DBRS Confirms Barclays Bank at A (high), Trend Revised to Negative

DBRS Ratings Limited (DBRS) has today confirmed ratings of Barclays Bank plc (Barclays or the Bank) including its A (high) Long-Term Debt Rating and R-1 (middle) Short-Term Debt and Deposits Rating. The Long-Term Critical Obligations Rating was also confirmed at AA. The Intrinsic Assessment (IA) for Barclays is A (high), whilst the support assessment remains SA3, reflecting DBRS’s view that developments in European regulation and legislation mean that there is less certainty about the likelihood of timely systemic support. As a result, the Bank’s final ratings are positioned in line with its IA.

In confirming the IA at A (high), DBRS recognises the strength of the Bank’s core customer franchises (particularly the UK retail and commercial banking businesses, and Barclaycard, as well as many parts of the investment bank), supported by the Bank’s solid funding position, and generally conservative risk profile. The change in trend to Negative reflects the fact that, despite progress made by the Bank in strengthening and cleaning up its balance sheet, DBRS expects the scale of the continued restructuring task and remaining litigation/conduct charges to continue to hamper statutory earnings and challenge internal capital generation. With returns at the lower end of the global peer range for the past few years, DBRS considers successful resolution of these issues as a key rating driver.

DBRS notes that Barclays has made progress in its restructuring plans, deleveraging Non-Core Risk-Weighted Assets (RWAs) by 50% since end-1H14 to GBP 51 billion at end-1Q16. The impact on the Bank’s earnings has, however, been significant, with Non-Core recording a loss before tax of GBP 2.6 billion in 2015, and GBP 815 million in 1Q16 (these results include losses due to Fair Value fluctuations in the Education Social Housing & Local Authority portfolio of GBP 374 million in 1Q16 and GBP 359 million in 2015). With the Bank targeting an accelerated run-down of Non-Core, the drag on earnings is expected to continue over the near-term. In addition, the Bank has been affected by a number of significant litigation and conduct charges, with total provisions taken since 2011 of approximately GBP 14 billion. Of that, over GBP 3 billion remains unutilized, predominantly relating to Payment Protection Insurance (PPI). Although DBRS expects the impact of certain charges, such as PPI, to diminish, there are a number of outstanding litigation items which could lead to further charges.

Barclays has strengthened its capital position in recent years, driven principally by RWA reductions. At end-1Q16, Barclays reported a fully-loaded CRDIV Common Equity Tier 1 (CET1) ratio of 11.3%, comfortably above the Bank’s current fully-loaded regulatory requirement and a leverage ratio of 4.3%. Barclays has committed to building capital further to reach 100 – 150 basis points above future regulatory levels. Given ongoing developments in regulatory capital requirements and RWAs, and with internal capital generation expected to be limited over the near-term, it will be important for the Bank to successfully execute the accelerated run-down of Non-Core as well as the planned sell-down of Barclays Africa Group Limited (BAGL), which are expected to be positive for capital ratios.

DBRS notes the resilience of the underlying performance of the Bank’s Core businesses (excluding extraordinary charges such as litigation costs & losses on disposal), which reported an 8% year-on-year (YoY) increase in profit before tax (PBT) in 2015 to GBP 6.2 billion. The risk profile of the Bank has also continued to improve, with the non-performing loans ratio (DBRS definition) down to 3.9% at end-2015, compared with a peak of 10.1% in 2010.

Barclays also benefits from a solid funding and liquidity position, with the Bank reporting a loan-to-deposit ratio of 96%, and Liquidity Coverage Ratio (LCR) of 129% at end-1Q16, and a Net Stable Funding Ratio (NSFR) of 106% at end-2015. The Bank has continued to manage down its usage of short-term wholesale funding, with a further 28% YoY decrease in 2015, to GBP 54 billion, which compares favourably to the total liquidity pool of GBP 145 billion at end-2015.

RATING DRIVERS
The trend could return to Stable if the Bank successfully executes its accelerated risk reduction/ disposals and earnings volatility recedes.

Further downward rating pressure could arise if litigation or restructuring charges continue to significantly affect profitability or there are delays in completing the final, yet significant, stages of the Bank’s restructuring.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (December 2015). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (March 2016), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016) and Critical Obligations Rating Criteria (February 2016). These can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include company documents and 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.

This rating did not include participation by the rated entity or any related third party and is based solely on publicly available information.

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, Managing Director, Head of EU FIG, Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: September 9, 2005
Most Recent Rating Update: February 4, 2016

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