Barclays PLC (BARC) Earnings Call Transcript & Summary

Welcome to Barclays Half Year 2024 Results Fixed Income Conference Call. I will now hand over to Anna Cross, Group Finance Director; and Dan Fairclough, Group Treasurer.

Good afternoon, everyone, and welcome to the fixed income investor call for our half year 2024 results and investor update. I'm joined today by Dan Fairclough, our Group Treasurer. Let me begin with a brief overview of our performance over the first half of the year, and then I'll hand over to Dan for his review of the balance sheet. As Venkat and I stated this morning, we set out a 3-year plan in February to deliver a better run, more strongly performing and higher-returning Barclays. We are continuing to execute in a disciplined way against the plan. Our second quarter and first half performance keeps pace with our 2024 and 2026 financial targets, which are: first, grow returns with a target RoTE of above 12% in 2026; second, distribute more capital to shareholders with a target of returning at least GBP 10 billion between 2024 and 2026, and third, rebalance the bank with a target to reduce RWAs in the Investment Bank from 58% of group RWAs at the end of 2023 to around 50% in 2026. Return on tangible equity was 9.9% in the second quarter and 11.1% in the first half of the year, on track for our target of above 10% in 2024. Total income for Q2 was GBP 6.3 billion and GBP 13.3 billion for the first half. We remain focused on the quality and stability of our income mix, and we increased our 2024 net interest income guidance. We continue to control our costs well and are seeing the benefit of the cost actions we took in the fourth quarter of last year. Our cost/income ratio was 63% in the second quarter and 62% in the first half. We remain well capitalized. Our CET1 ratio was 13.6%, comfortably within our 13% to 14% target range, and Dan will cover this in more detail shortly. We continue to manage our credit carefully. Impairment charges have improved in the U.S. Consumer Bank, in line with our expectations with overall credit performance strong, particularly in the U.K. I'll spend a moment on loan provisioning on the next slide. The impairment charge of GBP 384 million in Q2 equated to a loan loss rate of 38 basis points, below our through-the-cycle guidance of 50 to 60. The Barclays U.K. charge was just GBP 8 million, a loan loss rate of 1 basis point, which reflected continued benign credit conditions and an GBP 18 million release of economic uncertainty PMA. Our U.K. customers continue to act prudently with little current sign of stress evidenced by continued low and stable delinquencies. Starting from this low base, we expect the Barclays U.K. loan loss rate to track towards 35 basis points over time as we complete the Tesco Bank acquisition and grow the balance sheet, as outlined in our investor update. In the U.S. Consumer Bank, the Q2 charge increased year-on-year to GBP 309 million and the loan loss rate of 438 basis points. We still expect the U.S. Consumer Bank impairment charge to improve in the second half compared to the first, resulting in a lower full year charge in 2024 versus 2023. And we continue to guide to a loan loss rate translating towards the long-term average of circa 400 basis points. In summary, we remain focused on disciplined execution. This is the second quarter of progress against the targets we laid out in February, which we are reiterating today, and we remain on track. I'll now hand over to Dan for the balance sheet highlights.

