Barclays Plc beat forecasts with a near doubling of profits in 2009 to 11.6 billion pounds ($18.20 billion), cheering investors with an improved balance sheet and boosting shares across the sector.

Shares in the bank, the first UK lender to report earnings, jumped over 7 percent on the bumper profit and lifted its rivals, as investors welcomed its relatively optimistic outlook for 2010 and good news on bad debts and capital ratios.

Britain's second-largest bank by market value avoided a bailout during the crisis but has still been hit by a backlash over banker pay, and on Tuesday said it had reined in payouts, with its two top executives declining their cash bonus.

Its investment bankers will receive average pay of 191,000 pounds for 2009, including an average bonus of 95,000 pounds.

With a compensation ratio of 38 percent for its investment banking arm, down from 44 percent, Barclays is broadly in line with peers; just above Wall Street giant Goldman Sachs but below European rival Deutsche Bank's 40 percent.

The bond of trust between banks and stakeholders has been damaged by the credit crunch and the economic recession. That bond must be restored to health by how banks behave -- how we lend, and how we pay, said Chief Executive John Varley.

Barclays ranks as the top earning European bank for last year, with profits up 92 percent from 6.1 billion pounds in 2008 -- swollen by a 6.3 billion pound gain on the sale of its Barclays Global Investors asset management arm -- and beating a forecast of 11.2 billion from a Thomson Reuters I/B/E/S poll.

Underlying profit, stripping out the BGI gain and other one-off items, more than trebled to 5.6 billion pounds, which analysts said was about 5 percent ahead of expectations.

Earnings at Barclays Capital, the investment bank arm headed by Bob Diamond, jumped 89 percent to 2.5 billion pounds, thanks to its purchase of the U.S. operations of Lehman Brothers, expansion in Europe and Asia, and a revival in capital markets.

BarCap said its October to December income was virtually flat on the previous quarter, faring better than rivals who had on average seen a slowdown of about a third. Both JP Morgan and Goldman Sachs indicated weaker conditions at the end of 2009.

They have surprised positively in revenues, particularly in investment banking, said Arturo de Frias, analyst at Evolution.

The stock was trading at such low prices because of capital concerns, liquidity concerns, earnings concerns. I think these results are proof they can do much better than what the market expects, he added.

BONUS BACKLASH

Barclays said it would pay 1.5 billion pounds in discretionary cash payments for 2009 and a further 1.2 billion pounds of long-term awards that vest over three years and can be clawed back.

Diamond said he expected BarCap's compensation-to-revenue ratio to remain near 38 percent in future years.

Barclays said its board considered its performance last year merited bonuses for top executives, but Varley and Diamond said they would forgo theirs for a second successive year, although Diamond did land a 22 million pound windfall last year from the sale of shares in BGI under a plan dating back to 2003.

Bonuses for other executive board members and all members of BarCap's executive committee will be awarded over three years.

The bank will pay 225 million pounds to the British government under a 50 percent tax on bonuses of over 25,000 pounds. Varley said the bonus pool had been reduced to cover the cost of the tax, and would be shared by staff globally.

CEO Varley has steered the bank through the crisis without need for a direct taxpayer bailout and said pretax profit so far this year was well ahead of the run rates for the first half of 2009 and the full year.

Analysts said last year's bad debts of 8.1 billion pounds were well below expectations of near 9 billion pounds, and the bank said it expected a moderate decline this year.

Analysts say Barclays could be one of the hardest hit banks from proposed new rules on bank capital -- dubbed Basel III -- that are due to come into effect by the end of 2012.

It could need 17 billion pounds to repair an equity Tier 1 ratio that would fall to 5 percent under the Basel III proposals, Credit Suisse estimated. But it has options to plug the hole, including halving its 20 percent stake in U.S. asset manager BlackRock , the analysts said.

The changes could also affect its 58 percent stake in South African bank Absa .

Those are both strategic decisions to have the stakes in Blackrock and in Absa, so I wouldn't anticipate any changes there. But we have to react to those things as they come, and have one eye on the capital rules, Diamond told Reuters in an interview.

The bank's core Tier 1 ratio, a key measure of capital strength and a focus of many analysts' concerns, rose to 10 percent at the end of 2009 from 5.6 percent a year earlier, above forecasts.

Barclays paid a 2009 dividend of 2.5 pence after reinstated it in November, and signaling future annual payouts would be over 4.5p per share.

($1 = 0.6381 pound)

(Editing by Simon Jessop)