Moody's affirms ratings on RBS consortium members, cites restructuring challenges

Ratings Action - ABN AMRO Bank N.V.
Moody's comments on Consortium's acquisition of ABN AMRO following transaction closing

(Moody's) London, 17 October 2007 -- Moody's Investors Service today affirmed the ratings of the members of the consortium following the closing of their offer for ABN AMRO. Moody's also affirmed ABN AMRO's Aa2/P-1 debt and deposit ratings, changing the outlook on the long-term debt ratings to developing from stable. ABN AMRO's B- bank financial strength rating ("BFSR") was affirmed but its outlook was changed to stable from positive. The outlook on all other ABN AMRO ratings is stable.

The members of the bidding consortium ("the Consortium") include the Royal Bank of Scotland Group ("RBSG"), Banco Santander and the Fortis Group. (Please see Moody's press releases dated 17 July 2007 and 30 May 2007 for previous rating actions on this transaction.)

RATING AFFIRMATIONS -- OVERVIEW

Moody's affirmed the Aaa/P-1/B+ ratings of the Royal Bank of Scotland plc and National Westminster Bank plc as well as the Aa1/P-1 ratings of the Royal Bank of Scotland Group plc. The outlook on the BFSRs and long-term debt and deposit ratings remains negative. Moody's also affirmed the ratings of Ulster Bank Ltd (Aa2/P-1/C+), Ulster Bank Ireland (Aa2/P-1/C+) and First Active plc (Aa2/P-1/C) with their stable outlook.

Separately, Moody's affirmed the Aa2/P-1/B ratings of Citizens Financial Group's rated US bank subsidiaries. The outlook is negative on the long-term deposit and debt ratings and stable on the BFSR.

The ratings of Banco Santander (senior at Aa1/P-1/B) and all of the ratings of the Fortis Group and Fortis Bank were affirmed at their current levels with stable outlook. Fortis SA/NV and Fortis NV have issuer ratings of Aa3/stable while the main funding holding companies of the group have senior/subordinated and preferred debt ratings of Aa3/A1/A2/stable. Fortis Bank is rated Aa2/P-1/B-/stable.

Moody's affirmed the Aa2/P-1 ratings of ABN AMRO Bank N.V. but changed the outlook on the bank's BFSR of B- to stable from positive and the outlook on the long-term debt ratings to developing from stable. The outlook on all of the bank's other ratings is stable.

The ratings of Banca Antonveneta ("Antonveneta", A1/P-1/C- stable) and its subsidiary Interbanca (A3/P-2/D+ stable) as well as Banco ABN AMRO Real (foreign currency ratings of Ba2/NP/C stable) were also affirmed.

COMMENTARY ON FORTIS RATINGS

In affirming Fortis' ratings, Moody's noted the good strategic fit with ABN AMRO's businesses to be acquired as well as the expected reasonable impact of the funding package on the capital structure, capitalisation and underlying fundamentals of the group.

"With this deal, there is a clear potential for Fortis to significantly enhance its franchise in the Benelux region," said Jose Morago, a Moody's Assistant Vice-President/Analyst. "Our stable outlook is predicated on the expectation that Fortis will continue to deliver satisfactory operating results, maintain its risk profile and restore its capital position and financial flexibility in the coming months. However, there are material challenges in the short-to-medium term, given the size, complexity and amount of resource necessary for Fortis to integrate and extract value from the new ABN AMRO businesses," Mr Morago added.

Moody's noted that a key factor supporting the success of this transaction has been that relevant components of Fortis' approximately EUR24 billion funding package are already in place, despite the current level of volatility in the capital markets. More particularly, Fortis successfully placed an approximately EUR13.2 billion rights issue last week, issued EUR2 billion of Conditional Capital Convertible Notes (CCENs) over the summer and sold over EUR1.4 billion of non-core assets (i.e. its stake in BCP and 50% of Caifor).

COMMENTARY ON BANCO SANTANDER, ANTONVENETA AND BANCO ABN AMRO REAL RATINGS

In its affirmation of the Aa1/P-1/B ratings of Banco Santander, Moody's cites: (i) the strategic fit of this acquisition, which is fully consistent with Santander's international strategy; (ii) the bank's proven strong track-record of integrating large-scale acquisitions and extracting cost efficiencies from them, (iii) the limited negative implications for pro-forma profitability, both pre- and post-provisions; (iv) the fact that the larger contribution from more volatile markets (Latin America) does not change the group's existing risk profile materially; and (v) Santander's proven prudent management of its economic solvency.

