DBRS: Restructuring and weak FICC lead to Barclays Q4 net loss

Summary
• Attributable net loss of GBP 514 million in Q413 and net profit of GBP 2.4 billion in 2013; on an adjusted basis Profit Before Tax (PBT) of GBP 5.2 billion in 2013 down 32% year-on-year (YoY), driven by restructuring charges and weak Fixed Income, Commodities and Currencies (FICC)
• Core banking franchise remains resilient; balance sheet strengthened with 9.3% Common Equity Tier 1 (CET1) on fully loaded CRD4 basis
• DBRS rates Barclays Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Stable trend

In DBRS Ratings Limited’s (DBRS) opinion the 4Q13 and full year 2013 results of Barclays Bank plc (Barclays or the Bank) illustrate the challenge facing the Bank as it deals with legacy issues and adjusts its business in order to deliver higher returns in the years ahead. Restructuring costs (“Cost to Achieve” under the Transform programme), conduct/ litigation costs, and poor performance in FICC all weighed on the Bank’s results, but the Bank’s financial profile is supported by its core banking franchise, stable credit costs and a strengthened balance sheet (including stronger capital ratios, a reduction in total assets and an improved funding profile). Adjusted for own credit charges, customer redress and goodwill impairment, PBT was GBP 5.2 billion, down 32% YoY.

The Bank’s overall 2013 operating performance was resilient in UK Retail and Business Banking, Barclaycard and Corporate, but the Bank faced a number of challenges in the Investment Bank, European Retail and Business Banking, Wealth and Investment Management, and – to a lesser extent - Africa. The Bank has grown both lending and deposits in the UK and increased its mortgage market share, and adjusted profits were up at Barclaycard and Corporate Banking. However, at the Investment Bank, which remains a key driver for the firm’s profitability (49% of adjusted PBT in 2013), the FICC business was negatively affected by a difficult operating environment – as with a number of global peers. Whereas Equities were up 22% YoY and Investment Banking was up 3%, FICC was down 17% YoY (and 16% QoQ), leading to a 37% YoY drop in adjusted PBT in the Investment Bank division. DBRS would view positively an increase in the diversity of the Bank’s revenues and a reduction in the dependence on more volatile investment banking activities.

Barclays’ Transform programme led to Cost to Achieve charges of GBP 1.2 billion and the Bank has announced 7,650 headcount cuts as part of its current restructuring. The cost-income ratio was 71% in 2013 and it will be a challenge for the Bank to meet its target of a ratio in the mid-50s by 2015. However, DBRS notes the Bank’s strong commitment to reducing the underlying cost base and delivering returns in excess of the cost of equity for each business line by the end of 2015.

Barclays has made significant progress on improving capital and leverage ratios following the completion of its GBP 5.8 billion rights issue in October 2013, Additional Tier 1 issuance and a GBP 140 billion reduction in CRD4 leverage exposure during 1H13. The Bank reported a fully loaded CRD4 CET1 ratio of 9.3% and a CRD4 leverage ratio of 3.1%, and is only just under the Prudential Regulatory Authority’s 3% leverage requirement for June 2014. The Bank expects to make further improvements and is targeting a CRD4 CET1 ratio of 10.5% and a CRD4 leverage ratio of 3.5% by the end of 2015.There is still uncertainty regarding banks’ final regulatory capital requirements, but Barclays’ track record in adjusting to tougher requirements underpins the Bank’s current ratings.

DBRS rates Barclays Bank plc Senior Unsecured Long-Term Debt at AA (low) with a Stable trend.

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

[Amended on December 23th, 2014 to remove unnecessary disclosures.]