Rating agencies have dimmed their view of the firm Barclays Bank plc following the London Interbank Offered Rate (LIBOR) setting scandal and subsequent management turmoil.
Moody’s Investors Service has changed its outlook on the bank’s rating to negative from stable on concerns that the senior resignations at the bank, and the resulting uncertainty surrounding the firm’s direction, are negative for bondholders.
“The shareholder and political pressures on Barclays, which resulted in the resignation of the bank’s CEO, COO (previously the head of the investment bank) and the stated intention of the chairman to resign, could lead to broader pressure on the bank to shift its business model away from investment banking and reform perceived failures in its business culture,” Moody’s says. And, while it notes that this could have potentially positive implications over the longer term, the uncertainty is a credit negative in the short term.
Additionally, Moody’s says it believes that the bank could be challenged to replace the three senior staff, and in particular to, “find a new CEO who not only has a sufficient understanding of the investment banking business to run Barclays, but also has the credibility and ability to swiftly address the weaknesses that the LIBOR incident revealed and stakeholders’ perceptions of the investment bank.”
Standard & Poor’s Ratings Services also revised its outlook on Barclays to negative from stable, citing the management turmoil. Until now, it says, Barclays’ strong and stable management team and clear strategy have been seen as strengths in its credit ratings, S&P says, noting that this was especially relevant for a bank where investment banking contributes about 40% of revenues.
S&P says its assessment of Barclays’ overall franchise has been negatively affected by: the revelation of what it perceives to be poor business practices and weak compliance in relation to the setting of interbank offered rates, the current management flux, and near-term strategic uncertainty. It also sees potential for a financial impact from litigation relating to the LIBOR scandal, but notes it is very difficult to quantify that at this stage.
Fitch Ratings notes that the political, regulatory and reputation risks for major global banks involved in setting LIBOR have increased due to the scandal, yet it is more sanguine about the impact on Barclays itself, noting that the direct financial impact is manageable, and that it has a strong management team outside of the recent resignations.
Fitch says it’s premature to speculate about any change in strategic direction by new senior executives. Instead, it believes a new management team will focus on issues of corporate governance, risk management, operational controls and regulatory compliance.
“The potential for a lasting impact to Barclays’ franchise from the reputational damage as a result of being first to settle is unclear,” it says, adding that while it doesn’t alter its view on Barclays yet, “if the investigations or any reputational damage result in a notable and lasting business or financial impact that meaningfully impacts a bank’s credit risk profile, Fitch would then reconsider the appropriate rating levels for the affected institutions.”