Barclays 2014 Annual Report Download - page 119

barclays.com/annualreport Barclays PLC Annual Report 2014 I 117
i) Deterioration in political and economic environment
The Group’s performance is at risk from any deterioration in the
economic and political environment which may result from a number
of uncertainties, including most significantly the following factors:
a) Political instability or economic uncertainty in markets in which the
Group operates (emerging risk)
Political instability, economic uncertainty or deflation in regions in
which the Group operates could weaken growth prospects that could
lead to an adverse impact on customers’ ability to service debt and so
to higher impairment requirements for the Group. These include, but
are not limited to:
Eurozone
The economies across the Eurozone are showing little evidence of
sustained growth with debt-burdened government finances, deflation,
weak demand and persistent high unemployment preventing a
sustained recovery. Slow recovery could put economic pressure on key
trading partners of Eurozone countries, notably the UK and China.
Furthermore, concerns persist on the pace of structural banking reform
in the Eurozone and the strength of the Eurozone banking sector in
general. A slowdown in the Eurozone economy could have a material
adverse effect on the Group’s results of operations, financial condition
and prospects through, for example, a requirement to raise impairment
levels.
The Group is at risk from a sovereign default of an existing Eurozone
country in which the Group has operations and the adverse impact on
the economy of that exiting country and the credit standing of the
Group’s clients and counterparties. This may result in increased credit
losses and higher impairment requirements. While the risk of one or
more countries exiting the Eurozone had been receding, as a result of
the recent formation of an anti-austerity coalition government in
Greece, this risk and the risk of redenomination is now re-emerging
alongside the possibility of a significant renegotiation of the terms of
Greece’s bailout programme.
For further information see Exposures to Eurozone countries on page 150.
South Africa
The economy in South Africa remains under pressure with weak
underlying economic growth reinforced by industrial strike action and
electricity shortages. While the rapid growth in the consumer lending
industry over the past three years has begun to slow, concerns remain
over the level of consumer indebtedness, particularly given the
prospect of further interest rate rises and high inflation. Higher
unemployment and a fall in property prices, together with increased
customer or client unwillingness or inability to meet their debt
obligations to the Group, may have an adverse impact on the Group’s
performance through higher impairment charges.
Countries in developing regions
A number of countries, which have high fiscal deficits and reliance on
short term external financing and/or material reliance on commodity
exports, have become increasingly vulnerable as a result of, for
example, the volatility of the oil price, a strong US dollar relative to local
currencies, and the winding down of quantitative easing policies by
some central banks. The impact on the Group may vary according to
such country’s respective structural vulnerabilities but the impact may
result in increased impairment requirements of the Group through
sovereign defaults or the inability or unwillingness of clients and
counterparties of the Group in that country to meet their debt
obligations.
Russia (emerging risk)
The risks to Russia are escalating as pressure on the Russian economy
increases. Slowing GDP growth and high inflation due to the imposition
of economic sanctions by the US and EU, falls in the price of oil, a rapid
fall in the value of the rouble against other foreign currencies and
significant and rapid interest rate rises could have a significant adverse
impact on the Russian economy. In addition, foreign investment into
Russia reduced during 2014 and may continue in 2015.
While the Group has no material operations in Russia, the Group
participates in certain financing and trading activity with selected
counterparties conducting business in Russia with the result that
further sanctions or deterioration in the Russian economy may result in
the counterparties being unable, through lack of a widely accepted
currency, or unwilling to repay, refinance or roll-over outstanding
liabilities. Any such defaults could have a material adverse effect on the
Group’s results as a result of, for example, incurring higher impairment.
For further information see page 150.
b) Interest rate rises, including as a result of slowing of monetary
stimulus, could impact on consumer debt affordability and corporate
profitability
To the extent that interest rates increase in certain developed markets,
such increases are widely expected to be gradual and modest in scale
over the next 18 months, albeit at differing timetables, across the major
currencies. While an increase may support Group income, any sharper
than expected changes could cause stress in loan portfolio and
underwriting activity of the Group, leading to the possibility of the
Group incurring higher impairment. The possibility of higher
impairment would most notably occur in the Group’s retail unsecured
and secured portfolios, 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.
ii) Specific sectors
The Group is subject to risks arising from changes in credit quality and
recovery of loans and advances due from borrowers and counterparties
in a specific portfolio or from a large individual name. Any deterioration
in credit quality could lead to lower recoverability and higher
impairment in a specific sector or in respect of specific large
counterparties. The following provides examples of areas of
uncertainties to the Group’s portfolio which could have a material
impact on performance. However, there may also be additional risks
not yet known or currently immaterial which may have an adverse
impact on the Group’s performance.
a) Decline in property prices in the UK and Italy
The Group is at risk from a fall in property prices in both the residential
and commercial sectors in the UK. With UK home loans representing
the most significant portion of the Group’s total loans and advances to
the retail sector, the Group has a large exposure to adverse
developments in the UK retail property sector. UK house prices
(primarily in London) increased throughout 2014 at a rate faster than
that of income and to a level far higher than the long term average. As
a result, a fall in house prices, particularly in London and South East of
the UK, would lead to higher impairment and negative capital impact as
loss given default (LGD) rates increase. In addition, reduced
affordability of residential and commercial property in the UK, for
example, as a result of higher interest rates or increased
unemployment, could also lead to higher impairment.
In addition a significant portion of the Group’s total loans and advances
in Italy are to residential home loans. As a consequence, a number of
factors including, for example, a fall in property prices, higher
unemployment, and higher default rates have the potential to have a
significant impact on the Group’s performance through higher
impairment charges.
For further information see page 152.
b) Non-Core assets
The Group holds a large portfolio of Non-Core assets, including
commercial real estate and leveraged finance loans, which (i) remain
illiquid; (ii) are valued based upon assumptions, judgements and
estimates which may change over time; and (iii) are subject to further
deterioration and write-downs. As a result, the Group is at risk of loss
on these portfolios due to, for example, higher impairment should their
performance deteriorate or write-downs upon eventual sale of the
assets.
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