Barclays PLC (BARC) Earnings Call Transcript & Summary

It's a great pleasure for us here to introduce our next speaker, Anna Cross, group Finance Director of Barclays. Anna, thank you very much for coming to Rome and meeting with investors.

Thank you.

Anna joined Barclays in 2013, became CFO of Barclays Bank U.K. in 2016, and was appointed to her current role in February this year. So thank you very much for coming.

Maybe if I can start with a broader question in terms of the outlook. I mean, this has been an interesting year, the beginning of the year, the excitement on interest rate hikes, revenue tailwinds, consumers, snapback in terms of credit card lending. And this has now moved into fear about monetary policy, recession and so forth. And I just wanted to ask you do you see some of these tailwinds we saw earlier sort of rate tailwinds consumers snapback in terms of credit, unsecured credit balances, but also low risk cost comparatively low or modest risk costs. Do you see these tailwinds which can persist in the current environment?

Yes, thank you for that. It's certainly been an interesting time to take the role on. But in the first quarter, we saw quite a broad revenue performance. And to a large extent, those factors are still there, Martin. So we continue to see growth in the balance sheet. We continue to see sort of economic recovery that stimulates transactional income. And just reminding ourselves that, that is very much buoyed up by nominal growth as well. Whilst the market for primary issuance was relatively poor, actually, the volatility that we saw meant that revenue in global markets was still there. And then finally, interest rate tailwinds. So I would say that of all those factors that we called out in Q1, they remain broadly in place. As it relates to the credit environment, of course, the big question out there is in inflation and the extent to which corporates and customers are ready to manage that inflationary pressure. To date, we see no increases in unemployment in the U.K. and the U.S., which are our largest markets. It's historically low. Similarly, no major change in any of the kind of risk flags. So I would say, certainly, in the short to medium term, we'd continue with the guidance that we had around the cost of risk staying below pre-pandemic. Noting, of course, the balance sheet provisions that we have are fairly substantial. So that's really taking those revenue momentums plus the balance sheet position and impairment together. That's what gave us the confidence to reiterate our 10%.

And related to that, do you see the risk that a much tighter monetary policy could lead to a recession? And if a recession or a sharp economic slowdown were to occur, what would you be most worried about? Is it risk cost? Or is it also a meaningful reduction in revenues?

Yes, so -- it's difficult to say at this point what impact the tightening monetary policy across the world will have on economic growth. We've not been in this position for a very long time. What I would say is that we would continue to expect to see rates rising, certainly within the context of where the market is pitching those rate rises to go. That wouldn't be sufficiently high for us to have credit concerns per se, but let's see. The credit concerns such as they exist, do come really from inflation and that cost of living or the energy price pressures that are out there. So -- and again, just reflecting back on the sort of balance sheet positions that we've maintained sort of coming out of COVID, I would say the nearer-term risk is that economic recovery, recovery in unsecured lending perhaps is a little slower than folks might have wanted to see as opposed to a really sharp credit correction.

And in terms of the inflationary pressures, do you see risk that those could become ingrained in your cost structure?

I mean, we deal with inflation every year, and there's many environments that we operate in like India where inflation has been high for a long time. And the way we think about it is we're always trying to balance inflation, investment and efficiency and balancing those 3 to get to the right outcome. And you saw that in Q1 with positive jaws across the bank. Clearly, that equation will be different by business depending on the opportunities that it has. And our cost base is pretty much people, technology, property and they're not areas where you tend to see rapid shocks in inflation. It tends to sort of bleed in over time. And what we've done in 2021 is we took provisions both at the half year and the full year to change structurally our property costs and indeed, our people costs through London property and the BUK transformation. So I guess we do see some inflationary headwinds coming, but we've also got some efficiency that will hopefully help offset that. But it's clear that it's intensifying. We guided at Q1 for cost to be around 15 billion. What's happened since then is also, we've seen FX move, and for us, a strengthening dollar is positive for the P&L overall, but has a headwind, obviously, on the cost line. So when we get to Q2, we'll update as it relates to that. And we'll also update around the sort of the final stages of our recision offer in terms of the overissuance in the U.S. Just to remind folks, we did say that we expect any movement in that to be substantially offset, what I would say is the offsets are on different lines. So the recision cost is in cost and the hedges and income. So we'll update on that also.

Perfect. Let's move to the Investment Bank. I mean, the Investment Bank at Barclays has shown a very strong performance throughout the pandemic. And the performance continued in the 1Q and looking at some of the comments made by peers, also likely to continue into 2Q. I was more wondering -- how should we think about the revenue outlook more in the medium term in terms of revenues? Do you see the risk that revenues in investment banking opportunity set could revert back to kind of 2019 pre-pandemic level? Or do you see here the possibility that revenues could remain elevated at on the back of steeper yield curve, more capital market activity and so forth.

