Interim Results - Part 4

BARCLAYS PLC 5 August 1999 PART 4 ADDITIONAL INFORMATION (CONTINUED) CHANGES IN REPORTING OF GROUP STRUCTURE IN 1999 Since 1st January 1999, a number of changes have been made to the Group's reporting structure. Major changes, for which comparative figures have been restated, as appropriate, are: Retail Financial Services has re-organised the management of its business around customer segments to deliver services and products. For reporting purposes it is organised into Retail Customers, Wealth Management and Barclaycard. Retail Customers and Wealth Management have absorbed the relevant customer segments from the previous business groupings of UK Retail Banking, International Premier, Private, Savings and Investment and Africa and Caribbean, with Barclaycard remaining unaffected. Retail Customers comprises UK Retail Banking (excluding UK Premier), the African business, UK retail mutual funds and Barclays Life. Wealth Management comprises the former International Premier, Private, Savings and Investment business (excluding UK retail mutual funds and Barclays Life), UK Premier and the Caribbean business. The Structured Export Finance business and a number of large corporate assets have been transferred from Barclays Capital to Corporate Banking. Certain internal charges have been re-allocated between Retail Financial Services and Corporate Banking. In addition, Retail Financial Services has revised its presentation of income and costs within its profit and loss account. There is no effect on total Group revenue or costs as a result of these changes. RECENT DEVELOPMENTS On 27th July 1999, Barclays announced the appointment of Matthew Barrett as Group Chief Executive and as a director of Barclays PLC and Barclays Bank PLC with effect from 1st October 1999, when Sir Peter Middleton will step down as Group Chief Executive, continuing in his role as Group Chairman. On 2nd July 1999, the Group announced the appointment of David Allvey as Finance Director of Barclays PLC and Barclays Bank PLC. He will join the boards of both companies as a director on 1st September 1999 and succeed Oliver Stocken as Finance Director on 20th September 1999. Oliver Stocken will retire as a director of Barclays PLC and Barclays Bank PLC on 30th September 1999. ACQUISITIONS AND DISPOSALS In June 1999 the Group increased its holding in Banque du Caire Barclays International (subsequently renamed Cairo Barclays SAE) from 49% to 60%. This entity is now accounted for as a subsidiary. Details of significant disposals in the period are set out under exceptional items on page 17. ACCOUNTING POLICIES A change in policy has arisen from the adoption in 1999 of Financial Reporting Standard 12 'Provisions, Liabilities and Assets' (FRS 12). The Group has a number of vacant leasehold properties where unavoidable costs exceed anticipated income for which a provision is now required under FRS 12. Previously costs and income in relation to these properties were only recognised as they arose. The change in policy has resulted in a prior year adjustment and the profit and loss accounts and balance sheets for previous years have been restated. This has resulted in a net charge to shareholders' funds of £81m as at 1st January 1999 comprising the cumulative impact of prior year reductions in net interest income, net provisions for property costs and associated tax credits. Comparative figures have been restated with the effect that shareholders' funds have been reduced by £63m at 1st January 1998. Profit before tax for the six months to 31st December 1998 and 30th June 1998 has been reduced by £22m and £1m respectively. There have been no other significant changes to the accounting policies as described in the 1998 Annual report. CHANGES IN ACCOUNTING PRESENTATION The classification of certain items of income and costs have been reviewed and £25m has been offset between costs and income to more appropriately reflect the nature of the transactions involved. In view of the amounts involved no restatements have been made. There have been no other changes in accounting presentation from that reflected in the 1998 Annual report. REVIEW OF FINANCIAL INFORMATION BY AUDITORS The unaudited financial information for Barclays PLC comprising pages 7 and 9, 39 to 49 and 52 to 56 have been reviewed by PricewaterhouseCoopers and their report relating to it is included on page 58. GROUP SHARE SCHEMES The trustees of the Group's share schemes may make purchases of Barclays PLC ordinary shares in the market following the announcement of the Group's results in August 1999 for the purposes of those schemes' current and future