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