This article has been adapted from Fool U.K., our sister site across the pond.
The bank reporting season got underway today, with final results from Barclays
Big fall in bad loans
Pre-tax profit from continuing operations leapt by almost a third (32%) to 6.1 billion pounds in 2010, partly thanks to a 22% hike in net income. Pre-tax profit in 2009 was 11.6 billion pounds, but this figure included 6.3 billion pounds from the sale of Barclays Global Investors (BGI) to BlackRock in mid-2009.
However, the biggest boost to profitability came from a steep drop in bad debts and loan write-offs. These tumbled 30% to 5.7 billion pounds, down a tidy 2.4 billion pounds on 2009.
Bonuses down, pay up
Despite making 1.5 pounds billion more in pre-tax profit in 2010, Barclays reduced the size of its pool for bonuses and performance-related pay. Barclays CEO Bob Diamond has set aside 3.4 billion pounds for payouts to his bankers, down 7% on 2009's payout.
At first glance, a smaller bonus pool seems to suggest that Barclays is meeting the terms of Project Merlin, the deal on lending and bonuses recently agreed by banks and the government.
However, cunning bankers more than made up for a smaller bonus pool via a big hike in their base salaries. In fact, staff costs were 11.9 billion pounds in 2010 -- 2 billion pounds higher than in 2009.
Barclays denies that it has compensated for lower bonuses with higher pay, arguing that its workforce is growing, and that deferred pay from prior years explains much of this rise in staff costs.
However, pay accounted for 43% of income at investment-banking arm Barclays Capital, versus a 33% pay/income ratio in 2009. This strongly indicates that a 12% drop in bonuses was more than made up for by hefty pay hikes.
Diamond life
It's easy to knock Barclays for making money while enjoying the support of the Bank of England's various liquidity schemes, and so on.
However, unlike its rivals Lloyds Banking Group
Likewise, the aptly named Diamond gets a lot of stick, as journalists make him out to be a modern-day Gordon Gecko.
Before becoming Barclays' chief executive, Diamond ran Barclays Capital, where he got used to pocketing eight-figure bonuses. At his peak, Diamond was earning perhaps 25 million pounds a year, but he diplomatically refused his 2008 and 2009 bonuses. Diamond is said to be in line for a personal pay award of around 9.5 million pounds for 2010, payable largely in Barclays shares deferred over three years.
Barclays must do better
Despite these much-improved results, Diamond was not content with Barclays' performance. In his words, "The returns we are currently generating will not be acceptable to our shareholders over the medium term." Hence, his aim is to boost Barclays' return on equity to 13% (15% on tangible equity).
However, as I warned last month, Barclays and its peers face four big bumps in the road.
One issue will be of particular concern to Diamond: that the Independent Commission on Banking will force U.K. banks to demerge their investment-banking arms in order to safeguard their deposit-taking commercial divisions.
Were Diamond forced to part with Barclays Capital, there's a fair chance that the U.S.-born CEO would threaten to move Barclays' headquarters overseas. After all, Barclays Capital accounts for the majority of total pre-tax profit at Barclays.
Thus, Diamond faces an uphill battle to improve Barclays' returns in the face of tighter regulatory scrutiny. Nevertheless, having dodged a bullet by losing the bidding for ABN Amro at the peak of the market in 2007, and picking up the U.S. arm of Lehman Brothers for a fire-sale price of $1.75 billion in September 2008, Diamond seems to lead a charmed life.
Hence, I wouldn't bet against him succeeding!
Barclays' valuation
As I write, Barclays' share price stands at 320.8p, up 3% this morning. Based on earnings per share of 30.4p, its shares trade on a price-earnings ratio of 10.6. With the dividend boost to 5.5p (up 120% from 2009's 2.5p), Barclays has a dividend yield of 1.7%.
If Diamond succeeds in his drive to propel Barclays back into the big league of world banking, then its shares may well look cheap in hindsight.
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