DBRS Morningstar Confirms Barclays Bank PLC’s Long-Term Issuer Rating at A, Stable Trend

DBRS Ratings Limited (DBRS Morningstar) has confirmed the ratings of Barclays Bank PLC (Barclays Bank or the Bank) and Barclays PLC (Barclays or the Group). This includes the ‘A’ Long-Term Issuer Rating of Barclays Bank, and the A (low) Long-Term Issuer Rating of the Group. The trend on all ratings remains Stable. Barclays Bank’s Intrinsic Assessment (IA), which reflects DBRS Morningstar’s view of the credit strength of the combined Group, was maintained at ‘A’ and the Support Assessment for Barclays was confirmed at SA3. DBRS Morningstar also confirmed the ratings on the Group’s Preference Shares at BBB and Reserve Capital Instruments at BBB (high) and withdrew these ratings for business reasons. Please see a full list of the rating actions at the end of this press release.

KEY RATING CONSIDERATIONS

The confirmation of the ratings reflects Barclays’ strong franchise and well developed wholesale and consumer banking activities which are concentrated in the UK and the United States. In recent years, although earnings were adversely affected by significant litigation and conduct charges; the Group has largely resolved these major legacy matters. Consequently, the overall drag from litigation and conduct on earnings should diminish further from 2020. The funding and liquidity profile is strong, supported by a sizeable deposit base, with the Bank having good access to capital market. The Group benefits from solid underlying earnings generation and Barclays’ risk profile and capitalisation have improved consistently in recent years. Barclays’ Long-Term Issuer Rating at A (low), is one notch below that of Barclays Bank, and is in line with DBRS Morningstar’s approach to rating bank holding companies.

Nevertheless, DBRS Morningstar also notes that Barclays’ earnings generation and risk profile are likely to be adversely affected by the major economic slowdown, driven by the COVID-19 pandemic (COVID-19). In particular, the asset quality of the Group’s unsecured retail exposures could be adversely affected by the rise in unemployment. There is also significant uncertainty around the terms of the UK’s departure from the EU, which in the case of a disorderly exit, could lead to a further deterioration in UK macroeconomic conditions. However, we expect the effects of the economic downturn to be partly offset by some of the fiscal and monetary support measures introduced in response to COVID-19. DBRS Morningstar considers that the impact of the COVID-19 outbreak on the Group in the medium to long-term will depend on the depth of the economic crisis and we will continue to monitor the developing situation and its impact on Barclays’ overall credit profile.

RATING DRIVERS

An upgrade of the Long-Term Issuer Rating is unlikely in the near term, given the challenging economic outlook. However, the ratings would be upgraded if the Group’s credit profile remains resilient throughout the economic downturn caused by COVID-19, while, sustaining a significant improvement in financial performance over the medium term.

A structural deterioration in the Group’s asset quality and profitability, as a result of the economic shock resulting from the COVID-19 pandemic would lead to a ratings downgrade. This could also be driven by a Brexit outcome that materially diminishes the UK’s economic resilience and leads to a major deterioration in Barclays’ credit profile.

RATING RATIONALE

Barclays is one of the leading banks in the UK with total on-balance sheet assets of GBP 1.4 trillion at end-Q1 2020. The Group has a strong franchise in the UK and well developed international wholesale and consumer banking activities. In the UK, Barclays is a full-service bank with leadership in several important segments while in the United States it has a significant presence in corporate and investment banking as well as the cards business.

In Q1 2020, Barclays’ profitability was adversely affected by the impact of the COVID-19 pandemic. Its statutory profit before tax (PBT) declined by 38% year-on-year (YoY) to GBP 0.9 billion, driven mainly by an almost fivefold increase in the cost of risk to GBP 2.1 billion. This was in part offset by a 20% increase in the Group’s revenues to GBP 6.3 billion, reflecting growth in CIB income. Cost discipline remained good with operating expenses broadly unchanged at GBP 3.3 billion. Following the resolution of major legacy matters, Barclays’ profitability improved in 2019. PBT in 2019 was GBP 4.4 billion, increasing 25% YoY, despite substantial charges related to PPI, reflecting high complaint volumes in the run-up to the August 2019 industry deadline for claims.

DBRS Morningstar views Barclays’ credit risk profile as conservative, benefitting from sound underwriting. The Group's lending portfolio is dominated by a low risk mortgage book in the UK and a diversified portfolio of loans to corporate and institutional customers. However, exposure to unsecured retail lending, which we view as highly sensitive to the economic downturn driven by COVID-19, is relatively high. It represented 17.4% of the total loan portfolio at end-2019 and 15% at end-Q1 2020. Operational risk has been a key challenge with the Group’s earnings affected by litigation and conduct charges in recent years, however Barclays has now resolved its major legacy matters. In its view of the Group’s risk profile, DBRS Morningstar takes into account the Bank’s substantial capital markets activities, which are a more volatile source of earnings. During 2019, asset quality remained on a steady improvement trend with Stage 3 exposures in the Group’s gross loans and advances at amortised cost declining to 2.3% from 2.6% at end-2018. The early impact COVID-19 pandemic had a limited impact on impaired exposures in Q1 2020 and the share of Stage 3 exposures declined further to 2.2% during the quarter. However, asset quality is likely to deteriorate in the near to medium term.

The Group’s funding and liquidity profile is strong, supported by a well-established UK deposit franchise and good market access. Customer deposits in the CIB division are another important source of funding. Given the large capital markets business, Barclays remains reliant on a sizeable amount of wholesale funding. Liquidity remains robust, with the total eligible liquidity pool exceeding the outstanding total wholesale funding. At Q1 2020 the Liquidity Coverage Ratio was a strong 155% and the loan-to-deposit ratio was a relatively low 79%.

The Group is well capitalised and benefits from solid underlying earnings generation. The transitional Common Equity Tier 1 (CET1) ratio was on an upward trend in recent years. During 2019, it improved by 60bps to 13.8%, in part benefiting from the removal of the operational risk RWA floor. However, during Q1 2020 Barclays’ CET1 ratio fell by 70bps to 13.1%, mainly due to strong growth in RWA, in part driven by the COVID-19-related increase in corporate draws on committed lines in March and adverse FVOCI reserve movements. These impacts were partly offset the cancellation of the 2019 dividend. In addition, internal capital generation during the quarter was adversely affected by higher credit provisions. The end-Q1 2020 UK spot leverage ratio was 4.5%, declining from 5.1% at end-2019. With a fully-loaded MREL ratio of 29.3% at end-Q1 2020, Barclays is well positioned to meet the expected 2022 requirement of 30.6%.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Grades for Barclays 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 methodology is the Global Methodology for Rating Banks and Banking Organisations (11 June 2019). https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Barclays PLC Annual Report 2019, Barclays PLC Q1 2020 Results Announcement, S&P Global Market Intelligence, Bank of England, HM Treasury, and IMF. DBRS Morningstar 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.

With Rated Entity or Related Third-Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

DBRS Morningstar 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 Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar 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.

The sensitivity analysis of the relevant key rating assumptions can be found at:
http://dbrsmorningstar.com/research/362223

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: Elisabeth Rudman, Managing Director, Global Financial Institutions Group
Initial Rating Date: October 27 2004
Last Rating Date: June 24, 2019

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