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. 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 retail and wholesale banking franchise in its domestic UK market, combined with a well-established wholesale and consumer franchise in the United States (US), its strong asset quality metrics with low levels of Non-Performing Loans (NPLs), and sound capital position. The ratings also consider the Group’s sound funding and liquidity position, underpinned by a sizeable deposit base and large portfolio of liquid assets as well as its solid earnings generation which are benefiting from revenue growth driven by the higher interest rate environment.
The ratings also take into account that the challenging economic environment in the UK and US could translate into asset quality deterioration and require additional loan loss provisions. The ratings also consider that the Group’s investment bank, which has performed well in recent years, but nevertheless, provides revenues that tend to be less predictable than other sources of revenue and add a certain degree of volatility to the Group’s earnings. Moreover, the Bank has some weakness in its internal management procedures, which were most recently evidenced by the over-issuance of securities in the US by Barclays Bank PLC resulting in an investigation and fine by the SEC. While the financial impact was manageable from a profitability standpoint, the issue highlighted that operational risk needs to be strengthened.
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 consistent improvement in profitability, whilst maintaining a sound risk and capital position.
A downgrade of the Long-Term Issuer Rating would likely be driven by a material deterioration in asset quality or capital. Significant weaknesses related to operational risk could also result in a downgrade.
Franchise Combined Building Block (BB) Assessment: Strong
Barclays is one of the leading UK banks with total assets of GBP 1,539 billion at end-March 2023. The Group has a strong retail and wholesale franchise in the UK whereas in the US, the Group has sizable 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 a significant 40% to the Group's operating income in 2022, while wholesale (global) operations, including CIB, accounted for 54% of the Group's operating income.
Earnings Combined Building Block (BB) Assessment: Good
DBRS Morningstar views Barclays as having solid earnings generation aided by its well diversified business model and geographic footprint. In Q1 2023, Barclays reported a net attributable profit of GBP 1.8 billion, up 27% from GBP 1.4 billion in Q1 2022 largely supported by net interest income (NII) growth on the back of higher interest rates and higher structural hedge revenues. Barclays continues to maintain good cost discipline and reported a cost-income (C/I) ratio of 57% in Q1 2023; within its strategic target of a C/I ratio below 60% and much improved from 67% in 2022 and 2021. In Q1 2023, loan loss provisions totaled GBP 524 million, up from GBP 141 million the year before mainly due to growth in US card balances and a slight deterioration in the US card business. As a result, cost of risk increased to 52 bps, compared to 15 bps in Q1 2022. For 2023, the Group expects the cost of risk to range between 50-60 bps. The Return on Tangible Equity improved to 15% in Q1 2023 from 11.5% the year before.
Risk Combined Building Block (BB) Assessment: Good
DBRS Morningstar views the Group’s loan portfolio as well diversified, with mortgages accounting for 43%, corporate and SMEs 44% and unsecured retail lending accounts for a relatively high 13% of the Group’s total gross loans at end-Q1 2023. Despite the more challenging macroenvironment of persistent inflation and higher interest rates, asset quality remains sound with the Group’s Stage 3 loans accounting for 1.7% of the Group’s total loan book at end-Q1 2023 , compared to 1.8% at end-2022 and 2.0% at end-2021. The Group’s Stage 2 loans were 11% of total loans which is in line with pre-pandemic levels. Barclays exposure to UK commercial real estate remains limited and amounted to GBP 9.7 billion at end-2022, accounting for 2.4% of total gross loans.
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, diversified wholesale funding and good market access. Total customer deposits (excluding deposits from banks) amounted to GBP 525.8 billion at end-2022 up from GBP 501.6 billion at end-2021 and accounted for 66% of the Group’s total funding. Barclays customer net loan-to-deposit ratio was 65% at end-2022, similar to the year before. Around 41% of total deposits were insured at end-Q1 2023, largely associated with retail deposits. Liquidity remains sound with the GBP 333 billion liquidity pool representing around 22% of the Group’s assets and a Liquidity Coverage Ratio (LCR) of 163% at end-Q1 2023, broadly stable since end-2019.
Capitalisation Combined Building Block (BB) Assessment: Strong/Good
DBRS Morningstar views Barclays’ capital position as sound, supported by its solid earnings generation and good access to capital markets. In Q1 2023, Barclays reported a CET1 ratio of 13.6% down 30 bps from 13.9% at end-2022 due to a combination of factors including share buybacks, regulatory changes and increased capital deductions which were partly offset by strong earnings generation. The Group currently expects to maintain a CET1 ratio between 13-14%, which is well above its minimum regulatory requirement of 11.8% from July 2023 when the UK countercyclical buffer is raised to 2%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/414407
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Governance (G) Factors
We still consider the subfactor ‘corporate governance’ to be relevant for Barclays, but does not impact the overall rating or trend assigned to the Group. This is reflected in the risk building block and is largely associated with internal control weaknesses related to several different past and ongoing issues. In September 2022, Barclays paid a total settlement of USD 361 million imposed by the SEC due to over-issuance of securities by Barclays Bank PLC in the US, signalling deficiencies within the bank’s internal procedures that led to the bank exceeding its prospectus-defined issue amount issuance limit in the US. Furthermore, we note that Barclays is currently under investigation by the UK’s FCA for suspected persistent failings in its compliance and AML systems. As of end May 2023, there was no expected timeline for when this case would be finalised, however, we expect any potential fine to be manageable and in line with those of recent peers.
There were no Environmental/ Social factors that had a significant or relevant effect on the credit analysis.
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 (17 May 2022) 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 - https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
(23 June 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.
The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies
The sources of information used for this rating include Morningstar Inc. and Company Documents, Barclays PLC Annual Report 2022, Barclays PLC FY 2022 & 1Q23 Results Presentation, Barclays PLC FY 2022 & 1Q23 Fixed Income Presentation, Barclays PLC FY 2022 & 1Q23 Results Announcements, Barclays PLC FY2022 ESG Investor Presentation & Barclays PLC FY 2022 Pillar 3 Report. 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.
The conditions that lead to the assignment of a Negative or Positive trend are generally 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: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.
The sensitivity analysis of the relevant key rating assumptions can be found at: https://www.dbrsmorningstar.com/research/414406
This rating is endorsed by DBRS Ratings GmbH for use in the European Union.
Lead Analyst: Maria Rivas, Senior Vice President, Global FIG
Rating Committee Chair: William Schwartz, Senior Vice President, Credit Practices Group
Initial Rating Date: 31 August 2006
Last Rating Date: 27 May 2022
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