requirements. The total number of ordinary shares purchased would not be material in relation to the issued share capital of Barclays PLC. FILINGS WITH THE SEC This report is being furnished as a Form 6-K with the Securities and Exchange Commission in the United States of America. NOTES (UNAUDITED) Half-year ended 1. Loans and advances to banks 30.6.99 31.12.98 30.6.98 £m £m £m Banking business Loans and advances to banks 14,239 20,357 19,749 Less - provisions (25) (41) (24) 14,214 20,316 19,725 Trading business 25,805 16,296 18,109 Total loans and advances to 40,019 36,612 37,834 banks Of the total loans and advances to banks, placings with banks were £35.2bn at 30th June 1999 (31st December 1998: £32.8bn, 30th June: 1998 £31.7bn). The majority of placings have a residual maturity of less than one year. Half-year ended 2. Loans and advances to 30.6.99 31.12.98 30.6.98 customers £m £m £m Banking business Loans subject to non-recourse finance arrangements 255 278 304 Less: non returnable finance (245) (269) (294) 10 9 10 Loans and advances to 85,306 77,663 72,519 customers Finance lease receivables 5,700 5,776 5,875 91,016 83,448 78,404 Less - provisions (1,982) (1,902) (1,833) - interest in suspense (82) (77) (88) 88,952 81,469 76,483 Trading business 17,094 14,641 31,670 Total loans and advances to 106,046 96,110 108,153 customers 3. Provisions for bad and doubtful debts Half-year ended 30.6.99 31.12.98 30.6.98 Credit risk provisions £m £m £m Provisions at beginning of 1,862 1,781 1,761 period Exchange and other adjustments (23) 12 (7) Amounts written off United Kingdom (240) (318) (188) Other European Union (21) (30) (13) United States - (5) (2) Rest of the World (13) (6) (3) (274) (359) (206) Recoveries (analysed below) 40 81 95 Sub-total 1,605 1,515 1,643 Provisions charged against profit: New and increased specific provisions United Kingdom 372 489 262 Other European Union 13 20 11 United States 12 7 4 Rest of the World 27 10 13 424 526 290 Less: Releases of specific provisions United Kingdom (49) (43) (38) Other European Union (10) (20) (11) United States (6) (3) (5) Rest of the World (5) (9) (6) (70) (75) (60) Less: Recoveries United Kingdom (35) (77) (79) Other European Union (2) (2) (2) United States (2) (1) (12) Rest of the World (1) (1) (2) (40) (81) (95) Net specific provisions charge 314 370 135 General provision - 8 (23) 3 charge/(release) Net credit risk charge to 322 347 138 profit Provisions at end of period 1,927 1,862 1,781 Country risk provisions Provisions at beginning of period 81 76 89 Exchange and other adjustments - - 1 Amounts written off (net of 1 (11) (5) recoveries) Net specific provision releases (2) (4) (9) General provision charge - 20 - Provisions at end of period 80 81 76 Total provisions at end of period 2,007 1,943 1,857 The United Kingdom charge against profit in the second half of 1998 included £153m in respect of exposure to Russian counterparties. Total provisions for bad and doubtful debts at end of period comprise: Half-year ended 30.6.99 31.12.98 30.6.98 Specific - credit risk £m £m £m United Kingdom 1,007 928 801 Other European Union 153 213 225 United States 30 23 24 Rest of the World 75 35 45 1,265 1,199 1,095 Specific - country risk 15 16 31 Total specific provisions 1,280 1,215 1,126 General provisions - credit risk 662 663 686 - country risk 65 65 45 2,007 1,943 1,857 The geographic analysis of provisions shown above is based on location of office. Half-year ended 4. Other assets 30.6.99 31.12.98 30.6.98 £m £m £m Own shares 48 43 43 Balances arising from off- balance sheet financial 12,110 13,725 14,908 instruments Shareholders' interest in long- term assurance fund 539 530 488 London Metal Exchange warrants and other metals trading 385 457 535 positions Sundry debtors 1,680 1,862 2,345 Prepayments and accrued income 2,130 2,552 2,763 16,892 19,169 21,082 'Own shares' represent Barclays PLC shares held in employee benefit trusts that have not yet vested unconditionally with the eligible employees. Half-year ended 5. Other liabilities 30.6.99 31.12.98 30.6.98 £m £m £m Obligations under finance 145 141 146 leases payable Balances arising from off-balance sheet financial 13,267 15,849 15,744 instruments Short positions in securities 19,786 13,682 15,013 Current tax 537 479 670 Sundry creditors 2,379 3,199 3,116 Accruals and deferred income 2,894 3,074 2,672 Provisions for liabilities and 1,492 1,353 1,398 charges Dividend 263 414 232 40,763 38,191 38,991 6. Potential credit risk lendings The following table presents an analysis of potential credit risk lendings in accordance with the US Securities and Exchange Commission guidelines. Additional