Barclays PLC (BARC) Earnings Call Transcript & Summary

Thank you everyone for attending this session with Barclays. I'm delighted to introduce Anna Cross, our Group CFO, to this session. We will have the usual format with 5 slide questions. But before that, let's open with the polling question. What do you think is needed to close the gap between the trading multiple and the RoTE? Number one, demonstrates CIB can post over 10% RoTE even with weaker market activity; number two, allocate more capital to retail and payments business in U.S. and U.K.; number three, show resilient asset quality in cards despite the downturn; number four, post profits without sizable remediation charges; number five, prioritize share buybacks within shareholder remuneration. Hopefully, that gives us a bit of discussion points and open us for debate. I suspect that, that might be the case, but there we are. We can start...

I'm surprised you didn't have a number six, which was all of the above.

Well, yes, that would have spoiled the choice. Obviously, we've got to start with the deposit dynamics after the events of the weekend, that and the NIM was already part of the debate, but obviously, it's turned to even more focus on the wider deposit picture after the events. It's interesting to see on your side that you're guiding to increasing NIM in 2023 versus peers calling for a peak. Maybe we can talk in the current environment to those different dynamics you're seeing and anything of the weekend changes your view here?

Yes. I mean, the NIM that we're talking about here is our ring-fenced bank, it's Barclays U.K., which is the one that's closest to its U.K. peers. And the market that it operates in is extremely competitive. Mortgages is a largely intermediated market. So I wouldn't expect any differences there. Similarly on savings, we feel like we've got a very strong deposit franchise, but savings, again, is a very competitive market. So I think in terms of the product dynamics, there's going to be very little difference between us and our competitors. I think what might be different and what might be showing a bit more of a tailwind is just the scale and nature of our structural hedge, we rolled it very mechanistically for a number of years. We've got around GBP 50 billion maturing in 2023, which we would expect to reinvest the vast majority of. And if you think about where the maturing rates are coming off of, you need to sort of think sort of 5 years back, even if the yield curve comes down a bit, we feel like that's still going to give us a very substantial tailwind. So that's probably a bit more of a tailwind for us perhaps than for others. And we also talked about some smaller treasury impacts that we expect to roll off as the year goes on. So there's nothing in what we see right now that would change the guidance that we gave at the year-end.

Maybe we can go deeper on to the competitive dynamics on the deposit side. Retail deposits were relatively stable. It was mostly corporate deposits which were down among your competitors as well. I guess my question is, where are those deposits going? Is it to the market? Is it to competitors? And is that -- how are you reacting pricing-wise to that? And going forward, should we expect more stable performance again with the optics of what we've learned over the weekend, does that increase competition in the flight to quality debate, et cetera?

Yes. Well, I'll start with retail and corporate, and then I'll talk about liquidity more generally. On the retail side, our deposits have been extremely stable and no change there. We saw a small decline in the fourth quarter in our SME deposits, but we saw that pretty healthy. That was being deployed into the lending repayments but also deployed into their businesses working capital. So a small -- very small change, but very positive rationale behind that. On the corporate side, we haven't seen anything significantly beyond either what we would have expected or alternatively the normal seasonal pathway. So quite often in Q1, you get tax payments, et cetera. So that's exactly what we're observing. In the retail side, we've had some really attractive savings rate out for a number of months now. We had a 5% rate since September. And up to the end of Q4, we've seen very little migration. What we expect to happen in Q1 and then for the rest of 2023 is some more marked migration in the U.K. That's what we want to happen. We want our customers to develop really good savings habits. We think that's great for the franchise. We think that's really good for their own financial resilience. And we might expect to start to see that now in part because there were a number of base rate changes in rapid succession, which sort of nudge customers into action, but also Q1 is ISA seasons in the U.K., so it does tend to prompt behavior. So that's what we're expecting, and that's in our NIM guidance. On the corporate side, we actually saw migration more early. Again, that's exactly what you'd expect. -- corporate treasurers should really be optimizing the money that they've paid to optimize. So we saw some earlier migration there broadly in line with what we expected, but you probably saw that in the fourth quarter, we paused the role of our structural hedge, just so we can maintain a very conservative buffer. But that, again, remains in line. So nothing out of the ordinary as a seasonal matter. Stepping back from all of that, we are very comfortable with our liquidity overall. We've got a loan-to-deposit ratio of 73%, 74%. Our LCR is 165%. We've got GBP 117 billion of excess over the 100% requirement. So we're able to deploy our liquidity very dynamically, very focused on the franchise, but we're in an extremely strong position. And also because it's diversified, both within the U.K. but across the geographies and across our different businesses, it's -- there's no change to what we've previously seen.

