Hire Wire Feb 10 2012

Banker Bonuses Capped at Barclays

By max colchester

U.K. banking group Barclays PLC said Friday it would cap investment banker bonuses as its 2011 full-year net profit slumped on a sharp drop in investment banking revenue.

The London-based bank said net profit for 2011 fell 16% to £3 billion ($4.75 billion). Adjusted return on equity, a closely watched metric among investors and analysts, fell to 6.6% from 6.8% a year earlier, well below the bank's 2013 target of 13%. Chief Executive Bob Diamond said the bank's 2011 return on equity was "unacceptable" and warned that the 13% target might not be achieved by 2013.

In an apparent effort to offset political scrutiny over banker pay, Barclays said it cut its cash-and-share bonus pool at Barclays Capital by nearly a third to £1.5 billion. Cash bonuses at the investment banking division were capped at £65,000.

Diamond declined to comment on whether he will receive a bonus. "This [Thursday's announcement] is about the results," he said.

Diamond's peers at part-government-owned U.K banks Royal Bank of Scotland Group PLC and Lloyds Banking Group PLC have given up bonuses in the face of political pressure. However, Barclays never took direct state aid in the crisis and the U.K government accordingly cannot force its management to curb pay. Still, Diamond said it was important to "remain sensitive" to the public perception of banker pay. "We need to be responsive to the public mood," he said.

In 2011, the bank was hard hit as pretax profit in Barclays Capital, the bank's traditional earnings engine, fell 32% to £2.97 billion from £4.39 billion, as clients sat on the sidelines amid the euro-zone debt crisis. Costs in the division also rose as employee pay outpaced revenue.

The fall in revenue at this key business wasn't offset by a stronger performance of Barclays' retail and corporate divisions.

Barclays management pledged to continue cutting several billion pounds worth of costs in a quest to improve profitability. The bank's results were boosted by a 33% fall in impairment charges to £3.8 billion from £5.67 billion. This reflected ongoing low interest rates that have made it easier for customers to keep repaying loans.

Despite the earnings setback, Diamond struck a positive note for the coming year. "Our competitive position has improved over 2011," he said, adding there was "momentum" in the business heading into 2012 as economic conditions improved in the U.S and the impact of European regulation on the amount of capital banks need to hold becomes clearer.

Shares at the bank, after initially falling 3%, were the leading gainer on the FTSE 100. They were recently up 10 pence, or 4.3%, at 243 pence, as investors took heart from the optimistic outlook. "We are of the belief that it is a one-off negative quarter," analysts at Espirito Santo Investment Bank said.

Oriel Securities said investors should focus on the risk characteristics of the full-year results, noting that operating expenses and impairments are both down and Core Tier 1 equity is up on the year (11% from 10.8%).

The bank also raised the full-year dividend to 6 pence a share from 5.5 pence the previous year.

Barclays' results underscore the banking industry's uphill battle to kickstart its revenue-generating investment banking businesses in the face of marco-economic fears and tight credit markets.

Several of Barclays competitors reported limp 2011 fourth-quarter earnings, dragged down in part by the poor performance of their investment banking arms.

Credit Suisse Group AG reported an unexpected loss for the fourth quarter on Thursday and said it would slash its dividend and cut bonuses, as it booked a large charge for winding down risky assets and exiting certain investment banking businesses. UBS AG said Tuesday that net profit dropped 76% in the fourth quarter and the bank, Switzerland's largest, offered a gloomy outlook for the start of this year.

This story originally appeared on WSJ.com.

Margot Patrick contributed to this article

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