DBRS Confirms Barclays Bank Plc at A, Trend Stable

DBRS Ratings Limited (DBRS) has confirmed the ratings of Barclays Bank plc (Barclays Bank or the Bank) and Barclays Plc (Barclays or the Group). The confirmed ratings include the ‘A’ Long-Term Issuer Rating of Barclays Bank, and the A (low) Long-Term Issuer Rating of the Group. The trend on these ratings remains Stable. Barclays Bank’s Intrinsic Assessment (IA), which reflects DBRS’s view of the credit strength of the combined Barclays group, was maintained at ‘A’. The Support Assessment for Barclays was confirmed at SA3. Please see a full list of the rating actions at the end of this press release.

KEY RATING CONSIDERATIONS
The confirmation of the Bank’s IA incorporates the Group’s position as a major financial services provider engaged in retail and business banking, credit cards, payments and merchant acquiring, corporate and investment banking, and wealth and private banking. Barclays has a strong domestic position in the UK and the Group’s International wholesale and consumer banking activities concentrated in its two home markets of the UK and the United States add to the Group’s diversification. In recent years, the Group’s statutory profitability has been challenged by legacy conduct issues, restructuring charges and the rundown of the non-core businesses. While Barclays has made consistent progress in restructuring its legacy issues, the remaining litigation and conduct issues could continue to affect the Group’s earnings and capital in the near to medium term. Asset quality remains good, supported by the Group’s conservative approach to managing risk. Its funding and liquidity position is solid, supported by a sizeable deposit base and good market access. The Group has significantly strengthened its capitalisation in recent years and operates comfortably above its Maximum Distributable Amount (MDA) hurdle, however, capital ratios remain somewhat below domestic peers. Barclays’s Long-Term Issuer Rating of A(low), is one notch below that of Barclays Bank, in line with DBRS’s approach to rating holding companies.

RATING DRIVERS
Upward pressure on the ratings of Barclays could arise if the group demonstrates a track record of strong and stable earnings, following a successful resolution of the outstanding legacy issues, while at the same time maintaining its capital position.

Downward rating pressure could arise if the group’s profitability remains under pressure from higher than expected conduct-related or other material charges that would lead to a substantial weakening of the capital buffers. 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.

RATING RATIONALE
Despite legal separation and regulatory restrictions on capital and funding flows as a result of the UK ring-fencing regulation requirements, DBRS expects Barclays Bank, the non ring-fenced entity, and Barclays Bank UK Plc, the ring-fenced bank, to remain strongly integrated within the wider banking group, contributing to its strategic positioning as a transatlantic consumer, corporate and investment bank offering a broad range of products and services across a wide range of consumer segments in its home markets of the UK and the US under the Barclays brand.

Despite solid core earnings generation, Barclays’ profitability has, in recent years, been challenged by legacy litigation and conduct costs, restructuring charges, and the rundown of non-core portfolios. In 2017, the Group reported profit before tax (PBT) of GBP 3.5 billion, an increase of 10% year-on-year (YoY) with litigation and conduct charges remaining significant, at GBP 1.2 billion. The Group’s results were also affected by restructuring costs and losses in the Non-Core division, prior to its closure on 1 July 2017. The Group’s bottom line result was negative, with a reported GBP 1.9 billion attributable loss, additionally affected by the re-measurement of the US deferred tax assets (DTAs), following the US tax reform, and the loss from discontinued operations of GBP 2.2 billion, reflecting the sell down of Barclays Africa. In 1Q18, Barclays reported an attributable loss of GBP 0.8 billion, primarily due to litigation and conduct charges related to the Group’s RMBS settlement with the US Department of Justice (GBP 1.4 billion) and Payment Protection Insurance in the UK (GBP 0.4 billion). However, based on DBRS’s estimates, the Group’s underlying performance remained resilient with pre-tax income, excluding material and other items of interest, at GBP 4.8 billion in 2017, flat YoY, and at GBP 1.8 billion in 1Q18, up 12% YoY. Operating expenses excluding litigation and conduct decreased by 5% YoY in 2017 and by 6% in 1Q18 and this is viewed positively by DBRS. The Group is expecting a further decline in operating expenses, excluding litigation and conduct, and is targeting for its cost-to-income ratio to be below 60% in 2019, compared to 66% in 2017.

DBRS views Barclays’ credit risk as conservative, with the sound origination standards and low interest rates leading to a generally low level of impaired exposures. Following a rapid improvement in previous years, in 2017 the ratio of impaired loans as a percentage of gross loans to customers and banks was 1.5% under IAS 39, stable YoY. Based on DBRS’s calculations, the share of Stage 3 exposures in customer loans on 1 January 2018 under IFRS 9 was 2.8%. DBRS’s view of the Group’s risk profile takes into account its substantial capital markets activities. At end-2017, trading and financial assets and derivative instruments totalled GBP 527 billion, equivalent to 47% of the consolidated balance sheet. While much of the credit exposure related to trading and derivative exposures is mitigated through netting, set-off, collateral and risk transfer, significant capital markets activities increase the Group’s exposure to market volatility and contribute to counterparty risk. Operational risk also continues to be a key challenge as the Group deals with its legacy compliance and legal risks. In DBRS’s opinion, the remaining litigation and conduct issues are likely to continue to affect the Group’s earnings and capital in the near to medium term, albeit it at a lower level than in the recent past.

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 the total eligible liquidity pool exceeding the outstanding total wholesale funding. At end-2017 the CRD IV Liquidity Coverage Ratio was 154%.

At end-1Q18 the Group’s fully-loaded Common Equity Tier 1 (CET1) ratio was 12.7% and the UK leverage ratio was 4.6%. The Group remains on track to meet minimum requirement for own funds and eligible liabilities (MREL). At end-1Q18, Barclays’ MREL ratio on a transitional basis and including eligible Operating Company instruments was 27.5%, compared to the expected 2022 requirement of 29.1%.

The Grid Summary Grades for Barclays PLC are as follows: Franchise Strength – Strong; Earnings – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation – Strong/Good.

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 at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include SNL Financial, Bank of England, Coalition, Dealogic 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 included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.
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 and US regulations only.

Lead Analyst: Tomasz Walkowicz, Vice President, Global FIG
Rating Committee Chair: Ross Abercromby, Managing Director, Global Financial Institutions Group
Initial Rating Date: October 27, 2004
Last Rating Date: April 6, 2018

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