Barclays PLC (BARC) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to this session on with Barclays. I'm thrilled to welcome Tushar Morzaria, Chief Financial Officer of Barclays. And thank you, Tushar, for making it in these very difficult circumstances and making it happen. .

Maybe we can jump into -- straight into the issue at hand. Obviously, market environment has dramatically changed in recent weeks. The outbreak of coronavirus have added uncertainties in many, many levels. As a management team, how do you react to the fast-evolving environment? How resilient is your business performance? And how should we think about the diversification of your business now as one of those pillars?

Yes. Thanks, Alvaro, and thanks for setting this up in a sort of virtual way. I appreciate all the lens you've gone to keep the show on the road. I think it's terrific. Yes, in terms of where we are at the moment, obviously, it's a very fast-moving, dynamic environment with sort of news flow changing day by day. I'd say -- so it's definitely a period of uncertainty and we don't entirely know sort of the path of the real economy over the next handful of quarters, maybe less, maybe more, we just don't know. I would say the things that I think we're pleased with is that we have a diversified business model. So I think that will help us weather through these more difficult times. I think, for example, in the first quarter of this year, it's generally a good environment for sales and trading type businesses, more market volatility, very high sort of volumes of activity, as well as quite a bit of a spread that allows you to monetize some of that flow. So I think that's good. I think the other 2 things that we are pleased with is -- and maybe in some ways, the U.K. banking system was perhaps slightly more prepared for not quite this, but at least some difficult times was the expectations around Brexit. And so we've been in somewhat of a defensive posture for a little bit of time now. But defensive not only in terms of risk, but also in terms of liquidity and capital. So we've got the largest liquidity pool and the most liquid assets than I think we've ever had in the history of the group and certainly have the highest capital ratio than I think we've ever had as a group, at 13.8% at the year-end. I think in terms of where we go from here, the most important things for us is, I think, first and foremost, to make sure there are no new risks that we weren't already aware of and that where things are, if you like, panning out according to how we would expect in sort of these type of dramatic moves. And to the extent there is any new information, we detect it very quickly and are able to deal with it appropriately. And I think alongside that is just prudential conservativeness. So just ensuring that both capital and liquidity and the financial underpinning of the bank just remains as robust as it always has done. And on both of those fronts, I think we feel very good at the moment. I'd say on the capital side and on the liquidity side, central banks, particularly in the U.K. being very responsive on liquidity, you can see the coordinated dollar swap line that the federal reserve alongside all the other main sort of central banks in the world has made available. I think usually in times like this, there's obviously a rush to source dollars for funding. I think that's taken a lot of stress out of the system, which I think is a great thing. I think in the U.K., the PRA, also the Bank of England, have actually launched the ILTR program, which is also a very effective system. It's a very economic source of term funding, why sort of source of collateral that can be placed there and works very efficiently. So I think all of that, I think it's great response by the central banks very early on. And on the capital side, the removal of the countercyclical buffers very quickly. And I think the PRA has always been very much of the view that buffers are there to be used when they are meant to be used. And I think in times like this, I would imagine they would be encouraging banks to behave accordingly. So I think at the moment, it's early days. We don't know exactly which path we will play out on, but I think things are going to as we would have expected.

That's great. Last year, you -- several times, you made the point that you were very committed to exercise cost control if needed. How should we think about that flexibility this year, obviously, with the new information we have? On top of compensation, is there a discretionary investment budget that you can manage? What kind of flexibility do you have on costs?