categories of disclosure are included, however, to record lendings where interest continues to be accrued and where either interest is being suspended or specific provisions have been raised. Normal US banking practice would be to place such lendings on non-accrual status. The amounts, the geographical presentation of which is based on the location of the office recording the transaction, are stated before deduction of the value of security held, specific provisions carried or interest suspended. Non-performing lendings 30.6.99 31.12.98 30.6.98 £m £m £m Non-accrual lendings: United Kingdom 1,004 985 824 Foreign 268 282 283 Accruing lendings where interest is being suspended: United Kingdom 308 266 245 Foreign 131 118 125 Other accruing lendings against which provisions have been made: United Kingdom 444 457 370 Foreign 124 134 123 Sub-totals: United Kingdom 1,756 1,708 1,439 Foreign 523 534 531 Accruing lendings 90 days overdue, against which no provisions have been made: United Kingdom 276 309 382 Foreign 19 19 13 Reduced rate lendings: United Kingdom 6 7 9 Foreign - - - Total non-performing lendings United Kingdom 2,038 2,024 1,830 Foreign 542 553 544 2,580 2,577 2,374 UK non-performing lendings were broadly unchanged. Increases in credit card and other consumer non-performing lendings were offset by write-offs. Potential problem lendings: In addition to the above, the following table shows lendings which are current as to payment of principal and interest, but where serious doubt exists as to the ability of the borrower to comply with repayment terms in the near future. 30.6.99 31.12.98 30.6.98 £bn £bn £bn United Kingdom 0.6 0.6 0.7 Foreign 0.1 0.1 0.1 0.7 0.7 0.8 30.6.99 31.12.98 30.6.98 Credit risk provision coverage % % % of: - credit risk non-performing 77.9 75.2 78.7 lendings - total potential credit risk 60.7 59.4 59.4 lendings Half-year ended 30.6.99 31.12.98 30.6.98 Interest forgone on non- £m £m £m performing lendings: Interest income that would have been recognised under 84 74 108 original contractual terms Interest income included in (27) (32) (31) profit Interest forgone 57 42 77 7. Exposure to countries subject to International Monetary Fund liquidity support programmes Amounts outstanding, net of provisions, and commitments to counterparties in countries which are subject to International Monetary Fund liquidity support programmes were as follows: 30.6.99 31.12.98 30.6.98 Asia £bn £bn £bn Indonesia 0.1 0.1 0.2 South Korea 0.4 0.5 0.5 Thailand 0.1 0.1 0.2 0.6 0.7 0.9 Latin America Brazil 0.9 0.9 0.8 Eastern Europe Russia - - 0.5 1.5 1.6 2.2 Of the total of £1.5bn, £1.0bn (31st December 1998: £1.0bn, 30th June 1998: £1.1bn) was related to banks, £0.3bn (31st December 1998: £0.4bn, 30th June 1998: £0.8bn) to governments and £0.2bn (31st December 1998: £0.2bn, 30th June 1998: £0.3bn) to other corporate bodies, including project finance companies, and was mainly in respect of loans, off- balance sheet financial instruments and debt securities. Off-balance sheet financial instruments and debt securities are marked to market. The Group has a Brazilian associate, Banco Barclays e Galicia SA, which is equity accounted. At 30th June 1999 the 50% holding was included in the balance sheet at a value of £48m (31st December 1998: £47m, 30th June 1998: £43m), which is included in the figures above. Of the above exposures £22m (31st December 1998: £35m, 30th June 1998: £12m) were non-performing (interest not being accrued) as at 30th June 1999. In the second half of 1998 the Group raised a general provision of £20m in respect of country transfer risk arising from its business world wide, including exposure in these countries. The balance of such provisions at 30th June 1999 is £65m, this being in addition to £662m of general provision held against credit risk. 8. Cross-border outstandings At 30th June 1999, countries where Barclays cross-border outstandings exceeded 1% of assets were the United States, Germany and France. In this context, assets comprise total assets as presented in the consolidated balance sheet and include acceptances. On this basis total assets amounted to £242,583m at 30th June 1999 (31st December 1998: £220,564m). Cross-border outstandings As % Total exceeding 1% of assets of assets £m At 30th June 1999 United States 2.2 5,401 Germany 2.0 4,746 France 1.3 3,184 At 31st December 1998 United States 3.3 7,211 Germany 1.4 3,142 France 1.4 3,094 Netherlands 1.3 2,772 Japan 1.1 2,420 As at 30th June 1999, the countries with aggregate cross-border outstandings between 0.75% and 1% of total Group assets were Japan at £1,908m and the Netherlands at £1,892m. At 31st December 1998, Barclays had no countries in this category. 