DBRS Confirms Barclays Bank PLC Ratings at AA (high), Trend Negative

DBRS has today confirmed its ratings of Barclays Bank PLC (Barclays or the Bank), including its Long-Term Debt rating of AA (high), following the release of the Bank’s H1 2009 interim results. The trend on all long-term debt ratings, except those debts guaranteed by HM Treasury, remains Negative.

Today’s rating action follows Barclays H1 2009 interim results which indicated a profit before tax of GBP 3.0 billion, an increase of 8% to the year ago period. The solid results were driven by a 37% increase in total income net of insurance claims to GBP 16.3 billion. Strong results in Barclays Capital (BarCap) and a solid level of income generated from most other business lines were the primary contributors to significant increase in total income. DBRS views Barclays total income generation ability, which is a benefit of its solid diversified franchise, as a noteworthy factor underpinning the rating. Importantly, this solid income generating ability allows the Company to absorb the impairment charges and other credit provisions associated with the current cycle. Total income, however, was pressured by the continued elevated levels of impairment, the increase in costs, largely attributable to the addition of the Lehman Brothers business in the U.S., and a loss charge associated with the fair valuing of the Company’s own debt. Notwithstanding these pressures and the difficult operating environment, Barclays still generated solid results.

Further illustrating the benefits of diversification, all of Barclay’s business segments continued to generate positive profit before tax, except Global Retail and Commercial Bank (GRCB) – Emerging Markets. Barclays’ Investment Banking and Investment Management (IBIM) division reported a 44% increase in profit before tax, which increased to GBP 1.4 billion. BarCap increased its share of interest rate, commodity, prime services and equity products. BarCap’s earnings generation ability was bolstered by the Lehman acquisition, which is reflected in the business line’s profit before tax increasing 100% year-over-year to GBP 1.0 billion, however earnings also benefited client flows and wider spreads. BarCap’s net income was reduced by impairments of GBP 1.9 billion, credit market write-downs of GBP 3.5 billion and a GBP 893 million charge related to fair value movement in its own credit. Barclays Global Investors (BGI) reported a decline in profit before tax due to the inclusion of GBP 106 million of deal related costs and lower management and incentive fees partially mitigated by increased net interest revenue. Barclays Wealth profit before tax declined significantly due to the sale of the closed life business and the acquisition of Lehman Brothers North American businesses (Barclays Wealth Americas). However, excluding the affect of the sale and acquisition income was in line with H1 2008.

Barclays’ solid capitalisation further supports the rating. During the first half of 2009, capital increased through retention of earnings and other measures to bolster its capital position, which include the previously announced agreement to sell its BGI businesses to BlackRock. The sale of BGI is expected to close at the end of the year. At 30 June 2009, pro-forma to that sale, core Tier 1 capital and Tier 1 capital ratios would be 8.8% and 11.7%, respectively. Removing the expected impact of the sale, Barclays’ core Tier 1 and Tier 1 capital ratios at 30 June 2009 were 7.1% and 10.5%, respectively. DBRS views the capital enhancement resulting from the sale of the BGI business as a positive given the expectations of elevated credit costs through 2009 as the U.K. economy remains in a recession. However, DBRS recognises that this sale of the BGI business will lower underlying earnings generation ability of Barclays; as this business contributed 9.2% of Barclays H1 2009 profit before tax.

DBRS considers Barclays’ liquidity profile as sound and well-managed. At 30 June 2009, Barclays had surplus liquidity of GBP 88 billion, including unencumbered cash at central banks, government securities and other central bank eligible securities. DBRS views the level of surplus liquidity as prudent given the difficult funding markets. Barclays has been successful in issuing several benchmark transactions in the senior unsecured markets in the U.S., U.K. and Europe demonstrating the strength of the Barclays franchise. Moreover, the Bank has improved its loan-to-deposit ratio to 129% from 138% at year end 2008 as loans and advances to customers and banks declined by GBP 45 billion.

The trend remains Negative reflecting DBRS’s concern that the recessionary environment in the U.K will continue to pressure Barclays’ financial performance for the near term. DBRS anticipates that increasing unemployment, personal bankruptcies, and reduced property values will drive credit costs higher in the H2 2009; especially in U.K. Retail Banking and Barclaycard businesses. Moreover, Commercial Banking is likely to see significant increases in losses as reduced consumer spending and limited refinancing options lead to increasing corporate defaults, especially amongst small to medium size enterprises. Ongoing deterioration in the Spanish and South African economies is likely to further pressure operating results in the Western Europe and Absa business lines. Ratings could be pressured should income and earnings demonstrate that Barclays’ solid franchise and earnings generation ability are being compromised by the operating environment. Conversely, should recent signs of stabilization in global economic activity continue and underlying earnings generation be maintained the rating trend could revert to Stable.

Notes:
All figures are in GBP unless otherwise noted.

The applicable methodologies are Analytical Background and Methodology for European Bank Ratings, Second Edition and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.