"Although the acquisition will likely increase the group's leverage -- core capital levels are expected to fall to 5.3% from 6.97% -- we expect to see leverage levels restored within 12-18 months," said Maria Cabanyes, a Moody's Senior Vice President and Regional Credit Officer.

Commenting further, Moody's also cautioned about the challenges of turning around Antonveneta and integrating the Brazilian operations, which will double its existing size.

With reference to the rating affirmation on Antonveneta, Moody's said that the ratings already incorporate the expectation of improvements and that the likely positive impact of the acquisition by Santander will not be clear for some time. The rating agency added that the positive effect of expected support from a higher-rated bank appears counterbalanced by the expectation of an only moderate probability of support from its new parent. As regards Interbanca, Moody's commented that there appears to be a degree of uncertainty on the bank's strategic positioning and that the rating affirmation is based on the assumption that this entity will remain a subsidiary of Antonveneta.

With regard to the Brazilian subsidiary, Banco ABN AMRO Real, Moody's decided to affirm the C BFSR and Ba2/NP foreign currency deposit ratings, which the rating agency believes adequately reflect ABN Real's current market positioning and the competitive economic environment in the country.

COMMENTARY ON ABN AMRO RATINGS

In revising the outlook on ABN AMRO's B- BFSR to stable from positive, Moody's said that this rating action followed the withdrawal of the bid by Barclays Bank plc to acquire all of the bank (please see press release of 8 October), as well as the narrower franchise of ABN AMRO following its sale of LaSalle Bancorp to Bank of America (see Moody's press release of 1 October). In Moody's opinion, the sale of LaSalle has weakened the bank's franchise value in terms of geographic diversification and stability of earnings and has marginally increased its risk profile. Prospectively ABN AMRO's franchise will be further narrowed and changed as the break-up of the bank takes place over a period of up to three years as the Consortium plans to separate ABN AMRO into three parts once the Dutch regulators, the DNB, have approved the break-up plan which the Consortium is expected to submit before year-end 2007.

Nevertheless, Moody's recognises ABN AMRO's generally solid financial fundamentals and expects its operating efficiency and quality of earnings to show continued improvement under its new management. Furthermore, Moody's expects that its core Tier 1 and Tier 1 ratios will be maintained at the bank's stated near-term target of 6% and 8% respectively and 6.5% and 8.5% over the medium term, net of the one-time impact from the proceeds of the sale of LaSalle.

The BFSR outlook change also incorporates Moody's expectation that remaining regulatory issues with the US regulators stemming from past weakness in internal controls will be resolved in the near future. The rating agency notes that the Dutch regulator lifted its regulatory action in July 2007.

The change in outlook on ABN AMRO's Aa2 long-term debt rating to developing from stable reflects the lack of clarity regarding the future allocation of the company's outstanding debt, which has yet to be announced by the Consortium.

In affirming ABN AMRO's Aa2/P-1 debt and deposit ratings, Moody's said these are based on the bank's baseline credit assessment of A1 (which is mapped from the BFSR of B-) but also on Moody's assessment that the probability of systemic support in the Netherlands is very high given the bank's importance in its home market. Moody's expects that this systemic importance will continue notwithstanding the break-up of the bank's operations, which will primarily impact its foreign operations -- principally in Italy and Brazil -- and its Global Wholesale and International Retail client businesses, and the integration of its BU Netherlands with those of Fortis Bank Nederland (Holding), rated Aa2/P-1/B-, stable.

COMMENTARY ON RBSG RATINGS

With reference to RBSG, Moody's said that the maintained negative outlook on the ratings reflects the integration challenges in relation to ABN AMRO's Global Wholesale Businesses and International Retail Businesses, as well as the negative short-term impact of the proposed transaction on the quality of RBSG's capital and historically strong earnings as the bank integrates ABN AMRO's under-performing Global Clients unit. Moody's commented that, of the three Consortium banks, the integration challenges are, in its opinion, greatest for RBSG. The negative outlook also incorporates the ongoing uncertainty with regard to the performance of all banks involved in leveraged finance and related capital markets activities given the recent market turmoil.

