Barclays plc - Annual Report 2008 - Financial statements - The Group

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Notes to the accounts For the year ended 31st December 2008 48 Market risk (continued) Non-trading interest rate risk Non-traded interest rate risk arises from the provision of retail and wholesale (non-traded) banking products and services. Barclays objective is to minimise non-traded risk. This is achieved by transferring risk from the business to a local treasury or Group Treasury, who in turn hedge the net exposure with the external market. Limits exist to ensure no material risk is retained within any business or product area. The majority of exposures are within Global Retail and Commercial Banking . Risk measurement and control The techniques used to measure and control non-traded interest rate risk include Annual Earnings at Risk, DVaR and Stress Testing. Book limits such as foreign exchange and interest position limits are also in place. Annual Earnings at Risk (AEaR) measures the sensitivity of net interest income (NII) over the next 12 months. It is calculated as the difference between the estimated income using the current yield curve and the lowest estimated income following a 100 basis points increase or decrease in interest rates. DVaR is also used as a complementary tool to AEaR. Stress testing is also carried out by the business centres and is reviewed by senior management and business-level asset and liability committees. The stress testing is tailored to the business and typically incorporates scenario analysis and historical stress movements applied to respective portfolios. Analysis of Net Interest Income sensitivity The tables below show the pre-tax net interest income sensitivity for the non-trading financial assets and financial liabilities held at 31st December 2008. The sensitivity has been measured using AEaR methodology as described above. The benchmark interest rate for each currency is set as at 31st December 2008. The figures include the effect of hedging instruments but exclude exposures held or issued by Barclays Capital as these are measured and managed using DVaR. Net interest income sensitivity(AEaR) by currency +100 basis –100 basis +100 basis –100 basis points points points points 2008 2008 2007 2007 £m £m £m £m GBP 3 (273) 36 (37) USD (25) 7 (3) 1 EUR (34) 30 (23) 23 ZAR 13 (13) 19 (19) Others – (8) 4 (5) Total (43) (257) 33 (37) As percentage of net interest income (0.37%) (2.24%) 0.34% (0.39%) Non-traded interest rate risk, as measured by AEaR, was £257m in 2008, an increase of £220m compared to 2007. This estimate takes into account the rates in place as at 31st December 2008. The increase mainly reflects the reduced spread generated on retail and commercial banking liabilities in the lower interest rate environment. If the interest rate hedges had not been in place then the AEaR risk for 2008 would have been £670m. DVaR is also used to control market risk in GRCB – Western Europe, and Group Treasury. The indicative average DVaRs for 2008, using a simplified DVaR approach, were £1.3m and £0.6m respectively. Analysis of Equity sensitivity +100 basis –100 basis +100 basis –100 basis points points points points 2008 2008 2007 2007 £m £m £m £m Net interest income (43) (257) 33 (37) Taxation effects on the above 6 33 (9) 10 Effect on profit for the year (37) (224) 24 (27) As percentage of net profit after tax (0.70%) (4.24%) 0.47% (0.53%) Effect on profit for the year (per above) (37) (224) 24 (27) Available for sale reserve (806) 806 (390) 390 Cash flow hedging reserve (473) 474 (476) 476 Taxation effects on the above 166 (166) 242 (242) Effect on equity (1,150) 890 (600) 597 As a percentage of equity (2.43%) 1.88% (1.85%) 1.84% 280 Barclays PLC Annual Report 2008 | Find out more at www.barclays.com/annualreport08
48 Market risk (continued) Foreign exchange risk The Group is exposed to two sources of foreign exchange risk. (a) Transactional foreign currency exposure Transactional foreign exchange exposures represent exposure on banking assets and liabilities, denominated in currencies other than the functional currency of the transacting entity. The Group’s risk management policies prevent the holding of significant open positions in foreign currencies outside the trading portfolio managed by Barclays Capital which is monitored through DVaR. There were no material net transactional foreign currency exposures outside the trading portfolio at either 31st December 2008 or 2007. Due to the low level of non-trading exposures no reasonably possible change in foreign exchange rates would have a material effect on either the Group’s profit or movements in equity for the year ended 31st December 2008 or 2007. (b) Translational foreign exchange exposure The Group’s translational foreign currency exposure arises from both its capital resources (including investments in subsidiaries and branches, intangible assets, minority interests and debt capital) and risk weighted assets denominated in non-Sterling currencies. Changes in foreign exchange rates result in changes in the Sterling equivalent value of non-Sterling denominated capital resources and risk weighted assets. As a result, the Group’s regulatory capital ratios are sensitive to foreign exchange rate movements. The Group’s hedge strategy is to minimise the volatility of all capital ratios whilst taking into account the impact on hedging of non-Sterling net investments, the cost of hedging, the availability of a suitable foreign exchange market and prevailing foreign exchange rates. To minimise volatility in the equity ratio, the Group aims over time to maintain the ratio of foreign currency equity capital resources to RWAs the same as the Group’s equity ratio. To create equity capital resources denominated in non-Sterling currencies, the Group leaves some investments in core non- Sterling subsidiaries and branches un-hedged. The resultant change in the Sterling value of the investments is captured in the currency translation reserve, resulting in an equity capital movement. Depending on the value of