Thanks, Anna. Our balance sheet continues to be strong, as evidenced by the metrics on the slide. The CET1 ratio of 13.6% places us firmly within our target range and the MREL ratio of 33.5% provides GBP 12 billion of headroom above our requirements. A liquidity coverage ratio of 167% and low loan-to-deposit ratio of 72% demonstrates a robust liquidity position. Let me begin with capital on Slide 7. We ended the first half of the year with a CET1 ratio of 13.6% with accretive circa 80 basis points of capital in profits over the first 6 months, demonstrating our organic capital generation capability and supporting shareholder returns in RWA growth. As a reminder, we've recently announced 2 inorganic transactions that will impact capital, namely 30 basis points of capital consumption when the Tesco acquisition completes in Q4 and the 10 basis points accretion from the sale of the German consumer business expected to complete either later this year or early next. The sale of our Italian mortgage business had no material capital impact. Further out, we have the expected regulatory items that we've previously called out, Basel 3.1 and the U.S. Consumer Bank IRB impacts. Our guidance remains that the aggregate impact on RWAs to be at the lower end of 5% to 10%. Clearly, on Basel 3.1, there is a higher level of uncertainty internationally and we await the further set of PRA rules on credit risk and other items. As Anna mentioned this morning, we now expect the IRB go-live for U.S. cards to be in Q1 2025, reflecting a refined approval and implementation time line. All the items that I've mentioned were part of the plan that we announced in February. And to remind you, our 2024 RoTE guidance of above 10% translates to circa 150 basis points of CET1 accretion. As we set out in February, having a robust capital position is the primary objective of our capital management framework, and we are comfortable with our capital ratio and target range. Moving up to capital stack. On Slide 8, we show our total capital requirements as a proportion of RWAs split out by Tier 1 and total capital, respectively. We continue to target a prudent buffer against each of these requirements. Taking each tier in turn, our Tier 1 ratio was 17.3%, with a healthy headroom over our 14.4% regulatory requirements for the reasons I've outlined before. Within this ratio, you can see that we had a robust AT1 component of 3.7% or 3.3% when reflecting the call announcement this morning. We've exercised all of our AT1 calls due in 2024, which totals GBP 2.8 billion equivalent and issued GBP 1.25 billion in a sterling AT1 in May. This is consistent with our guidance at the beginning of the year to be a net negative issuer in 2024. Given the prudent position that we run, we do not currently expect to issue any further AT1 this year, and we will be a broadly balanced AT1 issuer going forward across the portfolio. Let me spend a brief moment on the 6-month part call feature, which is common across the AT1 market. This feature has been included in all Barclays AT1 securities issued since 2020. We see it as constructive providing us genuine flexibility within the 6-month window as we continue to manage AT1 calls on a portfolio basis. Our approach to assessing AT1 calls also remains as before, and this feature will be considered within our long-standing economic call framework. We remain mindful that views on this feature are evolving, including its use and inclusion for future issuance. Our first call decision on such as security is not until December 2025 at the earliest, and all calls will continue to remain subject to market conditions and regulatory commissions at the available time. Moving on to total capital. Our buffer over our regulatory minimum remains healthy at 240 basis points. This was supported by our successful EUR 1.5 billion, [indiscernible] Tier 2 issue in May. The strength of our Tier 1 level also contributed to this total capital position. As a result, our Tier 2 requirements continue to remain relatively modest, largely replacing our existing call and amortization profile. Turning now to Slide 9. In addition to our AT1 and Tier 2 transactions I've mentioned, we have also executed GBP 7.2 billion of senior from our holding company. These all contribute to meeting our MREL requirements, and we've issued GBP 10 billion in MREL-eligble instruments year-to-date. We stated at the beginning of the year that our MREL funding plan for 2024 would be around GBP 12 billion, and this remains our intention. For the circa GBP 2 billion remaining, which does not include AT1, we continue to monitor market opportunities across all currencies. At the operating company, the U.K. issued GBP 500 million sterling covered bonds, demonstrating external market access from the entity at a competitive pricing level. This was quite rare for us and generally public funding requirements for our operating companies will be limited going forward. Moving on to deposits on Slide 10. Our stable deposit base continues to reflect diverse deposit franchise that we have across consumer, SME and corporate sectors. Deposits have grown modestly across all the segments and partially offset by a temporary decline in short-term deposits from banks. Given continued quantitive tapering and upcoming TFSME repayments, the outlook for overall money supply remains muted, and we expect this to be reflected in a broadly stable deposit base over the year. As we remind you that we expect GBP 7 billion of deposits from Tesco consumer portfolios to transfer in Q4 this year. On to the next slide on liquidity. Our average LCR at 167% provided GBP 123 billion in excess of the regulatory requirement and our liquidity position is robust. This liquidity position also provides ample coverage for our TFSME drawings of GBP 18 billion and we have applied for GBP 4 billion of TFSME lending to be extended through 2031 under the terms of the Bank of England's recent extension announcement. Whilst we note that the Bank of England's continued actions to reduce its holding of yields are likely to restrict growth in U.K. money supply, we welcome their commitment to ensure stable reserves in the system. Moving on to the structural hedge on Slide 12. As a reminder, the structural hedge is designed to reduce volatility in NII and manage interest rate risk. In a falling rate environment, the hedge would help to offset some of the downward pressure to NII. The base building blocks of our structural hedge remains the same as we outlined in February. We have around GBP 170 billion of hedges