Nevertheless, notwithstanding the additional complexities presented by the integration of parts of ABN AMRO, Moody's recognises RBSG's strong track record in integrating past acquisitions and the group's robust core earnings capacity and internal capital generation. The rating agency also acknowledges other transaction benefits including enhancing RBSG's presence in Asia-Pacific and diversification of earnings, as well as expanding the reach of its corporate and institutional banking franchise, noting that the enlarged group will have market-leading positions in products such as international bonds and international cash management. Moody's cautions, however, that the increased contribution from wholesale banking operations could introduce a greater element of earnings volatility, which could have negative rating implications.

Moody's said that progress in integrating ABN AMRO and rebuilding RBSG's core capital and profitability in line with its current BFSR within 12-18 months could ultimately lead to the rating outlook being changed back to stable. Conversely, failure to resolve these issues within the same timeframe could lead to negative rating actions.

COMMENTARY ON TERMS OF FINAL OFFER

Commenting on the terms of the Final Offer, Moody's said that the total consideration for the transaction was approximately Eur 70 billion of which 94% was paid in cash with the balance paid with new RBS shares. Other features of the transaction remained unchanged from the previous announcement. Moody's noted that the Consortium has nominated management from the three banks to the Supervisory and Management Boards of ABN AMRO.

Moody's noted that the transaction is subject to various conditions including the following:

1) The Dutch Ministry of Finance, in issuing its 17 September Declaration of "No Objection" to the transaction, stipulated that the Consortium maintain the "status quo" with regard to the bank until it has acquired sufficient control and filed a Transition Plan with the regulator as well as Capital and Liquidity Plans. It also imposed measures on Fortis Bank Nederland (Holding). The Consortium will only be able to begin the formal integration of the bank once the regulator has approved these plans, which is expected by year-end 2007.

2) The European Commission's approval to Fortis to acquire ABN AMRO's BU Netherlands (BU NL) is subject to the divestment of certain assets of the BU including Hollandsche Bank Unie NV, 13 advisory branches and two Corporate Clients departments and the sale of the Dutch factoring company IFN Finance B.V.

As discussed above, a major uncertainty for ABN AMRO's bondholders is the future allocation of the company's outstanding debt, which has yet to be announced by the Consortium. Moody's will take appropriate rating actions when the details are made public. Moody's will also comment further on the prospective profile of ABN AMRO and the implications for the relevant rated legal entities of the Consortium once the transition plan has been approved by the relevant authorities. Furthermore, Moody's will monitor any uncertainties surrounding the due diligence process to be carried out by the members of the Consortium during 45 days after the closing in terms of initial asset and liability valuations.

COMPANY BACKGROUND

As of 30 June 2007, ABN AMRO Bank NV reported total assets of EUR1,120 billion, while the banking operations of Fortis had total assets of approximately EUR918 billion, RBSG had total assets of GBP1,011 billion and Banco Santander had total assets of EUR886 billion.

Bragging Rights

Who's Advising on ABN Deal? Only 19 Who Insist `I'm Spartacus'
By Ambereen Choudhury

Aug. 28 (Bloomberg) -- Like the rebellious Roman slaves who vowed to save their leader by declaring ``I'm Spartacus,'' the contested sale of ABN Amro Holding NV has 19 investment banks each insisting it is advising the would-be winner in the financial industry's largest takeover.

The Romans never found Spartacus and no one may ever know the real adviser to the victor of this six-month battle. Goldman Sachs Group Inc., UBS AG, Morgan Stanley, Lehman Brothers Holdings Inc. and N.M. Rothschild & Sons Ltd. make equal claim to coaching Amsterdam-based ABN Amro.

For its 61 billion-euro ($83.5 billion) bid for the Netherlands' biggest bank, Barclays Plc has retained Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, JPMorgan Cazenove Ltd. and Lazard Ltd. as counselors. A Royal Bank of Scotland Group Plc-led group appointed Merrill Lynch & Co. the strategist for its 72 billion-euro counter offer and enlisted Greenhill & Co., Fox-Pitt, Kelton Ltd., NIBC Holding NV, Banco Santander SA, Fortis and its own executives for extra help.