I'm sure there's going to be plenty of more questions on deposits in the Q&A. So maybe to touch on more topics in the Q4 results, one of the things that you called out was on the credit card business. The revolving credit card volumes were somewhat softer late in the year. How do you see consumer demand overall, I think the broader picture there? And maybe it might be good to touch both in U.K. and U.S. In the U.S., obviously, you closed the gap deal recently during last year. How is the outlook looking in the 2 regions basically?

Yes. They're very different. The consumer is behaving very differently on either side of the Atlantic. In the U.K., what we see is a pretty defensive behavior actually. I mean the really good news is customers are very engaged with the card. So purchases are elevated. We're seeing customers really engage with the product. They're using it, but they're paying back at very, very elevated level. So we actually saw our interest-earning lending step back a little. The extent to which that starts coming through and boosting NIM will be somewhat dependent on how the economic outlook pans out in the U.K., and also post-COVID, we step back into the promotional balance market, and that just takes a while to mature through. But that demand looks certainly muted at this point in time. But of course, it's a trade-off and impairment. So whilst we're seeing and capturing that sort of NIM downside, it's certainly showing through in really, really high-quality risk results. So some offset there. In the U.S., it's a completely different market. The customer is much more engaged in spending, in borrowing. So we're seeing organic growth across our existing partners. And as you said, [ although ] we've also added GAAP. So both of those things together are leading to increases in balances. What that means is we see some normalization of risk behavior. It's still well below pre-COVID and it's what we expected. That's what IFRS 9 does. It's -- you're booking impairment on day 1 of the card being opened. So it's still very much within our expectations, but we're thoughtful about the background, and we'll keep watching it. But the GAAP business, we've had to build technology for retail now that we previously didn't have. So it's given us more opportunities in the U.S. So we'll continue to look at those as they come up.

Maybe we can turn to the gist of the polling question on the CIB and discuss how you see the resilience of the revenue model in CIB. You had a strong market share -- you had strong market share gains, in particular, in FICC in the recent years, and you had a very strong 2021 as well -- 2022, sorry. Do you see more room to take market share? And how do you see the outlook here?

Yes. So our objective with the CIB is to build something that is resilient through a range of economic environment. So 2022 is a very strong year for FICC. If we've been sat here a year ago, you would have said what's wrong with FICC. Because it was a year that was very much dominated by banking revenue and equities. So we've performed really well across 3 different years, 3 very different macroeconomic environment. That's what we try to do. So we're trying to invest in our businesses so that they can be successful as we expect them to be given those opportunities. Now within that, we have specifically built out in areas that either we saw some opportunity in. So for example, particular areas of banking, we've always been very strong in DCM, but had some opportunities in both ECM and in M&A. And we've also sought to really focus on areas of the CIB, which afford more stable revenue stream. So like financing. We've always been #1 or #2 in fixed income financing. What we've done now is we've built out our prime business to fit alongside it, and that's what's really driven that growth in financing income, which is inherently more stable. So the way we think about it is that whilst we might expect market revenues to normalize this year, with a greater proportion of financing and with a greater market share, that will protect that revenue stream somewhat. And of course, if market revenues normalize, that would suggest that there is perhaps an end to rate hikes. There's a greater degree of economic stability and a more certain outlook. It's exactly in that environment that we would expect banking revenues to start flowing back in. And of course, then we've got transaction banking as well. So our corporate business, which is predominantly a U.K. franchise business is sitting in the CIB, which has grown very nicely over the last couple of years, and we'll provide further resilience there.

