Aug. 4 (Bloomberg) -- Barclays Plc, Britain's third-largest bank, may tomorrow report a decline in first-half earnings as bad debts rose and costs increased at its securities unit.

Net income probably fell 5 percent to 1.72 billion pounds ($3.06 billion) from 1.8 billion pounds a year earlier, according to the median estimate of seven analysts surveyed by Bloomberg.

Barclays, led by Chief Executive Officer John Varley, bought control of Africa's biggest consumer lender and expanded the workforce at its investment banking business by a third last year to counter slowing growth in Britain. The London-based bank on May 26 predicted loan-loss provisions will swell this year amid ``signs of strain'' in the U.K. consumer-lending market.

``It's going to be very hard work for the U.K. banks to keep moving their businesses forward at a reasonable pace,'' said Colin Morton, who helps oversee $1.1 billion at Leeds, England-based Rensburg Fund Management Ltd., which holds Barclays shares. ``Provisions are only going to be going one way over the next few years, and that's up.''

Shares of Barclays have fallen 4.1 percent this year, making the lender the worst performer on the 10-member FTSE 350 Banks Index, which has gained 2.5 percent. Barclays has a market value of 36.4 billion pounds, the sixth-largest among European banks.

Barclays's earnings beat analyst estimates in the past four half-year periods by an average of 8 percent. Of 18 analysts tracked by Bloomberg, five had ``buy'' recommendations on the stock, eight had ``holds'' and five had ``sells'' during the past three months.

Varley, 49, who was paid 2.07 million pounds last year, declined to comment. The London-based bank will publish earnings using International Financial Reporting Standards for the first time tomorrow.

Bad Loans Rise

Loan losses are rising at U.K. lenders after five interest rate increases by the Bank of England in less than two years pushed personal bankruptcies to a record in the first quarter and halted a decade-long housing market boom. Barclays probably set aside 725 million pounds for doubtful loans in the first half, according to analyst estimates, a 23 percent increase.

HSBC, the largest bank in Britain, said loan impairments rose by 20 percent in the first half. Lloyds TSB, the U.K.'s No. 5 lender, said provisions for doubtful loans jumped 52 percent. Both companies reported a 9 percent increase in profit during the period. HBOS Plc, the country's fourth-largest bank, yesterday said profit rose 11 percent and loan impairments increased 25 percent.

At Barclays, loans that may not be repaid increased in the first quarter, led by a jump at the credit-card unit, which issued Europe's first card in 1966. Late payments on loans also rose in mortgage and consumer lending, the bank said.

``The U.K. retail division will continue to be a drag on overall performance,'' said Richard Staite, an analyst at SG Securities in London, who has a ``sell'' rating on the stock. The unit accounted for about 22 percent of profit last year, according to company reports.

Africa, Spain

Barclays last month paid $4.48 billion to buy a controlling stake in South Africa's Absa Group Ltd. to accelerate growth abroad. The takeover was the biggest acquisition by Barclays outside of the U.K. and will increase Africa's contribution to earnings to about 33 percent of the total from 20 percent.

Gaining Absa's 7 million customers in Africa's largest economy will help Barclays expand its credit card, investment banking and asset management business, Varley said in April. In 2003, Barclays spent 1.12 billion euros ($1.37 billion) for Banco Zaragozano SA, the eighth-largest bank in Spain.

Rising in Rankings

The bank has also been expanding its investment bank, run by Robert Diamond, 54. Barclays Capital hired more than 2,000 people last year to strengthen businesses such as mortgage-bond trading and equity derivatives. The division accounted for 20 percent of profit in 2004.

``Barclays Capital should have a relatively solid performance,'' said Staite.

The company gained ground in debt underwriting in Europe and the U.S. in the first half of the year. Barclays climbed to third in arranging euro-denominated bond sales from fourth a year earlier, data compiled by Bloomberg show.

It ousted Royal Bank of Scotland Group Plc to become first in pound-denominated debt, with an 18.9 percent market share, up from second last year, when it had a 13.9 percent share, according to Bloomberg data.

The bank's slice of U.S. dollar bond sales rose to 3.4 percent in the first half from 2.2 percent in the same period a year ago, Bloomberg data show. It ranked fifth in Euromoney magazine's annual survey of foreign exchange market share this year, up from seventh in 2004.

The expansion has also pushed up costs. The securities unit spent 66 pence for every pound of revenue in 2004, up from 60 pence in the previous year, according to company reports.

To contact the reporter on this story: Jonathan Rosenthal in London at jrosenthal1@bloomberg.net

Last Updated: August 3, 2005 19:07 EDT