Barclays PLC 's BCS long-term issuer and senior unsecured debt ratings have been downgraded from Baa2 to Baa3 by Moody's Investors Service. The rating agency also assigned a notional Baseline Credit Assessment (BCA) of baa3 to the company for the first time. The outlook is stable.
Alongside, the long-term deposit and senior unsecured debt ratings of Barclays Bank PLC have been downgraded from A1 to A2. Its standalone BCA has also been downgraded to baa3 from baa2.
The above-mentioned ratings were placed under review for possible downgrade by Moody's in February. This move by the rating agency, thus, concludes the review.
Andrea Usai, senior vice president at Moody's informed, "The ratings downgrade for Barclays and Barclays Bank reflects Moody's assessment of the overall group's credit profile, particularly in light of its ongoing profitability challenges, and the impact on existing creditors of the implementation of ring-fencing."
Ring-fencing is the largest structural reform imposed on U.K. banks. It requires banks with more than £25 billion in deposits to separate their essential banking services from investment banking operations, effective Jan 1, 2019. This is to prevent a replay of the financial crisis in 2008, when banks' poor investment decisions put pressure on ordinary depositors, leading to big taxpayer-funded bailouts.
In order to comply with the rule, Barclays changed its legal structure on Apr 1, 2018, wherein it transferred its U.K. retail and business banking activities to a newly-formed ring-fenced bank, Barclays Bank U.K. PLC. However, per the new structure, Barclays Bank PLC remains the group's non ring-fenced bank.
As a result of this change, the risk profile and earnings volatility of Barclays Bank PLC are expected to increase as Barclays Bank PLC will have to depend upon riskier wholesale and capital markets activities.
Thus, the rating downgrade reflects the impact of such ring-fencing implementation and ongoing credit weakness for the existing creditors of both Barclays PLC and Barclays Bank.
Nonetheless, according to Moody's, the overall credit fundamentals of the entire group, along with the degree of protection for its creditors from the stock of bail-in-able liabilities, will remain more or less the same over the next one and a half years. Hence, it has assigned a stable outlook for the ratings.
Per Moody's, the notional BCA of Barclays PLC can be upgraded if there is an improvement in the standalone credit profiles of its two subsidiaries, Barclays Bank PLC and Barclays Bank U.K. PLC. Additionally, its ratings could be upgraded if the group is able to issue a substantially higher amount of bail-in-able liabilities or can maintain excess financial resources at the holding company level to give greater protection to its creditors.
On the other hand, if the standalone credit profile of its subsidiaries deteriorates, it will lead to a downgrade of Barclays PLC's BCA as well, which will ultimately lead to a downgrade in its long-term ratings. Apart from this, Barclays' ratings could also be moved lower if, according to Moody's assessment, the degree of protection that the creditors are getting from the stock of bail-in-able liabilities is low.
While the rating downgrade might weigh on Barclays' stock in the near term, improving global economy will likely support its profitability.
Over the last six months, Barclays' shares rallied 19.6% on the NYSE, outperforming the industry
's growth of 5%.
Currently, the stock has a Zacks Rank #3 (Hold). Stocks to Consider
A few better-ranked stocks in the same space are Canadian Imperial Bank of Commerce CM
, BanColombia S.A. CIB
and Banco Santander (Brasil) S.A. BSBR
In the last 60 days, Canadian Imperial has witnessed an upward earnings estimate revision of 5.2% for the current fiscal year. Additionally, the stock has gained 1.6% in the past year. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here
BanColombia's earnings estimates for the current year have been revised 7.3% upward over the last 60 days. Its shares have gained 13.8% in the past year. It carries a Zacks Rank #2 (Buy).
Banco Santander also has a Zacks Rank of 2. Its earnings estimates for the current year have remained stable over the last 30 days. The company's shares have increased 49.4% in a year's time. Today's Stocks from Zacks' Hottest Strategies
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Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Barclays PLC (BCS): Free Stock Analysis Report Canadian Imperial Bank of Commerce (CM): Free Stock Analysis Report Banco Santander Brasil SA (BSBR): Free Stock Analysis Report BanColombia S.A. (CIB): Free Stock Analysis Report To read this article on Zacks.com click here. Zacks Investment Research