I think that's a good point. I guess that the aspects that often gets overlooked is transaction banking. Is that going to be enough to grow the whole revenue line and offset any potential normalization in markets and fees?

Well, I would hope you see offset between markets and fees. But let's see. I think we have confidence about the CIB as a whole, the individual constituent parts and how they deliver is going to be dependent on the macro economy. But on transaction banking, yes, we're really pleased. I mean clearly, it's geared to rising rates, but it's also geared to economic activity and specifically nominal economic activity. So it's somewhat benefiting from the current environment. So we've seen a rise in fees as well in that business. Given the migration that I talked about before, you might expect that Q4 income to moderate a little. But year-on-year, I would still expect it to be a tailwind.

Maybe moving on to asset quality, which has proven more resilient than most of us feared, you guided for a normalized 50 to 60 basis points cost of risk this year. Within that, is there any differences you're seeing by region or product. U.S. card players have been sort of a bit more cautious when calling for normalized provisions this year. Maybe you can touch on that. And we obviously still have concerns about leverage finance. Maybe you can touch on the different areas and in particular, those 2 U.S. cards and leveraged finance.

Yes, sure. I think when we step back, our borrow, we shouldn't be as surprised as perhaps we all are because the system in terms of lending has been designed to absorb affordability stress. So whether that be prudentially or whether that be as a conduct matter, if you think about the way we stress test our mortgage customers, for example, before we extend mortgages to them, for us, that was up at like 6.6%. So we've put the lending under considerable stress before we even take it onto the books. So what that means is, whilst there is undoubtedly affordability pressure out there, that is 100% true. For our customers, our clients, that is not yet translating through into credit concerns -- about that, and of course, the IFRS 9 environment requires us to forecast forward, and we changed our macroeconomic assumptions to be a bit bleaker in the fourth quarter. But on the 2 specifics that you talk about in U.S. cards, as I said, we've seen some increase in delinquencies, but that is what we'd expect because they were just so historically low. So that is an area where we would expect perhaps increased impairments, just given the growth of that book and the J curve impact as we grow that book. It's not just cost, but it's day 1 impairment, really watchful. Clearly, GAAP, you would expect to have a higher delinquency level, but it also has a higher margin, and we're really disciplined in the way we manage returns partner-by-partner. On the lev-fin side, it's an important business for us. Clearly, 2022 is a very difficult year for that industry as a whole. We took marks as we went through the year, GBP 335 billion. We think that's the appropriate amount. We also called out that we'd manage down our risk exposure, and we've managed down the pipeline exposure by 50% by the fourth quarter. And you could see from our CIB results as a whole, how disciplined we were being in RWAs. So from our perspective, we feel like we're taking the right match, and it's a really, really important business for economic growth. So it's one that we remain committed to. But clearly, we need to wait for demand to return.

Maybe a last one before I open up for questions. On capital allocation, you have a 10% RoTE target this year, which would be the third year in a row that you're above 10%. And I think the stock valuation, as we were alluding to in the polling question doesn't reflect that. How does this influence your capital allocation strategy? You've been doing obviously, buybacks. But does this hold back investment in growth? Could it would be just great to understand how this feeds into management's thinking around deployment of capital.

Yes. So our target is greater than 10%. And those 2 words are really important. It's a floor. It's not a target. And so -- and the reason that we've done that is because we do see opportunities to invest in the business, as you say. So for Barclays, obviously, we've benefited from NIM growth as have all of the banks across the globe, but specifically in the U.K. But the rest of the bank is growing just as quickly. The revenue across cards and the rest of the franchise is growing just as quickly. And that requires investment because it's client growth, balance sheet growth. This is not just a margin story for us. So we want to be able to deploy RWAs and costs into the business. And we think whilst that may mean that the percentage RoTE is a little lower than otherwise it would be, this was just a margin story. The quid-pro-quo of that is the E will be -- we're going to get higher earnings as a result overall. So that's our philosophy. Within that, which we're trying to balance 3 things. We're balancing attractive levels to shareholders. For example, at the year-end, we announced the buyback. That buyback by the way, started yesterday. It was a quite an interesting day to start looking for a silver a silver lining. And then the third thing is that investment in the business. So at the year-end, when we printed 13.9%, we were looking at the investment in Kensington. We were looking at the roll-off of the IFRS 9 transition release, and we were also looking at the impact of buyback as well as considering what remains quite an uncertain environment. So we're very committed to capital returns, as you might imagine, given where the share price is. But we do really believe we got opportunities for growth.

