DBRS Downgrades Barclays Bank plc to AA from AA (high), Trend Remains Negative

DBRS, Inc. (DBRS) has today downgraded the Long-Term Debt ratings of Barclays Bank plc (Barclays or the Bank), including its Long-Term Debt rating to AA from AA (high). Concurrently, DBRS has confirmed the Short-Term rating at R-1 (high). The trend on both the Long-Term and Short-Term Debt ratings is Negative. This rating action has no impact on the Long-Term Debt ratings guaranteed by HM Treasury, which remain at AAA with Stable trend.

Today’s rating action reflects DBRS’s opinion that recent events, which include Barclays’ settlement with various regulators of the LIBOR suit and the resignation of key senior management, may have a longer-term reputational impact on Barclays’ overall strong franchise. Furthermore, while DBRS recognises that the events discussed in the LIBOR settlement are largely in the past, the magnitude of these events illustrate the risks inherent in Barclays’ business model and Barclays’ ability to manage risk across its large and complex franchise. DBRS has long viewed Barclays’ ability to manage risk as a key factor contributing to the Company’s ability to generate more stable results throughout the crisis when compared to many peers, especially in the Investment Bank. While there are still evolving issues, in DBRS’s opinion, it is too soon to tell the longer-term impact, if any, that these events may have on Barclays’ franchise. Nonetheless however, in DBRS’s view, events, such as the above, will likely increase regulatory scrutiny across the sector as a whole and may lead to further regulations thereby constraining industry earnings.

These events occur at a time when Barclays faces increasing headwinds caused by the ongoing disruption in the Euro zone and the declining economic conditions in the U.K., and as a result, DBRS sees potential for earnings pressure. Finally, while DBRS views the direct financial impact of the settlement as manageable, given Barclays’ solid earnings generation ability, as DBRS noted over the past several quarters, at the AA (high) level, DBRS has little tolerance for negative events and earnings volatility.

Importantly, DBRS still considers Barclays’ resilient performance, solid capitalisation, sound liquidity profile, and ability to generate organic capital as noteworthy factors supporting the current rating. The ratings also consider the Bank’s sizeable global investment banking franchise, which has become a more significant contributor to overall results. As discussed in DBRS’s press release dated 8 June 2012, in DBRS’s opinion, the capital markets business will remain challenging and more volatile for the near-term. Nonetheless, DBRS recognises Barclays’ stable, and in some cases, improving trends in earnings across its key businesses despite the difficult operating environment. Continuation of solid financial performance could lead to a Stable trend. Conversely, indications of less robust risk management, a long-term negative impact on earnings profile, or a deterioration in franchise strength or financial profile, may place additional downward pressure on the ratings.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 31 August 2006
Most Recent Rating Update: 8 June 2012

For additional information on this rating, please refer to the linking document under Related Research.