DBRS Confirms Barclays Bank PLC, Changes Long-Term Trend to Negative

DBRS has today confirmed all ratings of Barclays Bank PLC (Barclays or the Company), including its AA (high) Long-Term Debt rating and its R-1 (high) Short Term Debt & Deposit rating. Concurrently, the trend on all long-term debt ratings, except those of the 4.25% Senior Notes due 2011, has been revised to Negative from Stable. The trend on the Short-Term Debt & Deposit and the 4.25% Senior Notes due 2011 ratings remains Stable.

The rating confirmation reflects Barclays strong market positions across all retail, corporate and investment banking businesses; its high level of business and geographical diversification and the Company’s solid funding base. Moreover, the ratings consider Barclays’ solid underlying earnings generation ability which should allow the Company the ability to absorb increased overall credit costs and impairments resulting from the Company’s sizeable credit market exposures. That said, the Negative trend reflects DBRS’s view that the ongoing weakening of the credit markets has intensified, while the global economy continues to rapidly deteriorate, thereby DBRS sees significant risk of noteworthy earnings volatility caused by impairments and increased provisioning. Accordingly, DBRS views maintaining acceptable earnings and profitability metrics in the current difficult operating environment and successfully managing asset quality measures in the face of a slowing global economy as key challenges. Additionally, the deterioration in the U.K. and U.S. economies, both of which are core markets to Barclays, and the high levels of indebtedness of consumers in the U.K. and U.S. further exacerbate this challenge.

DBRS views the recent Lehman acquisition as further strengthening the franchise as the business complements Barclays’ existing business. The addition of the Lehman business lines has allowed Barclays to bolster its presence in the global financial markets and across major lines of business including equity capital markets, debt capital markets, mergers and acquisitions, commodities trading and foreign exchange trading. However, given the current level of market disruption, DBRS believes that the time frame for Barclays to fully realise the benefits of this transaction has been prolonged.

DBRS considers the Company’s liquidity position as robust, given the diversification of Barclays’ funding sources. Recent actions taken by the U.K. government, which include the guarantee on certain newly-issued debt, further enhance the Company’s liquidity position. DBRS notes that market funding is well diversified across instrument and investor types and the diversified depositor base adds a level of stability. Clearly, Barclays retains a very strong funding base in the United Kingdom.

Barclays’ earnings generation ability is a significant driver in the rating; however, as discussed above, DBRS expects earnings to be pressured in the near term by reduced volumes in certain businesses. Nonetheless, this solid earnings potential should allow the Company the ability to absorb much of the higher cost of operating in the current environment especially within the Barclays Capital and Barclays Global Investors segments. While these business segments have been more affected by the credit market turbulence than the other business segments, DBRS notes, importantly, that as of June 2008, both remained profitable. That said, since then the global credit markets and the economic outlook have deteriorated significantly.

DBRS recognises the Company’s efforts in reducing its credit market exposures; however, the sizeable exposures will likely lead to further earnings volatility as the credit markets remain in turmoil. While the absolute amount of the exposure to these asset classes is considered sizeable, DBRS does not view it as being outsized relative to the overall magnitude and composition of the Company’s balance sheet. However, these exposures will likely be the source of earnings volatility in the near term. Given today’s climate and the continued disruptions in the credit markets, these exposures could have a sizeable impact on the Company’s financial performance, thereby negatively pressuring ratings.

Given the challenging operating environment and the aforementioned exposures to the global capital markets, DBRS positively views the recent GBP7.05 billion Tier 1 capital raise. While the capital raise came at a substantially higher cost and notably dilutive to existing shareholders, DBRS views the ability to raise capital privately as a testament to the strength of the Company’s franchise. The offering consisted of GBP4.05 billion of mandatory convertible notes that convert by 30 June 2009 and GBP3.0 billion of Reserve Capital Instruments (RCIs) that carry a 14% (tax-deductible) coupon until 2019. Buyers of the RCIs were also issued warrants for 1.5 billion of ordinary shares. DBRS has today assigned a rating of AA (low) to the RCIs, which is two notches below the Long-Term Debt rating, consistent with other hybrid ratings.

Although DBRS is looking to Barclays’ ability to generate solid underlying earnings to help the Company successfully navigate through this particularly tough cycle, the Negative trend incorporates DBRS’s view that earnings will be pressured by the ongoing market disruption and the deepening and spreading global economic slowdown.

Note:
All figures are in GBP unless otherwise noted.

The applicable methodology is Analytical Background and Methodology for European Bank Ratings, which can be found on the DBRS website under Methodologies.

This is a Corporate (Financial Institutions) Rating.