I think I want to leave time for questions for the audience. So maybe I can open it now. I've got more questions, but why don't we -- who wants to ask the first question? There at the back, please.

How much dispersion do you see in the rate of normalization of delinquencies in your U.S. card business as and if delinquencies overall are 80% of pre-COVID levels, how does that differ for different FICO bands?

Yes. Good question. I mean it's -- it does differ by FICO band, and we also see differences by partner. But remember, our business is a relatively high FICO business overall. And whilst GAAP as a retail portfolio does have different characteristics, it is still a relatively high FICO business. So overall, no particular pockets of concern, but we're really watchful about that environment. We'll take it step by step. But at this point in time, whilst we see a growing bounds of delinquencies, it's within the bounds of expectation of what we anticipated given that we're growing the books.

Next question, here in the middle.

And just a quick one. I mean given your vantage point in the U.S. and the U.K., I wonder if you can talk about the bottom-up data points you are seeing post SVB, I mean, maybe a compare and contrast in the near term? And obviously, also in the medium term, how the banks could differ from a medium-term perspective, other market settles, especially in the U.S. versus the U.K. M&A could be part of it, flight-to-safety could be part of it. We've heard a lot about that during the day. But are you uniquely positioned to give us bottom-up data points on both?

Yes. I mean it's quite early to call out data. But what I would say is that, clearly, the U.S. regulatory environment and the U.K. regulatory environment are quite different. In the U.S., you've got this sort of tailoring system where clearly, the larger banks, the G-SIBs are exposed to a regulatory framework that's a bit more like the U.K. and Europe, but still isn't the same. And you'll see that if you line up all the different sort of balance sheet perspectives of liquidity pools, I think. So let me give you a couple of examples. So in Europe, and the U.K., where we are holding fixed rate instruments in the liquidity pool, if they are fair valued, that fair value adjustment is going through capital in the U.S., no. So there's a difference in that capital treatment. So whilst we might have fixed rate instruments in the liquidity pool, they're either fair valued or there are other regulatory stress tests that are unique to the U.K. and Europe that would mean that either we restrict the amount of held-to-collect instruments that caused the issue and SCP in particular, or they're hedged. The regulatory environment is leading to quite a different liquidity pool management, I would say. So that would be my first point. Secondly, in the -- our business is a franchise business. And therefore, we would tend to see -- be the beneficiary of a flight to quality. It's been a bit early for that yet. We might expect to see it over time, but we're not seeing anything quite yet. In the U.S., we haven't seen anything nor would I expect to simply because our U.S. deposits, which surround the cards business, in particular, are almost all insured. So I would expect those to be quite protected. So I think high-level messages would be you're going to see differences in the U.S. just because of the regulatory environment. I think generally, overall, you will probably see a flight to quality. But within the U.K. and Europe, I'd expect those impacts probably to be a little less extreme just because of the regulatory framework is more of a level playing field.

Maybe related to that, because it doesn't come up -- it definitely hasn't come up in previous conversations with your colleagues. If you have to think about the future and, well, if there's long lasting of this, would you expect your large corporate clients to keep more money in markets versus bank's balance sheet? Would that -- is that going to drive deposit betas maybe structurally for the time being higher, or do you see more a factor of it's going to go down the differentiation route, i.e., flight to quality, you might not have to pay as much as some of the smaller players. How do you think this might -- so you don't have a crystal ball, but you've been very experienced, and I'm sure you've been discussing this internally. How do you think about this kind of...

