DBRS Downgrades Barclays Bank to AA (low), Stable Trend

DBRS Ratings Limited (DBRS) has today downgraded the Issuer and Long-Term debt ratings of Barclays Bank plc (Barclays or the Bank) to AA (low) from AA. The Short Term rating was downgraded to R-1 (mid) from R-1 (high) and the Intrinsic Assessment to A (high) from AA (low). The outlook on all ratings is Stable. As a result of today’s actions the ratings have been removed from Under Review with Negative Implications, where they were placed on 8 March 2013.

The downgrade takes into account the longer-term challenges Barclays faces with regards to strengthening earnings diversity and rebuilding the Bank’s reputation, and DBRS’s view that these factors position the Bank’s ratings more appropriately at AA (low). The recently announced rights issue will bring Barclays more in line with peers in terms of fully-loaded CRD4 capital and leverage ratios, however as for all large, complex banks, adapting the Bank’s business model to the changing regulatory environment will remain a significant challenge.

The trend on the Bank’s ratings are now Stable, reflecting DBRS’ view that given the underlying strength of Barclays’ customer franchises and the Bank’s strengthened capital position, the Bank will be able to adapt to CRD4 and the tougher regulatory environment without further downward pressure on ratings. Upward pressure on the ratings is unlikely, however, given the size of the regulatory challenges ahead. Downward pressure on ratings could arise if the implementation of ring-fencing in the UK has a negative impact on bondholders, or if the Bank’s restructuring and cultural change efforts do not deliver the necessary progress.

To date Barclays has reported weaker fully-loaded Basel 3 capital ratios than a number of peers, in large part due to a higher proportion of investment banking business, which has relatively higher leverage and is more affected by CRD4 capital requirements than other activities. On July 14th 2013 Barclays announced a number of measures to significantly strengthen capital, including a GBP 5.8 billion underwritten rights issue, the issuance of up to GBP 2 billion of CRD4 qualifying Additional Tier 1 securities, and a reduction in CRD4 leverage exposures by GBP65 – 80 billion. DBRS considers these measures to be a positive step, and expects Barclays to continue to improve its capital ratios over the next 2 – 3 years as part of its Transform programme.

Barclays is undertaking a significant restructuring of its existing businesses under the Transform programme, to address both inherently underperforming businesses (e.g. Europe Retail and Business banking) and businesses affected by CRD4 capital requirements (in particular, parts of the investment bank). And although Barclays has shown it is capable of adapting to changing regulatory requirements, DBRS considers that Barclays has a larger restructuring job than higher rated peers, that mostly have a smaller proportion of investment banking in their overall revenue mix, and that this will continue to weigh on the Bank’s ability to generate strong profitability.

Barclays has embarked on a programme of cultural change following the reputational problems, which culminated in the significant management upheaval in 2012. DBRS understands this programme to be very broad, encompassing all areas of the Bank’s activities. However, at the same time the Bank has to manage legacy issues from Payment Protection Insurance and SME Interest Rate Hedging, as well as a number of regulatory investigations, and therefore DBRS considers that reputational concerns will continue to affect Barclays more than some of its peers.

Separately, DBRS has also withdrawn the AAA ratings on government-guaranteed debt under the Credit Guarantee Scheme, as this debt has been repaid.

Notes:
All figures are in British Pounds (GBP) unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organizations. Other applicable methodologies used include the DBRS Criteria – Intrinsic and Support Assessments; DBRS Criteria: Rating Bank Subordinated Debt and Hybrid Instruments with Discretionary Payments and DBRS Criteria: Rating Bank Preferred Shares & Equivalent Hybrids. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on July 30, 2014, to reflect actual methodologies used.]

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

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Elisabeth Rudman
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 9 September 2005
Most Recent Rating Update: 8 March 2013

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/

The conditions that lead to the assignment of a Negative or Positive Trend are generally resolved within a twelve month period. DBRS’s trends and ratings are constantly under surveillance.