Barclays Plc beat forecasts with a near doubling of profits in 2009 to 11.6 billion pounds ($18.2 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, closing up 7 percent, as investors welcomed its record earnings, good start to 2010 and positive news on bad debts and capital ratios.
Britain's second-largest bank by market value avoided a bailout during the crisis. But it 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 a bonus for the year.
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 its 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, Chief Executive John Varley said.
Barclays ranks as the top earning European bank of 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 mean forecast of 11.2 billion in 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.
They have surprised positively in revenues, particularly in investment banking, said Arturo de Frias, an 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.
Barclays said it would pay 1.5 billion pounds in cash bonuses 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. CEO Varley said the bonus pool had been reduced to cover the cost of the tax and would be shared by staff globally.
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.
The keen table tennis player and angler has been at the helm of Barclays since 2004 and seen it through some tough spots. Its shares crashed below 50 pence in early 2009 amid fears it would be part-nationalized but the bank sold asset manager BGI and is regarded as one of the relative winners from the crisis.
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.
Profits in UK retail banking fell sharply as margins came under pressure and retail and commercial banking in emerging markets made a loss after a jump in bad debts in India and the United Arab Emirates.
Varley said the bank had pushed too hard in those markets at the wrong point in the cycle, and would be rebalancing its activities to focus on lucrative businesses, more often around corporate banking, rather than retail.
The bank also said it had options to mitigate the impact of proposed new rules on bank capital -- dubbed Basel III -- due to come into effect by the end of 2012, which could leave the bank needing 17 billion pounds to plug capital gap.
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, well above analysts' forecasts.
Barclays paid a 2009 dividend of 2.5 pence after reinstated it in November, and signaling future annual payouts would be over 4.5 pence per share.
For a graphic on Barclays shares and profits, click on:
($1 = 0.6381 pound)
(Editing by Simon Jessop and Karen Foster)