non-Sterling net investments, it may not always be possible to maintain the ratio, leaving some capital ratio sensitivity to foreign exchange movements. The proceeds from equity accounted foreign currency preference shares are also used in the equity ratio hedge. If a preference share is redeemed, the cumulative movement in the currency translation reserve will be offset by an equal and opposite movement in other reserves reflecting the revaluation of the preference shares to prevailing foreign exchange rates. The exposure of Tier 1 and Total capital ratios is managed by issuing, where possible, debt capital in non-Sterling currencies such that the ratio of Tier 1 and total capital resources to risk weighted assets is the same as the Group’s Tier 1 and Total capital ratios. This is primarily achieved by the issuance of debt capital from Barclays Bank PLC in major currencies, but can also be achieved by subsidiaries issuing capital in local currencies. The carrying value of the Group’s foreign currency net investments in subsidiaries and branches and the foreign currency borrowings and derivatives used to hedge them as at 31st December 2008 were as follows: At 31st December 2008 Functional currency of the operation involved Structural Foreign Borrowings Derivatives currency Remaining currency which hedge which hedge exposures structural net the net the net pre economic Economic currency investments investments investments hedges hedges exposures £m £m £m £m £m £m United States Dollar 14,577 6,019 – 8,558 6,720 1,838 Euro 6,336 2,922 – 3,414 3,125 289 Rand 3,725 – 1,306 2,419 164 2,255 Japanese Yen 5,009 801 4,212 (4) – (4) Swiss Franc 3,042 2,936 101 5 – 5 Other 2,940 – 880 2,060 – 2,060 Total 35,629 12,678 6,499 16,452 10,009 6,443 3 Financial statements At 31st December 2007 Functional currency of the operation involved Structural Foreign Borrowings Derivatives currency Remaining currency which hedge which hedge exposures structural net the net the net pre economic Economic currency investments investments investments hedges hedges exposures £m £m £m £m £m £m United States Dollar 3,273 1,000 – 2,273 3,575 (1,302) Euro 3,690 1,506 – 2,184 2,387 (203) Rand 3,205 – 2,599 606 165 441 Japanese Yen 2,986 180 2,773 33 – 33 Swiss Franc 2,140 – 2,131 9 – 9 Other 1,847 53 465 1,329 – 1,329 Total 17,141 2,739 7,968 6,434 6,127 307 Barclays PLC Annual Report 2008 281
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Financial statements Presentation o
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Independent Auditors’ report Inde
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Consolidated accounts Barclays PLC
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) financial assets, loans to custom
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11. Collateral and netting The Grou
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17. Issued debt and equity securiti
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24. Taxes, including deferred taxes
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The following IFRIC interpretations
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Consolidated balance sheet As at 31
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Consolidated cash flow statement Fo
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Statement of recognised income and
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4 Principal transactions 2008 2007
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9 Administration and general expens
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12 Trading portfolio 2008 2007 £m
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14 Derivative financial instruments
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16 Available for sale financial inv
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20 Investments in associates and jo
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22 Intangible assets 2008 Internall
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24 Financial liabilities designated
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26 Insurance assets and liabilities
Page 41 and 42: 27 Subordinated liabilities (contin
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Page 45 and 46: 29 Securitisations The Group was pa
Page 47 and 48: 30 Retirement benefit obligations (
Page 53 and 54: 31 Ordinary shares, share premium,
Page 55 and 56: 32 Reserves (continued) Retained ea
Page 57 and 58: 34 Contingent liabilities and commi
Page 59 and 60: 37 Leasing The Group is both lessor
Page 61 and 62: 39 Acquisitions The Group made the
Page 63 and 64: 39 Acquisitions (continued) (c) Exp
Page 65 and 66: 42 Other entities There are a numbe
Page 67 and 68: 43 Related party transactions and D
Page 69 and 70: 43 Related party transactions and D
Page 71 and 72: 45 Share-based payments (continued)
Page 77 and 78: 47 Credit risk (continued) Whilst t
Page 79 and 80: 47 Credit risk (continued) Credit r
Page 81 and 82: 47 Credit risk (continued) Credit r
Page 83 and 84: 47 Credit risk (continued) All loan
Page 85 and 86: 47 Credit risk (continued) Loans an
Page 87 and 88: 47 Credit risk (continued) Renegoti
Page 89 and 90: 47 Credit risk (continued) Reverse
Page 91: 48 Market risk (continued) To furth
Page 95 and 96: 49 Liquidity risk (continued) Year-
Page 97 and 98: 49 Liquidity risk (continued) At 31
Page 99 and 100: 50 Fair value of financial instrume
Page 105 and 106: 52 Capital Management (continued) R
Page 107 and 108: 53 Segmental reporting (continued)
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Page 111 and 112: Barclays Bank PLC data Consolidated
Page 117 and 118: c Principal transactions (continued
Page 119 and 120: f Other income 2008 2007 2006 £m
Page 121 and 122: k Called up share capital (continue
Page 123 and 124: l Reserves Other reserves Available
Page 125 and 126: Barclays Bank PLC data Financial Da
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Barclays plc - Annual Report 2008 - Financial statements - The Group

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