Moody’s puts HSBC and Barclays ratings on review for downgrade

Moody’s Investors Service, (Moody’s) placed the long-term ratings, the baseline credit assessment (BCA) and the long-term counterparty risk assessment (CRA) of HSBC Bank plc (HSBC Bank) on review for downgrade. The review for downgrade reflects Moody’s view of the likely impact on the bank of the UK’s so-called ring-fencing legislation.

HSBC Bank is reorganising its legal structure because of the forthcoming requirement to separate its retail and business banking businesses from its other operations. As a result, HSBC Bank will become the non ring-fenced bank, further increasing its dependence on wholesale debt and deposit funding and its reliance on riskier wholesale and capital markets activities.

The group will transfer its UK retail, commercial banking (excluding most large corporate and financial institutions business) and private banking activities to HSBC Bank UK (unrated), a newly created ring-fenced-bank, from HSBC Bank during 2018.

HSBC Bank will become the non ring-fenced bank, further increasing its reliance on wholesale and capital markets activities, which Moody’s views as riskier and more volatile, and its dependence on confidence-sensitive wholesale debt. Both HSBC Bank and HSBC Bank UK are expected to operate under a UK intermediate holding company.

Under ring fencing, HSBC Bank will likely have a weaker credit profile than it currently does, as it will become the group’s principal entity for conducting capital markets activities. Moody’s considers these activities to be typically riskier and more volatile than retail and commercial banking, and some other fee-based activities such as cash management and payments services.

During the review period, Moody’s will assess the prospective standalone credit profile of the proposed non ring-fenced bank, the potential for intra-group support, the expected loss for each instrument class under its advanced LGF analysis, as well as the likelihood of government support.

The bank’s short-term CRA, the short-term deposits and the short-term senior unsecured debt ratings were affirmed.

Moody’s expects to conclude its review by April 2018 ahead of the legal separation of the bank into two legal entities later in the year, and prior to the legislation’s implementation on 1 January 2019.

Barclays Bank PLC’s baa2 standalone credit assessment, long- and short-term debt and deposit ratings also placed on review for downgrade

Barclays is reorganising its legal structure because of the forthcoming requirement to separate its domestic retail and business banking businesses from its other operations, under the UK’s ring-fencing rules.

Barclays’ management has indicated that on 1 April 2018 Barclays Bank will become the group’s non-ring-fenced bank. As such, its existing UK retail and business banking activities will be transferred to the newly formed ring-fenced bank, Barclays Bank UK. Barclays Bank will thus become more reliant on riskier wholesale and capital markets activities, increasing its risk profile and earnings volatility, as well as its dependence on wholesale funding, though its funding profile will remain diversified. These factors will lead to a weaker standalone credit profile for Barclays Bank.

Moody’s baa2 standalone baseline credit assessment (BCA), the A1 long-term deposit and senior unsecured debt ratings, the Prime-1 short-term deposit ratings and the A1(cr) long-term Counterparty Risk (CR) assessment of the group’s main operating entity Barclays Bank PLC (Barclays Bank), were also placed on review for downgrade. Barclays Bank’s Prime-1(cr) short-term CR assessment was affirmed.

The review for downgrade on Barclays reflects the group’s ongoing credit weaknesses and likely impact of ring-fencing implementation, which have been the main drivers for the negative outlook since last September.

During the review, the rating agency will reassess Barclays’ overall credit profile given its ongoing credit challenges, particularly profitability, and evaluate the likely impact on the existing creditors of Barclays and Barclays Bank from the implementation of structural reforms (‘ring-fencing’) in the United Kingdom (Aa2 stable). Moody’s expects to conclude the review over the next few weeks, when Barclays plans to transfer the group’s ring-fenced operations to Barclays Bank UK PLC (Barclays Bank UK, provisional deposit rating (P) A1) from Barclays Bank, well ahead of the legislation coming into force on 1 January 2019.

Moody’s will reassess the standalone credit profiles of both Barclays Bank, following the transfer of ring-fenced activities to Barclays Bank UK, and the broader Barclays group. This will include whether the degree of diversification of the group’s operations going forward will generate a level of stable profits that is sufficient to maintain the one-notch positive adjustment for Business Diversification, currently included in the BCA for Barclays Bank.

Moody’s currently expresses the credit profile of the overall Barclays group through the baa2 BCA of Barclays Bank, accounting for the vast majority of the group’s total assets, which is under negative pressure and will be reassessed during the review period.

Barclays Bank’s baa2 BCA, is currently supported by the group’s

(1) strong franchises in UK retail, business banking and global credit cards;

(2) strong loan quality, which is partly offset by tail risks from residual legacy assets, and pending high-profile litigations;

(3) improved regulatory capitalisation, albeit potentially subject to various high-profile outstanding conduct and litigation issues; and

(4) diversified funding and sound liquidity.

The group’s credit profile is however constrained by weak net profitability, which the rating agency expects to persist over the next 12-18 months, as well as the risks stemming from the group’s sizeable capital markets activities, carrying market, counterparty and operational risks. Moody’s expects that activities will expose the firm to higher earnings volatility.

As a result of ring-fencing implementation and the transfer of the retail and business banking business to Barclays Bank UK from Barclays Bank, Moody’s will, for the first time, assign a separate notional BCA to the broader Barclays group. This will reflect the combined standalone credit profiles of the group’s two main subsidiaries Barclays Bank and Barclays Bank UK, which will account for around 80% and 20% respectively of the group’s total assets, post ring-fencing implementation.


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