Yes, thanks for that question. So it's a very good question. And we -- as you are probably aware, over the last number of years, we have reduced our absolute cost base regardless of things like currency fluctuations and what have you every single year. So we have the levers in front of us to know how to bring our cost base down. And we've been able to do that quite successfully. I think in a year like this, we have those levers available to us in all divisions. Obviously, variable compensation is one, but other decisions such as deferring investments, changing the pace of some of the work that we are doing on and even the gross productivity that we would expect to realize in any natural year, how much of that do we take to the bottom line. I think the bigger question for us, though, is as much what economic path will we proceed on. And if, for example, this is all very hypothetical, none of us really know, but if this is an abrupt slowdown for 2 quarters and growth begins again in the fourth quarter or indeed the first quarter of next year, I think you will make a set of choices that will bridge you to that point that are probably different if you don't expect growth to return until, say, the end of 2021 or whatever time frame you choose. I think we'll know a lot more about which path we may be on as I think we learn more about, and I'm talking we as a sort of collective we here. Governments and the industry, and you learn more about the path of the way this virus will work and also treatment plans, the way the vaccinations' success. Countries, for example, Spain have had in terms of going into sort of lockdown mode and how effective that is. I think once we -- once all of that information becomes more available, we'll have a clearer sense of the likely path we'll be on. But I think whichever path we take, we have the ability to react accordingly. And the other comment I'd make on that is not only do we need to plot the right, if you like, cost path for ourselves to bridge to a period of, hopefully, growth again, but also it's important for customers and clients that we act in a way that's helpful to help our customers and clients to bridge to a better future as well there. Their security and their success is our success. So I think that's equally important as to the -- whichever path we take that we are able to factor that into our decisions as well.

If we maybe talk about the CIB division for a bit, you've come along way the last 2 years. The IB has gained market share probably for 8 quarters in a row. And if we look back, to be honest, you've done better than any of us expected. Can you talk us through what levers you pull to get there to take that market share? And as we look forward, how is that going to help you going forward to keep on gaining market share, will be more resilient in the market, looking forward, how will that help?

Yes. I think with these things, there's no -- something I've been saying for a period of time, many would have probably heard this answer. There's no secret sauce as such. I think it's a 3-pronged strategy, and it's continuously -- the continuous application of that strategy. I think first and foremost, was human capital, investing in the right human capital. I am not talking here just quantum of traders, bankers, et cetera. Actually, it was more the managerial ranks. Ever since the sort of the turn of the last decade, there's been an enormous management change in the investment bank, and we really didn't have any -- we were going through layers of management rather than restacking those senior sort of 25- to 30-year risk in doing a client-facing professionals. I think we've done that, and this management team has been in place now for at least 2 years now. And every day, the cohesion and the strength of the management team really comes through in terms of how good a job we do at covering clients and monetizing risks that we're taking on behalf of our clients. Second thing is financial capital and having the right quantum there. We talked about probably around about 2017 into 2018, ensuring that we have the right leverage deployed in the investment bank, where we thought that was very important because we did feel underweight in our financing businesses, and that's a very sort of stable source of income. And there's a good halo effect. If you're financing a lot of clients, you quite often get the execution business and peripheral business around it. So we feel very good with that, and the financing revenues have come on nicely as our share of the market on that. And the third thing is technology. When you go through an enormous period of restructuring, and we've had our own problems in the past, we had an issue with our dark pools venue in the United States. We probably underinvested in our foreign exchange platform, which at the time was probably one of the best in the marketplace, but it became average over time. And it is a constantly evolving, constantly innovative banking, new forms of banking that's constantly sort of innovating, using technology and investment banking, no difference. Our ability to create capacity, to invest into technology and connectivity to clients. So I think those are the 3 sort of pronged strategy. And it's more of the same really. I do think that, at the margin, what has been helpful, and I wouldn't overstate this, I was a little bit cautious about this, but I think as some capacity has left the industry, most of that capacity leaving the industry has been non-U.S. banks. And I think being a non-U.S. bank at the margin just simply because of counterparty diversification and choice of counterparty, it can be helpful. That doesn't mean you're in the business, doesn't mean you get automatic rights to anything. You still have to compete and win it on your own merits, but you probably get an opportunity set that you may not have otherwise had. And that's been helpful with the margin.

Obviously, I think it has made very good progress, but I would argue equity may be less so presumably last year due to the lower volatility, clearly, that has changed at the beginning of this year. Maybe you can talk through sort of your franchise at this moment in your presence in those segments at the moment and in the current market environment. And we -- and when we have this volatility in the markets in mind, how is that both impacting your clients in the way your clients interact? How do you manage that risk at this point?

