Moody's on Barclays proposed combination with ABN AMRO

Moody's Investors Service has commented on the recent announcement by Barclays Bank plc and ABN Amro N.V. that they are in exclusive preliminary discussions concerning a potential combination of the two organisations.

Barclays Bank is currently rated Aa1/P-1/A- with a stable outlook, by Moody's. ABN Amro is rated Aa1/P-1/B- also with a stable outlook.At the end of 2006 Barclays Bank plc had total assets of GBP997 billion (€1,479 billion) while ABN Amro had total assets of €987 Billion. The combined group would have risk- weighted assets of around €578 billion.

Moody's said it was taking no rating actions at the present time, given the considerable uncertainty regarding the outcome of this transaction where negotiations are at a preliminary stage. However, the agency noted that the financial implications of any transaction would need close examination, were it to go ahead. These would include the implications for the capital adequacy ratios of both banks, as well as the implications, if any, for the quality of the capital base. The development in particular of Barclays' risk-weighted asset base and implications for profitability, both pre- and post-provisions will also be important considerations.

Another important focus for the agency will be the possible execution risk of any merger. Prima facie, there appears to be a number of areas where Barclays could use its own expertise to further develop the ABN Amro business; Moody's will focus on the fit of the two groups and any possible synergies that might arise. However, Moody's in particular notes the challenges arising from the need to meld the investment banking operations of the two banks together.

Moody's noted that on the upside the potential link-up with ABN Amro would give Barclays the significant presence in the US retail market, via ABN Amro's LaSalle Bank, which it currently lacked. This would balance and complement Barclays strong presence in the US investment banking market. Moreover, a potential merger would also create a strong retail franchise across some of the major markets in Europe (UK, Holland, Spain and Italy) providing in due course a strong and stable income stream for the new group.

Moody's feel that the link up would also give Barclays more exposure to developing markets including Brazil where ABN Amro's Brazilian operation -- comprising Banco Real and including Banco Sudameris plays a key role in the bank's retail strategy, contributing around 15% ABN Amro's earnings at present. However, the potential for high volatility of the bank's earnings from Brazil will be a factor that needs to be considered. Additionally, the need to turn around the underperforming Antonveneta franchise could have negative implications for the ratings of Barclays going forward.

(Extracted from press release of Moody's Investors Service)

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