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,
) outlook has been downgraded by Moody's, the rating arm of
), and Standards & Poor's (S&P). Both rating agencies
lowered their outlook to 'Negative' from 'Stable.' However, Fitch
Ratings affirmed its 'Stable' outlook.
BARCLAY PLC-ADR (BCS): Free Stock Analysis
MOODYS CORP (MCO): Free Stock Analysis Report
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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
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.