Fitch Affirms Barclays at 'AA-'; Outlook Stable
Fitch Ratings-London-29 October 2009: Fitch Ratings has today affirmed Barclays Bank plc's (Barclays) ratings at Long-term Issuer Default 'AA-', Short-term IDR 'F1+' and Support '1'. The Outlook is Stable. Barclays's Individual rating of 'B' has also been affirmed and the Rating Watch Negative (RWN) removed. A full list of rating actions is provided at the end of this commentary.
The rating affirmation reflects the stabilisation in financial markets following a prolonged period of severe turbulence that had put pressure on banks with large wholesale and investment banking businesses. This has been reflected in a sharp rebound in Barclays Capital's revenues in H109, which has underpinned group profitability and compensated for growing cyclical pressures elsewhere. Despite notable improvements in the investment banking operating environment, Fitch retains the view that the scale and ambitions of Barclays Capital expose the group to greater risks and earnings volatility over the long-term and this is likely to be a constraining factor on the group's IDR.
Fitch has removed the RWN from Barclays Individual rating to reflect the reduction in near-term concerns. Significant improvements to the group's capital base in 2008 and H109 have mitigated concerns over the potential for additional asset deterioration and the adequacy of impairment charges in credit market portfolios wrapped by sub-investment grade monoline insurers. At end-June 2009 credit market exposures had reduced to 72% of tier 1 capital from 116% as at end-2008. The transaction announced in September 2009 whereby Barclays has agreed to sell USD12.3bn credit market assets to Protium Finance LP is rating-neutral, in Fitch's opinion, since the structure of the transaction leaves Barclays exposed to the performance of the underlying assets.
There is limited downside risk to Barclays' IDR given the strongly supportive stance of the UK authorities to large troubled banks in that sector. The most significant threats to the Individual rating would be a material increase in the scale of the group's investment banking activities relative to its retail and commercial businesses, heightened earnings volatility in the investment bank, a greater-than-expected impact of a weak global economic environment on more vulnerable portfolios such as retail unsecured and commercial real estate and a material adverse change to capital relative to risks.
Barclays Capital was hit hard by the credit crisis in 2008, although many of its peers fared worse. Excluding fair value gains on its own debt, large credit market write-downs and impairment charges of meant it was loss-making in 2008. In common with many other investment banks, Barclays Capital has benefited from favourable market conditions in H109 resulting in a strong rebound in profitability. Strong income growth in H109 was driven in part by the transformation in the scale of its US offering as a result of the acquisition of Lehman Brothers North American businesses.
Barclays enjoys a strong retail and commercial banking franchise in the UK which should be capable of generating sound profitability and capital over the cycle. However, earnings and asset quality are currently being impacted by a weak UK operating environment and impairment charges are likely to rise meaningfully in UK commercial and retail unsecured portfolios through the rest of 2009 and possibly into 2010. In mitigation, Barclays has a relatively conservatively positioned UK residential mortgage portfolio and is less exposed than several of its domestic peers to commercial property.
The UK authorities have provided a substantial amount of support to both the UK banking system and to specific UK banks. Barclays has not made use of direct capital support and will not be required to join the Asset Protection Scheme. It has, however, participated in various schemes to support system-wide liquidity and wholesale funding, including the 'Credit Guarantee Scheme' under which it has issued 'AAA'-rated debt.
Barclays has improved its capital position significantly since end-2007. Including the effects of the sale of BGI, its reported core tier 1 and tier 1 ratios would have been 8.8% and 11.7%, respectively, at end-June 2009, thereby providing a stronger cushion against further asset deterioration. In recognition of changing market perceptions, Barclays has reduced its adjusted leverage ratio (the most significant adjustment being the elimination of net/collateralised derivative balances) to 20x at end-June 2009 (including the effects of the BGI sale) from 32x a year earlier. Fitch views Barclays' capitalisation as adequate relative to its risk profile and notes that despite improvements it remains somewhat weaker than many large global peers'. The agency expects Barclays to maintain capital ratios above the group's historical levels while market conditions remain uncertain. Material downward pressure on capital, which could arise from organic growth and/or acquisitions, is likely to be tempered by external influences such as evolving regulatory requirements.
Barclays Bank plc's ratings are as follows:
LT foreign currency IDR: downgraded affirmed at 'AA-'; Outlook Stable
Senior debt: affirmed at 'AA-'
UK government guaranteed debt: affirmed at 'AAA'
Short-term foreign currency IDR and short-term debt: affirmed at 'F1+'
Subordinated debt: affirmed at 'A+'
Preference shares and other hybrid capital: affirmed at 'A+'
Individual Rating: affirmed at 'B'; RWN removed
Support Rating: affirmed at '1'
Support Rating Floor: affirmed at 'A+'
The rating actions have no impact on Barclays' covered bonds.
Rating actions taken today in respect of Barclays plc, Barclays Bank plc's holding company parent:
Long-term foreign currency IDR: affirmed at 'AA-'; Outlook Stable
Short-term foreign currency IDR: affirmed at 'F1+'
Support Rating: affirmed at '5'
Support Rating Floor: affirmed at 'No Floor'
Rating actions in respect of Absa Group Limited and Absa Bank Limited:
Absa:
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Long-term local currency IDR: affirmed at 'A'; Outlook Negative
Individual rating: affirmed at 'C'
Support rating: affirmed at '1'
National Long-term rating: affirmed at 'AAA(zaf)'; Outlook Stable
National Short-term rating: affirmed at 'F1+(zaf)'
Absa Bank:
Long-term foreign currency IDR: affirmed at 'A'; Outlook Negative
Short-term foreign currency IDR: affirmed at 'F1'
Long-term local currency IDR: affirmed at 'A'; Outlook Negative
Senior debt: affirmed at 'A'
Individual rating: affirmed at 'C'
Support rating: affirmed at '1'
National Long-term rating: affirmed at 'AAA(zaf)'; Outlook Stable
National Short-term rating: affirmed at 'F1+(zaf)'
The Long-term IDRs of Absa Group Limited (Absa) and Absa Bank reflect the majority ownership by Barclays, and an extremely high probability of support that arises as a result of the latter's 55.4% ownership. The Negative Outlooks on Absa's and Absa Bank's Long-term IDRs reflect the downward pressure on South Africa's Country Ceiling, following the change in the Outlook of the South African sovereign rating on 9 November 2008. Absa's and Absa Bank's Long-term foreign currency IDRs are not constrained by South Africa's Country Ceiling.
Barclays is one of the world's largest banks. In the UK it offers a full range of financial services to retail, SME and corporate/wholesale customers. Internationally, it has mainly retail and commercial operations in Europe, Africa and parts of the Middle East and Asia. Through Barclays Capital, it services large corporate and institutional investors.
In Fitch's rating criteria, a bank's standalone risk is reflected in Fitch's Individual ratings and the prospect of external support is reflected in Fitch's Support ratings. Collectively these ratings drive Fitch's Long- and Short-term IDRs.
Contacts: James Longsdon, London, Tel: +44 (0) 20 7417 4309; Gordon Scott: +44 (0)20 7417 4307; Anthony Walker, Johannesburg, Tel: +27 11 380 0900
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