9. European Economic and Monetary Union The Group's implementation of the euro in the first week of January 1999 was very successful. Barclays believes it is competitively placed to meet the needs of its customers for the euro. Some planning for the possibility of UK entry has taken place and Barclays is participating in follow-up work identified by the Government in its National Changeover Plan. The Group's current policy is not to incur significant expenditure until there is more certainty about a decision to enter. It is too early to give any meaningful estimate of the cost of preparing for UK entry. 10. Year 2000 Readiness Disclosure Barclays has confidence in its readiness for the Year 2000. The Barclays Group Year 2000 Programme, initiated in 1996, is responsible for Year 2000 projects across the Group world wide. A Programme Board of executives representing all Group businesses is chaired by the Director, Planning, Operations and Technology, who reports directly to the Chairman and Chief Executive. During the first half of 1999 Barclays has continued working to ensure that its mission critical systems (those which could have an immediate and observable impact on the Group's customers and therefore its ability to continue to operate effectively) can deal satisfactorily with the Year 2000. All mission critical IT systems, including embedded systems, have now been tested and are Year 2000 ready. Together with other banks and external network providers Barclays has taken part in successful testing of the key industry infrastructure in the United Kingdom including the cheque clearing and electronic payment systems, credit cards and ATMs. Barclays will continue to participate in industry-wide testing throughout the remainder of 1999. Where appropriate, similar joint testing is undertaken in other countries in which it operates. As a result of working closely with key suppliers the Group has been able to satisfy itself as to their current, or planned, state of readiness and the support arrangements required for the cutover to the new year. The Year 2000 readiness of approximately 1,500 of Barclays most critical counterparties is being assessed centrally and procedures are in place to ensure that credit exposure to those, and other banks with whom the Group has a relationship, is managed with Year 2000 readiness in mind. The Group collates and analyses information on specific aspects of the preparedness of countries in which it operates using data from a variety of sources. Barclays continues to evaluate significant potential Year 2000 impacts on its funding capability and incorporates such risks into the capital and liquidity plans. Awareness campaigns have been undertaken for corporate, small business and personal customers in the United Kingdom and some overseas areas. Information gathered from these campaigns, the results of surveys and other internal initiatives have allowed the Group to continue to evaluate the preparedness of the corporate and small business customer base and this information has been used to inform the Group's risk management activities. In the United Kingdom Barclays has co-operated with other major financial institutions in order to support public confidence concerning the Year 2000 by working closely with the British Bankers Association in the production of an information leaflet 'Your Money and the Millennium' and with Action 2000 on 'Facts Not Fiction'. In June Barclays issued its own leaflet, 'The Millennium Bug - It's business as usual with Barclays into 2000' and launched in the United Kingdom a telephone helpline to address specific Year 2000 questions from staff and customers. A Year 2000 Website (www.y2000.barclays.com) gives further information on the Programme. Despite all these actions Barclays is not taking its progress for granted. All systems changes are now subject to 'Clean Management' processes in order to prevent the Year 2000 problem being reintroduced. In order to further mitigate the risk associated with the introduction of new systems a 'Change Freeze' regime has been implemented across the Barclays Group the first element of which commenced in July. It is a prudent planning scenario that there could be some disruption caused directly or indirectly by the Year 2000 issue. Contingency plans across the Group are therefore being reviewed and updated, and are being augmented with continuity plans to mitigate the possible effects of the Year 2000. At the end of July Barclays had completed an initial cutover plan which defines how the Group will operate across the change from 1999 