TEXT - Fitch says no immediate rtg impact on Barclays from strategic review

Thu Feb 14, 2013 11:43am EST

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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
environment.

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 
model-approval reductions. 

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.
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