DBRS Confirms Barclays Bank at AA (low), Stable Trend

DBRS Ratings Limited (DBRS) has today confirmed the Issuer and Long-Term debt ratings of Barclays Bank plc (Barclays or the Bank) at AA (low). The Short Term rating was confirmed at R-1 (mid) and the Intrinsic Assessment at A (high). The outlook on these ratings remains Stable. The Bank’s Subordinated debt ratings remain Under Review with Negative Implications reflecting the rating action taken on the subordinated debt of 23 European banks on May 8, 2014.

The confirmation of the ratings takes into account developments at the Bank since the last rating action taken in September 2013, including the Strategy Update announcement on May 8, 2014. Under its revised strategy, Barclays intends to reduce the size of its investment bank, placing greater weight on retail and commercial banking activities, and will reinforce its focus on cost and capital targets. DBRS views the announcement as a necessary adjustment to the cyclical and structural challenges Barclays faces in investment banking, particularly fixed income, as well as to the evolving regulatory environment.

Barclays is setting up a Non-Core unit with risk weighted assets (RWA) of approximately GBP 115 billion, largely comprising of non-core investment banking assets (including non-standard derivatives, non-core commodities, and certain emerging market products), as well as certain other assets, including the Europe Retail and Business Banking operations. This will mean the Core Investment Bank, which accounted for GBP 120 billion RWAs at end 2013, will represent no more than 30% of total RWAs, giving the Bank a better balanced business mix.

Barclays has introduced a 2016 capital target to reach a fully-loaded Common Equity Tier 1 (CET1) ratio of above 11%, in addition to the existing target of 10.5% by the end of 2015. DBRS notes that its current fully-loaded CET1 ratio of 9.6% is at the lower end of the peer group, and therefore it will be important for the Bank to demonstrate steady progress towards this goal. The cost target is for the Core Bank to reduce adjusted operating expenses to GBP 14.5 billion or less by 2016, from the current level of approximately GBP 16.2 billion.

The revised strategic plan faces a number of execution challenges. Given the disruption, revenues are likely to fall initially more quickly than costs in the Non-Core unit. Also, the restructuring could have an unintended negative impact on the Core Investment Bank (IB) franchise. Other factors that could delay the Bank’s progress include further fines and/or settlements for conduct risk and litigation. Nevertheless, Barclays has demonstrated its ability to adapt to evolving requirements including its GBP 140 billion (excluding FX impact) reduction in CRD4 leverage exposure in H2 2013, as well as a 12% year-on-year reduction in underlying operating costs in Q1 2014. Moreover, DBRS considers the Bank’s UK retail and commercial banking, Barclaycard and Africa to be businesses with strong customer franchises and good underlying profitability.

The trend on the Bank’s ratings remains Stable. DBRS considers that given the underlying strength of Barclays’ customer franchises and the recently announced strategy to improve the profitability and balance of the Bank through the creation of the Non-Core unit, the Bank will be able to adapt to ongoing challenges in the environment without further downward pressure on ratings. Upward pressure on the ratings is unlikely, however, given the size of the restructuring task ahead, as well as the continuing regulatory challenges. Downward pressure on the ratings could arise, if the Bank’s restructuring efforts do not deliver the necessary progress, or if the implementation of ring-fencing in the UK and/or a bail-in regime has a negative impact on bondholders.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the following: DBRS Criteria: Support Assessment for Banks and Banking Organisations and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities. These can be found at: http://www.dbrs.com/about/methodologies

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

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

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/statistics/defaults.xhtml.

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: September 9, 2005
Most Recent Rating Update: September 9, 2013

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