Following the revelation of the penalties for the London Interbank Offered Rate (LIBOR) rigging scandal and the subsequent resignations of its CEO and the COO, Barclays Plc’s (BCS - Analyst Report) outlook has been downgraded by Moody’s, the rating arm of Moody's Corp. (MCO - Analyst Report) , and Standards & Poor’s (S&P). Both rating agencies lowered their outlook to ‘Negative’ from ‘Stable.’ However, Fitch Ratings affirmed its ‘Stable’ outlook.
Last week, Barclays was fined £290 million ($450 million) for manipulation of the LIBOR between 2005-2009 by various regulators in the US, UK and Japan. The company was accused of presenting misleading LIBOR rates to favor its interest rate derivative traders, who sought to benefit from the bank’s favorable trading position. Moreover, the company submitted dubious EURIBOR rates in order to influence rate settings by other banks.
Reasons for Revision
While explaining the rationale behind the lowered outlook, S&P stated that until now, Barclays’ strong management and clear business strategy had been the primary reasons for its ‘Stable’ outlook. However, the current turmoil will have an adverse impact on its financials as the CEO was focused on the steady growth in the investment banking operations. Further, the penalties paid for influencing the LIBOR rates show poor business practices and weaker compliances.
S&P concluded that its present ‘Negative’ outlook is based on the near-term uncertainty in relation to changes that will take place in the top management and the monetary impact of the penalty paid. Additionally, Barclays’ franchise might be affected as well, leading to slower revenue growth over the upcoming quarters.
Likewise, Moody’s was impelled to lower its outlook on Barclay’s owing to the resignation of a few senior personnel and the ambiguity in the overall direction of the company related to the shifting of the business model from investment banking operations. Moreover, the company will also find it challenging to replace its senior level executives.
Nevertheless, both the rating agencies affirmed their respective ratings on Barclays. S&P retained ‘A+/A-1’ long- and short-term counterparty credit ratings based on the company’s leading position in global financial markets, stable capital base as well as credit quality. Likewise, Moody’s has also reiterated standalone bank financial strength rating (BFSR) at ‘C-/baa2’ and long-term debt rating at ‘A2.’
Another ratings agency, Fitch Ratings stated that its view on Barclays remains unchanged even after the above mentioned incidents. However, Fitch acknowledged that there has been increased political, reputation and regulatory pressure, but these seem manageable given the company’s stable capital position and earnings generating capability.
The downward revision of the outlook will have an adverse effect on Barclays’ financials. However, S&P and Moody’s stated that though the upward revision in the outlook is not likely in the near term, they might uplift the outlook in case the company is able to demonstrate its operating stability over the next few quarters.
Barclays currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.