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Barclays buoyed in activist battle by investment banking gains

* 2018 profit 3.5 bln stg versus forecasts 3.8 bln stg

* Bank takes 150 mln stg Brexit provision

* Investment bank weathers tough Q4 better than peers

* Shares (Berlin: DI6.BE - news) rise 3.5 pct (Recasts, updates shares, adds CEO quote)

By Lawrence White and Iain Withers

LONDON, Feb 21 (Reuters) - Barclays (LSE: BARC.L - news) hit back at its activist shareholder critic by reporting rising annual income at its investment bank but sounded a note of caution with a 150 million pound provision against possible losses due to Brexit.

Barclays shares rose 3.5 percent on Thursday as investors looked past an annual profit of 3.5 billion pounds ($4.56 billion) that came in below expectations, focusing instead on progress in its investment bank where profit increased 15 percent.

Barclays Chief Executive Jes Staley is locked in a high-profile tussle over the bank's strategy with activist investor Edward Bramson, who believes the lender should ditch a costly plan to grow its investment bank and focus on other less risky parts of its business.

Bramson this month sought to ratchet up pressure on the bank by tabling a bid to win a board seat, a move which investors said was unlikely to succeed but which has sharpened focus on the performance of the investment bank.

The results gave ammunition to both sides in the debate. Staley pointed to the investment bank's return on tangible equity -- a key measure of profitability -- rising from 2 percent to 7 percent in 2018, close to the overall target of 9 percent for the group in 2019.

The bank's fixed income, currencies and commodities trading business weathered the volatile markets of the fourth quarter better than its Wall Street rivals with revenue down 6 percent compared with double digit falls at Goldman Sachs (NYSE: GS-PB - news) , Citi and JPMorgan (LSE: JPIU.L - news) .

Staley rebutted the accusation made by Bramson in a letter to his investors in December that Barclays has bought that improved performance at the expense of long-term profitability, by offering uncompetitive pricing to customers.

"If you have portfolio managers and traders at Blackrock (Sao Paolo: BLAK34.SA - news) and Brevan Howard making decisions to direct a trade to our trading desks that then generates revenue for the bank, we are not buying that business," he said.

Staley said that he has still not formally heard Bramson's proposals but will do so when the pair meet in New York next month.

Barclays Chairman John McFarlane recommended investors vote against electing Bramson to the bank's board in the lender's annual report.


BREXIT PROVISION

Profits fell 3 percent in the Barclays UK division on the Brexit provision as well as flat interest margins from lending that Barclays said could fall yet further in 2019.

The bank also saw a 20 percent decrease in corporate lending income, which it attributed to resources being deployed to higher-returning business elsewhere.

That offered ammunition to critics of the investment banking-led strategy, who argue against funnelling resources to a unit that still earns half of the bank's more profitable consumer and cards business.

"As a seller of Barclays, one’s principal concern is always that the results will be so bad that management is forced to revisit a strategy that is hardwired to destroy shareholder value," analyst Edward Firth at broker KBW said.

Barclays' 150 million pound Brexit provision followed similar moves by HSBC and Royal Bank of Scotland (LSE: RBS.L - news) in recent days.

Barclays said the provision reflected the lesser of two downside economic scenarios, in which growth would slow to 0.3 percent and the country's unemployment rise to 5.7 percent.


CAPITAL CONCERNS

Barclays paid a dividend of 6.5 pence per share and signalled intentions to return more capital via dividend increases and buybacks when it was practical to do so.

The bank however reported its core capital ratio fell to 13.2 percent from 13.3 percent a year ago, a dip which is likely to renew a debate over its ability to return more capital to shareholders at a time when rivals Lloyds Banking Group and RBS are ramping up payouts.

Staley's total pay package for 2018 fell to 3.36 million pounds, down from 3.87 million pounds the previous year. He was the lowest paid among the four biggest British bank bosses. ($1 = 0.7674 pounds)

(Reporting By Lawrence White and Iain Withers Editing by Sinead Cruise/Keith Weir)