DBRS Downgrades Barclays Bank to A, Trend Now Stable

DBRS Ratings Limited (DBRS) has today downgraded the ratings of Barclays Bank plc (Barclays Bank or the Bank), including its Issuer Rating and Long-term Debt to A, Short-Term Debt & Deposit rating to R-1 (low), as well as Subordinated Debt Rating and Hybrid Capital Securities rating to BBB (high). Preference shares rating was downgraded to BBB and Reserve Capital Instruments Rating to BBB (high). The Long-Term and Short-Term Critical Obligations Ratings were downgraded to AA (low) and R-1 (middle), respectively. Concurrently, DBRS has assigned a Long-Term Deposits rating of A to Barclays Bank and Issuer Rating and Long-Term Senior Debt ratings of A (low) and a Short-Term Debt rating of R-1 (low) to Barclays Plc (Barclays or the Group). The trend on all the above ratings is Stable.

The downgrade takes into account the challenges Barclays has faced in generating solid and stable statutory earnings as a result of substantial conduct and litigation expenses, restructuring and Non-Core exits. In DBRS’s opinion despite a decline in litigation and conduct expenses in 2016, conduct-related risks remain significant, due to a relatively high number of outstanding conduct-related investigations and litigations. Despite a gradual strengthening of the Group’s capital position in recent years by 340 basis points (bps) since December 2013, driven by solid Core performance and Non-Core exits, Barclays’ capital and leverage ratios remain in the lower end of the UK peers range. In the 2016 Bank of England’s stress test Barclays reached a low point of 6.9% following ‘strategic’ management actions under the stress, and as a result, fell short of its Common Equity Tier 1 ratio (CET1) systemic reference point hurdle prior to the conversion of its AT1 instruments. However, after taking account of subsequent active capital management in 2016, Barclays was not required to submit a revised capital plan. DBRS views positively that the Group’s deconsolidation of Barclays Africa Group Limited (BAGL) is expected to provide a 73 bps uplift to the CET1 ratio, therefore narrowing the differential between Barclays and its peers.

The Stable trend reflects DBRS’s view that the ratings are now well-placed at the current level. Supporting the current rating level is the strength of Barclays’ Core franchises in the UK, where it is a full-service bank with leadership in several segments, and in the US where it has a significant presence in corporate and investment banking, and in the cards business.

In the near-term DBRS expects Barclays to proceed with the execution of its strategic agenda, which includes the full regulatory deconsolidation of BAGL, closure of the Non-Core unit at 30 June this year, and undertaking structural changes in response to new regulations. Barclays faces a number of outstanding legacy and conduct matters, some of which could be material. DBRS notes that while significant progress has been achieved in restructuring the Group, execution risks remain with respect to the Group’s strategy. This includes the further structural changes implementing to comply with ring-fencing in the UK. External challenges include an uncertain economic outlook, following Brexit, and low interest rate environment, albeit Barclays continues to benefit from significant international diversification.

While the Group’s core earnings generation remains solid, Non-Core has represented a significant drag on statutory earnings generation. The pre-tax loss generated by the Non-Core division remained a substantial GBP 2.8 billion in 2016. Despite the significant progress in down-sizing Non-Core in 2016, the Group anticipates a large, albeit reduced, Non-Core loss before tax at approximately GBP 1 billion in 2017 and weighted towards the first half of the year pre-closure of the unit. In DBRS’s opinion, conduct risk is significant as highlighted by approximately GBP 13 billion of conduct/litigation costs incurred between 2011 and 2016 and a significant number of currently outstanding investigations and litigation cases. DBRS expects that in the medium-term, once legacy matters and restructuring are finalised, Barclays’ statutory financial performance should fully reflect the strength of its Core businesses.

DBRS views Barclays’ credit risk as conservative, supported by a generally low level of impaired exposures, benefiting from sound origination standards and very low interest rates. The share of impaired loans (defined as Credit Risk Loans and comprising individually impaired loans, loans 90 days or more past due and restructured loans) as a proportion of gross loans was 1.5%, improving slightly from 1.6% at end-2015. At the same time, credit impairment charges increased by 35% in 2016, in part due to a review of the UK and US cards portfolio impairment modelling.

DBRS views the Group’s funding and liquidity profile as strong, benefiting from a well-established UK deposit franchise and good market access. Liquidity is robust, with a total eligible liquidity pool slightly exceeding the outstanding total wholesale funding. At March 2017 the CRD IV Liquidity Coverage Ratio (LCR) was 140%.

Barclays’ end-1Q17 fully-loaded CET1 ratio was 12.5% and the UK leverage ratio was 4.6%. The Group looks well placed to meet minimum requirement for own funds and eligible liabilities (MREL), with Barclays reporting an MREL ratio of 21.6% at end-1Q17, which compares well with an interim 2020 requirement of 24.5%, including going-concern capital buffers.

RATING DRIVERS

Upward pressure on the ratings could arise if Barclays finalises its restructuring and successfully resolves the outstanding major legacy issues, while at the same time, continues to improve its earnings and capital position.

Downward rating pressure could arise from higher than expected conduct-related or restructuring charges or a significant weakening of the franchise or deterioration in earnings, funding, and capital. Potential adverse economic effects of the UK’s exit from the EU on the Group’s risk profile could also exert downward pressure on the ratings.

Notes:
All figures are in GBP unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations
(May 2017). This can be found can be found at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial and company documents. DBRS considers the information available to it for the purposes of providing this rating to be 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 historical default rates published by the European Securities and Markets
Authority (“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: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Global Credit Policy
Initial Rating Date: October 27, 2004
Last Rating Date: March 7, 2017

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