Well, I mean, I'd expect most large corporates to be multibank anyway. So they should already be managing their diversification. So I think that's what we'd expect the larger, more sophisticated corporates to be operating out with smaller corporates. We may see more of that flat quality impact. But as I say, we haven't seen it yet. As it relates to the sort of more macro impacts as to whether or not it's in bank balance sheets or elsewhere, what we've seen over time is certainly on the lending side, much of the lending is not sitting in bank balance sheets, sitting in nonbank financial institutions. Actually, given where rates are going, we may see a leveling back of that. But in terms of sort of corporate's desire to maintain liquidity, what's really important to them is the operational franchise, making payments every day, very much plumbed into the system. So that's why the relationship within corporates and the extent to which we're able to offer them competitive rates is really important to us.

Next question, please? Right at the back.

Can I come back to the structural hedge point you made at the beginning, you said compared to your competitors, it's tailwinds mainly because of its size as a proportion of your U.K. assets. Given how much it's yielding compared to how much it could yield, you could end up in a situation in, say, 2 or 3 years' time, where actually, most of your NII is coming from the structural hedge. Would that be okay actually? Or would that be acceptable to have to be perceived as the bank that's making most of fixed revenues from a carry trade, so it will be a little bit relevant.

I always expect an interesting question for you, Simon. But so I wouldn't expect it to go that far, to be honest, because these are very competitive, very intermediated market. But when it comes down to it, the retail margins in the U.K. are spread between 2-year fixed mortgages, the savings franchise, that's how much of the system operates. For us, the structural hedge is the way we manage risk and the way we manage income risk. So I would expect it to offer some tailwind on the way up and it will offers some protection on the way down, but I would still expect to see a fundamental product margin there simply because that's how the majority of the U.K. market operates.

So as rates come down at some point, you regain pricing power on the asset side and the structural hedges contributing less. Is that fair -- which is basically the way it's worked for the last 20 years or so.

I think so. I mean what we're getting used to at the moment is the return of mix that would have been very familiar a number of years ago, which is the profit balance, if you like, has moved from the asset side of the balance sheet to the liability side of the balance sheet. As rates move, that will shift back and all that's happening is the structural hedge is providing some balance or some balance to the upward movement, but also it's downward movement. So even in a downward rate environment, it's going to continue to give us a degree of protection, which is what it's there for. It's there to remove volatility.

Next question please.

I can't believe there's no question.

I've got -- I'll ask a follow-up on the U.K. margin, which has also been debated in the previous sessions on the mortgage market. The activity does look like it's recovering not necessarily showing up in Bank of England data yet, but it does feel like it's coming back, but the pricing is evolving as well. And the spreads are coming down again, which I guess is a good thing given the post mini budget. But do you see a floor in that pricing would have sort of pre-COVID, there was a pretty tough competition going on to DCF Floor. There are players out there looking for market share. There's also always a temptation to subsidize the deposits. I don't know if you can speak to that spread and overall sort of market activity in mortgages.

Yes. I mean mortgage market activity has come back a little but it's still somewhat dominated by remortgage activity. In the current environment, you wouldn't expect a lot of house purchase activity or indeed first-time buyer activity. So it's very much the sort of recycling of remortgage that we see. The implication of that is what's out in the market is predominantly a lower LTV, lower-margin business. Now as a marginal matter, it's still attractive. It's still an attractive RoTE for us. The issue will be that just the mix impact of it being predominantly remortgage. And the other thing is the impact on the portfolio because in this kind of environment, people are remortgaging really quickly. We and others are giving customers the opportunity to remortgage up to 6 months before the end of their fixed term. So they're doing that. So the portfolio is churning quite quickly. But if you think about what's maturing now, it will be stuff written in 2021 or before where the margins were much richer. So even though the absolute margin is fine, the portfolio impact is going to be a bit of a drag. As to where it bottoms out, I would say, certainly, when we are pricing our mortgages, we're trying to balance 3 things: our desire to maintain what we would see as our natural flow share, which is around 10% or 11%. Although typically, we do better in a remortgage market. That's very much our sweet spot is that vanilla remortgage business. And we're balancing operational capacity and obviously returns. And when we price our mortgages, we're very disciplined. We're using the marginal wholesale cost of funding that's how we do it. So to the extent that we feel we're not getting the return, you might expect to step back a little bit. That's also true of most of the sophisticated players in the U.K., I would say.

There's another question over here in the middle.