Yes. Yes, I'd always encourage folks when they look at investment banking, sales and trading revenues, or for that matter, even the fee business. Look it on a trailing average, and I think that's the way you sort of teed up the question. I always caution people to look at any one particular quarter. We'll have good quarters, we'll have not so good quarters. And so with every other bank. I think it's the trading average that's important, 90 days. Time slices can be quite unrepresentative of where the trend is quite sometimes. I think the modern sort of broker-dealer, the modern sort of sales and trading business is far less, if you like, inventory heavy than perhaps it used to be. So therefore, I think the likelihood of being caught with inventory that can really get you in trouble, as certainly banks had in 2008, is probably less so. Obviously, banks do need to carry inventory, otherwise they can't provide liquidity. But it's a different -- it's a much more faster-moving, high velocity business than it certainly used to be. I think for equities, you are right. And fixed income has done relatively very well. And equities -- and fixed income can improve, but I think equity also has room for improvement. Things that have worked well for us. I think equity financing, I feel very good about equity prime brokerage. I think we could do better in some forms of parts of equity derivatives and there's progress being made there. Thinking about managerial ranks, we have hired a very senior, experienced equity derivatives manager of that trading -- trade employees over a year, I think, ago now or something. And that's beginning to pay dividends. So I think the same 3-pronged strategy that we keep marching to that drumbeat and expect to see improvement there. But by and large, in terms of the volatility that you talked about, volatility, as long as it's sort of accompanied with decent volume and activity levels and the opportunity to widen bid offers is generally a very good environment for all trading floors. And I think for the majority of this quarter, I think you've heard other people comment that that's the sort of environment that they see as well.

Good. Very clear. One question about your corporate book. How do you think about your credit exposures positioning and monitoring and insulating sort of those exposures to resources? Whether we're analyzing the energy sector or transport, how do you see -- in particular, we've seen sort of a lot of press reports when some of these companies start to pull some of those credit lines. Are you seeing that? How do you manage that?

Yes. I get the report in the media. So absolutely, you would expect corporations with such a sudden sort of jolt to the economy to themselves want to get defensive and draw down cash lines where they can. And we are seeing a bit of that. We're not in some of the more larger syndicated facilities. But we are in some of those, and you will see that reported. I mean what we're seeing most of the time is actually, at least for us when the draws have taken place, which isn't so big at the moment, but it may change. Most of that cash actually ends up back on the balance sheet, anyway. It's not sort of more on the sidelines ready to be properly utilized to be spent in a way that's appropriate for that corporation rather than immediately being deployed. And some of it may just be sort of defensive posturing. In terms of credit risk, I don't think we are seeing any surprises. We have a quite tight credit box and have had one for a number of years now. And we haven't really moved that. In fact, one of the positives, again, go back to Brexit planning, we became quite defensive, generally speaking, in U.K. corporate credit as well as U.K. consumer credit. And some of the more high-profile names in the U.K. that you saw had difficulties before this, the coronavirus issue, you saw us probably absent from many of those names. And that was really the result of either avoiding those credits for good reasons or having very effective hedges in place. So our risk management department, I think, have done a terrific job on that. And this is a much more broader beyond just U.K. sort of names that are exposed to Brexit type issues. This is a much more broader thing. But I think that risk management approach, I feel pretty comfortable with. We have in the past, people will be probably wanting to know more and more about things like oil and gas and aviation and various things like that, which at the end of the first quarter, we'll obviously disclose oddly enough in the first quarter. It's probably a month away from reporting season, and those what we'll be talking about then and how quickly events are evolving. But if it was today, I'm sure we'd be talking about sensitivities to oil and gas. And the last time we put out an oil and gas sensitivity, we talked about if oil dipped below $30 a barrel, I think it was in 2016 and stayed there for the remainder of that year. We said that we'd expect cash losses of somewhere around GBP 250 million. Now that's 3 years, 4 years ago now. But it will give you a sense of, at least, the sensitivities and the risks that we've been running historically and we'll obviously update that. And for those that want sort of an early read at that, feel free to have a look in the annual report and the Pillar 3 report. There's a lot of credit information in there and feel strongly tell which page to go and our Investor Relations team can obviously -- can help out.

Great. Maybe we can turn to your retail business in the U.K. The mortgage volumes were off to a very good start in January and February. But I suspect it's going to slow down, and you will also have the Bank of England rate cut now. You were already guiding to a margin erosion, but how do you think the revenues will evolve with the new environment? Anything you can tell us there?

