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Fitch Affirms Barclays plc's IDR at 'A'; Rates Ring Fenced Bank 'A+(EXP)'
September 28, 2017 / 9:12 PM / 2 months ago

Fitch Affirms Barclays plc's IDR at 'A'; Rates Ring Fenced Bank 'A+(EXP)'

(The following statement was released by the rating agency) LONDON, September 28 (Fitch) Fitch Ratings has affirmed Barclays plc's (B plc) Long- and Short-Term Issuer Default Ratings (IDR) at 'A'/'F1' and Viability Rating (VR) at 'a'. The Long-Term 'A' IDR of Barclays Bank Plc (BB plc) has been placed on Rating Watch Positive (RWP). Fitch has also assigned expected ratings to Barclays Bank UK plc (BBUK plc), the entity which will become the domestic ring-fenced bank, at Long- and Short-Term IDR 'A+(EXP)'/'F1(EXP)' and VR 'a(EXP)'. The Outlook on the IDR is Stable. The RWP on BB plc's IDR reflects our expectation that the bank will over the next six to 12 months have received sufficient senior debt from its parent holding company, which will become junior to BB plc's external senior debt. We believe that this will be achieved soon after the bank receives clarification from the UK's resolution authority, the Bank of England, on how to structure the subordination of this debt so that it protects the bank's external creditors in case of failure and qualifies for internal minimum requirement for own funds and eligible liabilities (MREL). At that point we expect to upgrade the IDR of BB plc by one notch to 'A+'. 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 VRs BARCLAYS PLC AND BARCLAYS BANK PLC B plc and BB plc's VRs are analysed on a consolidated basis and are equalised because of B plc's role as a holding company and the absence of common equity double leverage. We expect the holding company to maintain prudent management of liquidity, which should be helped by existing policies to manage liquidity across a large number of legal entities globally. Their VRs are underpinned by strong franchises in domestic retail and commercial banking, in the group's UK and US cards as well as sound franchises in selected investment banking businesses primarily in the UK and the US. While we view the group's business model as diversified, a high share of capital markets businesses, which we regard as more volatile, caps our company profile assessment. We view this as a factor of high importance in assessing the bank's ratings. BB plc's capitalisation is broadly in line with European GTUB peers', after having been boosted by the proportional deconsolidation of the African operations in 1H17 and the sale of various non-core assets over past quarters. Its reported CET1 ratio of 13.1% is in the range within which the group expects to operate, which has been set at 150bps-200bps above known regulatory requirements. We expect further modest regulatory capital ratio accretion through the full regulatory deconsolidation of Barclays Africa Group Limited (BAGL) (26bp CET1 by end-2018 according to the bank) and possibly further rundown of risk-weighted assets (RWAs) previously assigned to the non-core unit, although these are likely to be limited. Therefore an improvement to profitability will be crucial to offset the impact of any possible further litigation or extraordinary charges and allow the group to follow through with its aim of expanding in certain capital markets businesses to reinforce its franchise. The bank has temporarily reduced its pay-out ratio but we expect this to return to competitive levels in the future. The group's earnings are modest for the rating level, and management's plans to improve returns towards the newly stated target of above 10% of tangible equity may be challenging to achieve given a slowing domestic economy and pressure on operating expenses from Brexit. Earnings are supported by high-margin credit card businesses in the UK and US, fee share gains in underwriting and advisory in the corporate and investment bank as well as from the cyclically low cost of risk and weaker sterling versus the US dollar. However, over the last years and in 1H17 underlying profitability offered only a limited buffer to absorb charges for previous misconduct, structural transformation costs and deleveraging costs, and the resulting net performance lagged US and some European GTUB peers. Full year profitability for 2017 will be weakened by a GBP1.2 billion attributable loss reported in 1H17, which included a GBP2.5 billion charge relating to the sale of BAGL and additional UK customer redress provisions (PPI) of GBP700 million. BB plc's loan quality is generally sound, with low levels of impairments, low concentrations and controlled exposure to higher-risk sectors. Fitch believes that BB plc's NPLs are at a cyclical low, underpinned by a benign economic environment and low interest rates in the group's key markets - the UK and US. A high share of unsecured lending in the UK and US exposes it to some loan quality deterioration if the economic environment worsens in the UK, and if interest rates increase in the US. But overall we expect the group's moderate risk appetite, and a reduced footprint in countries with weaker asset quality, to help maintain adequate overall loan-quality metrics. The group's funding profile is well-matched and diversified. It benefits from the group's UK retail franchise to fund retail assets and good market access to fund wholesale operations. Liquidity is ample, with a loan coverage ratio (LCR) at 149% and an available liquidity pool of GBP201 billion at end-1H17, well above requirements. We expect the cost of funding to benefit from maturing and early redemption of legacy wholesale funding, though this may in the longer term be offset as the group looks to replace GBP10 billion of Bank of England term funding scheme loans and continues to issue total loss-absorbing capacity (TLAC) in the