``I cannot recall a deal that has so many advisers,'' said Scott Moeller, a professor of mergers and acquisitions at Cass Business School in London and a former banker at Morgan Stanley and Deutsche Bank. ``The most significant issue is bragging rights. It's more important to the bank than the client.''

No securities firm can afford to be left out if it hopes to be counted among the leaders in a record year for mergers and acquisitions. Takeovers already surpassed $3.28 trillion in 2007, just $277 billion short of last year's total, according to data compiled by Bloomberg.

Full Credit
Each banker to ABN Amro will be credited with the full value of the purchase in mergers tables. Those representing London- based Barclays and Edinburgh-based Royal Bank only get recognized if their suitor wins. Santander of Santander, Spain, and Fortis, based in Brussels and the Dutch city of Utrecht, are bidding with Royal Bank.

This year's top three advisers -- New York-based Goldman, Citigroup and Morgan Stanley -- have little more than ABN Amro's $90 billion market value separating them in the rankings.

Goldman and Morgan Stanley's spots are safe no matter who wins because they are working for ABN Amro. Citigroup will lose its No. 2 ranking if the Barclays bid fails, while Merrill would drop as low as eighth place from fifth should Royal Bank lose.

A handful of the firms will get the lion's share of what New York-based Freeman & Co. estimates to be as much as $459 million in M&A fees because most are providing limited services for their clients, said people with knowledge of the talks. Bankers may collect another $170 million for underwriting the stocks and bonds needed to finance the acquisition, according to Freeman.

`Trophy Deal'
The purchase of the biggest Dutch bank will eclipse Travelers Group Inc.'s $69.9 billion buyout of Citicorp in 1998, until now the biggest in the financial industry. It also may become the third-largest ever, behind the $186 billion acquisition of America Online Inc. by Time Warner Inc. in 2000 and Vodafone Group Plc's $185 billion hostile takeover of Mannesmann AG in 1999, according to Bloomberg data.
``Nobody wants to miss it,'' said David Dodds, an investment analyst who helps manage $1.2 billion at SVM Asset Management in Edinburgh. ``It's a trophy deal.''

ABN Amro has become more important after the rout in securities related to subprime mortgages caused investors to shun riskier assets, increasing costs for financing mergers.

Fees from advising in mergers accounted for about 5 percent, or about $6.4 billion, of the combined revenue last year at Goldman, Morgan Stanley, Merrill and Lehman. Fixed-income and equities trading generated about half of the firms' revenue and underwriting accounted for almost 9 percent.

Slowest Month
August has been the slowest month for deals since July 2005, Bloomberg data show. London-based Cadbury Schweppes Plc, the world's biggest candy maker, and Virgin Media Inc. have delayed asset sales. Atlanta-based Home Depot Inc., the biggest home- improvement retailer, had to cut the price on its contractor- supply business by 18 percent to $8.5 billion to salvage a sale.

Using a group of banks allows companies to reward financiers and eliminate support for rival bidders.

``Companies hire advisers to honor prior favors and relationships,'' said Roy Smith, professor of finance at New York University's Stern School of Business and former head of Goldman's London office. ``It probably doesn't make too much difference how many you have, except that the chairman will get fewer frantic pleading calls if he hires several.''

Six Banks
Barclays hired JPMorgan Cazenove and Lazard in February and added Citigroup, Credit Suisse and Deutsche Bank in March, the month it announced the merger talks. It also has about 15 of its own employees on the deal.

Until last year, Barclays Chairman Marcus Agius, 61, was the U.K chairman of New York-based Lazard, the firm run by Bruce Wasserstein. He helped arrange Halifax Group Plc's 9.8 billion- pound ($20 billion) purchase of Bank of Scotland in 2001 to create HBOS Plc, the biggest U.K. mortgage lender.

Lazard's team is led by Jeffrey Rosen, 59, who advised Wal- Mart Stores Inc., the world's biggest retailer, in its acquisition of U.K. supermarket chain Asda Group Plc for $10.8 billion in 1999.

