Barclays calculates £1.3bn sub-prime loss

The following correction was printed in the Guardian's Corrections and clarifications column, Wednesday November 21 2007

In the article below we made the mistake of referring to the US mortgage group owned by Barclays as Equifax; we meant Equifirst. Equifax is a credit reference agency unconnected to Barclays. This has been corrected.

Barclays bank has taken a £1.3bn hit on the sub-prime mortgage crisis in the US. Britain's third biggest bank said it had written off £500m during July, August and September, and £800m in October alone.

Barclays' share price has been under severe pressure in recent days as concern mounted about losses the bank could be facing. Last Friday shares were suspended as rumours swirled of £10bn, and investors rushed to sell.

Yesterday, to settle nerves, the bank unexpectedly brought forward by a fortnight

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[Middle English fourtenight, alteration of fourtene night, fourteen nights : Old English f  a trading statement of its Barclays Capital investment banking operation.

The write-off was less than expected and the shares reacted with a bounce from 533p to 569p, but they later lost ground and closed down 9p at 524p as investors showed concern about the unpredictable outlook.

BarCap chief Bob Diamond described the sub-prime market as "a mess" that would take up to two years to be sorted out. The statement was the latest in a series of monthly updates to reassure shareholders issued since the crisis hit in August. Yesterday's contained far more detail.

John Varley, the bank's chief executive, said the "extensive disclosure demonstrates the strength and resilience of our performance during the year and in particular during the turbulent month of November".

The £1.3bn writedown includes £700m against the bank's top-rated mortgage-backed securities. Other hits include £400m for mezzanine finance exposures and £400m on other sub-prime positions.

"They've given us some clarity but the numbers are still pretty big," said Philip Richards, analyst at Execution, pointing to Barclays' £5bn exposure to CDOs (collaterised debt obligations), £5.4bn for its whole loans and trading book, and a £7.3bn exposure from unsold leveraged finance underwriting positions.

Varley said the bank had looked ahead at potential defaults in order to make "consciously conservative" write-off estimates. Its most risky residential mortgage-backed securities, including all those where Barclays does not have first call on the mortgaged property, are now assumed to be worthless.

The big increase in the October write-down, said Diamond, was the result of a "second leg down" in the sub-prime market when credit rating agencies downgraded a huge number of CDOs. He said BarCap had been "actively managing" its risks.

The group has also tightened lending criteria at Equifirst, a US mortgage originator it acquired this year before the sub-prime crisis hit to package up more mortgage-backed securities.

In its statement Barclays said it had "progressively tightened underwriting criteria" and that Equifirst mortgages were at an average loan-to-value of 82%. In addition, the bank said it had first call on more than 99% of Equifirst's mortgage exposure.

The scale of the write-downs, however, has not held the bank back. The BarCap business has still generated huge profits -£1.9bn in the first 10 months of the year, which is ahead of last year's October total. In the full 2006 year BarCap made a record £2.2bn.

Diamond said that other parts of the BarCap business had been making profits - with "strong growth" across commodity, equity, currency and interest rate products, and "excellent contributions from continental Europe and Asia and good results in UK markets".

Varley added: "We have been firing on a lot of cylinders."

Analyst Alex Potter, at Collins Stewart, describe the statement as "pretty confidence-inspiring". He added: "They've gone though it with a fine-tooth comb and taken some realistic decisions."

Analysts at Credit Suisse said that the statement was "useful; and will put a backstop, at least for now, on the speculation that much bigger losses had emerged".

Credit Suisse also questioned whether Barclays has been as conservative as it claims: "It represents about 12% of the exposure, net of tax, in line with several of the other European bank write-downs.

"However, [it's] well below levels at certain US banks. Merrill Lynch and Morgan Stanley have written down about 30%."

Banks have announced collective losses and write-downs of almost $50bn in the past month.

Barclays will give a full trading update for the group, including the high street banking arm, on November 27.

BarCap's Diamond

Bob Diamond was teaching at the University of Connecticut when a passion for the markets led him to become a bond trader at Morgan Stanley. Twenty-seven years later he landed as head of investment banking at Barclays. The Massachusetts native is now the highest paid director in the FTSE 100, earning £23m in 2006, of which £12m was made up of share options. He counts charitable work and Chelsea FC among his interests. He recently gained Britishcitizenship, though he still considers himself "very, very American".