Yes. It's a tricky one because you are absolutely right. I think, let's say, the first 2 months of the year, application volumes are actually quite robust. Obviously, they are tailing off quite rapidly. Now I think part of the challenge goes into, again, sort of this is going to be a 2-, 3-quarter type and we're back to a growing economy or this is going to be sort of more of a longer-term, slow-moving change. I think if we go into a very sort of strict sort of restriction of movement, for example, in Spain or France, Italy, et cetera, just house price transactions -- sorry, house move transactions just obviously won't happen. So I imagine growth will be dramatically subdued. Having said that, to the extent there is transactions taking place, margins, customer rates have held up pretty well. And at least from our vantage point, have actually gone up slightly. Obviously, funding rates have dipped to lower, whether it swap rate through and deposit pricing. So I think mortgage margin is probably in better shape. Certainly, churn margin for us, back book to front book is positive, and it's got even slightly more positive. But I just think that volume weren't maybe very subdued for some period of time. And it is a little bit too early to know which parts we go on until there's a little bit more information around how we get beyond the sort of the immediate sort of slowdown in economic activity.

In your cards business in the U.K., you have been reducing the balances for the last few years. How do you think that helps you in the current environment? How resilient could provisions be in the downturn scenario? And can you give us maybe some sensitivity on how provisions might perform or maybe, in an IFRS 9 world, maybe handhold us a bit, what could we expect?

Yes. I think first things first, so I'd probably just take a little bit of a step back and say, first of all, IFRS 9 is, by design, is a procyclical accounting standard. So as an economy begins to deteriorate, in fact even before it begins to deteriorate, as forecast of the economy begin to deteriorate, that will feed into the IFRS 9 models that drive the impairment balance, and we'll start increasing that impairment balance. In other words, you will be building up provisions. And I'd put that into the sort of very loose speaking sort of general provision category. These aren't necessarily real defaults, real delinquencies, real cash losses, but the expectation that we're going to get real cash losses, and so you rapidly build up those provisions. On the flip side, when the economy stops deteriorating, indeed, if you like, deteriorates less than forecast then starts improving, you'll get a rapid release of provisions. So you get quite a sort of a big swing in impairments from a rapid build to a rapid release, which can sort of make earnings forecasting a little bit tricky. And that's why probably capital is equally important because at the end of the day, as a shareholder, investor matter, distributable capital is an important sort of underpinning. And in there, at least in the U.K., the regulators have been applying a transitional relief to that "sort of general provision build" if I describe it like that, it's 85% transition rate. So every GBP 100 of provision build as a consequence of those economic forecast updates, so only GBP 15 is deducted from capital. So that's helpful. And I think the PRA will be looking at that very closely to see if they want to refine that in any different way. It is responsive in the sense that you will see provisions build much quicker than you would have under the old accounting standard. I think for the unsecured credit book in the U.K., for us, again, Brexit planning has been probably a good help for us. We took a very defensive view on U.K. consumer credit, probably since 2016, probably a little bit earlier than we needed to. But that has been helpful. Since I have been in this job, I think we have at or even below the lowest level of interest-earning balances in unsecured consumer credit since I've been here. So the books are sort of as tight as it's been in that regard. It's very sensitive to changes in unemployment. I mean if you do see an increase, a rapid increase, particularly in the U.K. unemployment, IFRS 9 provisions are very sensitive to that, and you'd see the transmission effect relatively quickly. I think when we look at forecast, changes in unemployment, pick your favorite economists, you will probably be able to find someone that sees this as a very rapid V-shape and someone that sees this as a sort of more prolonged and difficult sort of period to work through. And I think until we sort of coalesce around a sort of a consensus view from the economists, I think it will be hard to forecast what that means for the IFRS 9 sort of provision build. But any form of slowdown in the economy, any form of credit stress, the provisions will build quicker than you're used to in the old accounting standard, no doubt about it.

Maybe a couple of quick questions before we open up. We've already got a few questions online. If I compare your U.K. credit card business versus your U.S. credit card business, in the U.S., you've clearly been keen to grow your co-branded segment. How do you see the asset quality picture in the 2 regions? How do they compare, basically U.S. where you are keen to grow and where you have been very caution in the U.K.?

