December 13, 2016 / 9:50 PM / 7 months ago

Fitch Affirms Barclays at 'A'; Outlook Stable

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(The following statement was released by the rating agency) LONDON, December 13 (Fitch) Fitch Ratings has affirmed Barclays plc's and Barclays Bank plc's Long- and Short-Term Issuer Default Ratings (IDR) at 'A'/'F1' and Viability Ratings (VRs) at 'a'. The Outlooks are Stable. Fitch has also assigned a Derivative Counterparty Rating (DCR) of 'A' to Barclays Bank plc. Fitch has assigned a Derivative Counterparty Rating (DCR) of 'A' to Barclays Bank as part of its roll-out of DCRs to significant derivative counterparties in western Europe and the US. DCRs are issuer ratings and express Fitch's view of banks' relative vulnerability to default under derivative contracts with third-party, non-government counterparties. The rating actions have been taken in conjunction with Fitch's periodic review of the Global Trading and Universal Banks (GTUB), which comprises 12 large and globally active banking groups. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR, SENIOR DEBT, and DCR Barclays' (the holding company) and Barclays Bank's (the operating company) ratings are analysed on a consolidated basis as their VRs are driven substantially by the same factors, with no significant difference in the likelihood of failure between the two entities, in our view. The VRs of the two entities are at the same level, and in both cases, the VRs drive the IDRs. The VRs and IDRs of the two entities are equalised because of the lack of holding company double leverage and as yet insufficient junior debt buffer to protect the operating company's senior debt. Because senior debt down-streamed from the holding company to Barclays Bank should rank pari-passu with Barclays Banks' external senior creditors in resolution, in our view it does not afford any protection to Barclays Bank's external senior creditors. Our assessment of the VRs places high importance on Barclays' company profile, which benefits from a balanced and well-diversified core business model and strong franchises in domestic retail and commercial banking, and UK and US cards. Its capital markets activities, which we regard as more volatile, have been scaled back, but remain sizeable, effectively limiting the VR's upside. Barclays non-core (BNC) and its associated tail risk are gradually diminishing but parts of it will remain and will be re-integrated within the bank. The group's company profile is still evolving, with large parts (Barclays Africa Group Limited (BAGL) and BNC) earmarked for sale. In addition the bank has set up an intermediate holding company (IHC) in the US in July 2016 and is planning to set up a new bank to contain ring-fenced domestic activities by 2019. These changes are costly and could lead to business disruptions. The increased subsidiarisation of businesses, which leads to reduced fungibility of capital and liquidity, also acts as a constraint on the group's VR. Barclays' common equity tier 1 (CET1) ratio of 11.6% and leverage ratio of 4.2% at end-9M16 are commensurate with the bank's risk profile and broadly in line with European GTUB peers. The group's capital planning foresees further strengthening of the CET1 ratio to 100-150bp above fully-loaded regulatory requirements, currently at 10.8% (based on end-2015 risk-weighted assets (RWAs)). We expect Barclays to achieve this primarily through deleveraging (planned run-down of BNC and deconsolidation of BAGL), given that internal capital generation is challenged by costs associated with restructuring, business sales and litigation. The reduction in the dividend until end-2017 should also support this. Barclays' modest profitability is a result of a satisfactory underlying performance by the group's core businesses, dragged down by losses related to the non-core unit and charges for previous misconduct. The group's core businesses achieved an underlying 10.7% return on tangible equity (RoTE) during 9M16, aided by continued healthy performance in the cards businesses, strong third quarter trading results and the appreciation of the US dollar against sterling, but net of non-core losses and other items, RoTE was just 4.4%. We expect profitability to remain under pressure in 2017. In the UK businesses, we expect low base rates, lower volumes of business and higher loan impairment charges, relating to uncertainties around Brexit. Restructuring and business disposal-related charges will likely remain high as Barclays progresses with its plan to run-down BNC. Litigation costs, which in 9M16 mainly related to UK customer redress, will likely continue to burden profitability as the group works through its legacy cases. Barclays continues to focus on improving cost efficiency through strategic cost-cutting programmes, but the long-term cost-income ratio target, which is now set at below 60%, is ambitious in our view. Fitch believes that Barclays' NPLs are at a cyclical low, underpinned by a benign economic environment and low interest rates in the group's key markets UK and US. A high share of unsecured lending in the UK and US expose