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

DBRS has today confirmed its ratings for Barclays Bank PLC (Barclays or the Company), including its AA (high) Long-Term Debt rating. The confirmation of the ratings considers the Company’s 2009 performance, its near-to-intermediate term prospects, and the current operating environment. The trend on the Company’s ratings remains Negative, largely reflecting the uncertainties in the economic and regulatory environment. Ultimately, DBRS believes that Barclays is well poised to manage through the tail end of this cycle and will be able to leverage its strong franchise to benefit from the ensuing global recovery.

DBRS views the Barclays diversified global franchise and its overall solid market position as a key strength and a noteworthy consideration underpinning the rating. Barclays’ global franchises were enhanced by the 2008 acquisition of the North American investment banking and capital markets businesses of Lehman. DBRS sees the Lehman transaction as transformational, bringing Barclays to the top tier in terms of importance to the functioning of the global financial markets. The strong franchises provide the building block of solid and diversified earnings generation ability.

Barclays has significant earnings generation ability. Indeed, for 2009, Barclays’ underlying profit increased threefold to GBP 5.6 billion on strong income growth of 34% to GBP 31 billion. This solid result excludes the GBP 6.3 billion gain on the sale of Barclays Global Investors (BGI) to BlackRock. As such, the solid results were driven by substantial growth in Barclays Capital (BarCap) which experienced top line income growth of a noteworthy 81% to GBP 17.9 billion; fixed income, currency and commodities, equities, prime services and investment banking all reported strong top line income growth as well. These areas benefited from the increased scale and service offering following the addition of the Lehman acquisition and strong performance in the U.K. and Europe. While the Lehman acquisition has thus far been accretive and has transformed Barclays into a more global and better diversified market participant, leveraging the US operations in various business cycles may prove to be a challenge. Barclays’ substantial and diversified revenue stream has afforded the Company the ability to absorb the sizeable credit costs associated with the global economic slowdown.

Maintaining solid asset quality metrics and solid profitability continues to be a challenge. Barclays’ credit quality weakened considerably in 2009 as consumers in many economies came under stress as did wholesale portfolios in some countries and sectors. DBRS sees potential for asset quality deterioration as losses on wholesale exposures can be “lumpy” with a few defaults having a large impact. Moreover, while down appreciably in 2009, the Company retains significant exposures to legacy assets, which remain a potential source of writedowns and could produce meaningful earnings volatility should markets falter. Although DBRS sees the risks within the businesses, Barclays has been able to effectively navigate through the most difficult cycles yet still generate acceptable results.

DBRS considers the Company’s liquidity and capital position as solid, given the diversification of Barclays’ funding sources. Prudently, the Company has significantly grown its liquidity pool, extended the maturity of unsecured funding, and increased secured funding at BarCap. 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. Capital levels improved significantly in 2009 due to strong earnings and the conversion of Mandatorily Convertible Notes. Barclays’ Core Tier 1 ratio at the end of 2009 was 10.0% up from 5.6% at 31 December 2008.

The Negative trend reflects DBRS cautious view given the preponderance of external factors and the sustainability of the global economic recovery remains tenuous. Continuing elevated levels of unemployment and a less than robust recovery could weigh on credit metrics and reverse the positive trends seen in 2H09. The resiliency of the recovery will be tested in 2010 as governments and central banks begin to remove extraordinary liquidity support and reduce stimulus spending. Furthermore, DBRS remains concerned that the improvement in global capital markets, which bolstered results in 2009, may prove unsustainable, as new risks emerge. DBRS sees heightened sovereign risk, as well as uncertainty surrounding the ultimate form and subsequent impact of new regulations as key risks. Given that perspective, DBRS views managing asset quality and, by extension, maintaining acceptable earnings in what remains a difficult operating environment as a key challenge for the Company. DBRS believes that the Negative trend on Barclays’ ratings is appropriate considering this uncertain outlook.

Note:
All figures are in GBP unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Banks and Banking Organisations 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.