Barclays Group PLC announced today that it took a $2.7 billion write-down related to losses on securities linked to U.S. subprime mortgages.
The news came as a surprise to investors, who hadn’t expected a business update from Barclays until later this month.
It is believed that Barclays decided to reveal the hefty loss in their Barclays Capital Investment unit after rumors of a large loss began to spread, leading to widespread investor criticism.
The stock had also been losing ground after rumors floating around put a possible write-down at $10 billion, and claimed top brass would be kicked to the curb as well.
Robert Diamond, who runs Barclays trading unit, assured investors that there was no further risk of write-downs linked to Barclay’s CDOs, which contain residential mortgage-backed securities.
However, there are still question marks regarding other areas of the business, which could lead to further write-downs.
“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,” Diamond said.
“Subprime will be in work-out for a couple of years, there’s no doubt about it,” he added.
Investors were also pleased to hear that net income and profit before tax for the 10 months ended Oct. 31 beat the previous year’s record results as performance in Europe, Asia and the U.K. worked to offset problems related to the U.S. mortgage crisis.
“In announcing as we are very strong performance, indeed record performance, for the first 10 months of the year, I think we’re able to give strong reassurance to our shareholders that they have nothing to worry about,” said Chief Executive John Varley.
The opinion from analysts regarding the near-term future of the bank was skeptical after the surprise news release.
Collins Stewart analyst Alex Potter noted that the write-off level was 7%, based on U.S. subprime exposure of $37.7 billion, much higher than that of their peers which ranged from 3-5%.
“We cannot categorically state that this is the end of the write-downs but this gives us confidence,” said Potter.
Bear Stearns analyst Robert Sage said, “We still remain unconvinced on the outlook for Barclays given its revenue growth outlook, although we expect this statement to result in a positive bounce for the shares.”
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