Barclays PLC (BARC) Earnings Call Transcript & Summary

Good morning. I'm Jason Goldberg. And on behalf of the entire Barclays Financial Services Equity Research team worldwide, welcome to our 18th Annual Global Financial Services Conference. While we are virtual this year, we aim to provide you as close to the same experience as prior years with all the presentations and meetings conducted via video. Thank you for joining us in what I'm sure will be an informative 3 days from a record 212 financial companies and 24 fintechs. In Barclays, we have the perfect company to kick off a global financial services conference as it's diversified by business, by customer and clients and by geography. Its businesses include consumer banking and payments operations around the world as well as a top-tier full-service global and corporate investment bank, all of which are supported by a services company. With us this morning, we are very pleased to have with us Jes Staley, Group Chief Executive of Barclays. Good morning, Jes.

Morning, Jason. It's good to be with you. And again, congratulations for bringing together what I'm sure will again be the largest conference in the financial industry. So a real testament to the following that you have and the franchise that you've built with Barclays. So it's good to be with you, Jason.

Appreciate that.

Maybe the best place to start is, if you can maybe walk us through what Barclays' experience of the crisis has been so far and your priorities of the business during this time.

Yes. So when the COVID-19 crisis began and the consequential contraction in the global economy was upon us, we sort of set 3 priorities within the Executive Committee of Barclays. The first one was to make sure we preserve the financial integrity of the bank. Our ability to provide financing around the globe from consumers to large corporations is obviously dependent upon the financial strength and resiliency of the bank. And so that was very much amongst our priorities. Second one was around the world but particularly in the United Kingdom that we seek to play a role as being a partner with governments as they exercise fiscal policy and monetary policy in order to try to manage the economic pain created by the pandemic. In our view, banks have a unique opportunity right now, whereas many people would argue that the banks were the catalyst for the financial crisis in '08 and '09 leading to the economic crisis in those years, to fast forward to now, given the capital strength that I think the banking industry is showing, the high levels of liquidity that the banking industry is showing, we have a real opportunity to partner with governments and with regulators to act as a firewall to, as much as we can, minimize the challenges and the stresses that are created in our economies because of this pandemic. And so we've really been focused on working with the Bank of England, with the ECB, with the Federal Reserve and with governments to continue to provide oxygen, if you will, which is the financial markets to our customers and clients around the world. And the third one, I think, as all responsible businesses, very much focused on the health and well-being of our employees. We have 85,000 employees at Barclays. Heroically, 20,000 have continued to man our call centers and our branches around the world. And particularly in the branches, these are locations that have a lot of social traffic keeping in front of our customers and clients, particularly those that are vulnerable at a time like this. They really have been heroic, and then to have 60,000-some-odd people managing the complexities of the global financial market, most of them working from their kitchen table. And what has happened in terms of our technologists and people in operations, the control and compliance that we can manage all this complexity and engage with hundreds of thousands of customers and clients around the world and keep a very complicated universal bank functioning at a very high level, is a real testament to our people and the investment that we've made in our people. And staying focused on their well-being has been one of our 3 priorities.

Good stuff. I guess the biggest focus of investors at the moment seems to be credit costs. Given that the major impact government-supported initiatives have had on your customers and clients, how comfortable are you with your impairment outlook now that these are starting to be lifted? And maybe just discuss what areas of the loan book you're most concerned about.

We've always said or I've always said that the biggest credit risk at Barclays is our unsecured consumer loan portfolio. The correlation of losses in -- with the credit card business to unemployment is very high. And obviously, we were all looking at some very scary unemployment numbers as the pandemic really took off. We took a sizable impairment reserve in the first and second quarter of GBP 3.7 billion. We remained profitable in both of those quarters despite such a high impairment reserve. When you look at the underlying economic assumptions that we used to -- that resulted in that level of impairment reserve, we believe then that we were quite conservative. In the actual performance in the economy and in unemployment and GDP, et cetera, as the -- has the truth been better than we modeled when those impairment numbers were produced. So there are some encouraging signs. As I said earlier on, there are sort of 2 tsunamis that are hitting each other. One is the extraordinary economic contraction caused by the pandemic, but the other is an unprecedented response by governments through fiscal policy and central banks through monetary policy, trying to sustain the economy, particularly businesses, small businesses and the financial stability of consumers. And how those 2 influences or those 2 forces will deliver in the second half of this year and going into 2021 is a very difficult thing to call. So we've been conservative in terms of our reserves. We've maintained the profitability of the bank. We have the highest level of capitalization in the history of Barclays. And we're keeping our eye very much on the consumer, particularly our unsecured consumer portfolio. What we are seeing right now is payment holidays have come to an end in the U.K. and elsewhere. It's pretty encouraging actually how the average consumer has started again to make their normal payment streams, whether it's secured in the mortgage portfolio or unsecured in the credit card portfolio. I think we are -- the direction of travel, we still have a lot of challenges in front of us. As the government supports begin to have a declining degree of influence, we don't quite know what's going to happen. But right now, I think we feel we're in a better place than we might have felt a couple of months ago.

