Barclays hit by credit rating blow

Mathieu Robbins
Tuesday 03 February 2009 01:53 GMT
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Barclays Bank faced a new challenge yesterday as credit ratings agency Moody’s cut its rating by two full notches, leading to a one-tenth fall in its share price. As well as falls in stock making fundraising through rights issues harder, a lower credit rating tends to make borrowing more expensive. The ratings agency cut Barclays’ rating to Aa3 on expectations the bank has not yet finished writing down the value of its assets.

Unlike rivals Royal Bank of Scotland and Lloyds Banking Group, Barclays executives have so-far steadfastly shunned government money. Under the bailout plans announced by Gordon Brown in October and last month, the government will own a majority stake in RBS and a substantial stake of Lloyds Banking, the lender formed by the government-backed combination of Lloyds TSB and HBOS.

But Barclays instead opted to raise £7.3 bn from a group of Middle-eastern investors, in a costly exercise which it justified at the time by saying it would keep its management independent from government intervention.

Barclays last week confessed to £8bn of credit-market writedowns, but said it could absorb these without seeking capital from private investors or the state.

The bank said that, even after the writedowns, its tier-one capital buffer would be £17bn more than the regulator’s minimum, allowing it to absorb further losses. Record revenue in 2008 will more than offset the writedowns on toxic assets, the letter said.

Barclays also stuck to its forecast that its 2008 pretax profit would be “well ahead” of 5.3 billion pounds, even after the expected writedowns. It reports earnings on 9 February.

Moody’s however yesterday cited expectations for “significant” further losses at Barlays due to credit-related writedowns and rising impairments.

Moody’s maintained a stable outlook for the British lender but lowered Barclays’ Bank Financial Strength Rating to C from B, with a negative outlook, and cut the bank’s hybrid instruments also by two notches to Aa3.

The action brings Barclays’ long-term ratings in line with rival credit agency Fitch, which last week cut the lender by one notch citing expected earnings volatility from investment banking unit Barclays Capital and deteriorating economic growth.

“The downgrades reflect Moody’s expectation of potentially significant further losses at Barclays as a result of writedowns on credit market exposures as well as an increase in impairments in the UK, which could weaken profitability and capital ratios,” the agency said in a statement out on Monday morning.

Moody’s also noted the deteriorating economic outlook and the volatility in earnings from Barclays Capital, which recently acquired Lehman Brothers’ North American operations, as factors behind its downgrade.

Moody’s noted Barclays had a buffer for additional writedowns or losses of up to around 16-17 billion pounds in order to retain its new financial strength rating of C. The lender last week said its core tier 1 ratio was about 6.5 percent, while its tier 1 ratio was at around 9.5 percent.

Fears that the lender would be nationalised dented shares in Barclays last month, though they’ve recovered significantly since the bank last week reiterated its profit forecast.

Shares in Barclays still lost a third of their value in January.

“Although Barclays has not taken any government capital to date, Moody’s considers the systemic importance of the bank and the likelihood of receiving government support in case of need to be high,” Moody’s said.

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