Sorry, very [indiscernible] question, but on your pension funds have now moved into a nice surplus, see the market never gives you credit for that. So I wonder if there are ways to release capital from a pension fund, which is potentially nearly GBP 2 billion in surplus now. And we've seen a few insurance companies here, and really, they'll open to do more business and one of these buy in or buyout opportunities to release capital from that surplus position.

I mean what we've done over time is derisked the pension fund and obviously made a lot of capital contributions to a deficit reducing contributions. And you can see that was a big feature of last year. What you described is not something that we are considering at this point in time. However, the way I think about it is we have no more deficit reduction payments to make. And actually, in the current environment, given that it's as well funded as it is, we are taking a payment holiday. So in comparison to where we would have been, it's about 45, 46 basis points of capital benefit even given its current structure. So we're happy with that. We think it's -- we think we've done what we need to with it and, obviously, pleased to have got to this position.

Next question.

I have 2 questions on my side. First, can you talk about the income profile of the consumer borrower in the U.K. card portfolio? On the second was about the counterparty risk in Prime finance. How do you say that?

Okay. So on the U.K. cards book, we have a -- well, given our market share and given the age and vintage of that book, as you can imagine, we are reflective of U.K. society as a whole, no different. What I would say is that during COVID and also as a result of the application of the persistent debt conduct regulation in the U.K., we have seen risk fall in that book quite substantially. So you can see our balances are 40% lower than they were. And actually, the risk performance of it has improved and you can see that in the way that we're starting to reflect in our coverage ratios, which are still very elevated, but that reflects conservatism on our part. In terms of Prime and the way we think about Prime, I would say there's probably 3 things. The first is the way we go through client due diligence on the way in and the clients that we are trying to attract to our platform. We are more focused on larger clients, more diversified, better capitalized with better liquidity themselves. That means that we probably give up a bit of margin, but we think that's the right trade-off to make, given that we have a very technology-enabled, very efficient platform, we think that's the right call. Secondly, the way we manage that business in terms of margining and dynamic margining is extremely disciplined. And given it seems like a long time ago now, but given the high-profile issues that there have been in that business, we run that same stress through our business and satisfied ourselves that our losses would have been pretty low, actually materially just because of the way we manage that margining. And what's key about our book that is really quite different is that we run a single technology platform. So fixed income financing and prime when the client comes to us, they are coming through one technology interface. That's good for the client. They love it. But from our perspective, we see the full client exposure in one place. And that, we believe, allows us to manage our risk better. And then the final thing that we do is we are performing stresses on those clients every single day and post [ Archie Cox ], very extreme tail stresses for us to identify pockets of risk, whether they'd be concentration risk or liquidity risk that we're really disciplined. I mean for us, prime and fixed income financing is a business that's relying on technology infrastructure and stability and risk management. That's really what it's about. It's a volume business.

Next question here in the front, please.

In terms of the SVB sort of fallout, we saw one of your domestic competitors scoop up SVB U.K. As things pan out and maybe some assets become available, is there anything that's going to your mind in terms of a wish list or is it maybe too early to say? I'm just trying to get a feel for where you could step in for something because I think you made the case that you're a winner in some respects from this kind of turbulence.

Yes. Thank you. Good question. We actually have a good business in the U.K., very focused on high growth and entrepreneurs that sits within our SME book. And obviously, we run across the U.K., what we call Eagle labs, which are very focused on that early start-up business. That's already good business for us. There may be more opportunities just because we feel like we're adept at that business and well plugged into that environment. So we would hope that perhaps organically, we get some flows. I think the other opportunity for us is what I said before in terms of building out our ECM and our M&A business. We've been a little bit contrarian in the current market in that we've continued to focus on that, perhaps because we're coming from a different place. We're still growing and maturing in those businesses. And where we sought to grow have been precisely in technology, in health care, in biopharma, those sorts of areas where we've really sought to gain clients and recruit bankers. So again, the current environment may offer some opportunities for us in that space organically. I hope it does. It's a bit early to tell, but we'll definitely be alert to it.

Any last questions? Great. Well, we're coming up to 45 minutes. So thank you very much. And I think it's very insightful.

Thank you.