maturing between 2024 and '26, and we expect to roll the majority of these on to higher spot rates. In response to greater stability in customer and client deposit behavior, we have slightly increased the average duration. The expected NII tailwind is significant and predictable. GBP 11.7 billion of [indiscernible] gross income is now locked in over the 3 years to the end of 2026, up from GBP 9.3 billion in Q1, reflecting both an additional quarter of rolling and also the modest adjustment to duration. As we said in February, we're investing around 3/4 of the GBP 170 billion at around 3.5% would compound over the next 3 years to increase structural hedge income in 2026 by circa GBP 2 billion versus 2023. The stabilizing effect of our structural hedge helps to dampen our NII sensitivity to interest rates, which we disclose on the next slide. Slide 13 shows an illustrative and simplistic sensitivity to interest rate moves for our customer banking book, including hedges. It assumes a static balance sheet and a parallel shift of 25 basis points to base and spot rates. Given the high proportion of balances and the programmatic approach we take with our structural hedge, we have a sensitivity to marginal rate changes that we believe is lower than many U.K. peers. We've updated some of our macroeconomic assumptions in Q2, including the U.K. base rate of 5% at the end of this year, which is 100 basis points higher than our expectation in February. Alongside the product dynamics that Anna mentioned this morning, this was a driver in our upgrade of our 2024 NII guidance, a further U.K. rate cut of 4.75% towards the end of the year, which is currently assumed in latest consensus would not materially change our NII guidance this year. Turning to credit ratings on Slide 14. Our medium-term aim for Barclays PLC senior to qualify a single A composite across all indices remains an important medium-term target. We continue to engage with the credit rating agencies in a focused and constructive manner as they follow our execution of our 3-year plan. Before I conclude, let me now turn to Slide 15 and to the topic of risk transfer rates which I know has gained the interest of both the sell-side and buy-side since the start of this year. This has been another active year for us in this space, and we've executed 8 transactions backed by over GBP 6.4 billion of exposures, primarily refinancings to hedge our corporate loan book. We also completed a sale of $1.1 billion of receivables from our U.S. credit card portfolio to Blackstone, also providing this transfer. At the heart of what we aim to achieve across these programs is to enhance our risk management capabilities. We transfer credit risk to investors, typically asset managers and pension funds. We benefit from relief and stress when defaults and single names have occurred over the years and also theoretically in regulatory stress tests. The resulting reduced risk weight density also means that these transfers reduce capital requirements subject, of course, to regulatory oversight, noting the importance of parts on strict tests to demonstrate ongoing significant risk transfer. Therefore, in addition to the risk decision, we also lay out the cost of the protection against the capital that gets released and a consideration for the go-ahead of these traits is ensuring overall RoTE accretion. We have risk transfer programs of different types across a number of our loan portfolios, including corporate loans, mortgages and credit cards, our split in both synthetic versus cash structures and will explain briefly the difference. In synthetic SRT deals, the underlying loans remain on our balance sheet for accounting purposes. Our synthetic SRTs involve issuing notes to investors, the repayment of which links to the underlying assets or credit linked notes, so we take no counterparty credit risk. In cash SRT deals, the risk and rewards of the underlying loans are passed to the investors to such an extent that the assets are derecognized in our balance sheet. However, we retain the legal title and we receive income from the resulting arrangement in servicing fees. To date, the synthetic SRT transactions have been backed by corporate exposures and the cash SRT transactions by more granular retail exposures. Our experience in both allows us to select the optimal structure for future transactions. Turning to Slide 16. Our corporate loan book across the IB and U.K. Corporate Bank has used the Colonnade program since 2016. Today, we benefit from GBP 54 billion of notional protection on corporate loans and revolving credit facilities. To be clear, this is across on and off-balance sheet exposures. It's worth noting that we also have other risk management tools, and we supplement SRT with other forms of market hedging. We are often asked 2 questions by the market about this program, namely refinancing risk and counterparty risk. In terms of managing our refinancing, our maturity profile is actively managed, and we have no more than GBP 2 billion of RWAs requiring refinancing in any quarter. It's also worth stating that we view the Colonnade program as active maturity, both from a volume and hedge proportion perspective. Lastly, the SRT market is active indeed, with issuance last year of GBP 180 billion according to the IA PCM securitization survey, and we have issued GBP 6.4 billion so far this year. And the last question, program is fully funded. And as such, there is no counterparty risk by any other form of bond issuance. Turning to the right hand of the slide. We were pleased to initiate risk transfers for the U.S. credit card book consistent with our stated intention at the beginning of the year, with particular securitization involves selling the risk of $1.1 billion of receivables to Blackstone, and we received servicing fees. We continue to see significant opportunities for these trades on a sector basis as part of the broader strategy of the U.S. Consumer Bank business. I hope this is a helpful introduction on the ways we conduct risk transfer at Barclays, ensure the enhanced risk capabilities from these trades can provide us with an important risk management tool and return accretive options. Let me conclude on the half year results overall. Our robust capital and liquidity positions are important foundations for the strategy, the targets that we set out in our 3-year plan in February. The performance of our balance sheet in the first half of this year has been consistent in supporting the strategic aims of the group. And with that, I'll hand back to Anna.

