Barclays 2013 Annual Report Download - page 135

Risk review
Risk factors
Business conditions and the general economy
Weak or deteriorating economic conditions or political instability in
the Group’s main countries of operation could adversely affect the
Group’s trading performance
The Group offers a broad range of services to retail and institutional
customers, including governments, and it has significant activities in a
large number of countries. Consequently, the operations, financial
condition and prospects of the Group, its individual business units and/
or specific countries of operation could be materially adversely
impacted by weak or deteriorating economic conditions or political
instability in one or a number of countries in any of the Group’s main
business areas (being the UK, the US, the Eurozone and South Africa)
or any other globally significant economy through, for example: (i)
deteriorating business, consumer or investor confidence leading to
reduced levels of client activity and consequently a decline in revenues
and/or higher costs; (ii) mark-to-market losses in trading portfolios
resulting from changes in credit ratings, share prices and solvency of
counterparties; and (iii) higher levels of impairment and default rates.
The global economy continues to face an environment characterised by
low growth. However, governments and central banks in advanced
economies have maintained highly accommodative policies that have
helped to support demand at a time of very pronounced fiscal
tightening and balance sheet repair. During the next few years, a
combination of forecasts of and actual recovery in private sector
demand and of a reduced pace of fiscal austerity in Europe and the
United States is likely to result in a return by central banks towards
more conventional monetary policies. While the pace of decreasing
monetary support by central banks is expected to be calibrated to the
anticipated recovery in demand, such actions could have a further
adverse impact on volatility in the financial markets and on the
performance of significant parts of the Group’s business, which could,
in each case, have an adverse effect on the Group’s future results of
operations, financial condition and prospects.
Credit risk
The financial condition of the Group’s customers, clients and
counterparties, including governments and other financial
institutions, could adversely affect the Group
The Group may suffer financial loss if any of its customers, clients or
market counterparties fails to fulfil their contractual obligations to the
Group. The Group may also suffer loss when the value of the Group’s
investment in the financial instruments of an entity falls as a result of
that entity’s credit rating being downgraded. In addition, the Group
may incur significant unrealised gains or losses due solely to changes
in the Group’s credit spreads or those of third parties, as these changes
may affect the fair value of the Group’s derivative instruments, debt
securities that the Group holds or issues, or any loans held at fair value.
Deteriorating economic conditions
The Group may continue to be adversely affected by the uncertainty
around the global economy and the economies of certain areas where
Barclays has operations, as well as areas which may have an impact on
the global economy. The Group’s performance is at risk from any
deterioration in the economic environment which may result from a
number of uncertainties, including most significantly the following
factors:
i) Interest rate rises, including as a result of slowing of monetary
stimulus, could impact on consumer debt affordability and corporate
profitability
The possibility of a slowing of monetary stimulus by one or more
governments has increased the uncertainty of the near term economic
performance across our major markets as it may lead to significant
movements in market rates. Higher interest rates could adversely
impact the credit quality of the Group’s customers and counterparties,
which, coupled with a decline in collateral values, could lead to a
reduction in recoverability and value of the Group’s assets resulting in a
requirement to increase the Group’s level of impairment allowance. Any
increase in impairment resulting from, for example, higher charge-offs
to recovery in the retail book and write-offs could have a material
adverse effect on the Group’s results of operations, financial condition
and prospects.
ii) Decline in residential prices in the UK, Western Europe and
South Africa
With UK home loans representing the most significant portion of the
Group’s total loans and advances to the retail sector, Barclays has a
large exposure to adverse developments in the UK property sector.
Despite a downward correction of 20% in 2009, UK house prices
(primarily in London) continue to be far higher than the longer term
average and house prices have continued to rise at a faster rate than
income. Reduced affordability as a result of, for example, higher interest
rates or increased unemployment could lead to higher impairment in
the near term, in particular in the UK interest only portfolio.
The Spanish and Portuguese economies, in particular their housing and
property sectors, remain under significant stress with falling property
prices having led to higher LTV ratios and contributing to higher
impairment charges. If these trends continue or worsen and/or if these
developments occur in other European countries such as Italy: the
Group may incur significant impairment charges in the future, which
may materially adversely affect the Group’s results of operations,
financial condition and prospects.
The economy in South Africa remains challenging and the risk remains
that any deterioration in the economic environment could adversely
affect the Group’s performance in home loans.
For further information see pages 158 to 176
The following information describes the material
risks which the Group believes could cause its
future results of operations, financial condition
and prospects to differ materially from current
expectations. Certain of the risks described below
also have the potential to adversely impact the
Group’s reputation and brand which could have a
material adverse effect on the Group’s results of
operations, financial condition and prospects,
including the ability to meet dividend
expectations, ability to maintain appropriate levels
of capital and meet capital and leverage ratio
expectations, or achieve stated targets and other
expected benefits.
Additional risks relating to the Group that are not
currently known, or that are currently deemed
immaterial, may individually or cumulatively also
have a material adverse effect on our business,
operations, financial condition and/or prospects.
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