Barclaycard bad debts and rising costs blemish bank's bumper year

Barclaycard is on course to report its first fall in full-year profits since 1997 as customers fail to repay credit card debt and the company invests in growth.

The decline in profits at Britain's oldest and largest credit card company emerged from a trading statement issued by Barclays yesterday, which also showed that the banking group is likely to report, in its results for the 2005 financial year, profits of more than £5bn for the first time.

The first of the banks to update the City on trading for 2005 ahead of figures to be published next year, Barclays was the biggest faller in the FTSE 100 as investors took fright from its warning about bad debts and rising costs across the bank.

James Eden, an analyst with Dresdner Kleinwort Wasserstein, pointed out that Barclays shares had been performing strongly before the update. There was also little in the statement to prompt any upgrades of forecasts. The shares ended 6.5p lower at 595.5p.

Naguib Kheraj, finance director, said Barclaycard was now turning away 55% of applicants for cards - its highest rejection rate for some time. It has also raised its interest rates for customers to try to offset its fall in profits.

The problems at Barclaycard emerged in August when the bank's interim results showed a 17% fall in profits at the card arm on the back of a sharp rise in bad debts.

Analysts are now forecasting a drop in full-year profits at the card company. The last time Barclaycard suffered a fall in profits was in 1997, though the business has expanded considerably since then.

The bank said: "The rate of growth in impairment charges [bad debts] for the first nine months to the end of September was consistent with first-half trends. Combined with continued investment in the business, this more than offset the growth in income."

Analysts said Barclaycard's plight might not apply across the sector. They believe Barclaycard has been lending to more high-risk customers than some rivals.

Barclaycard contributes 13% of group profits but analysts are pencilling in £5bn-plus as the overall figure and the bank said yesterday that it expected its 2005 earnings to be "broadly in line with the market consensus".

The high-street business has been struggling to show growth. In the interim results, profits fell 2% and in yesterday's update Barclays described the business as having "delivered good profit growth from a combination of a modest risk in revenues and strong cost control".

Investment banking and asset management were said to have delivered strong profit growth, despite a rise in operating expenses, which was in part due to higher bonuses.