DBRS Maintains Barclays Intrinsic Assessment at A (high); Snr Ratings Remain Under Review Neg

DBRS Ratings Limited (DBRS) has today maintained Barclays Bank’s (Barclays or the Bank) intrinsic assessment (IA) at A (high). The Bank’s Long-term debt and deposit ratings remain at AA (low) Under Review with Negative Implications (URN), with the URN reflecting the action taken on 20th May 2015 to review the systemic support assumptions of 38 European Banking Groups. The short-term rating remains R-1 (middle). This action follows a detailed review of the Bank’s performance and outlook.

Barclays has made some progress with its wide-reaching restructuring programme, which was updated in May 2014 and aims to reduce the size of the investment bank, generate higher and more sustainable returns and reinforce its focus on cost and capital, but further work remains. As well as execution risks for the remainder of the restructuring programme, Barclays continues to face conduct/litigation costs, below cost of capital returns at the investment bank, and tough capital requirements, all of which make improving returns on capital challenging to achieve. The recent decision by the Board’s Non-Executives to remove the current CEO and appoint the Chairman as Executive Chairman in the interim, indicates a commitment to swifter progress on the restructuring.

The Bank’s ratings have been underpinned to date by the strength of the core retail and commercial banking businesses, which continue to perform steadily, supported by a solid risk and funding profile. However, if the Bank’s restructuring efforts do not deliver the necessary timely progress and the Bank continues to underperform similarly rated peers during the next few quarters, downward pressure on the Intrinsic Assessment is probable. Upward pressure on the Intrinsic Assessment is unlikely, given the challenges of the restructuring task, as well as the continuing regulatory challenges.

The Bank has cut risk weighted assets (RWA) in Barclays Non-Core (BNC), but further progress is needed in order to improve the Bank’s returns. RWAs fell 41% from GBP 110 billion at end 2013, to GBP 65 billion at end of 1Q15, driven by business disposals, including the sale of the UAE business in September 2014, and the Bank’s Spanish retail business in 1Q15. BNC, however, continued to represent a drag on the Bank’s Return on Equity (RoE) of 3.3% (annualised) in 1Q15, albeit down from 4.1% in 2014.

The Bank’s capital ratios have strengthened, thanks partly to the RWA reductions, although final regulatory requirements are still evolving. The Bank reported a fully-loaded Common Equity Tier 1 ratio of 10.6% at 1Q15 (up from 9.1% at end 2013), which is at the bottom of its UK peer group, but in line with a number of large international peers. Barclays is now nearing its 2016 target of above 11%. The Bank’s leverage ratio is also nearing its 2016 target of above 4%, at 3.7% at end-1Q15, however DBRS notes that it remains at the lower end of both the international and UK peer group.

Cutting costs continues to be a key challenge for Barclays, with the Bank targeting an adjusted cost base excluding Costs to Achieve (CTA) for the Core Bank of less than GBP 14.5 billion by 2016, from GBP 16.4 billion in 2013. In addition to excluding CTA, the adjusted cost base excludes provisions for Payment Protection Insurance and interest rate hedging redress, provisions for litigation relating to FX, and goodwill impairment. The Core Bank reported an adjusted cost base of GBP 15.1 billion in 2014, with reductions in expenses across all business lines. Despite some progress, the Bank’s overall cost-income ratios are still high: the statutory cost-income ratio for the overall Group was 81% in 2014, which reflected large conduct charges, fines and restructuring charges, as well as further work to be achieved in the cost base of the underlying businesses.

The restructuring of the Investment Bank is central to the Bank’s transformation plans. Barclays has maintained its focus on the UK and US markets, but has reduced activity in some other markets and now has a smaller Markets business. Investment Bank income was down 12% year-on-year in 2014 but up 2% quarter-on-quarter in 1Q15. DBRS views the Bank’s recent performance as weaker than a number of European and global peers, although currency movements have also had an impact on results.

Barclays’ core retail and commercial banking businesses (Personal and Corporate Banking, Barclaycard and Africa Banking) have continued to perform steadily over the past 18 months and underpin the Bank’s current ratings. The risk profile of these businesses remains solid and the Bank’s Non-Performing Loan ratio (DBRS definition) reduced further to 4.4% at end 2014 (6.0% at end 2013). The Bank’s funding profile has also remained strong, and Barclays reported a loan-to-deposit ratio of 101% at 1Q15 and estimated Liquidity Coverage Ratio (LCR) of 124% and Net Stable Funding Ratio (NSFR) of 102% at the end of 2014. The Bank has a relatively large usage of short-term wholesale funding (GBP 75 billion at end 2014), but the risks are mitigated by a sizable liquidity pool of GBP 149 billion at end 2014.

The Bank’s ratings remain Under Review with Negative Implications due to DBRS’s review of the systemic support assumptions for a number of European Banks initiated on 20th May 2015. The review reflects DBRS’s view that recent developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. Currently, Barclays has a support assessment of SA-2, which results in a one-notch uplift from Barclays’s IA of A (high) to the final rating of AA (low). During the review period DBRS is considering whether to change the support designation of a number of European banks from SA-2 to SA-3, which is the category for banks in countries where DBRS has no expectation of systemic support or is not confident enough that timely systemic support would be forthcoming in times of need to add a notch for systemic support. Such a conclusion would lead to the removal of any uplift and a downgrade of the senior ratings for any affected banks. The review is expected to be completed in September.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (June 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2015) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015).These can be found can be found at: http://www.dbrs.com/about/methodologies

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

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

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

This rating is under review. Generally, the conditions that lead to the assignment of reviews are resolved within a 90 day period. DBRS reviews 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 Reid
Initial Rating Date: September 9, 2005
Most Recent Rating Update: 20 May 2015

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