advances
    5,129       4,465       5,566       7,384       8,920  
Finance lease receivables
    47       45       33       32       30  
 
Total
    5,176       4,510       5,599       7,416       8,950  
 

61


 

Risk management
Statistical information



Table 11: Total loans and advances to customers
                                         
 
    2004     2003     2002     2001     2000  
At 31st December   £m     £m     £m     £m     £m  
 
 
                                       
Banking business
    192,647       170,919       160,216       148,992       140,843  
Trading business
    65,099       58,961       45,176       34,240       23,198  
 
Total
    257,746       229,880       205,392       183,232       164,041  
 

Table 12: Maturity analysis of loans and advances to customers

                                                 
 
                    Over three     Over one              
                    months     year but              
            Not more     but not     not more              
            than three     more than     than five     Over        
    On demand     months     one year     years     five years     Total  
At 31st December 2004   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
                                               
Corporate lending(a)
    8,327       8,754       8,597       15,063       17,543       58,284  
Other lending from United Kingdom offices
    4,532       8,049       7,196       13,172       67,861       100,810  
 
Total United Kingdom
    12,859       16,803       15,793       28,235       85,404       159,094  
Other European Union
    951       2,807       5,709       3,308       7,618       20,393  
United States
          913       563       2,807       3,701       7,984  
Rest of World
    741       1,247       1,774       829       585       5,176  
 
Total banking business
    14,551       21,770       23,839       35,179       97,308       192,647  
Total trading business
    4,294       58,978       1,529       298             65,099  
 
Total
    18,845       80,748       25,368       35,477       97,308       257,746  
 
                                                 
 
                    Over three     Over one              
                    months     year but              
            Not more     but not     not more              
            than three     more than     than five     Over        
    On demand     months     one year     years     five years     Total  
At 31st December 2003   £m     £m     £m     £m     £m     £m  
 
 
                                               
Banking business:
                                               
United Kingdom
                                               
Corporate lending(a)
    6,108       9,298       4,596       17,138       11,796       48,936  
Other lending from United Kingdom offices
    2,869       6,940       6,359       12,345       66,360       94,873  
 
Total United Kingdom
    8,977       16,238       10,955       29,483       78,156       143,809  
Other European Union
    597       2,497       2,591       2,507       10,835       19,027  
United States
          276       253       1,745       1,299       3,573  
Rest of the World
    601       2,151       495       764       499       4,510  
 
Total banking business
    10,175       21,162       14,294       34,499       90,789       170,919  
Total trading business
    2,004       54,996       1,615       335       11       58,961  
 
Total
    12,179       76,158       15,909       34,834       90,800       229,880  
 
(Also see chart on page 40.)

Note

(a)   In the UK, finance lease receivables are included in ‘Other lending’, although some leases are to corporate customers.

62


 

Barclays PLC Annual Report 2004 

Table 13: Loans and advances to borrowers in currencies other than the local currency of the borrower for countries where this exceeds 1% of total Group assets

                                         
 
                                    Commercial  
                    Banks             industrial  
                    and other     Governments     and other  
    As % of             financial     and official     private  
    assets     Total     institutions     institutions     sectors  
          £m     £m     £m     £m  
 
 
                                       
At 31st December 2004
                                       
United States
    4.1       21,556       10,102       2       11,452  
Germany
    1.4       7,128       6,614             514  
France
    1.1       5,562       5,019       27       516  
 
                                       
At 31st December 2003
                                       
United States
    2.7  </