I guess how conservative do you think you've been in your assumptions just given a pathway to this economic recovery is still fairly uncertain?

Yes. Only time will tell. We have, in our models, forecasted a fairly prolonged contraction in the global economies and a fairly slow recovery in employment numbers. So we think that we are conservative, but none of us know what the pandemic is going to do. Will there be a second wave? Will there be a third wave? Have we really made a significant impact on the mortality rates? How soon is a vaccine going to be available to all of us globally? How quickly can it be used? So tremendous number of uncertainties. One of the advantages that I think we all recognize, it's got a headwind for us in the banking community, but low interest rates are, on one level, a blessing given the economic challenges that we're having, that -- the amount of financing that has been raised by governments, by sovereigns, by major corporations is unprecedented and that this amount of borrowing can go on to provide an economic stimulus into the economy. Whilst interest rates, in many cases, on real basis, are negative, even for corporates, we should feel pretty good about that, even though those very low interest rates create a headwind for the banking industry.

I think it's a good point. Maybe we delve into that a bit more because banks are experiencing a challenging outlook for consumer revenues given the low interest rate environment. You've seen a drop-off in spend, in card balances and just really lower activity across the board. What trends are you seeing in the U.K. as well as the U.S. that just gives you confidence in your outlook for that business?

I talked about our first priority being the financial resiliency or a strong financial position as a bank. The first thing you look to, when you think about your economic or financial integrity, is the balance sheet. That is -- that's sort of the bedrock of how financially strong a bank is. And so when we looked at it and had one of the highest capitalization ratio we've ever had, our liquidity coverage ratio got over 180%. The balance sheet of this bank is very strong even with very conservative assumptions around our credit exposures. So we feel good about the principal foundation of the bank. And part of that capital strength reflects the fact that low interest rates have allowed the major economies that we participate in to refinance themselves and provide some degree of financial stability across industries, across small businesses. And that clearly, including the fiscal programs that the governments have imposed, that's helped the capital strength of Barclays. The headwind that we're all going to face is as interest rates stay low and the yield curve flattens, that will have an impact going forward on the revenue stream of, I think, the banking industry, including Barclays. But I'd rather wrestle with that revenue/cost issue than -- and have a very strong balance sheet than the other way around.

Makes sense. So maybe we delve more into the kind of U.S. card business, obviously a big business for several of the companies I cover. Do you expect Barclays' reliance on airline partner programs to lead to further revenue headwinds as the travel segment remains under pressure? And just maybe what's the outlook there?

When we look at -- so another comment I'd make that I think we've witnessed in both the U.S. and in the U.K. and to a degree in Germany as well with our card business there, generally, as you go into an economic slowdown, what you expect is the consumer or the small business, they'll borrow a little bit more, draw a little bit more down on their cash in order to sustain a standard of living or maybe an investment base for their small business. This time around, we didn't see that. Actually, what I think we saw was fear. And what the consumer and the small businesses did, both in the U.S. and -- U.S., U.K. and Europe, is focus on their balance sheet. So what we saw is receivable levels in our U.K. card and our U.S. card go down and our deposit levels go up. That's why our liquidity coverage ratio just shot through the lights, is because of deposits coming into the bank. As a credit matter, that our receivables have come down decreases our credit risk, and we'll see that in our future impairment numbers. But it's a weight on your revenues because it is that spend level and it is that borrowing level, particularly in the U.K., which is important to your revenue numbers. What we're seeing is clearly less travel, like everybody. But in our major credit cards that are tied to airlines, American Airlines, JetBlue, we're about to announce another major co-brand relationship in the airline industry, the actual spend numbers are not too far distant than what the other credit card companies are experiencing as well. So the amount of times that someone's going into their local restaurant or buying something from the local pharmaceutical -- pharmacy, and they're using an American Airlines AAdvantage card versus some other co-branded card or branded card, our spending numbers are not that far different than the industry. Now we may have a little bit more in the travel and leisure spend than some credit card platforms. But overall, we're not -- we don't think that we're under any medium-term or long-term disadvantage with the nature of our co-brand portfolio. But for sure, we saw it in the second quarter, in particular, pressure on both our U.K. and U.S. consumer business principally driven by those unsecured consumer loan books and, in our case, handsomely compensated by how our investment bank did particularly in the markets business in the first and second quarter, allowing us to take the impairment charge, allowing us to stay profitable through the first half of the year and feel confident in the capital strength of the bank.