Based on Moody’s own stress tests, in a base stress scenario deteriorating values will lead to significant further writedowns on the bank’s credit market exposures, particularly for the GBP10.3 billion (as of Q308) commercial mortgages and non-US residential mortgage securitisation exposures and on the GBP23.0 billion notional of monoline-wrapped structured exposures — an area in which the rating agency considers the bank to be exposed to a potentially sharp increase in provisioning requirements.
Barclays saw its share price rally 107 per cent last week – largely on the assurances that seemed to be made in this letter from the banks’ CEO and chairman.
Moody’s though – as per the above – are not convinced. The rating agency is throwing some pretty large numbers around. Numbers which BARC still maintains are way off the mark.
Clearly, someone is wrong.
We’ve drawn attention on a number of occasions to the particularly precarious situation in which Barclays finds itself with regard to its large holdings of structured products – notably CLOs and monoline wrapped instruments that, as Moody’s notes, are exposed to “potentially sharp increases” in capital requirements. This is particularly so given the sensitivity of those instruments to the coming corporate downturn – and the likelihood that the remaining monolines will falter.
There are of course mitigating factors. The FSA’s loosened capital requirement regime for banks, for example, comes into force today. Then there is the UK government’s asset insurance scheme – which Barclays might utilise to replace the monoline wraps currently protecting parts of its balance sheet.
It might not be too unusual then to see more results like those most recently reported by the bank: big writedowns offset by big gains.
Moody’s statement is most worrying for Barc though because it challenges the rather fragile return of confidence in the bank’s management that we saw last week. Barclays have had an extremely hard time convincing the market that the bank is in good form. Investors just don’t want to believe them. Most sector analysts too remain very cautious. Moody’s may rather have broken the détente.
Moody’s Investors Service has today downgraded the long-term ratings of Barclays Bank plc (“Barclays”) from Aa1 to Aa3 with a stable outlook. The Bank Financial Strength Rating (BFSR) was lowered from B to C, with a negative outlook.
The downgrade to C with a negative outlook reflects Moody’s expectation that Barclays’ profitability and capitalisation will continue to be pressured by the ongoing need to implement further writedowns and build larger loan loss reserves.
Related links:
Moody’s cuts Barclays – FT.com
Of Barclays, warrants and MCNs – FT Alphaville
What’s rocking Barc? – FT Alphaville