Moody's downgrades Barclays to reflect risk after ring-fencing

The ratings agency also cut its ratings for Royal Bank of Scotland's investment banking operations to reflect their riskier profile when split off from retail banking.

Moody's cut Barclays Plc's long-term issuer and senior unsecured debt ratings to Baa3, or one step above junk, from Baa2. It said Barclays' strong UK retail banking franchise and strong loan quality were offset by weak profitability and risks in its large capital markets business. A lower credit rating can increase a bank's borrowing costs.

Moody's also cut its rating to baa2 from baa3 on Barclays Bank Plc, which is Barclays' non-ringfenced bank following the legal separation of retail banking on 3 April. Barclays carried out the split to comply with rules designed to protect retail customers from riskier capital markets operations.

Andrea Usai, senior vice president at Moody's, said: "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."

RBS said it would split off its retail banking business on 30 April as Moody's reduced its rating on the deposits and senior unsecured debt of Royal Bank of Scotland Plc, which will become NatWest Markets, and Royal Bank of Scotland NV to baa2 from A2 and A3.

Moody's restated the Baa3 unsecured debt rating of RBS's holding company and upgraded the long-term deposits rating to A1 from A2 for National Westminster Bank Plc and Ulster Bank Ltd, which will be the main ring-fenced retail banking operations.

The agency said under ring-fencing RBS's investment banking units "will be weaker as they are focused mostly on capital markets and wholesale activities and have a greater reliance on wholesale funding. Conversely, NatWest Bank's and [Ulster Bank's] credit profiles will be stronger, due to their mostly retail, SME and large corporate banking activities and largely deposit-based funding profiles."

UK banks were ordered to split their retail and investment banking operations under recommendations from the Vickers Commission, which was set up to review bank safety after the financial crisis.