Barclays’ yo-yo balance sheet
Talk about deleveraging. By far the most striking number in Barclays’ first-half profits concerns its balance sheet:
Our total assets decreased by £508bn to £1,545bn over the first half of 2009.
Given the stated desire by regulators – and investors – for banks to shrink their balance sheets, a 25 per cent reduction in total assets in the space of just six months has to be applauded, right?
Not so fast. While it is true that Barclays’ asset base has shrunk since last December, it’s still higher than it was a year ago, when total assets were £1,366bn. So all that has happened is that its balance sheet, which ballooned in the second half of last year, has shrunk to something approaching its former size.
It’s not entirely clear what is going on. When it reported full-year results in March, Barclays attributed the explosion in its balance sheet largely to the devaluation of sterling, which boosted the value of its giant dollar-denominated derivatives book.
Derivatives are also the culprits this time. Total derivatives assets on Barclays’ balance sheet collapsed from £982bn at the end of December to £555bn at the end of June. Investors perplexed by this change will have to turn to page 97 of Barclays’ earnings announcement, where it offers the following one-sentence explanation:
The £428,757m decrease (2008: increase of £584,793m) in the gross derivative assets has been predominantly driven by movements in market rates and initiatives to reduce the derivative balance.
Of course, Barclays’ reporting is hampered by international accounting standards, which force it to include gross derivatives positions on its balance sheet. By contrast, US banks are allowed to report net positions. As Barclays explains:
Balances attributable to derivative assets and liabilities would be £506.8bn (31st December 2008: £917.1bn) lower than reported under IFRS if netting were permitted for assets and liabilities with the same counterparty or for which we hold cash collateral.
So if Barclays used US accounting standards, most of the fluctuations in its balance sheet over the past twelve months would have miraculously disappeared. (Even here, however, there has been a significant shift: Barclays’ net derivatives exposure at the end of June was £49.3bn, down from £67.7bn at the end of December.)
But there is another, easier, way for Barclays to remove some of the volatility from its reported figures. HSBC and Standard Chartered already report in dollars. Given its increasingly overt international ambitions, perhaps it is time for Barclays to start doing the same.