Thank you, Dan. We would now like to open the call for questions, and I hope you have found this call helpful. Operator, please go ahead.

[Operator Instructions] Our first question today comes from Lee Street from Citigroup.

I have 3, please. Starting off where you finished on risk transfers, these obviously seems to have come to a lot more prominence recently. So my question is, is this just a risk management for you? Do you actually think in the medium to long term, it might change the way your actual business model works? That's the first question. Secondly, on the target of the A ratings at Moody's and S&P, you referred to the medium term. Can you be a bit more specific on that? And secondly, linked to that, do you think you can get upgrades under your own being purely driven by sales? Or do you think the agencies might actually need to take a better view of the U.K. to facilitate that? And then finally, on your legacy subordinate securities that less than a year now to the end of the grandfathering period for certain of them, does this mean they too come in sort of a bit more focus in terms of potentially engaging looking for a potential solution for them, that would be my 3 questions.

Thanks very much, Lee. It's Anna. I'm just going to pass to Dan to pick up on those questions.

Yes. Lee, on the ratings question, obviously, the timing of this is in the agency's hands, not ours. We have really good ongoing engagement with them on a whole range of topics. And I think in particular, the diversity of our funding base and stability of their earnings are kind of key touch points for them. But we think ultimately, the journey that we set out in February and in our plan to 2026, all of that should be supported from a credit quality perspective. Clearly, any change positively in the U.K. operating environment is a good thing. But we think really this is about delivering on our financial targets and our plan. You asked a question about SRT as well. So SRT, there's no change here. I mean we've been a long established user of SRT. I think as I said, we've been doing corporate loan risk transfer trade since 2016. So no real change here. And really, this is about risk management for us. It's really a risk management tool. As we noted in February, we will use risk transfer in the U.S. consumer bank business, and then that will be part of the capital returns [indiscernible] that we expect in there. And again, it's primarily about managing the risk appropriately. And then I think your last question was on legacy. We've obviously made a really significant progress in this space. We've got around GBP 1 billion of securities, that is a very, very small amount compared to the overall capital stack. Regulatory capital treatment is a factor, of course. It's not the only one. I think the small size is relevant and the fact that none of this is issued from our resolution entity is also really relevant. So -- but clearly, we'll update you more on this in due course, but we're comfortable with position at the moment.

Thank you, Lee. Are there other further questions?

[Operator Instructions] We have no further questions, so I'll hand back over to Anna and Dan for any closing remarks.

Okay. Well, look, thank you very much, everyone, for dialing in. Thank you for your continued support. We'll obviously see a number of you in the coming weeks as we visit you. Thank you very much.

Thank you.

Thank you. This concludes today's conference call.