JPMorgan Cazenove's corporate-broking relationship with Barclays stretches back more than two decades. Cazenove, overseen by Chairman David Mayhew, 67, formed a joint venture with New York-based JPMorgan Chase & Co.'s U.K. unit in 2004.
Corporate Brokers
Corporate brokers, unique to the U.K., act as liaisons with investors and help companies comply with London Stock Exchange rules. They accept nominal fees or work for free, expecting the relationship will lead to underwriting and M&A assignments.

Credit Suisse, the second-largest Swiss bank, has been Barclays's other broker for about 15 years. Zurich-based Credit Suisse worked on the U.K. company's largest deals, including the 5.9 billion-pound purchase of Woolwich Plc in 2000, and bought Barclays's BZW equities and investment-banking arm 10 years ago. The team is led by London-based European mergers chief David Livingstone, 44, and Ewen Stevenson.

Frankfurt-based Deutsche Bank's team is led by Tony Burgess, 48, and Tadhg Flood, 35, while Citigroup's is under Hamid Biglari, 48, and Christopher Williams. The biggest German bank and Citigroup, the largest U.S. financial-services company, were hired for their relationships with hedge funds and prime- brokerage businesses, according to two people with knowledge of the deal.

Balance Sheets
``A number of the advisers are there to prevent them representing others,'' said Philip Keevil, a senior partner in London at Compass Advisers LLP and former head of European mergers at Salomon Smith Barney Inc. ``Some of them are there because they have large balance sheets and could help push the ball over the line.''

Morgan Stanley's Donald Moore and UBS's John Cryan are the lead advisers to ABN Amro. Zurich-based UBS arranged the Dutch bank's sale of its Bouwfonds property management units for 1.69 billion euros last year. UBS, the biggest Swiss bank, and Morgan Stanley, the second-largest U.S. securities firm by market value, have been paid about 39 million euros each, according to U.S. regulatory filings.
ABN Amro's own employees are playing a part, along with bankers from Goldman, New York-based Lehman and London-based N.M. Rothschild.

The Royal Bank-led group is relying on a team of about 15 Merrill bankers led by Andrea Orcel, 44, and London-based Matthew Greenburgh, 46. Merrill has advised Royal Bank since about 1999, when the company bought National Westminster Bank Plc in a 23.6 billion-pound hostile takeover. Merrill has also advised Santander, according to Bloomberg data.

Merrill Lynch
New York-based Merrill, the third-biggest U.S. brokerage firm, may earn about 90 million euros from advising the Royal Bank group if it's successful, according to a person with direct knowledge of the talks. It may get another $120 million for helping finance the deal, Freeman's estimates show.

The members of the Royal Bank group are also using advisers from their own companies as well as New York-based Greenhill, NIBC, based in the Hague, and Fox-Pitt, Kelton, a London firm specializing in the financial industry, according to Bloomberg data.

ABN Amro spokesman Jochem van de Laarschot said the company has ``a number of advisers and they each have their role.'' Spokespeople for all the banks weren't immediately available or declined to comment.

Multiple advisers are common in larger deals. The 13 billion-euro takeover battle for Altadis SA, the Spanish maker of Gauloises cigarettes, and the 63 billion-euro contest for Endesa SA, Spain's largest power company, both attracted about a dozen investment banks, according to Bloomberg data.

``Increasing the number of advisers doesn't increase the quality of the advice,'' said Compass's Keevil. ``It's payback time for the relationship banks, particularly for ABN Amro, for which this is the last deal.''

Tying up loose ends - Fortis gains investor approval for ABN bid, rights issue approval to follow; Barclays wins EU anti-trust approval

Fortis Shareholders Back Proposal for ABN Amro Bid (Update2)
By Martijn van der Starre and John Martens

Aug. 6 (Bloomberg) -- Fortis, Belgium's largest financial- services company, moved a step closer to buying part of ABN Amro Holding NV after shareholders backed a plan to raise as much as 13 billion euros ($17.9 billion) to pay for the deal.

Investors at a meeting in Brussels approved the 72 billion- euro joint bid by Fortis and two other banks for Amsterdam-based ABN Amro, Fortis said today. More than 93 percent endorsed a rights offer to finance the transaction, which also needs the backing of a meeting in Utrecht this afternoon.