Yes, yes, yes. Again, a good question, I think. I won't make comments about the current quarter trading. But if you sort of look back over time, we've seen quarters very recently where global markets have been very strong, equities have been strong. Then in Q4, banking was really strong. And FIC, it wasn't in Q1, FIC was strong and banking wasn't. So actually, what we think is really important is that in different environments, different parts of the CIB stepped to the full. And what's really important is that you have a credible presence in all of them. So what we've been working very hard on is a CIB franchise that can operate in a range of environments, even if that were back to a sort of pre-pandemic lower level of volatility. And actually, if you look at the split of our business now between banking, FIC and equities, it looks a bit more like our larger peers. Within Barclays, I guess we've also been focused on growing the element of our revenue that comes from financing, which is a little less volatile. And then when I look at the outside world, in comparison to pre-pandemic, the amount of debt and equity and issuance is markedly higher. So purely by being a financier and an intermediary, you are standing on a larger playing field than there was before. I think you're right to call out widening margins as yield curves have tilted upwards. And of course, we've also seen some competitors step up back from some parts of the market. So we're confident that we've built a franchise that will go forward successfully. And that's why we're very focused on that 10% return in the CIB.

And then in terms of the growth prospects for the Investment Bank, how do you see the opportunity for either growing share in the current market, so predominantly U.S. and U.K.? Also the opportunity to expand, say, more into Asia?

Yes, so our investment bank is very much U.K. and U.S. focused, increasingly so in Europe. And we do have trading offices in Asia and Hong Kong, Singapore and offshore in China. I would say we have slow growth there. You should expect that to continue. Where we see probably more opportunity is in-filling in some areas where we feel like we still got scope to grow even in our core markets, like securitized products or prime or within ECM and specific sectors like health care and tech. And I think the last thing I would say is we feel the CIB has a tremendous opportunity to grow in the transition of the economy to a low-carbon economy, whether that be in helping our own clients or more broadly financing.

Let's move to Barclays U.K. I mean, Barclays U.K. is similar to other domestic PSS increased guidance with the last set of results. How excited are you about the growth prospects? And here, just grabbing 1 product as an example, credit cards, Barclays has lost market share in credit cards over a period of time due to prudence in the back of obviously, Brexit and similar. Do you see the opportunity here to more stronger leaning into the recovery of card balances as and when it occurs.

Yes, I mean, I'm always excited about the U.K., as you know, it's close to my heart. We stepped back from the cards market, in part post-Brexit, again, through the pandemic. We've probably been a little slower than some of our peers to step back into risk, but we are there. And I would say we're also very conscious about rebuilding the cards business with a very strong eye to returns and a very strong eye to sustainability. So within the balance transfer market, we are present and we're competitive, but we're probably not top of the table. And equally, we would be very focused on new product innovation around spend rather than lend. So products that actually look and feel a little bit more like the kind of products that we have in the U.S. So we are seeing good signs in terms of purchase activity, particularly around I would say, larger purchases, travel, et cetera. That's a good sign for credit card growth. Equally, we're watchful about signs of stress around cost of living. So we guided to growth maybe a little more slowly than others, and I think we'd stay in that position. But it's a business that we like, and we have a long heritage in.

And then in terms of the outlook for the competitive landscape in the U.K. on one hand, one could argue competition could become more intense. You have large pockets of excess deposits trapped in ring fences. There is fintechs or newcomers, new entrants in a market like Chase. On the other hand, it seems like mortgage pricing is stabilizing, banks increasingly passing on higher mortgage or higher swap rates to mortgage pricing. How do you see the landscape evolving?

The U.K. retail market is always competitive. It's characterized by very high-quality mature businesses. And to a large extent through the asset markets is intermediated. So, the broker activity keeps it very competitive. I mean you're right in terms of mortgages. Spreads got very tight. They've started to stabilize a little. But at the same time, we should recognize that liability spreads have widened for the first time since 2009. And there will be a bit of a quid pro quo between those 2. And you should think of it as -- expect the net NIM to keep rising, and that's what we and others have guided to. I think in terms of competitiveness more broadly, I think we can't rest on our laurels, though, or on those tailwinds. Certainly, the customer will expect us to continue to innovate, whether that be in cards or elsewhere. And I would say that not just in terms of product but also the way that we deliver our services through digital but also investing in the real estate infrastructure that we do maintain. So I mean that's great for customers, it will also be great for investors because it will improve the CIR of the business over time.

Thank you. Let's move to U.S. cards. U.S. cards is obviously another key pillar of Barclays profitability. I think the Gap partner deal, which you announced, I think, around a year ago is about to close imminently. And that will add 3.5 billion of balances, so a significant part of the book to your U.S. cards business. How should we think about the U.S. cards business going forward? Is there opportunity to do more such deals in terms to accelerate the trajectory of cards grow? And how excited are you about those opportunities?

