DBRS Ratings Limited (DBRS Morningstar) 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. Concurrently, DBRS Morningstar discontinued Barclays Bank plc’s Hybrid Capital Securities rating 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 and well diversified retail and wholesale banking franchise in the United Kingdom (UK) and the United States (US), its sound asset quality with low levels of Non-Performing Loans (NPLs), and its strong funding and liquidity position, supported by a sizeable deposit base and large portfolio of liquid assets. The ratings also consider the Group’s solid earnings generation although these have recently been supported by sizeable capital markets revenues, which generally add a certain degree of volatility to the Group’s earnings. Despite some capital headwinds ahead, the Group’s capital position is expected to remain sound, supported by solid earnings generation, as revenues are well positioned to benefit from interest rate rises.
The ratings also take into account that that there have been some weaknesses in internal controls, most recently evidenced by the announcement that the Group had, for a period of approximately one year, exceeded the registered amount of issuance of certain securities in the US. As a result of this, Barclays is launching a rescission programme for the affected securities. Whilst the cost of buying back the affected securities is manageable, profitability could be potentially further impacted by litigation costs or fines that may arise in the medium-term.
Barclays’ A (low) Long-Term Issuer Rating is one notch below that of the operating bank, in line with DBRS Morningstar’s approach to rating bank holding companies.
An upgrade of the Long-term Issuer Rating would require a longer track record of improved profitability, without increasing its risk profile while maintaining a sound capital position.
A downgrade of the Long-Term Issuer Rating would likely be driven by a sustained and significant deterioration in profitability, asset quality or capital. It would also arise if the franchise or capital position weaken as a result of material fines or litigation costs.
Franchise Combined Building Block (BB) Assessment: Very Strong/Strong
Barclays is one of the leading UK banks with total assets of GBP 1,496 billion at end-March 2022. The Group has a strong retail franchise in the UK and in the US it has meaningful presence in corporate and investment banking (CIB), as well as in the cards business. The Group’s operations are well diversified by geographic and business with the non-UK operations contributing 49% to the Group's operating income in 2021, while wholesale operations, including CIB, accounted for 56% of the Group's operating income. In November 2021, CS Venkatakrishnan was appointed CEO. DBRS Morningstar expects a smooth transition and no major changes to the current strategy given that Venkatakrishnan was previously on the Executive Committee.
Earnings Combined Building Block (BB) Assessment: Good/Moderate
DBRS Morningstar views Barclays’ earnings generation as solid, supported by the Group’s strong business and geographic diversification. In 2021, net attributable profit was GBP 6,375 million, up from GBP 1,526 million in 2020 primarily driven by significant loan loss releases (vs. high loan loss provisions in 2020). In Q1 2022, Barclays, reported a net attributable profit of GBP 1.4 billion, down 18% from GBP 1.7 billion in Q1 2021, largely impacted by the GBP 320 million of litigation and conduct costs relating to the over-issuance of securities by Barclays Bank PLC in the US, GBP 181 million related to a legacy loan portfolio, as well as higher loan loss provisions after significant reversals the year before. Operating revenues were up 10% in Q1 2022 YoY, largely reflecting strong revenue growth in sales and trading which benefitted from strong client activity and high market volatility, as well as recovery of UK and US unsecured lending balances. DBRS Morningstar also views that the Group’s net interest income is positioned to benefit from recent interest rate rises in the UK and the US. Barclays continues to maintain good cost discipline despite higher investment spend across all divisions and higher variable compensation. The statutory cost-income ratio was 63% in Q1 2022, down from 66% in 2021, although above the 60% management target for the medium-term.
Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar views the Group’s loan portfolio as well diversified by sector and geography. UK lending accounted for 75% of Barclays’ net loan portfolio at end-2021, and overall retail lending, primarily home loans, represented 59% of the book with the remaining 41% being wholesale lending. Asset quality remains sound with the Group’s stage 3 loans accounting for 1.9% of the Group’s total loan book at end-Q1 2022, compared to 2.0% at end-2021 and 2.6% at end-2020. The Group’s stage 2 loans accounted for 11% of total loans which is in line with pre-pandemic levels. Nevertheless, DBRS Morningstar expects the stage 2 and 3 ratios may further deteriorate due to the increased macroeconomic uncertainty which has been exacerbated by rising inflation, supply chain disruptions and Russia’s invasion of Ukraine. Barclays has very limited exposure to Russia, and has no physical operations in the country. Since Russia’s invasion of Ukraine, Barclays has reduced its exposure to Russian counterparties.
Funding and Liquidity Combined Building Block (BB) Assessment: Strong
DBRS Morningstar views Barclays as having a strong funding profile, underpinned by a well-established deposit franchise in its domestic market, and good market access. Total customer deposits, which represent the largest funding source for the Group of 68% of total funding, amounted to GBP 501.6 billion at end-2021, up from GBP 463.7 billion at end-2020. As a result, the Group's customer net loan-to-deposit ratio improved to 72% at end-2021, compared to approximately 85% at end-2019. Liquidity remains sound with the liquidity pool of GBP 320 billion representing around 21% of the Group’s assets and a Liquidity Coverage Ratio (LCR) of 159% at end-Q1 2022, broadly stable since end-2019.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar considers Barclays capital position as generally sound, supported by its solid earnings generation and access to capital markets. However, Barclays’ CET1 ratio did weaken to 13.8% at end-Q1 2022 from 15.1% at end-2021. The reduction was driven by regulatory changes which increased RWAs by GBP 6.6 billion (circa -80 bps impact), share buybacks (circa -30 bps impact) and the impact from the over-issuance of securities in the US (-19 bps). The Group expects some capital headwinds in 2022, including the negative impact of the amortisation of IFRS 9 transitional relief of 20 bps and the impact of scheduled pension deficit reduction contributions (circa 40 bps). However, the Group expects to maintain its CET1 ratio within its target range of 13-14%, generally in line with its domestic and international peers and well above the expected minimum regulatory requirement of 11.5% for end-2022.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/397402
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
DBRS Morningstar views the ‘corporate governance’ subfactor as relevant for Barclays’ ratings. This is reflected in the Risk building block, and is largely associated with internal control deficiencies, although the impact does not affect the rating or trend assigned to the Group. In March 2022, the Group announced that weaknesses within the Group’s internal controls and monitoring had led to Barclays having exceeded its issuance limit of certain securities in the US. As a result, Barclays has provisioned GBP 540 million in order to buy back the affected securities and an investigation by the US Securities and Exchange Commission (SEC) is under way.
This G factor is new and was not present in the prior credit rating disclosure.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in GBP unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (19 July 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (17 May 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings
The sources of information used for this rating include Morningstar Inc. and Company Documents, Barclays PLC Annual Report 2021, Barclays PLC FY 2021 & Q1’22 Results Presentation, Barclays PLC FY 2021 & Q1’22 Fixed Income Presentation, Barclays PLC FY2021 ESG Investor Presentation, Barclays PLC FY2021 & Q1’22 Results Announcements. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.
With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit 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 12-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. DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage: https://www.fca.org.uk/firms/credit-rating-agencies.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/397400
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Chair: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: August 31, 2006
Last Rating Date: May 27, 2021
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