The agreement paves the way for Fortis, Royal Bank of Scotland Group Plc and Banco Santander SA, whose offer is mostly in cash, to trump a competing 65.3 billion-euro share and cash offer from Barclays Plc, said Alan Beaney, who helps manage $2 billion at Principal Investment Management.

``The Royal Bank consortium will win now with their higher offer,'' said Sevenoaks, England-based Beaney, whose holdings include shares of Barclays and Royal Bank. ``Ironically, Barclays's share price and their offer will rise because investors think they are less likely to do the deal.''

Barclays stock rose 0.8 percent to 684.5 pence as of 2:30 p.m. in London. Shares of Fortis fell 1.6 percent to 28 euros in Brussels, valuing the company at 36.5 billion euros.

Fortis plans to pay 24 billion euros for the Dutch retail and commercial banks, as well as the asset-management and private-banking units. It's bidding for 40 percent of ABN Amro, the largest part after ABN Amro sells its Chicago-based LaSalle unit to Bank of America Corp.

`Major Step Forward'
Fortis would increase the number of branches in the Netherlands to 720 from 159 and add more than 4 million retail customers with the purchase. The combined private banking and asset-management units would manage about 500 billion euros in assets, Fortis, based in Utrecht and Brussels, said.

The purchase would be ``a major step forward for our company and we'll be able to speed up our development on an international level,'' Fortis Chief Executive Officer Jean-Paul Votron told shareholders before the vote. It will lead to ``diversification and a better balance in our portfolio,'' Votron said.

ABN Amro withdrew its recommendation of the Barclays bid on July 30, saying it's financially inferior to the proposal by the Royal Bank group. The original agreement with Barclays, announced April 23, won European Union antitrust approval today.

``We continue to believe that Barclays's offer will ultimately deliver more value to ABN Amro shareholders with a low degree of risk and a high certainty of completion,'' Barclays CEO John Varley said today in comments passed on by spokesman Alistair Smith. The formal offer to shareholders, ``is another tangible step towards the merger with ABN Amro,'' Varley said.

`Blow Through Numbers'
Barclays made its formal offer to shareholders today and will hold a meeting with its shareholders to approve the offer Sept. 14. London-based Barclays bid 2.13 ordinary shares and 13.15 euros a share for each ordinary share of ABN Amro.

``The bid of the others is basically maximized,'' Barclays board member and head of consumer banking Frits Seegers said in an interview in Mumbai on Aug. 4. ``Our bid with the rise in share price will blow through these numbers.''

Edinburgh-based Royal Bank is to hold a meeting with its shareholders Aug. 10. ABN Amro shareholders will consider both bids Sept. 20. ABN Amro spokesman Jochem van de Laarschot declined to comment today. Spokespeople for Royal Bank and Barclays also declined to comment.

The acquisition of ABN Amro would be the largest financial- services takeover, exceeding the $69.9 billion combination of Citicorp and Travelers Group Inc. in 1998. Under the plan, Royal Bank would take the Dutch bank's investment banking and Asian consumer units and Banco Santander, Spain's largest bank, would take its Italian and Brazilian unit.

Fortis Share Slump
Fortis also sold 2 billion euros of notes last month that would automatically convert to securities tradable for stock, contingent on Fortis shareholders approving the rights issue. The company agreed to sell its stake in a Spanish insurance venture for 980 million euros.

Fortis shares fell 18 percent through yesterday from April 13, the day ABN Amro said it received a letter from the Royal Bank-led group asking for ``exploratory talks.'' ABN Amro's stock rose 5 percent, valuing the company at 67.3 billion euros.

After today's meeting at the Centre for Fine Arts in Brussels, shareholders discussed the vote and sipped on drinks from strawberry juice to Absolut Vodka and Duval-Leroy champagne.

Stichting VSBfonds, which owns about 4.99 percent of Fortis, voted in favor of the plans, said Luuk van Term, a Utrecht-based spokesman for the non-profit organization.

The takeover is ``very good for growth and employment,'' said Gunther Van Sant, a Belgian who owns Fortis shares and voted in favour of the resolutions. ``If this doesn't take place Fortis may end up being a prey itself.''

``I voted in favor of the bid to support the Fortis management,'' said Roger Smets, who manages about 1.2 million euros at the non-profit Belgian Society for Cremation. Smets said he has ``rock-solid'' confidence in management's plans.