Yes, yes. I mean you're right, Gap comes on board at the end of Q2. So we're well through that prep now. Our focus is on very much onboarding those customers safely and while there are 9 million customers. It's a substantial change to the franchise in the U.S. I think what it does do is once we've got that behind us and embedded in the organization. It does give us the opportunity for new areas of growth. So the retail market in the U.S. is as big as the airlines market. So essentially, we're doubling the waterfront that we can operate across, which is really exciting. So you should expect us to be focused on that in time and obviously continue to build our corporate relationships. But organically, the business is growing as well. So -- and we've undertaken a lot of acquisition activity through '21 and into '22. You've seen the balances grow. The income isn't growing yet because of the J-curve impact, but that will come in time.

And then a similar question to earlier in terms of the prospect of a slowdown in the U.S. now and the impact it will have on the cards business. Are you concerned?

Not yet. It's a very, very similar story to the U.K. So unemployment is very low, 3.6%, again, historically at very low levels. I mean, arrears levels, again, very, very low. So we don't see signs of strain. But again, we're very focused on looking at the data and to identify those early and the coverage levels in U.S. cards, if anything, are actually higher than they are in the U.K. So we're comfortable as we stand currently.

Let's move to the payments business, which I think is also an interesting aspect of Barclays. I think Barclays is #2 in Europe and probably the largest in the U.K. and I was just wondering how strategic is payments to Barclays, because we have seen a number of players divesting their payments business, others choosing to retain it. What are the potential benefits of keeping such a payments business in-house? And how excited are you about the growth prospects?

Yes. So we -- I think the strategic benefits are probably twofold. The first is the fact that it's a capital-light business. So strong revenues, high-volume business, but capital light. And the other is the extent to which we're able to integrate it into the wider franchise. So what's really good for us is for us to be able to offer those services to corporate clients and increasingly offer those services across Europe. And I would say, also increasingly offer those services to our SME clients, which is more of a new venture for us. So it's strategic and one that we think is geared to the economic recovery that we're seeing now in the U.K., again, very geared to nominal growth. So in the first quarter, we saw revenue growth of about 44%. So yes, we're pleased with it.

And do you -- I mean, related to the payments business, I mean, one can see some of the larger payment companies envisaging expanding the product capabilities more into areas which are traditional for banks such as certain types of lending and so forth. Do you see a risk there that some of the revenues might get cannibalized from other payments companies?

Yes, I mean it has been an investment heavy business. We invested in the core infrastructure a few years back, and what we're doing now is sort of building out on top of that real areas of innovation. And I think what is very important is the extent to which we already have those corporate clients in-house, we already have those SME clients in house. So how are we able to offer that innovation to them and indeed use the broader strength across the business to deliver that to those clients. So for example, we have very strong fraud analytics capability. We are able to bring that to life to corporate clients as they navigate kind of 2 factor authentication themselves. We launched our e-commerce gateway in Q4, and we've migrated our clients into that now. So we are adding pieces that I think will benefit the payments business as a whole.

Let's move to capital and what could impact capital from here. And the first one, obviously, you mentioned the vision. So I was just wondering is there any update that you can give us on this point? And also, how should we think about this hedging cost, which was booked in the first quarter to allow over time.

Yes, yes. So I mean, just to reiterate what we said at Q1, it was extremely disappointing, and we continue to work through it, I would say, very constructively with our regulators, including the SEC. We said at Q1 that we would pause the buyback. We've now started that again. And that reflects the fact that we were able to sort of refile our 20-F positions relatively quickly and move forward. We're making good progress in terms of finalizing the recision offer. And we'll update on that more at Q2. Just the point that you're stressing, when we did our more recent RNS, we talked about being substantially hedged. I stand by that. However, just to remind people that the costs of any recision offer come through cost, the hedging offset to that will be in income. So you're going to see some grossing up there.

And then, I mean, you touched on the overlay still in place in terms of risk costs. Just if there was to be now a weaker macro opportunity set going forward, how should we think about the progression in terms of kind of impairment charge? What's the risk here to capital?