Barclays to some loan quality deterioration if the economic environment worsens, which we expect to a certain extent after the Brexit vote, and if interest rates increase in the US. But overall we expect the group's moderate risk appetite, and its reducing footprint in countries with weaker asset quality, to mitigate this. Barclays' well-matched and diversified funding profile benefits from the group's domestic retail franchise to fund retail assets and good market access to fund wholesale operations. Barclays' funding structure is evolving because of the group's resolution planning and structural changes required around ring-fencing. Liquidity is ample, with a loan coverage ratio (LCR) at 125% and an available liquidity pool of GBP157bn well above requirements. The minimum requirement for own funds and eligible liabilities (MREL) set by the Bank of England, equivalent to 24% of RWAs) by 2022, suggests that the group will be an active issuer of eligible debt over the next few years. The UK's approach to resolution planning means that Barclays is required to use structural subordination, involving the issuance of external MREL through the holding company, to meet requirements. Currently externally raised funds are down-streamed as corresponding instruments to the operating company, which means that as they stand they would rank pari-passu in resolution. We expect that this will change once internal MREL requirements are known and the future shape of the group materialises. The bank has seen material senior management turnover over the past three years, which as with other GTUB peers, highlights the challenges to restore profitability in light of higher capital requirements and high costs related to past misconduct. Barclays' strategy has evolved, but the plan to become increasingly focused on transatlantic consumer, corporate and investment banking businesses supports and extends past strategic reviews. At the same time, we view that a certain degree of fine-tuning is inherent to Barclays' capital markets businesses and a necessary reaction to the evolving regulatory environment. We judge that the bank's execution on building capital and reshaping its businesses has been adequate so far, but execution risk related to implementing structural reform and down-sizing BNC and reducing its stake in African banking, remain substantial. The Stable Outlook is based on Fitch's expectation that the BNC targets will be achieved in a capital-accretive way and in a sufficient quantity to allow the group to achieve its stated capital trajectory over the medium-term. This will be despite expected losses in this division and possibly large additional conduct and litigation charges. A DCR has been assigned to Barclays Bank because it has significant derivatives activity. The DCR is at the same level as Barclays Bank's Long-Term IDRs because derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR Barclays Bank's and Barclays plc's SRs and SRFs reflect Fitch's view that senior creditors of the bank and the holding company cannot rely on extraordinary support from the sovereign in the event that Barclays Bank becomes non-viable. In our opinion, the UK has implemented legislation and regulations to provide a framework that is likely to require senior creditors participating in losses for resolving even large banking groups. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital issued by Barclays Bank and Barclays are all notched down from their respective VRs, in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles, which vary considerably. Subordinated lower Tier 2 debt is rated one notch below the VR for loss severity, reflecting below-average recoveries. Upper Tier 2 instruments are rated three notches below the VR, including one notch for loss severity and two notches for incremental non-performance risk, reflecting cumulative coupon deferral. High trigger contingent capital Tier 2 notes are rated four notches below the VR. The notes are notched down twice for loss severity, reflecting loss absorption if the bank breaches a 7% CRD IV transitional (FSA October 2012 statement) CET1 ratio. In addition, they are notched down twice for non-performance risk. Barclays' high-trigger contingent capital Tier 1 instruments and preference shares with no constraints on coupon omission are rated five notches below the VR. The issues are notched down twice for loss severity, reflecting poor recoveries as the instruments can be converted to equity or written down well ahead of resolution. In addition, they are notched down three times for very high non-performance risk due to fully discretionary coupon omission. Other legacy Tier 1 securities are rated four notches below the VR, comprising two notches for higher-than-average loss severity, and two further notches for non-performance risk due to partly discretionary coupon omission. RATING SENSITIVITIES IDRS, VR, SENIOR DEBT and DCR Barclays' and Barclays Bank's IDRs, VRs and senior debt ratings are primarily sensitive to the group's progress in meeting performance and capital targets, as the ratings rely on our expectation that the release of RWAs will be sufficient