market, in an environment where interest rates are set to rise. BARCLAYS BANK UK PLC BBUK plc's VR reflects the entity's simple retail and SME banking business model, strong funding profile dominated by granular deposits and solid asset quality. We expect integration with the sister company BB plc to be strong, notwithstanding increased regulatory restrictions on capital and funding transfers and the requirement to maintain separate management and governance structures. Integration, translating into ordinary support, will be driven by common group management and strategy, group-wide deployment of excess capital, and access to group know how and systems through the newly set up service company. We expect BBUK plc's capital management to follow the principles applied at group level of maintaining a 150bp-200bp buffer above regulatory capital requirements and to make available any surplus capital over this target for dividend distributions and re-deployment within the group. We expect BBUK plc's earning assets to consist mainly of loans, with an overall sound quality, little exposure to cyclical or distressed sectors but high correlation with UK economic indicators. The bank will inherit some low-yielding assets previously classified as non-core, but we expect their impact on asset quality to be neutral. Loans will consist mainly of UK retail mortgages, which benefit from conservative underwriting standards and which have performed well through the last economic downturn. The bank will also contain the group's UK credit card and consumer unsecured lending, which are inherently higher-risk, but adequately remunerated and benefit from Barclays' long experience and good market positioning. SME loans (primarily loans to borrowers with turnover of less than GBP6.5 million) will also be transferred to BBUK plc and these are expected to be fairly granular as larger exposures will remain outside the ring-fence. Given BBUK plc's purely domestic focus, we expect the performance of the bank's loan book to be correlated with the UK economy. Some increased non-performance and larger loan loss rates are likely if the economy slows down following Brexit, but this will be from low levels and mitigated by a moderate risk appetite. BBUK plc's earnings generation capacity is underpinned by a high-margin credit card business, solid franchise in retail and SME lending, and good use of digital channels. Overall we expect underlying earnings to be fairly stable, more so than those of its sister bank. However, UK retail businesses have incurred high costs for customer redress, especially for mis-selling payment protection insurance (PPI), which remain difficult to predict ahead of the August 2019 submission deadline and may continue to dent net profits. BBUK plc's funding will be mostly from customer deposits, mainly retail but with some SMEs and wealth management, which are expected to remain stable and loyal reflecting Barclays' strong brand in the domestic market. The bank will also have access to secured funding markets (ABS and covered bonds) and will have internal MREL provided by the holdco. We expect the balance sheet to have adequate volumes of liquid assets and additionally the bank to have access to ordinary liquidity support from the group. IDRS, SENIOR DEBT and DCR BARCLAYS PLC AND BARCLAYS BANK PLC The Long-Term IDR and senior debt ratings of BB plc have been placed on RWP to reflect the large volumes which B plc has issued so far in the form of hybrid additional tier 1 (AT1) instruments, tier 2 debt and senior debt ahead of being subject to a MREL requirement communicated by the Bank of England of 28.5% of RWAs by 2022. While currently debt and capital issued by the holding company are down-streamed in mirror instruments to BB plc we expect that the down-streamed senior debt to become subordinated to the senior obligations issued externally and to become eligible for the proposed TLAC requirements. At that point, subject to sufficient amounts being issued and pre-placed, we expect BB plc's IDR to be rated one notch above the bank's VR. We do not expect to assign an uplift to B plc's IDR as we do not expect the bank to build up a sufficient amount of subordinated debt to allow for such an uplift. The DCR assigned to BB plc is at the same level as its Long-Term IDR because derivative counterparties have no definitive preferential status over other senior obligations in a resolution scenario in the UK. BARCLAYS BANK UK PLC BBUK plc's expected IDR is based on our expectation that the group will have injected into the bank sufficient amount of qualifying junior debt (QJD) to confer protection to its external senior obligations if the bank fails. This results in a one notch uplift of the expected IDR above its VR. A DCR has been assigned at the same level as the Long-Term IDR. SUPPORT RATING (SR) AND SUPPORT RATING FLOOR (SRF) BARCLAYS BANK AND BARCLAYS PLC BB plc's and B 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 BB plc becomes non-viable. In our opinion, the UK has implemented legislation and regulations to provide a framework that is likely to require senior creditors to participate in losses for resolving even large banking groups. BARCLAYS BANK UK BBUK plc's SR of 1 reflects our view of an extremely high probability of institutional support being made available from B plc and indirectly BB plc given the ring-fenced bank's strategic role in the group and reputational considerations. Despite its size we believe that support would be manageable. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES BARCLAYS BANK AND BARCLAYS PLC Subordinated debt and other hybrid capital issued by BB plc and B plcs 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. B plc's and BB's subordinated (lower) Tier 2 debt is rated one notch below the VRs for loss severity, reflecting below-average recoveries. BB plc's upper Tier 2 instruments are rated three notches below the VR, comprising one notch for loss severity and two notches for incremental non-performance risk, reflecting cumulative coupon deferral. High trigger contingent capital Tier 2 issued by BB plc are rated four notches below the VR of B plc as their terms reference group capitalisation and dividend payments. 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. High-trigger contingent capital Tier 1 instruments and preference shares with no constraints on coupon omission are rated five notches below the VRs. 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 of BB plc 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 VR BARCLAYS BANK AND BARCLAYS PLC The ring-fencing of domestic retail assets and liabilities out of BB plc and into a new legal entity in April 2018 will reduce BB plc's business diversification. However, our ratings will continue to factor in ordinary support between the two sister companies and the holding company, to complement their standalone earnings and capitalisation and offset any pressure that may arise on their credit profile as a result of ring-fencing. We do not expect any change to BB plc's VR purely as a result of ring fencing. The VRs are primarily sensitive to the group's progress in meeting performance and capital targets, as the ratings rely on our expectation that earnings and further release of RWAs will be sufficient to absorb non-core and misconduct costs without capital ratios being eroded. We expect the potential to reduce and optimise RWAs to have reduced significantly since the group has achieved most of the benefit of the sell-down of its stake in BAGL. Consequently we expect to see profits increasingly replacing RWAs as a source of strengthening capital ratios. Failure to return to internal capital generation could lead to a downgrade of the group's VR, if we believe that flexibility to manage regulatory capitalisation is impaired. The VRs 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. Upside for the VR is limited in the medium term as the group would need to demonstrate a sustainable improvement in earnings through the cycle, resulting in a materially stronger capacity to generate capital internally. BARCLAYS BANK UK PLC BBUK plc's VR could be downgraded if we believe that the bank's competitive position or financial profile weakens and operational support from the group is not available to offset this weakness, either because of competing needs in other parts of the group or a shift in group strategy. A downgrade of BB plc's VR could lead to a downgrade of BBUK plc if we believe that weaknesses of the group could negatively reflect on BBUK plc's franchise or capitalisation. An upgrade of BBUK plc's VR would require a sustainable improvement in its earnings generation capacity beyond the non-recurrence of conduct costs, which would reflect the bank's competitive advantage in the domestic market. Because of the high indebtedness of the UK private sector, Fitch currently caps the VRs of domestic retail banks in the UK in the 'a' category. IDRS, SENIOR DEBT and DCR BARCLAYS BANK AND BARCLAYS PLC B plc's IDR could be rated above the VR if the group materially increases its qualifying junior debt buffer consisting of AT1 and Tier 2 debt, which we do not expect. 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. We expect to upgrade BB plc's IDR one notch above the VR when the debt received by the holding company becomes subordinated to BB plc's other senior creditors, and provided that the quantum together with its external qualifying junior debt remains sufficient and sustainable. The DCR is primarily sensitive to changes in BB plc's Long-Term IDR. BARCLAYS BANK UK PLC BBUK plc's IDRs and DCR are primarily sensitive to the bank's VR. In addition, they would be sensitive to the presence of a sufficient quantum of internally down-streamed subordinated debt being in place at the time of the transfer of liabilities to the legal entity takes place and beyond. SUPPORT RATING AND SUPPORT RATING FLOOR An upgrade of BB plc's and B plc's SR and upward revision of the SRFs would be contingent on a positive change in the sovereign's propensity to support its banks, which we do not expect. A downgrade of BBUK plc's SR would require a downgrade of BB plc's SR or evidence that the group's ability or propensity to support BBUK plc has decreased. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES Subordinated debt and other hybrid capital ratings are primarily sensitive to changes in the VRs of BB plc and B 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 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 Bank Plc Long-Term IDR 'A' placed on RWP 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 'A(dcr)' placed on RWP Long-term senior unsecured debt, including programme 'A' placed on RWP Short-term senior unsecured debt, including programme ratings, commercial paper and certificates of deposits: affirmed at 'F1' Market-linked senior securities rating 'Aemr' placed on RWP Lower Tier 2 debt: affirmed at 'A-' Upper Tier 2 debt: affirmed at 'BBB' Additional Tier 1 and 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 Bank UK plc Long-Term IDR: assigned at 'A+(EXP)'; Outlook Stable Short-Term IDR: assigned at 'F1(EXP)' Viability Rating: assigned at 'a(EXP)' Support Rating: assigned at '1(EXP)' Derivative Counterparty Rating: assigned at 'A+ (dcr)( EXP)' Contact: Primary Analyst Claudia Nelson Senior Director +44 20 3530 1191 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Ioana Sima Associate Director +44 20 3530 1736 Committee Chairperson Christopher Wolfe Managing Director +1 212 908 0771 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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