Yes. So we said at Q1, and we have said for a while, that we expect the cost of risk to remain below pre-pandemic. And again, at this point, we wouldn't change that. And there are quite a few reasons why. The first is that the balance sheet is so different from pre-pandemic. Levels of unsecured are much lower. And even within secured, if you look at the LTV of the mortgage book, it's much lower than it was. And so the balance sheet and the risks within it are quite a different shape. I think that's also true when you look at our customers and clients, actually. Their personal balance sheets are in a different shape to where they were pre pandemic. Nobody had done a stress test where everybody was locked in their house. So it's quite a different position. And also our own balance sheet coverage is very different. So I talked about unsecured coverage. And Stage 2 is north of 30%. But also, if you look at where we are on wholesale, we've maintained PMAs there. We focus those very much on sectors that we've been concerned about, whether that's been through the pandemic or, I guess, more recently now given the kind of energy price concerns that we have. So it feels like as a provision matter, we're well prepared. And I'd also say that we are looking very, very hard for signs of stress, but we are yet to see them. So again, unemployment low, arrears low. And we maintain a really strong analytical focus on those customers or clients that we feel might be more exposed than others. And as yet, there are no red flags. And that's really what causes us to say that we expect levels to remain below pre-pandemic. If anything, we want to see the economy expand, and we want to see slightly higher levels of impairment because that would suggest that economies rebounding and the economic activity levels are coming back. So if anything, you want to hope for a little increase.

Final question from my side before opening up for questions from the audience, I was just wondering if you could remind us in terms of how capital -- scope of capital return, you just mentioned the 1 billion buyback, which you recently commenced. How should we think more broader about the scope for coming return of Barclays?

Yes. So we, like others, on the 1st of January this year, recognized quite a regulatory sort of impact for us. It was 80 bps, and that varied around. So what you saw through the prior years was us building to that point. We feel like we could and should operate between 13% and 14%. And we'll continue to balance dividends and buybacks. Certainly, we take a lot of feedback from investors on this. So we will continue to sort of progressively increase the dividend. But with a 10% return, that's 150 basis points of capital. So we'll supplement that with buybacks as we see fit, particularly at the current share price. Longer term, we now have clarity that Basel 3.1 in the U.K. is 25. So we'll build our way towards that as we get more clarity in the third and fourth quarter of this year. But we remain very committed and we understand how important it is for our investors. Perfect. Thank you very much. Let's open up to the floor for questions. Let me just use this opportunity to ask one more.

I mean what intrigued me in the U.K. is the buildup of deposits, retail and commercial deposits since the beginning of the pandemic, which has led to a significant increase in funding, particularly within ring fences in the U.K. I was just wondering how do you think about this deposit level going forward? Is the assumption that the consumer will start spending again and utilizing some of those savings, similar corporates? Or could this clearly say a scenario where this could just become the new kind of net level of where this will settle. How do you think about this excess funding level?

Yes, I mean it depends. It depends how intense the stress and the affordability becomes, really. What we've typically seen in stressful environments previously is that the propensity to save increases as customers become more cautious. So there's a trade-off here, I think, between economic activity and deposits. What I would definitely expect to see is a change in the shape of those deposits over time more in response to rate rises than anything else. So as rates continue to rise, yes, we might see a change in deposit beta but I would think we'll see a change in product mix. So we're already starting to see some of that as we and others have increased savings rates, doing it in a very targeted way to try and encourage franchise savings or loyalty. So I think as much as any change in absolute level, we would certainly expect it to slow down post pandemic. Whether it folds, we'll wait and see. But I would expect it to start to change in shape. I think that's really important for us to consider.

There's a question here.

Yes. [ Markov ] from BDL. Just going back to credit risk, we understand that the book is different than it was during COVID and certainly during the global financial crisis. So that's comforting. But the U.K. economy, even the Bank of England is expecting a recession, the metrics don't look good. when would you start to get concerned? What should we be looking at unemployment when unemployment goes to x, then you're going to have to change that guidance? What are the warning signals as external investors that we should be keeping an eye on?

Yes, sure. Unemployment is the single metric that's most heavily correlated to impairment. And think of that as the sort of converse in terms of wholesale, it's almost like employed levels. So you're looking at the 2 in conjunction. We're looking harder than that. So we run what we call sort of recession readiness frameworks. So we're looking at tiny changes in behavior, and that's what we model. So I'll give you a couple of examples. Customers who reduced their minimum payments -- their payment on credit cards at minimum, we are actively looking for changes in those trends. We're actively looking for SMEs that we believe are more exposed to energy prices and then there's specific cohorts that we're focused on. And in terms of -- we've maintained these post model adjustments. We've got 1.3 billion on the balance sheet. That's essentially the signs that we're covering with those. But no real red flags yet, but even before unemployment hits, we'll be looking for those things. What I would say is that in terms of the construct of the balance sheet, customers and clients are more prepared than they were. And the modeling that we've done historically has been very focused on unemployment. However, what we have not experienced in any recent time is where disposable income, whether that be for a customer or a corporate, is impacted so heavily by inflation. And that's why we've maintained those additional provisions outside the model.

Let's wait for a moment if there's any further questions. Otherwise, anything we have missed in our discussion?

No, thank you. It's been very broad ranging. Thank you for having us, and we look forward to seeing many of you over the next few hours, and seeing many of you at Q2.

Thank you much again for joining our conference this year.

Okay, thank you, thank you.

Thank you.