July 05 -
Overview
— On July 3, 2012, Barclays Bank PLC announced the resignation of its
CEO, Bob Diamond, with immediate effect.
— This follows a period of intense media, political, and investor
scrutiny of Barclays after it had announced its agreement to pay penalties in
relation to an industrywide investigation into the setting of interbank
offered rates.
— We are revising our outlook on the long-term rating on Barclays to
negative from stable.
— We are affirming our ‘A+/A-1′ counterparty credit ratings on Barclays.
— The negative outlook reflects our view of the current management flux
and near-term strategic uncertainty arising from the revelation of what we
perceive to be certain poor business practices and weak compliance in relation
to the past setting of interbank offered rates.
Rating Action
On July 5, 2012, Standard Poor’s Ratings Services revised its outlook on
Barclays Bank PLC (Barclays) to negative from stable. At the same time, we
affirmed our ‘A+/A-1′ long- and short-term counterparty credit ratings on
Barclays. We also affirmed our ‘A+/A-1′ ratings on “core” subsidiaries
Barclays Private Clients International Ltd. and Barclays Capital Inc. and
revised the outlook on both entities to negative from stable.
The ratings on Barclays Bank Ireland PLC (A-/Negative/A-2) and Barclays Bank
S.A. (BBB+/Negative/A-2) are unaffected by this rating action because the
outlook on the long-term ratings on both entities is already negative.
Rationale
The outlook revision reflects the resignation of Barclays CEO, Bob Diamond, on
July 3, 2012. This departure, on top of the resignation of Barclays’
non-executive Chairman on July 2, follows a period of intense media,
political, and investor scrutiny of Barclays after it had announced on June
27, 2012 that it has agreed to pay penalties in relation to an industrywide
investigation into the setting of interbank offered rates.
Hitherto, Barclays’ strong and stable management team and clear strategy have
been supportive factors in our ratings assessment. We reflected this, in
particular, in our view of Barclays’ “strong” business position, as defined by
our criteria. These supportive factors are especially relevant for a bank for
which the potentially more volatile investment banking business line makes a
significant contribution to group revenues (about 40% in the case of
Barclays). Moreover, in the specific case of Barclays, we believe that Mr.
Diamond was closely related to the growth and relatively resilient performance
of the investment bank (having led the investment bank for a number of years
before becoming CEO at the start of 2011) and was supportive of its strategic
prominence within the group.
Our assessment of Barclays’ overall franchise has been negatively affected by:
— The revelation of what we perceive to be certain poor business
practices and weak compliance in relation to the past setting of interbank
offered rates. These revelations have emerged in regulatory reports on
Barclays pertaining to two distinct periods, especially that between January
2005 to July 2008. The second period related to September 2007 to December
2008.
— What we see as current management flux following the resignations of
first the non-executive Chairman, and then the CEO. We understand that the
Chairman has since agreed to remain in place on an executive basis to lead the
appointment of a new CEO.
— Our view of near-term strategic uncertainty caused by the change in
management. We see potential for the eventual new CEO to review the current
scope of Barclays’ activities, particularly if that person were an external
hire.
We note that the reported total penalties of GBP290 million in relation to the
setting of interbank offered rates is not sufficient, on its own, to
negatively affect our “adequate” assessment of Barclays’ capital and earnings.
This is because we maintain our expectation that Barclays’ Standard Poor’s
risk-adjusted capital (RAC) ratio will remain in the 7.0%-7.5% range in the
coming 18-24 months. (We calculate this ratio to be around the top end of this
range at 7.6% at Dec. 31, 2011.) However, we see potential for a financial
impact from litigation relating to interbank interest rates, but it is very
difficult to quantify at this stage.
We continue to view Barclays’ leading positions in U.K. banking and global
investment banking, and its diversified revenue profile and good asset quality
relative to peers, as rating strengths.
Our ratings reflect our expectation that Barclays’ board will make progress in
appointing a new CEO and a new Chairman in the coming weeks, and that these
appointments will not lead, in due course, to a major change in Barclays’
strategy toward its investment bank or other areas of the business. We believe
that this process in its entirety may take a number of months to fulfil.
We understand that a number of other major global banks, according to
regulatory statements, have reportedly been part of the industrywide
investigation into the setting of interbank offered rates. This rating action
is specific to Barclays and we have not pre-judged whether we would take any
rating action on any other institution affected by the investigation.
Outlook
The negative outlook reflects our view of the current management flux and
near-term strategic uncertainty which has arisen from the revelation of poor
practices and weak compliance in relation to an industrywide review of
interbank offered rates. It also reflects our view that the impact on
Barclays’ overall franchise may persist for an extended period, which in turn
could lead to both weaker and less stable revenue generation.
We could lower the ratings on Barclays if the bank is unable to demonstrate to
us that its overall business is stronger than other banks with similar
industry risk. We would reflect this in a downward revision of our assessment
of Barclays’ business position to “adequate” from “strong”. We could also
lower the ratings if Barclays’ RAC ratio does not remain within our acceptable
range for an “adequate” ratio (7%-10%). We would reflect this in a downward
revision of our assessment of the bank’s capital and earnings to “moderate”
from “adequate”. Our revised assessment could arise, for example, from
weaker-than-expected performance in the investment bank, from further
financial costs resulting from the interbank interest rate setting episode, or
from asset quality deterioration in its retail and corporate banking
businesses.
If Barclays was able to demonstrate that its management team and strategic
approach has been solidified and clarified, we could revise the outlook back
to stable. We could also revise the outlook back to stable if Barclays is able
to maintain a resilient operating performance across its key business lines
over the coming quarters, thus supporting our assessment of the bank’s
“strong” business position.
