Barclays Plc, Britain's third-biggest bank, unveiled a 1.3 billion pound ($2.7 billion) writedown for losses on securities linked to the U.S. subprime housing crisis, less than was feared.
In a surprise trading update on Thursday, the Barclays Capital investment bank unit said it would write down 500 million pounds for the July-September quarter and 800 million pounds for October.
Barclays shares jumped over 6 percent after the update, but pared gains as analysts said BarCap's growth this year and next will be restricted, and that market conditions remain unpredictable.
By 4:31 a.m. EST the stock, which has fallen 15 percent in the last month on fears about possible writedowns, was up just 0.2 percent at 534 pence, valuing the bank at 35 billion pounds.
This is pretty confidence inspiring. They've gone though it with a fine-toothed comb and taken some realistic decisions, said Alex Potter, analyst at Collins Stewart, adding that BarCap's strong income growth was encouraging.
BarCap said its pretax profit for the 10 months to the end of October was 1.9 billion pounds after writedowns, up on the corresponding period last year, but it declined to say by how much. BarCap's full-year 2006 profit was 2.2 billion pounds.
We had a very strong income month in October and that's enabled us to absorb those writedowns, said John Varley, Barclays chief executive, adding that BarCap's income was a record for any month in the fourth quarter.
We have been conservative, but we've also been firing on a lot of our cylinders in the income line and that enables us to report the results we've reported today, he told reporters on a conference call.
Growth in commodities, interest rate swaps, government bonds, foreign exchange and in its expanding Asian business countered the problem areas, the bank said.
Turmoil in credit markets in recent months was sparked by a U.S. subprime mortgage crisis and has forced rivals including Citigroup and Merrill Lynch to take multi-billion dollar writedowns due to a meltdown in mortgage securities and collateralized debt obligations (CDOs) market.
BarCap said its October writedown reflected the impact of rating agency downgrades on a broad range of CDOs and the subsequent market downturn.
It continues to have exposure to some areas under pressure, but the bank said it had sought to limit any future writedowns by valuing all its residential mortgage backed securities CDO principal and second lien mortgage collateral at zero.
Barclays still faces the risk of further writedowns if markets fail to recover, some analysts warned.
They've given us some clarity but the numbers are still pretty big, said Philip Richards, bank analyst at Execution, citing the bank's 5 billion pound exposure to CDOs, 5.4 billion for its whole loans and trading book and a 7.3 billion pound exposure from unsold leveraged finance underwriting positions.
They are material numbers so could there be further writedowns? Absolutely, Richards said.
Barclays said it was optimistic that markets such as leveraged finance will recover by early next year.
This is going to be a one to two year workout period for subprime, the issues are deep and the excesses were severe so there will be a period to transfer the risk from those people who shouldn't have it to those that should, Bob Diamond, head of BarCap, said on the conference call.
But that doesn't necessarily have to have contagion into leveraged finance and other credit.
I would still be optimistic that going into the first quarter of next year in leveraged finance the new issue pipeline will come back and be operating again, Diamond added.
Last week, Barclays denied speculation it was about to announce a $10 billion writedown and that its top management would quit.
Other banks have announced collective losses and writedowns of almost $50 billion in the past month.
Barclays said its Barclays Global Investors asset management arm had performed well in the third quarter and October. The bank plans to release a group trading update on November 27.
(Editing by Louise Ireland/Andrew Callus)