DBRS Morningstar Confirms Barclays Bank PLC’s Long-Term Issuer Rating at ‘A’, Stable Trend

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 and diversified franchise across retail and wholesale banking, particularly in the UK and the United States, which has supported the Group’s resilient earnings generation during the challenging operating environment driven by the COVID-19 pandemic. Barclays’ ratings continue to reflect its strong funding and liquidity position, supported by a sizeable deposit base and sound access to the capital markets, as well as its sound asset quality and capitalisation. Barclays capital markets activities are sizeable and are viewed as a less predictable revenue source, adding a certain degree of volatility to the Group’s earnings and capital position, although DBRS Morningstar notes that these have provided strong revenues over the last year. The ratings also take into account the profitability challenges the Group is facing in its US card business and in its retail business in the UK, with revenues under pressure from lower consumer activity and the low interest rate environment. They also incorporate DBRS Morningstar’s view that asset quality is likely to deteriorate when the COVID-19 government support measures are withdrawn, and that the full impact of the UK’s withdrawal from the European Union is still to become clear.

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.

RATING DRIVERS

The ratings would be upgraded if the impact from the COVID-19 pandemic and the withdrawal of the UK from the European Union on the Group’s asset quality remains limited and the Group demonstrates sustainable improved returns whilst maintaining its risk profile.

A downgrade of the Long-Term ratings would likely be driven by a sustained and significant deterioration in profitability, asset quality or capital.

RATING RATIONALE

Barclays is one of the leading banks in the UK with total on-balance sheet assets of around GBP 1.4 trillion at end-Q1 2021. In the UK the Group has leading positions in several business areas, while in the United States the Group has a significant presence in corporate and investment banking as well as in the cards business. The Group has good geographic and business diversification with the non-UK operations contributing 48% to the Group's income in FY20, while wholesale operations, including CIB, accounted for 56% of the Group's income in FY20 .

DBRS Morningstar views Barclays’ earnings generation as solid, supported by the Group’s strong business and geographic diversification. In FY20, net attributable income was GBP 1,526 million, down 38% compared to FY19, negatively impacted by significantly higher loan loss provisions of GBP 4.8 billion, partly driven by the update of macro-economic assumptions into credit models. Furthermore, revenues have been under pressure due to the lower interest rates in the UK, and due to lower business volumes in the consumer business. The Group was able to partly offset this pressure with strong revenue growth in its Investment Bank, particularly from trading, which benefitted from higher levels of volatility and client activity. Barclays reported improved results in Q1 2021 with net attributable profit of GBP 1.7 billion in Q1 2021, up from GBP 605 million in Q1 2020, with this largely driven by significantly lower loan loss provisions. Nevertheless, revenue pressure continued to show similar trends, with total income down 6% YoY.

Barclays generally maintains good cost discipline. Litigation and conduct costs reduced significantly in FY20, resulting in total operating expenses declining by 10% YoY to GBP 13.9 billion. However, operating expenses grew 9% YoY in Q1 2021, largely driven by higher variable compensation in the Investment Bank. This, combined with revenue pressure, weakened the Group’s reported efficiency ratio to 61% from 52% a year ago (FY20: 63%). Given the ongoing revenue pressure, DBRS Morningstar considers it important that the Group’s cost control remains strong. Litigation and conduct costs, which were a significant drag on profitability up to FY19, were significantly lower in FY20, and are expected to remain at low levels.

DBRS Morningstar views the Group’s loan portfolio as well diversified by sector and geography. DBRS Morningstar would expect asset quality to deteriorate once government support measures are removed. However, to date, asset quality has remained sound with Stage 3 loans accounting for 2.4% of the Group’s loan book at end-Q1 2021, broadly in line with end-FY19, despite some increase in Stage 3 international wholesale loans. DBRS Morningstar recognises that UK banks, including Barclays, have been proactive in recognising potential asset quality deterioration in the form of higher Stage 2 loans since the onset of the pandemic, with these being loans where credit risk has significantly increased since initial recognition. At end-Q1 2021, Barclays had total Stage 2 loans of GBP 48.8billion, up 28% YoY, accounting for a relatively high 13.8% of total loans, compared to 11.1% at end-2019.

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 increased to GBP 463.7 billion at end-FY20, up from GBP 400.4 billion at end-FY19, partly reflecting reduced consumption due to the lockdown measures and improved levels of liquidity at SMEs and Corporates, driven by government funding schemes. This, combined with a marginal 0.6% decrease in the customer loan book, resulted in the Group's customer net loan-to-deposit ratio improving to 67% at end-FY20, compared to approximately 80% at end-FY19. Liquidity remains sound with the liquidity pool of GBP 290 billion representing around 20% of the Group’s assets and a Liquidity Coverage Ratio (LCR) of 161% at end-Q1 2021, broadly stable since end-2019.

DBRS Morningstar considers that Barclay's capital position is sound. The Group maintains an ample cushion over regulatory minimal capital requirements. At end-Q1 2021 Barclays’ CET1 ratio was 14.6%, down 50 bps from end-FY20, largely as a result of the removal of some regulatory supporting measures and a GBP 700 million share buy-back, but the ratio was still 80 bps higher than at end-FY19, as capital levels benefitted from the cancellation of dividends in 2020 and IFRS 9 transitional relief. Management continues to target a CET1 ratio in the range of 13-14% for 2021/22 as the Group expects some regulatory capital headwinds buffer. The UK Spot leverage ratio was a sound 5.0% at end-March 2021, compared to a minimum requirement of 3.8%, including a G-SIB buffer.

ESG CONSIDERATIONS
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/373262.

The Grid Summary Grades for Barclays are as follows: Franchise Strength – Strong; Earnings – Good; Risk Profile – Strong/Good; Funding & Liquidity – Strong; Capitalisation –Strong/Good.

Notes:
All figures are in GBP unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (8 June 2020) https://www.dbrsmorningstar.com/research/362170/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 (3 February 2021) https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883

The sources of information used for this rating include Barclays PLC Annual Report 2020, Barclays PLC Q1 2021 Results Announcement, Barclays Pillar 3 2020 and Q1 2021 report and S&P Global Market Intelligence. 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 twelve 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:
http://dbrsmorningstar.com/research/379068

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: Ross Abercromby, Managing Director, Global FIG
Initial Rating Date: September 9, 2005
Last Rating Date: June 9, 2020

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