DBRS Comments on Barclays Bank PLC Q3 2009 Results, Unaffected at AA (high), Trend Negative

DBRS has today commented that the ratings of Barclays Bank PLC (Barclays or the Bank), including its Long-Term Debt rating of AA (high), are unaffected following the release of the Bank’s Q3 2009 interim management statement. The trend on all long-term debt ratings, except those debts guaranteed by HM Treasury, remains Negative.

Today’s comment follows Barclays Q3 2009 interim management statement indicating that the Bank for the nine months ending 30 September 2009, generated a profit before tax, own credit, gains on acquisitions and disposals and gains on debt buy-backs of GBP 4.4 billion an increase of 116% over the comparable period a year ago. Continuing earnings growth momentum from Barclays Capital (BarCap) and the international businesses within Global Retail and Commercial Banking (GRCB) resulted in overall revenue net of insurance claims increasing 26%, to GBP 23.8 billion. Strong revenue growth combined with continued focus on controlling costs contributed to positive operating leverage or “jaws” of 7%. DBRS continues to consider Barclays earnings generation ability, which is driven by the well-diversified franchise, as a noteworthy factor underpinning the ratings. Importantly, this solid earnings generation power affords the Company the ability to absorb the impairment charges and credit market write-downs associated with the current cycle. Profit before tax was down 19%, to GBP 4.5 billion, pressured by the continued elevated levels of impairments, which increased markedly to GBP 6.2 billion or 65% year-on-year. Notwithstanding these pressures and the difficult operating environment, Barclays still generated solid results.

Both the GRCB and Investment Banking and Investment Management segments increased revenue during the nine months ended 30 September 2009. GRCB grew earnings 11% year-on-year primarily driven by the expanded international businesses. Reflecting the continuing difficult economic environment, impairments in the segment increased over the prior year reducing GRCB’s profit before tax by 29.8% to GBP 2.2 billion. BarCap’s top-line revenue nearly doubled over the prior year to GBP 14.2 billion; as the division continues to increase its share of interest rate, commodity, prime services and equity products in the U.S. and Europe. However, BarCap did see some moderation in the growth of top-line income from 2Q 2009 to 3Q 2009 reflecting normal seasonal slowdown and tighter spreads.

Barclays continues to make significant progress in reducing overall credit market exposures. Credit market exposures totalled GBP 23.6 billion at 30 September 2009, resulting from GBP 6.9 billion in net sales and pay-downs, gross write-downs of GBP 5.7 billion and a decrease of GBP 1.9 billion due to other movements and currency depreciation. Additionally, exposures were reduced by GBP 5.1 billion with the sale of certain credit market exposures as well as GBP 2.4 billion in other assets to Protium Finance LP. While DBRS recognises the progress made to date in reducing credit market exposures, DBRS remains concerned that, given Barclays’ remaining GBP 8.9 billion of commercial mortgage exposure, increasing stress in the global commercial real estate market could result in further sizeable write-downs.

In DBRS’s view, Barclays’ continuing solid performance illustrates the strength of the Barclays global franchise. Barclays’ underlying earnings generation ability affords the Bank the ability to absorb losses from the current challenging operating environment. The current ratings reflects DBRS’ opinion that the Bank is well positioned to successfully operate and strengthen its already strong franchise in the current still evolving environment. In maintaining the Negative trend, DBRS notes that uncertainties remain in this environment presenting continuing risks and reflects DBRS’ ongoing concern that the recovery in the global economy remains tenuous. However, DBRS is looking for further evidence that the recent signposts suggesting that the operating environment has improved are sustainable. Accordingly, should the positive developments in the economic and capital markets continue, DBRS would likely revert the rating trend 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.