into 2000. This includes the establishment and testing of a network of command centres, internal and external communications and participation in industry testing during the non-business days. This work will continue to be refined during the remainder of 1999 incorporating market requirements. The total cost of the Year 2000 Programme is estimated not to exceed £250m (including £20m of capitalised costs) for the four year period ending December 2000. The total amount spent on the Year 2000 Programme to the end of June was about £180m (including £15m of capitalised costs) of which £35m was incurred in the half year to June 1999. Year 2000 costs include correction, testing, third party assurance and contingency planning. Cautionary statement Certain of the statements contained in the foregoing Year 2000 Readiness Disclosure are forward looking statements within the meaning of the United States Private Securities Litigation Reform Act 1995. Barclays expectations about the anticipated business, operational and financial risks to it from Year 2000 problems are subject to a number of uncertainties. The foregoing Readiness Disclosure of Year 2000, therefore, should be read in conjunction with the cautionary statements contained in Barclays Annual Report on Form 20-F for 1998. 11. Legal proceedings Barclays is party to various legal proceedings, the ultimate resolution of which is not expected to have a material adverse effect on the financial position of the Group. 12. Geographical analysis Half-year ended 30.6.99 31.12.98 30.6.98 Profit before tax £m £m £m United Kingdom 622 437 1,046 Other European Union 177 130 111 United States 103 2 65 Rest of the World 68 38 66 970 607 1,288 30.6.99 31.12.98 30.6.98 Total assets £m £m £m United Kingdom 170,607 154,446 183,371 Other European Union 18,288 18,490 20,231 United States 35,407 24,886 23,720 Rest of the World 16,963 21,672 21,634 241,265 219,494 248,956 13. Contingent liabilities and commitments Half-year ended 30.6.99 31.12.98 30.6.98 Contingent liabilities £m £m £m Acceptances and endorsements 1,331 1,384 1,531 Guarantees and assets pledged as collateral security 11,011 8,784 6,861 Other contingent liabilities 5,359 5,069 5,181 17,701 15,237 13,573 Commitments Standby facilities, credit lines and other commitments 73,376 68,191 63,545 14. Off-balance sheet financial instruments, including derivatives The tables set out below analyse the contract or underlying principal amounts of derivative financial instruments held for trading purposes and for the purposes of managing the Group's structural exposures. Foreign exchange derivatives 30.6.99 31.12.98 30.6.98 £m £m £m Contract or underlying principal amount Forward foreign exchange 233,836 263,958 323,816 Currency swaps 81,025 79,447 65,537 Other exchange rate related 65,460 101,310 183,648 contracts 380,321 444,715 573,001 Interest rate derivatives Contract or underlying principal amount Interest rate swaps 900,052 787,486 690,780 Forward rate agreements 69,513 99,960 164,726 OTC options bought and sold 232,236 222,589 189,712 Other interest rate related 124,381 104,003 222,366 contracts 1,326,182 1,214,038 1,267,584 Equity, stock index and commodity derivatives Contract or underlying 55,961 51,347 57,865 principal amount Other exchange rate related contracts are primarily OTC options. Other interest rate related contracts are primarily exchange traded options and futures. Derivatives entered into as trading transactions, together with any associated hedging thereof, are measured at fair value and the resultant profits and losses are included in dealing profits. The tables below summarise the positive and negative fair values of such derivatives, including an adjustment for netting where the Group has the ability to insist on net settlement which is assured beyond doubt, based on a legal right that would survive the insolvency of the counterparty. Positive fair values 30.6.99 31.12.98 30.6.98 £m £m £m Foreign exchange derivatives 6,090 9,913 9,222 Interest rate derivatives 16,573 20,083 13,062 Equity, stock index and 2,289 2,240 2,939 commodity derivatives Effect of netting (12,842) (18,511) (10,315) 12,110 13,725 14,908 Negative fair values Foreign exchange derivatives 6,836 12,062 9,012 Interest rate derivatives 16,517 19,603 13,446 Equity, stock index and 2,756 2,695 3,601 commodity derivatives Effect of netting (12,842) (18,511) (10,315) 13,267 15,849 15,744 Deferred profits and losses on hedging activities Derivative instruments used to manage risk on transactions which are superseded, cease to be effective or are terminated early are measured at fair value. Any profits or losses