DBRS Comments on Barclays 1H12 Results; Senior at AA, Trend Negative

DBRS, Inc. (DBRS) has today commented that the ratings for Barclays Bank plc (Barclays or the Group), including its Long-Term Debt rating of AA and its R-1 (high) Short-Term rating, are unaffected by the Group’s 1H12 results announcement. The trend on all ratings remains Negative. For the six months ending 30 June 2012, Barclays reported a statutory pre-tax profit of GBP 759 million, due in particular to not only the GBP 2.9 billion of charges related to tightening in the Group’s own credit in the period, but also to a range of other adjusting items. On an adjusted basis, which among other things, excludes own credit charge, the gain on sale of the Blackrock investment, PPI provisions, provisions for interest rate hedging products redress, goodwill impairment, and acquisition related costs, Barclays reported a very solid pre-tax profit (PBT) of GBP 4.2 billion. This result was up GBP 502 million from 1H11 and up GBP 2.0 billion from 2H11.

DBRS sees Barclays’ 1H12 results as illustrating the strength of the Group’s universal banking model, which generates diverse revenue streams across products and businesses. To this end, the Group’s key domestic businesses, U.K. Retail & Business Banking (RBB), Barclaycard and the U.K. Corporate Banking franchise continue to generate solid results despite the slowing U.K. economy. Investment Bank (IB) (formerly Barclays Capital) generated a resilient performance that outpaced many industry peers in the face of significant market volatility and subdued client activity. The strength of these segments is enabling the Group to cope with weak (though improving) results in some of its other businesses, primarily Europe RBB and Corporate Banking in Europe, as well as the various “one-time” events.

For the half-year, the IB reported adjusted PBT of GBP 2.3 billion, a modest decline from 1H11, but up notably from GBP 655 million in 2H11. Results were solid on both an absolute and relative-to-peer basis as Barclays’ IB was able to increase overall revenues 4% from 1H11 to GBP 6.5 billion, led by FICC. UK RBB and Barclaycard both reported higher adjusted profits on a half-year linked basis, reflecting lower impairment charges and well-managed expenses (excluding the PPI provision). For 1H12, UK RBB generated adjusted PBT of GBP 746 million while Barclaycard earned GBP 753. Further demonstrating the strength of the domestic franchise, Corporate Banking – U.K. reported adjusted pre-tax profits of GBP 487 million, up 46% on a half-year linked basis. With Europe still struggling, the Corporate Banking segment as a whole reported adjusted profits before tax of GBP 346 million.

Despite the solid results, DBRS cautions that risks remain. Barclays’ European businesses continue to face a challenging environment. European RBB reported a loss before tax of GBP 92 million, a 43% improvement from 1H11. The narrower loss reflects continuing efforts by Barclays to restructure the business offset by higher credit costs as delinquencies were higher across the mortgage books in Spain, Italy and Portugal. Overall exposures to Spain, Italy and Portugal continue to be significant at GBP 56.4 billion. While a majority of these exposures (58%) are residential mortgages with relatively low LTVs, DBRS sees the potential for increased impairments, especially if prospects for these countries continues to deteriorate and the current recessions are deeper and more prolonged than anticipated. While DBRS notes also that the U.K economy has slowed, there are no indications of a meaningful reversal of recent trends, which include market share gains for Barclays and mostly positive credit trends.

DBRS views Barclays’ financial profile as sound underpinned by strong liquidity and solid capital levels. Risk-weighted assets were largely stable from year-end 2011 at GBP 390.2 billion, while the Bank’s Core tier 1 ratio was 10 bps lower than 31 December 2011 at a still solid 10.9%. At 30 June 2012, the Group’s liquidity pool was a substantial GBP 170 billion, of which 92% was held in cash, highly liquid government bonds and deposits with central banks. Barclays participated in the ECB’s LTRO in 1H12, drawing EUR 8.2 billion of secured funding to address its Euro funding gaps in Spain and Portugal by borrowing through its local subsidiaries. As a result, Barclays’ net funding mismatches in Spain and Portugal have reduced to GBP 2.5 billion and GBP 3.7 billion compared to GBP 12.1 billion and GBP 6.9 billion at year-end 2011. DBRS notes that Barclays’ retail banking corporate banking and wealth and investment activities are predominantly deposit funded. At 30 June 2012, the combined loan-to-deposit ratio for these businesses was 106%.

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 the DBRS website under Methodologies.

The sources of information used for this rating include the issuer, SNL Financial. 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: Roger Lister
Approver: William Schwartz
Initial Rating Date: 31 August 2006
Most Recent Rating Update: 3 July 2012

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