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Fitch Affirms Barclays at `AA-`; Outlook Stable

Fitch Ratings has affirmed Barclays Bank plc’ (Barclays) Long-term Issuer Default Rating (IDR) at ‘AA-’, Short-term IDR at ‘F1+’, Viability Rating at ‘aa-’, Individual Rating at ‘B’ and Support Rating at ’1′. The Outlook is Stable.


The ratings reflect Barclays strong UK franchise, broad business mix, robust profitability, good liquidity and sophisticated risk management. They also consider the earnings and risk volatility in its investment banking division, Barclays Capital (BarCap). Barclays weathered the market turmoil in better shape than many of its peers, reflecting its good risk management and strong revenue generation. Diverse, robust and stable earnings are able to absorb significant impairments.


BarCap’ current dominance in earnings (H111: 63% of group profit before tax) should moderate slightly in the medium term. BarCap’ increased scale should eventually be balanced by improved performance in retail and corporate banking once the credit and interest rate cycles turn, and by the build-out of the wealth business, using Barclays strong track record in developing new businesses.


The most significant threat to the IDRs would be continued over-reliance on BarCap’ earnings through the cycle if Barclays is unable to generate sufficient growth in its retail, corporate and wealth businesses to balance the expansion of the investment bank. Continued volatility in financial markets could heighten revenue fluctuations for the rest of this year and into 2012, while slower economic growth is likely to affect the other businesses. Weaker capital relative to risks, greater-than-expected earnings volatility or a material deterioration in liquidity would also increase downward pressure. The scale and ambitions of BarCap expose the group to greater earnings volatility as it is more sensitive to market conditions than many of its other business lines and is a constraint on the group’ IDR, so an upgrade is highly unlikely.


Operating ROE improved to 13% in H111 despite rising regulatory costs and a challenging operating environment, but excluded a GBP1bn provision for payment protection insurance (PPI) redress in the UK. Underperforming businesses and costs are being reviewed, and together with better margins and lower loan impairment charges, should support an improvement in returns towards the targeted 13% ROE in 2013. However, a slower-than-expected economic recovery and prolonged turmoil in the European sovereign market could slow the pace of improvement.


Barclays enjoys a strong retail and commercial banking franchise in the UK, western Europe and Africa, which should be capable of generating sound profitability and capital over the cycle. Impaired loans are elevated as these economies remain under cyclical pressure, particularly western Europe. However, impairments have peaked (H111: down 41% yoy) and reserves coverage is reasonable.


Funding and liquidity are strengths of the group. Barclays retail operations provide a large and stable funding base. Access to wholesale funding recovered quickly and has not been materially impaired by the recent debt and money market problems. The bank retains a substantial pool of cash and highly liquid assets.

Nevertheless, ongoing issues could further test the group’ liquidity. Capital is adequate relative to risks and compares well with European peers’, and retained earning should be sufficient to enable it to meet additional regulatory capital requirements, without needing to go to the market.


Barclays plc’ IDRs reflect Barclays high ratings and the fact that there is no double leverage at Barclays plc. If this changes, Fitch would expect a more formal and suitably prudent liquidity policy to be introduced. The ratings of Absa Group Limited and Absa Bank Limited are unaffected by today’ rating actions.