Yes. Yes, so U.K., in some ways, is an index of the U.K. economy. We are probably 1 of the 2 largest credit card businesses. It's an open market business. You don't have a bank with Barclays to have a Barclaycard in the U.K. So I would say it's quite representative of the U.K. But been shrinking very deliberately sort of over the last sort of 2 to 3 years. U.S. is very different. It's, like you said, very skewed towards a co-brand partnership business, affinity program. And within that skewed -- within that probably more towards the airline industry, actually. Now that has good things and bad things. On the positive side, airline customers tend to be better credits. So it's a slightly lower-margin business, but a lower risk business. Those that like airline rewards obviously have the wherewithal to spend money to fly around, et cetera. So have to be better credits. The aviation industry obviously is under immense stress. And so the pressure to open new accounts isn't there from the retailers themselves because there's typically the account opening tends to be in airports and in flights. So that's obviously not happening at the moment. On the flip side, of course, the aviation industry is under stress. So to the extent that they don't go through that stress period and there's no government support, then that may have an implication to whether that partnership continues or not. I think it's too early to tell you. But from what I sort of hear on what everybody hears, I guess, from whether it's a U.S. politician or indeed U.K. politicians, there will probably be fiscal responses to some of the very challenging industry sets, and aviation maybe one of them.

And maybe last question before we open up. On capital, you printed 13.8% in Q4. You have a 13.5% target. You already flagged there will be seasonality in Q1. But obviously, the market sort of with widening spreads, market selloff, how could this increase the seasonality we've seen in Q1? Maybe you can help us think through the moving parts. And also, in the context of the countercycle buffer, obviously be moved to 0 until March 2022. How is that going to interact in the way you think about capital?

Yes. Yes, so you're absolutely right. We guided to being sort of back to our sort of target level of around 13.5%, all other things being equal. Procyclicality, which is, I think, the sort of gist of your point, is true. That is, again, inside the Basel framework by design. So the risk-weighted asset models will pick up that procyclicality and there will be some inflation of risk-weighted assets as a result of that. You've seen that in the stress test that the Bank of England publishes and all that. So you get a sense of how our risk-weighted assets will respond to that. That's something we'll just manage. That's something where we used to -- we know these models, and we'll deal with that in the way you'd expect us to. I think the -- on the flip side of that, of course, the Basel framework is by design sort of procyclical in nature. Basel's approach in dealing with that has been, well, we have buffers in place and they are there to be used in times like this, I guess, and the first sort of explicit sort of utilization of them is the removal of the countercyclical buffer by the U.K. And the encouragement of U.K. banks to utilize those buffer removals appropriately, not to use them, unfortunately, from many of your audience to pay dividends, extra dividends or employees remuneration, but certainly to be responsible participants in what could be a difficult time for those countries. And I think we would look to behave responsibly and utilize those buffers accordingly in the right way. I think in times like this, it's important that the banking sector is seemed to be a force of good and a stabilizing impact to what could be a difficult time for many customers and clients. And I think you would see the U.K. banking sector, some of the responses, both the central bank facilities but also the prudential sort of removal of some of these buffers, I think banks would expect to utilize appropriately.

We'll take questions. Maybe one, which I'll slightly adapt to just on dividends, just given you just touched on that. Has the regulator discussed upcoming sort of upcoming 2019 dividends like we have seen in Norway and other countries?

No, we haven't had those discussions. I think it's way too soon to be having anything like that. I think we need a much better understanding of the likely path in which the economy will take. So I think there will be a time and a place, I think, where we'll have better clarity on what would be the right thing to do. But I think it's way too early for that.

There's also a question on rates of capital. The capital -- is the IB capital constraint given volatility in VaR moves?

I think it's a very good question, actually. I think this is perhaps the benefits of diversification. I think the good thing about the investment bank in one sense is it can deploy capital relatively quickly, but can release capital relatively quickly as well. And the ability to be nimble and make good use of it to support clients when they need it or to provide liquidity when counterparties are demanding it, I think, is some of the positives of having that business in our portfolio. So I would say, I wouldn't put it into the sort of capital constraints simply because we're in this environment. We have a capital allocation for all our divisions, and we'll operate within that. But at the margin, we do have the flexibility to take advantage of opportunities and to be there for our clients as we see them without being a permanent drain on the firm's resources.

