Barclays surprise capital boost triggers pension concerns

By Lawrence White and Andrew MacAskill

LONDON (Reuters) - A surprise boost to Barclays' capital reserves failed to convince some analysts and investors on Thursday, with the British bank's shares falling nearly three percent as the market digested the figures, reversing earlier gains.

Concerns over the sustainability of the capital level centred on the accounting treatment of Barclays' UK pension scheme, which moved from a 1.1 billion pound deficit to a 27 million pound ($34 million) surplus in the last quarter of 2016.

Capital has been a concern for investors since the Bank of England said last November that Barclays had fallen short of one of its targets in a stress test scenario, but stopped short of requiring the bank to submit a new plan to boost reserves.

Barclays said its core capital ratio, a closely watched measure of financial strength, had reached 12.4 percent.

"It has taken off the table a question we got quite often last year: will you need to raise capital? ... That should lay that question to rest," Chief Executive Jes Staley said.

However, some analysts said the new-found capital strength could be at the mercy of talks taking place with the pension fund trustees over Barclays' pension contributions.

The fourth quarter swing from deficit to surplus could trigger an accounting charge that would hit the bank's capital ratio by 0.3 percent, Rob James, Senior UK Equities Analyst at Old Mutual Global Investors said.

But Tushar Morzaria, Barclays finance director, told investors on a call that it had taken the talks into account.

"This ... is completely factored into our capital projections, we have been very prudent in any assumption around the outcome," he said.

Barclays cut its dividend last year in a bid to bolster capital reserves while it sells unwanted assets, including most of its African business, to focus on the U.S. and Britain.

For 2016 it reported an adjusted pretax profit of 3.2 billion pounds ($4 billion), compared with 1.14 billion a year earlier. That was below the average forecast of 3.97 billion from analysts' estimates compiled by the bank.

The capital boost came from rising profits from trading amid volatile markets and the faster than expected disposal of unwanted assets in 2016 included its Asian private bank, its Southern European cards business and Italian retail business.

And Barclays said would close its so-called non-core division in June, six months ahead of schedule.

Meanwhile its investment banking division reported strong results from active fixed income trading. Credit trading was up 44 percent, in line with U.S. rivals that have seen similar boosts thanks to a backdrop of volatile markets.

CHALLENGES AHEAD

Barclays still faces challenges including litigation costs in the United States, rising provisions for late credit card repayments and completing the sale of its African division.

It is alone in contesting a U.S. Department of Justice suit on civil charges of fraud in the sale of mortgage-backed securities in the run-up to the 2008-09 financial crisis, whereas other major banks have settled.

The lender also posted a hefty 35 percent increase in credit provisions to 2.2 billion pounds as more customers, particularly in the United States, fell behind on payments.

And while it has reached an agreement with its African division on the terms of their separation that will see it pay Barclays Africa 12.8 billion rand ($993 million) to fund investments required to separate the two businesses, terms are pending regulatory approval and it has yet to find buyers.

Barclays said in March last year it would sell the stake in two to three years but has so far sold only one block of shares worth 12 percent of Barclays Africa Group in a deal last May, meaning it still owns 50 percent.

Attempts to dispose of the stake in one go have faltered, with interest from a consortium led by former Barclays CEO Bob Diamond and from Africa's biggest pension fund, Public Investment Corporation, not leading to a deal.

($1 = 12.8922 rand)

($1 = 0.7976 pounds)

(Editing by David Clarke and Alexander Smith)