(Bloomberg) -- Barclays Plc's ratings were cut by Moody's Investors Service, citing concerns about earnings at the investment bank after the British lender split its riskier trading activities from its retail operations.
Barclays overall debt rating was cut to one level above junk by Moody's on Wednesday, which said the bank will face “ongoing profitability challenges” on top of the negative impact of ring-fencing. The bank's 1 billion euros ($1.2 billion) of 1.375 percent senior unsecured bonds were little changed on Thursday, largely because executives had flagged a likely downgrade earlier in the year, according to analysts at Investec Plc.
Credit ratings for some of the biggest U.K. banks have been hit by the post-crisis rules, known as ring-fencing, which come into force next year, Moody's said. This is because lenders' wholesale and retail arms will have to issue debt independently in future and therefore lose the benefits of business and funding diversification, the ratings agency said in the report.
Barclays, led by Chief Executive Officer Jes Staley, changed its legal structure earlier this month to comply with the law, which was designed after the financial crisis to protect consumers' deposits from losses in riskier trading activities, dubbed the "casino" part of banking by lawmakers. Moody's said the non-ringfenced part of Barclays will see bigger swings in earnings because of the volatility of its capital markets business.
Lower credit ratings can increase a company's borrowing costs. Barclays has about 14.8 billion pounds ($20.8 billion) of bonds due by the end of 2019, according to data compiled by Bloomberg.
Barclays had told investors that it hopes to save as much as $1 billion in interest expense over the next year as it refinances expensive crisis-era debt -- issued in 2008 when the bank was close to collapse -- at today's much lower rates, Bloomberg News reported last month.
Read More: Jes Staley Faces Countdown to Revive ‘English Patient' Barclays
Moody's cut Barclays' long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. Rival Deutsche Bank AG is currently rated one notch higher.
However, the ratings agency gave the British lender a stable outlook and highlighted its "strong franchises in U.K. retail, business banking and global credit cards." Shareholders shrugged off the news, with the stock up 1 percent at 9.45 a.m. in London.
“We've been on negative watch for some time and now they're reviewing the rating,” Finance Director Tushar Morzaria said last month. “It would be a little bit surprising if they decide to review the rating and leave everything where it is.”
Moody's also separately downgraded the ratings of some units owned by the Royal Bank of Scotland Group Plc.
--With assistance from Tom Beardsworth
To contact the reporters on this story: Stephen Morris in London at smorris39@bloomberg.net, Emma Orr in New York at eorr6@bloomberg.net.
To contact the editors responsible for this story: Ambereen Choudhury at achoudhury@bloomberg.net, Jon Menon
©2018 Bloomberg L.P.
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