Concluding a review initiated more than a month ago, Fitch Investors Service Inc. has lowered its long-term rating for structured transactions of London-based Barclays Bank PLC to AA-minus from AA.
The New York-based rating agency affirmed the bank's short-term F-1 plus rating.
"The downgrade is based on the expectation of protracted loan-quality problems in the United Kingdom and Europe, uncertainty regarding provision levels, and a potentially weaker competitive position in the U.K. as the economy emerges from a three-year recession," Fitch said in a statement.
However, the rating agency emphasized that despite these pressures, Barclays' underlying earnings are expected to strengthen over the near term, particularly because of higher dealing profits.
In a statement released last week, the British bank expressed disappointment with the decision and said that 1993 would be a "year of recovery for the group."
Warning on Provisions
Barclays noted that its Tier 1 capital ratio stands at 5.6% and overall capital at 9.7% of risk-weighted assets.
The bank added that credit-risk provisions for the first half of this year have fallen 5% compared with the first half of 1992 and 31% below the second half of last year.
However, Fitch warned that Barclays probably would need to set aside higher provisions to cover bad lending.
The liberal use of general provisions by the bank, Fitch noted, still makes it difficult to quantify specific loan losses.
"Loan-quality pressures could persist as the stalled economy in continental Europe may hurt longer-term prospects for U.K economic recovery, which has depended on consumer confidence and exports to the continent," Fitch said.
About 70% of Barclays' provisions as of June 30 were for credits under $7.5 million, according to Fitch.
Big Commercial Portfolio
Recent problems with small-business loans, the agency predicted, would oblige the bank to devote more capital and personnel resources to dealing with such credits than for the large problem property loans in 1992.
Barclays has the largest commercial property and construction portfolio of any major U.K. bank, equal to 12% of total loans, Fitch noted.
The bank has some $33.4 billion in assets in North America out of a worldwide total of $254 billion as of June 30.
Earlier last week, Barclays won its first round in a battle to have California's unitary tax declared unconstitutional after the U.S. Supreme Court agreed to review the case.
Review of Tax Is Set
"We welcome the U.S. Supreme Court's decision," Barclays said in a statement.
"This case concerns not only Barclays, but numerous other U.K. and foreign-owned multinationals."
In a move that flew in the face of a Clinton-administration bid to quash an appeal, the court announced last week that it would review California's right to apply a unitary tax to worldwide revenues of multinationals operating in the state.
The tax is based on a percentage of payroll, property, and sales receipts of a multinational in California compared with worlwide operations.
Britain Backs Suit
Barclays initiated legal action against the tax more than a decade ago and is said to have demanded around $32 million in tax refunds.
However, the case has much broader implications and could call into question more than $4 billion that California has collected from Barclays and other multinationals under the unitary tax.
The Barclays suit is being backed by the British government and the European Community.
Supreme Court Role
California had hoped the Court would reject a hearing after it approved legislative changes that permitted multinationals to opt to be taxed only on their earnings in the state.
Both the administration and the U.S. solicitor general also argued that there was no need for the Supreme Court to review after California changed its tax legislation.
However, the U.K. and European Commission have pressed for a Supreme Court ruling on the constitutionality of the law out of fear that California might reverse its position in the future.
Barclays has argued that California's tax is contrary to accepted international tax practice and is unconstitutional because it violates the Federal government's constitutional authority to regulate foreign commerce.
Final Ruling Seen as Near
Sources said that the case was expected to be heard next March and that the Supreme Court would probably rule next June.
The bank said it believed a final ruling in the matter is near.
"It is right that these issues should be addressed in court," the bank said in a statement.
"We are confident of a successful outcome to this long-running matter."