to absorb non-core and misconduct costs. Failure to reduce exposure in a timely and controlled manner, leading to persistently weaker profitability and capital ratios, could put the ratings under pressure. Upside for the VR is limited in the medium term unless the bank shows sustainable improvement in earnings, resulting in a materially stronger capacity to generate capital internally. The VRs and IDRs are also sensitive to a material worsening of earnings and asset quality if the economic environment deteriorates substantially following the UK's decision to leave the EU. The ratings would also come under pressure if the bank increases its risk appetite materially, particularly in the corporate and investment banking division. The creation of separately capitalised and ring-fenced legal entities within the group could result in rating differentiation. Barclays has indicated that it plans to transfer domestic retail and the UK SME portfolio currently in Barclays Bank plc to a new legal entity in 1H18, in preparation for meeting UK ring-fencing requirements by 2019. Fitch expects to incorporate such considerations into the ratings once we have sufficient and credible information to form an opinion around the creditworthiness of the future ring-fenced and non-ring-fenced entities separately, and of the impact on the group, if any, in light of the planned changes. We expect any rating differentiation between legal entities arising from UK ring-fencing requirements to be small. The Long-Term IDRs of Barclays plc are equalised with its VR. Fitch does not consider the group's layer of subordinated debt and hybrid capital instruments to be large enough to provide sufficient protection to senior debt-holders such as to warrant an uplift of the group's IDR above its VR. Barclays plc' IDR could be rated above the VR if the group materially increases its qualifying junior debt buffer. Conversely it could be rated lower if common equity double leverage increases above 120% or if the role of the holding company changes, both of which we do not expect. Barclays Bank's IDR could be upgraded one notch above the VR if the quantum of debt issued by the holding company and Barclays Bank's own external qualifying junior debt are sufficient and structurally subordinated to provide greater protection to other senior creditors of Barclays Bank. External senior debt issued by the holding company is currently down-streamed as senior debt to Barclays Bank and ranks pari passu with Barclays Bank's external senior debt. The DCR is primarily sensitive to changes in Barclays Bank's Long-term IDRs. In addition, it could be upgraded to one notch above the IDR if a change in legislation (for example as recently proposed in the EU) creates legal preference for derivatives over certain other senior obligations and if, in Fitch's view, the volume of all legally subordinated obligations provides a substantial enough buffer to protect derivative counterparties from default in a resolution scenario. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of Barclays Bank's SR and upward revision of its SRF would be contingent on a positive change in the sovereign's propensity to support its banks, which we do not expect. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital ratings are primarily sensitive to changes in the VRs of Barclays Bank plc and Barclays plc. The securities' ratings are also sensitive to a change in their notching, which could arise if Fitch changes its assessment of the probability of their non-performance relative to the risk captured in the respective issuers' VRs. This may reflect a change in capital management in the group or an unexpected shift in regulatory buffer requirements, for example. The rating actions are as follows: Barclays Bank Plc Long-Term IDR: affirmed at 'A'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Derivative Counterparty Rating: assigned at 'A(dcr)' Senior unsecured debt, including programme ratings: affirmed at 'A'/ 'F1' Commercial paper and certificates of deposits: affirmed at 'F1' Market-linked senior securities: affirmed at 'Aemr' Government-guaranteed senior long-term debt: affirmed at 'AA' Lower Tier 2 debt: affirmed at 'A-' Upper Tier 2 debt: affirmed at 'BBB' Additional Tier 1 instruments: affirmed at 'BB+' Preference shares with no constraints on coupon omission: affirmed at 'BB+' Other hybrid Tier 1 instruments: affirmed at 'BBB-' Tier 2 contingent capital notes (US06740L8C27): affirmed at 'BBB-' Barclays plc Long-Term IDR: affirmed at 'A'; Outlook Stable Short-Term IDR: affirmed at 'F1' Viability Rating: affirmed at 'a' Support Rating: affirmed at '5' Support Rating Floor: affirmed at 'No Floor' Senior debt including programme ratings: affirmed at 'A'/'F1' Commercial paper: affirmed at 'F1' Tier 2 instruments: affirmed at 'A-' Basel III-compliant additional Tier 1 instruments: affirmed at 'BB+' Barclays US CCP Funding LLC US repo notes programme: affirmed at 'F1' Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ioana Sima Analyst +44 20 3530 1736 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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