Aug. 2 (Bloomberg) -- Barclays Plc, the U.K. bank competing to buy ABN Amro Holding NV, posted a 14 percent increase in first-half net income and said subprime mortgage defaults in the U.S. won't hamper the investment bank this year.

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. The securities unit, Barclays Capital, will boost profit at least 15 percent a year through 2008 and has limited risks in subprime mortgages, Barclays President Robert Diamond said in an interview.

Growth is decelerating at the investment bank, which boosted profit at half the 66 percent pace of the year-ago period. Companywide profit slowed as well from 25 percent in the first half of 2006. This year's first-half profit growth of 14 percent compares with an estimated 11 percent at Royal Bank of Scotland Group Plc, Barclays's rival in the ABN Amro takeover contest.

``We are past the peak in credit growth in Europe,'' said Martin Kinsler, who helps manage $128 billion for London-based Henderson Group Plc and owns Barclays shares. ``They're not trying to buy ABN Amro for nothing,'' he said. ``It would improve the growth profile of the group.''

Trading of securities backed by subprime mortgage loans will be ``challenging for quite a while,'' Diamond said in an interview today. New York-based Bear Stearns Cos. triggered a worldwide decline in credit markets in June, when hedge funds it managed faltered as mortgage defaults by people with poor credit rose to a 10-year high.

`Hedging, Managing'

Barclays's risk levels in the subprime market are lower than there were a year ago, and its inventory of subprime loans has dropped by 50 percent in the past 12 months, Diamond said. ``We are hedging that. We are managing that. It is challenging,'' he said, forecasting it will take about 12 months to 16 months to work through subprime defaults.

``This is a market event, not an economic event to the extent that this relates to the housing market in the U.S.,'' Diamond said. ``The weakness in the U.S. housing sector has been reflected in the GDP for a while.''

Pretax profit at the investment bank increased 33 percent to 1.66 billion pounds, helped by structured credit, derivatives, equities and commodities.

``Barclays Capital continues to trade well, and that allays my fears about subprime,'' said Euan Stirling, who helps manage $158 billion at Standard Life Investments in Edinburgh. ``As a group they are very risk aware, which is encouraging.''

`Dilutive Effect'

Shares of Barclays fell 0.2 percent to 676.5 pence at 1:14 p.m. in London, valuing the bank at 44.3 billion pounds. Barclays will begin a previously announced buyback of as much as 2.4 billion pounds of its shares to ``immunize the dilutive effect'' of its sale of stakes to Singapore's Temasek Holdings Pte and China Development Bank, it said. The buyback will take about four months and will be managed by JPMorgan Cazenove Ltd.

Temasek and China Development Bank will buy stakes totaling 9.2 percent in Barclays, it said July 25. The investments will be reduced to 5.2 percent if the ABN Amro takeover doesn't go through.

Barclays increased its first-half dividend by 10 percent to 11.5 pence a share. The higher dividend, buyback and ``strategic'' partnership with China Development Bank will ``begin to work in people's minds'' and boost Barclays's cash and stock offer to buy ABN Amro in the world's biggest bank takeover, Diamond said.

Losing Ground

Barclays has lost ground in the battle to buy the biggest Dutch bank. 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.

ABN Amro withdrew its recommendation of the Barclays's bid, saying it's 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 bank said it would keep the biggest Dutch lender intact.

``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.

Barclays announced first-half pretax profit and division results July 23. Barclays Global Investors, the asset-management unit, increased pretax profit by 7 percent to 388 million pounds. Barclays Capital, which increased staff by 19 percent to 15,700 in the first half, is adding a further 600 graduates in July and August, Diamond 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.

First-half bad debts in its U.K. retail banking unit fell 9.5 percent to 277 million pounds and bad debts at its credit- card unit dropped 9.2 percent to 443 million pounds. U.K. consumer-banking revenue was hurt by an 87 million-pound payout to customers relating to overdraft fees charged for prior years.

Cost-to-Income Ratio

Barclays's cost-to-income ratio, expenses as a proportion of revenue, rose to 58 percent in the first six months of the year from 57 percent a year ago. Profit margins on lending slipped to 1.2 percent from 1.35 percent in its U.K. retail bank and the margin at its credit-card operation slipped to 6.87 percent from 7.32 percent.

Overseas bank profit declined 12 percent to 452 million pounds as a decline in the rand 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.

To contact the reporter on this story: Ben Livesey in London blivesey@bloomberg.net; Jon Menon in London jmenon1@bloomberg.net

Last Updated: August 2, 2007 08:39 EDT