Moody's, S&P take steps to downgrade Barclays

July 5, 2012 - 11:38 AM

LONDON (AP) — Two leading credit rating agencies took steps Thursday toward downgrading Barclays in the wake of a trading scandal that's seen three senior Barclays executives, including CEO Bob Diamond, hand in their resignations.

Although both Moody's and Standard & Poor's maintained their ratings on the bank, they lowered their outlooks to "negative" from "stable." That means that a downgrade of the actual rating is now more likely.

Barclays did receive some respite from one of the three big agencies, Fitch Ratings, which said its view was unaltered by the interest rate scandal and resignations.

All three ratings agencies, however, indicated that they were watching developments including Parliamentary hearings examining the scandal.

Diamond, Chairman Marcus Agius and Chief Operating Officer Jerry del Missier resigned in the wake of last week's action by U.S. and British agencies to fine Barclays $435 million for making false submissions on borrowing costs, which along with data from other banks sets a key financial benchmark, the London interbank offered rate (LIBOR).

A House of Commons committee said Paul Tucker, the deputy governor of the Bank of England, would testify Monday on his conversation with Diamond on Oct. 29, 2008, at the height of the crisis.

Diamond's memo of that conversation led a Barclays executive to conclude that the Bank had ordered Barclays to submit lower reports of its borrowing costs. But Diamond told the committee on Wednesday that he had not believed that Tucker gave an order, or even given an indication that he wouldn't object to false reports.

Although Fitch said political, regulatory and reputation risks for Barclays and other major global banks had increased, it added "the direct implications (for Barclays), in terms of the size of the regulatory settlements announced last week, are easily manageable given its capital and earnings capacity."

The other two agencies took a less generous view.

Moody's said its change reflected concerns that the resignations and the consequent uncertainty about the company's direction could negatively impact on bondholders.

"The bank could be challenged to replace the three senior staff and in particular 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," Moody's said.

S&P said its revised outlook reflected, in part, "our view that the impact on Barclays' overall franchise may persist for an extended period, which in turn could lead to both weaker and less stable revenue generation."

Moody's said the resignations could lead to pressure on Barclays "to shift its business model away from investment banking and reform perceived failures in its business culture."

In any case, the British government has said it intends to pass legislation to insulate retail banking from the riskier activities of investment banking, a structural change that Barclays has strongly opposed.

Moody's said its concerns were mitigated "by Barclays' broad and strong management team, which provide the firm with stability and continuity" while it searches for a new chief executive and chairman. Agius continues to serve as executive chairman until his successor is chosen.

The company's shares were 0.7 percent lower at 164.85 pence in afternoon trading in London.