(The following statement was released by the rating agency)
Feb 14 - Fitch Ratings says that Barclays Bank plc's ('A'/Stable/'F1'/'a')
strategic review and its announced adequate adjusted Q412 results have no
immediate rating implications.
The bank's strategic review marks a clear intention to overhaul the bank's
corporate culture and reduce reputational and political risks, which have been
high of late. However, as expected, the review has not resulted in a
transformational change in the banking group's business mix. Barclays will
continue to operate as a global universal bank with material investment banking
operations that concentrate on the UK and US but will reduce or reposition less
profitable, capital intensive activities. Although Barclays plans to invest more
in other areas of the bank over the next three years, the group's investment
banking activities will remain large in absolute terms with GBP210bn-GBP230bn
Basel III risk-weighted assets (RWA) by 2015, which would account for about half
of the group's 2015 RWA.
At the same time, the bank has plans to continue to improve capitalisation and
to strengthen its traditional banking businesses and its wealth management
franchise, cutting back and repositioning its poorly performing retail
operations in continental Europe, for example. Fitch believes that combined and
over time, these could help to underpin better, more stable earnings and a lower
overall risk profile for the group as a whole.
Barclays reported only GBP0.1bn of pre-tax profit in Q412 adjusted for a GBP560m
fair-value loss of own debt, because of further substantial charges for PPI
redress (GBP600m) and redress for interest rate swap sales (GBP400m). Barclays'
FY12 return on tangible equity adjusted for fair-value losses on own debt stood
at about 5% but excluding the PPI redress and redress for interest rate swap
sales increases to 9.1%, which Fitch views as adequate, given the tough economic
Under its repositioning programme, Barclays aims to achieve a return on average
equity above its 11.5% cost of capital by 2015. As the bank expects only
moderate income growth rates in most businesses, improved performance is also
based on a GBP1.7bn cost reduction over the next three years. The targeted
headcount reductions for this year in the European (ex-UK) retail operations
(1,900 or a significant 24%) and the corporate and investment bank (1,800 or 5%)
reflect the bank's strategic repositioning.
Like other global trading and universal banks in Europe, Barclays is
concentrating on areas where it considers it has a competitive advantage.
Barclays benefits from good franchises in several fixed income (FICC) segments,
which have provided the bank with some earnings diversification. Barclays plans
to reduce and reposition less profitable FICC segments and has identified around
GBP70bn of inefficient Basel III RWA (roughly 27% of the division's end-2012
total) that it plans to reduce gradually. In equities, Barclays plans to
concentrate its activities in the UK and US, where it has strong market
positions, and to reposition itself in Europe and Asia.
The performance of Barclays' investment banking activities oscillates, but has
remained more stable than at many peers. Q412 pre-tax profit in the investment
bank declined 8% qoq to GBP858m, but was significantly up compared with GBP267
in Q411. Revenue in Q412 fell by only 2% qoq, showing a significantly less
marked seasonal deterioration than most peers, with management indicating a
strong credit and rates result. The FY12 divisional compensation to revenue
ratio of 39% (FY11 47%) and cost/income ratio of 62% (FY11 71%) both showed
substantial improvement driven by higher revenues. Fitch believes that the bank
should continue to benefit from its leading franchise in FICC, while its solid
position in US and UK equities should still provide some operating leverage to
any improvement in investor confidence although cost containment measures appear
to reflect the new management's cautious economic outlook
Barclays' strategic initiatives in its traditional banking businesses and in
Barclaycard and wealth and investment management are concentrated on benefiting
from the bank's strong position in the UK and in Barclaycard and to expand its
franchise in wealth and investment banking, where client assets amounted to
GBP186bn at end-2012. In continental Europe, where the bank's profitability has
suffered in the weak economic environment, Barclays plans to reduce the retail
network, infrastructure and cost base by 30% over the next three years. The
European retail unit was loss making in 2012 and the bank expects only a modest
return on equity by 2015. As these operations represent only a small portion of
the group's overall business (4% of end-2012 RWA), the drag on group earnings
should remain modest.
Barclays' 'look-through' Basel III common equity Tier 1 (CET1) ratio of 8.2% at
end-2012 is in line with Fitch's expectations and within the peer group range.
The bank targets a 'transitional' CET1 ratio of above 10.5%, which Fitch
considers sound but unambitious compared with leading peers, as the agency
estimates this ratio to translate into a 'look-through' CET1 that would be about
100bp lower. Barclays has indicated an 11.7% 'transitional' CET1 ratio by 2015
excluding RWA growth and earnings and Fitch expects that the group will continue
to strengthen capital ratios over coming years and that its capitalisation will
remain in line with leading peers'.
Under the bank's target capital structure, it expects to maintain a 10.5% CET1
ratio, supplemented by further issuance of additional Tier 1/contingent capital
instruments to total about 2% of RWA (the USD3bn of contingent capital issued in
2012 is equivalent to around 0.4% of target end-2015 RWA). On top of this,
further loss absorbing capital is expected to replace gradually called or
maturing existing Tier 1 and Tier 2 securities, to reach the 17% primary loss
absorbing capital (PLAC) target
There was a slight increase in Barclay's overall Basel 2.5 RWA in 2012 despite
business risk reduction because of a higher operational risk charge and a
GBP20bn methodology-related increase attributed to market RWA, sovereign
loss-given-default assumptions and commercial real estate slotting rules. This
appears in contrast to continental peers, where RWA have benefited from
Fitch considers Barclays liquidity a strength. During Q412, Barclays' liquidity
pool reduced by 6% but remained large at GBP150bn at end-2012, comfortably
covering the bank's GBP89bn unsecured wholesale maturities within 12 months at
end-2012. At the same date, the bank's Basel III liquidity cover ratio (LCR)
under the revised January 2013 rules was a strong 126%. The bank indicated that
it will reduce the buffer within its GBP125bn-GBP150bn target range and to
change the composition of the buffer and reduce the proportion of cash and
deposits with central banks. The bank expects that this will reduce the carry
cost of the liquidity portfolio by about GBP300m. Fitch expects that at this
level, liquidity would remain sound, especially as unsecured wholesale funding
needs will decline under the bank's business plan, under which secured funding
will form an increasing proportion of wholesale funding.
(Caryn Trokie, New York Ratings Unit)
(Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://email@example.com)
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