There's a couple of questions which are a bit nitty-gritty on loan exposures. But there's -- it ends up with do you have -- and when you think about your leverage in high-yield loans business, is there -- are there any hung deals in the market today?

Frankly, you never know what's public and what isn't these days. Nothing that I think is -- I mean we get this question sometimes from time to time. And I don't ever recall in my time ever calling out a mark on a leverage alone. And if there was one, obviously, of any significance, I have been calling out on a quarterly. So you should take that as we manage the risk very carefully and make sure that our underwriting commitments stay well within our limits. And to the extent a loan gets hung or something, it's never of any individual significance to us.

There's another question. Is the 10% target at risk given the current crisis at lower rates? I think you gave some color at the full year, but maybe you can talk about it again.

Yes. Look, well, the world has moved on since the full year. It feels like a lifetime ago at the moment. But we felt at the full year with the more of the sort of rate headwinds and sort of general sort of sluggish growth that we'd expect it to be well above 9%. But 10% was our objective, but it would have been quite hard to achieve this year, even though we'd still do our best to achieve it. I think where we are now, that looks very, very unlikely, I think. As I mentioned, just previously, just the provisioning build will be a much more significant headwind and the rate environments become, obviously, a much more significant headwind as well and growth probably starts shrinking, possibly even going backwards. So it's going to be very -- it's going to be a tough year, I think, for earnings. Having said that, as we come out of the other side of this, whenever that may be, I see no reason why Barclays Group is on a 10% returning group through a cycle and at most points in the cycle I think we have the level of diversification. I think we have the earnings power and the balance of businesses. But in a year like this, I think it will be tough to do.

And there's another question, can you describe what's going on in the pound-dollar funding markets? And are you going to be able to access U.S. dollar liquidity?

Yes. Look, we have no problem with dollar liquidity. Bank funding lines remaining open. We're able to roll our funding just like all other banks are. And I do think the dollar swap line, which dollars was a particular difficulty in the 2008 crisis, I think the preemptive application of that and making that available in very significant size with a very broad acceptability of collateral on very economic terms. So I don't see that being an issue this time around.

Maybe one on IFRS 9. This morning, there was a couple of commentaries. Obviously, IFRS 9, there's a judgment call to be made as to what actually you take given the expectations as you clearly pointed out. Is there any expectations that maybe there will be sort of the -- I don't know if the PRA will take a view and maybe all the banks will use the same set of economic assumptions to make it all sort of more comparable given the uncertainty? Or is there any expectation of that? Or is there any way maybe the Bank of England can manage it?

Yes. It's a very premier question. It's a really good question. The Bank of England does have convening power. As I understand it, they can convene banks, and indeed the accounting professionals they wish to do that as well. I do think behind the scenes, the Bank of England has been generally a force for good in trying to create some consistency in IFRS 9 across the banks. I think it's quite hard for individual bank management teams to do if you can imagine the sensitivity of sharing this kind of information. But the Bank of England has been a force for good for this. So I don't know whether they will do that. But generally, they have been, of course, good in situations like this.

There's also one question on impact of the FCA review on mortgage switching on competition. Is that increasing competition?

Yes. Yes, I mean, I think the ability to make switching less -- more frictionless, shall we say, I think as a general statement, whether it's moving current accounts, moving mortgages, whatever, I think that is just something that our financial conduct authority is keen on. One of their core objective is to increase competition. It's a stated objective. So I think very consistent with that, and banking is another example of trying to create more competition. And we're also -- I think all the big banks would not be -- would welcome competition. It keeps us on our toes. It keeps us on edges. It's good for consumers, good for the development of products. So yes, we'll welcome it and -- which is a really important business for us. For us, it's an open market product. Again, it's still like our card business. You don't have to bank with Barclays to have a Barclays mortgage. And so we're used to actually dealing with that as an open market product. So we welcome all of those actions.

Well, as I see, I don't think there's any more questions on the webcast. So I just wanted to say thank you very much for joining us. I hope it was a very interesting conversation. And best of luck in these tough times. Thank you very much.

Thank you very much, Alvaro, and thanks everybody for listening. And everybody, keep safe. See you later.

Thank you. Bye.