May 15 (Bloomberg) -- Barclays Plc, the U.K.'s third-biggest bank, reported a drop in first-quarter earnings because of 1.7 billion pounds ($3.3 billion) of writedowns and said further losses from the credit markets are possible.

Barclays fell 2 percent today in London trading after Finance Director Chris Lucas told reporters he hasn't ruled out a share sale to replenish capital. The markdowns, confined to the Barclays Capital securities unit run by President Robert Diamond, were smaller than those announced at U.K. rivals, and analysts at firms including Hichens, Harrison & Co. questioned whether Barclays has adequately addressed its credit risks.

``More aggressive writedowns may be constrained by tight core capitalization,'' said Jennifer Kapila, a London-based analyst at Dresdner Kleinwort, who has an ``underweight'' rating on Barclays. ``The bullish tone at Barclays Capital seems to have disappeared, and risk exposures still seem relatively high.''

Royal Bank of Scotland Group Plc and HBOS Plc, two of Britain's biggest banks, are raising about 16 billion pounds to bolster capital after the collapse of the U.S. subprime mortgage market led to losses. Barclays will decide how to increase capital when the outlook for writedowns and earnings becomes clearer, Lucas said. Pretax profit may fall about 10 percent in 2008, matching analysts' estimates, he said.

``Earnings momentum is slowing and there is the prospect of significant further writedowns,'' said Sandy Chen, a London-based analyst at Panmure Gordon & Co., who has a ``sell'' rating on the stock. ``As for rights issues, I would rather be at the front of the queue than at the back.''

Moody's Downgrade

Barclays fell 8.5 pence to 418.75 pence in London, valuing the bank at 27.5 billion pounds. The shares are down 17 percent this year, trailing the eight-member FTSE 350 Banks Index, which fell 10 percent.

The bank had its outlook cut to ``negative'' from ``stable'' and its financial-strength rating cut to B from B+ at Moody's Investors Service, which said earnings and capital are under pressure. The bank may post further writedowns on securities and credit assets as it faces a slowdown in its consumer banking unit, Moody's said.

First-quarter earnings were less than ``the very strong prior-year period,'' Chief Executive Officer John Varley said in a statement. The report, called a trading update, didn't say how much Barclays earned or give specific year-ago comparisons.

Profit rose in the consumer and commercial banking units run by Frits Seegers. The bank had ``very strong'' earnings growth in credit cards and ``solid'' gains in international retail and commercial banking, Barclays said.

Asset-Management Provisions

Profit at Barclays Global Investors, the asset-management unit run by Diamond, was reduced as the company added 170 million- pound to provisions to cover ``selected liquidity products,'' the company said.

Analysts at firms including MF Global Securities Ltd. estimated Barclays Capital would write down less than 2 billion pounds in the first quarter. The unit wrote down 2.3 billion pounds in 2007.

The Barclays Capital securities division also had a so-called fair-value gain of 703 million pounds on notes held by the unit. That gain was reduced by a 469 million-pound charge as credit spreads narrowed in April. Pretax profit in the first four months of the year was close to zero.

Barclays has 4 billion pounds of mainly residential-mortgage backed CDOs, 4.2 billion pounds of U.S. subprime loans, 4.5 billion pounds of Alt-A loans, 12.6 billion pounds of commercial mortgages, 7.3 billion pounds in buyout loans, 565 million pounds in structured investment vehicle assets and 2.8 billion pounds of insured bonds.

Jobs Cuts

The bank is ``aggressively'' managing cost growth to preserve profit at Barclays Capital, said Rich Ricci, the unit's chief operating officer. The bank has cut about 800 jobs at subprime mortgage division EquiFirst since August. The unit, which had 1,400 staff last year, will employ about 500 people by year end.

The bank sold 300 million pounds of credit assets in the first quarter and will sell more by the end of the first half, Ricci said. Barclays Capital didn't take writedowns on buyout loans, and markdowns related to bond insurance were ``relatively small,'' Lucas said.

Banks and brokerages globally have written down $342 billion in credit-related assets, ousted managers and shut down units because of the credit-market crunch.

Barclays's writedowns included 495 million pounds for collateralized debt obligations and 1.21 billion pounds for ``other credit market exposures,'' the company said. The securities unit took 598 million pounds in bad-debt defaults.

Better Than Subprime

The securities unit also took a charge of 229 million pounds in the quarter on securities backed by so-called Alt-A mortgages, which are rated a step above subprime. Barclays took the charge against reserves rather than earnings.

``The writedowns look light,'' said Magnus Mathewson, a London-based analyst at Hichens, Harrison & Co., who has an ``add'' recommendation on the stock. ``If you take RBS's level of writedown and apply it to Barclays' positions, it would not be too hard to arrive at a much bigger figure than the one given today,'' Mathewson said.

RBS announced 5.9 billion pounds of 2008 writedowns last month on U.S. mortgages, credit-related assets and leveraged loans, about a third of which came from the bank's acquisition of Amsterdam-based ABN Amro Holding NV.

Barclays's Tier 1 ratio, a measure of capital strength, will be ``slightly lower'' than the 5.1 percent reported at the end of 2007, the company said. It aims to raise that to 5.25 percent. RBS and HBOS both plan to lift their ratios to above 6 percent, helped by share sales.

Dilution

RBS got backing yesterday from 95 percent of its shareholders to raise 12 billion pounds after writedowns and the takeover of ABN Amro depleted capital. Its new shares, offered at a 46 percent discount to the April 21 price, will increase stock outstanding by about 40 percent, diluting existing investors.

Barclays declined to say whether it will seek capital from investors including China Development Bank, which owns a 3 percent stake in Barclays, or Singapore's Temasek Holdings Pte, which holds 2.1 percent. Barclays said it is unlikely to pay this year's dividend in shares rather than cash.

``We feel no sense of compulsion to do anything,'' Lucas said. ``We don't feel constrained. We have options which put us in a particular good place to be.'' Still, Barclays won't ignore investors' concerns about its financial strength, Lucas said in an interview. ``We have set out an intention'' to raise capital ratios, he said.

`Hang Over'

Barclays is under pressure to explain its plans, said Alan Beaney, head of investments at Principal Investment Management in Sevenoaks, England who helps manage $2.1 billion including Barclays stock.

``I was a bit surprised they didn't raise some money, as they are the only ones that haven't and have the weakest capital ratios,'' Beaney said. ``It would be good for them to have got the capital raising out of the way, as it will hang over the share price.''

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net

Last Updated: May 15, 2008 13:27 EDT