Barclays offer may appeal to ABN Amro

Barclays First-Half Net Rises 14% on Securities Unit (Update3)
By Ben Livesey and Jon Menon

Aug. 2 (Bloomberg) -- Barclays Plc, the U.K. bank competing to buy ABN Amro Holding NV, said first-half net income increased 14 percent, helped by record gains in the securities unit.

Barclays's first-half profit rose to 2.63 billion pounds ($5.35 billion), or 40.1 pence a share, from 2.3 billion pounds, or 35.1 pence a year earlier, it said today in a statement. Barclays Capital, the investment bank, increased earnings in July, ``a time of turbulence in the capital markets,'' Chief Executive Officer John Varley said.

The investment bank, which provided 39 percent of total profit, predicts credit markets will be ``challenging for quite a while.'' Barclays sells and invests in securities that package subprime mortgages, which ``will take some time to work out,'' said Barclays President Robert Diamond. U.S. mortgage foreclosures hit a 10-year high after less-credit worthy borrowers defaulted.

``Profits have been driven by excellent profit growth at Barclays Capital, but people are concerned that cannot go on forever,'' said Simon Willis, an analyst at NCB Group in London with a ``buy'' rating on the stock. ``Investors worry that something will come out on subprime that will cost them a meaningful sum of money.''

Shares of Barclays rose 2.1 percent to 691.5 pence at 8:10 a.m. in London, valuing the bank at 45.3 billion pounds. The shares are little changed since March 16, the last trading day before Barclays said it was in talks with ABN Amro.

China, Singapore
Barclays announced first-half pretax profit and division results July 23. Pretax profit at the investment bank rose 33 percent to 1.66 billion pounds, helped by structured credit, derivatives, equities and commodities. Barclays Global Investors, the asset-management unit, increased pretax profit by 7 percent to 388 million pounds.

Singapore's Temasek Holdings Pte and China Development Bank agreed July 25 to buy stakes totaling 9.2 percent in Barclays. The investments will be reduced to 5.2 percent in the event that the ABN Amro takeover doesn't go through.

The partnership with China Development Bank will lift the bank's earnings, Varley said today. ``We believe that the further earnings growth unlocked by that agreement is material, that it creates further exposure to Asia, which fits well with our strategy, and that it will create further benefits for all shareholders,'' Varley said today.

Losing Ground
Barclays has lost ground in the battle to buy ABN Amro in the biggest bank takeover. Barclays's shares are down 4.6 percent since it sweetened its all-stock offer. The new bid, which includes 37 percent cash, was valued yesterday at 65.3 billion euros ($89.3 billion), less than the all-cash bid of 72.1 billion euros from a group led by Royal Bank of Scotland Group Plc.

ABN Amro withdrew its recommendation of the Barclays's bid, saying it is financially inferior to the Royal Bank group's offer. Royal Bank's bidding partners are Fortis, Belgium's largest financial-services company, and Banco Santander SA, Spain's biggest bank.

ABN Amro had backed Barclays since April, in part because the London-based said it would keep the biggest Dutch lender intact. ABN Amro declined to recommend the Royal Bank-led bid, citing ``unresolved questions'' about the group's proposed breakup of the 183-year-old company.

``There is significant dependency on where the share price is'' when ABN Amro shareholders vote on the deal, Varley said on a conference call today with reporters. ``The issue is not where the share price is today.'' He said he is ``confident'' Barclays will succeed in the acquisition.

`In Play'
``If Barclays doesn't buy ABN then it will be perceived as being in play,'' Willis said.

Pretax profit at Barclays's credit card unit fell 17 percent to 272 million pounds as the bank lost money on the sale of its Monument subprime business. U.K. consumer-banking profit rose 8.5 percent to 651 million pounds, while total bad loan charges declined 9.3 percent to 959 million pounds, the company said.

Overseas bank profit declined 12 percent to 452 million pounds as the weaker currency hurt earnings at its Absa unit in South Africa, the company said.

Expenses rose 9.2 percent to 6.85 billion pounds as the company added employees in Barclays Capital, Barclays Global Investors and Absa in South Africa. Revenue rose 8.5 percent to 11.9 billion pounds, lifted by Barclays Capital, the company said.