arising are deferred and amortised into interest income or expense over the remaining life of the asset, liability, position or cashflow previously being hedged. The table below summarises the deferred profits and losses at 30th June 1999, all of which are in respect of interest rate derivatives: Under One to Over five Total one year five years years £m £m £m £m Deferred profits being amortised 5 5 1 11 Deferred losses being amortised 2 2 - 4 15. Market risk Market risk is the risk of loss arising from adverse movements in the level or volatility of market prices, which can occur in the interest rate, foreign exchange, equity and commodity markets. It is incurred as a result of both trading and asset/liability management activities. The market risk management policies of the Group are determined by the Group Risk Management Committee, which also determines overall market risk appetite. The Group's policy is that exposure to market risk arising from trading activities is concentrated in Barclays Capital. The Group's banking businesses are also subject to market risk, which arises in relation to non-trading positions, such as capital balances, demand deposits and customer originated transactions and flows. The Group uses a 'value at risk' measure as the primary mechanism for controlling market risk. Daily Value at Risk (DVAR) is an estimate, with a confidence level of 98%, of the potential loss which might arise if the current positions were to be held unchanged for one business day. Daily losses exceeding the DVAR figure are likely to occur, on average, only twice in every one hundred business days. Actual outcomes are monitored regularly to test the validity of the assumptions made in the calculation of DVAR. Barclays Capital Trading activities In Barclays Capital, the formal process for the management of risk is through the Barclays Capital Risk Management Committee. Day-to-day responsibility for market risk lies with the Chief Executive of Barclays Capital, supported by a dedicated global market risk management unit that operates independently of the business areas. In the fourth quarter of 1998, Barclays Capital closed its non-customer related proprietary trading businesses and its secondary market corporate bond inventory was substantially reduced. This reduction in risk contributed to a decrease in DVAR from £22.8m at 30th June 1998 to £12.2m at 31st December 1998. The lower risk profile was maintained in the first half of 1999, with a DVAR of £14.5m being recorded on 30th June 1999. The average, maximum and minimum daily values of DVAR were estimated as follows: DVAR Half-year ended 30th June 1999 Average High Low £m £m £m Interest rate risk 10.1 13.1 6.2 Foreign exchange risk 3.7 11.7 1.0 Equities risk 1.8 3.7 0.6 Commodities risk 0.8 1.5 0.5 Diversification effect (3.4) Total DVAR 13.0 20.4 7.7 Half-year ended Half-year ended 31st December 1998 30th June 1998 Average High Low Average High Low £m £m £m £m £m £m Interest Rate Risk 16.2 36.6 9.6 13.9 24.2 9.5 Foreign Exchange 5.3 13.2 1.2 6.4 13.9 3.7 Risk Equities Risk 3.3 7.9 1.3 2.6 3.5 1.7 Commodities Risk 0.8 1.5 0.6 1.6 2.9 0.8 Diversification (3.9) (4.4) Effect Total 21.7 43.3 12.2 20.1 31.6 15.9 In February 1999, Barclays Capital implemented historical simulation as the standard method for calculating DVAR, having previously used mainly a variance/covariance calculation. Compared with the previous approach, historical simulation is considered to give better risk aggregation, a more accurate estimate of options risk and a more realistic assessment of the statistical distribution of low probability extreme losses. The new method, currently based on a one-year historical sample, is now used for the majority of the Barclays Capital businesses, the main exception being that a historical simulation method is still being developed for the Commodities business. The new approach has been approved by the Financial Services Authority for calculating regulatory capital for general market risk. All 1999 figures reported in the above table are based on the new method, while the 1998 figures use the old approach. The Group estimate that the change to the new methodology increased the reported average DVAR for the first half of 1999 by around 10% to 15%. This increase is due to the new methodology placing equal weighting on all data points in the sample, whereas the old methodology placed greater weighting on more recent data points. As a result, the new method places more emphasis on the higher levels of market volatility during the second half of 1998. MORE TO FOLLOW IRCBIGBIIGGCCCS

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