Barclays PLC (BCS) Earnings Call Transcript & Summary

Welcome to Barclays Half Year 2025 Fixed Income Conference Call. I will now hand over to Anna Cross, Group Finance Director; and Dan Fairclough, Group Treasurer.

Good afternoon, and welcome to the Half 1 2025 Fixed Income Investor Call. I'm joined by Dan Fairclough, our Group Treasurer. Let me begin with a brief overview of our financial performance. These results marked the midpoint of our 3-year plan to deliver a better run, more strongly performing and higher returning Barclays. I am pleased with the group's operational and financial progress so far. Return on tangible equity was 13.2% in the first half of the year and 12.3% in the quarter. Total income grew 14% year-on-year to GBP 7.2 billion, while costs grew by 5%, supporting a 4 percentage point improvement in our cost/income ratio to 59%. By design, our plan is delivering operational improvements across each of our divisions to drive structurally higher and more consistent group returns in 2026 and beyond. All divisions generated a double-digit RoTE in Q2. This included a 2.6 percentage point year-on-year improvement in the Investment Bank's RoTE to 12.2% and a 1 percentage point improvement in the U.S. Consumer Bank to 10.2%. Our 3-year plan set out in February 2024 outlined a road map to produce higher and more balanced returns. And I would stress that our 2026 targets were never intended to be a resting place and do not represent the extent of our ambition. We are executing against our plan, as we said we would. And momentum that we are seeing across the group positions us well to deliver our RoTE guidance and targets by continuing to drive income growth, operating leverage and business mix changes. Since 2023, we have deployed GBP 17 billion of business growth RWAs into Barclays UK, the U.K. Corporate Bank and Private Bank and Wealth Management. This includes GBP 10 billion from organic growth. This organic progress and the acquisition of Tesco Bank mean that we have now deployed more than half of the planned GBP 30 billion by 2026. Within the Investment Bank, we have intentionally kept RWAs broadly stable for 3.5 years to drive optimization and productivity, and to ensure that the division is a consistent source of capital generation for the group which has not always been the case. Stable income streams now account for 40% of the investment bank's income in the past year, up from 29% in 2021. In addition, progress has been delivered alongside prudently managed risk reflected in stable VaR. By continuing to execute our plan, we will produce structurally higher and more consistent returns supported by our diversified business model. As debt investors, I appreciate credit quality is a key focus area. So I will cover this topic in more detail on the next slide. The Q2 group impairment charge of GBP 469 million equated to a loan loss rate of 44 basis points. The U.K. credit picture remains benign with low and stable delinquencies in our consumer books and wholesale loan loss rates below our through-the-cycle expectations. The Barclays UK charge was GBP 79 million in Q2, resulting in a loan loss rate of 14 basis points. The improvement versus Q1 reflected a release of credit card provisions and diminishing post-acquisition stage migration effects for Tesco Bank balances. The US Consumer Bank charge of GBP 312 million was stable year-on-year and down 22% versus last quarter. Consumer behavior remains resilient with payment rates in our book above pre-COVID levels and consistent with Q1 and a stable mix of new account acquisitions as can be seen on Slide 23 in the appendix. This is reflected in stable 90-day delinquencies and 30-day delinquencies, which fell 20 basis points versus Q1 to 2.8%, consistent with normal seasonal trends. Looking forward, the acquisition of General Motors card balances is expected to lead to a circa GBP 100 million day 1 charge in Q3 and a post acquisition stage migration charge of circa GBP 50 million for the next few quarters from Q4. Including this charge, we continue to expect a group loan loss rate within the through-the-cycle guidance of 50 to 60 basis points for full year 2025. I'll now hand over to Dan for the highlights.

Thanks, Anna. Let me begin first with capital on Slide 7. We ended with a CET1 ratio of 14% or 13.7% adjusted for the announced H1 buyback. This is in line with our guidance that we expect to operate towards the upper half of our 13% to 14% target range. This is a deliberate consequence of the strategy, which was designed to drive higher and more consistent returns and improved capital generation. We generated 100 basis points of capital from attributable profits in H1 and expect around 170 basis points this year aligned to our circa 11% RoTE guidance versus around 150 basis points in 2024. Looking ahead, we note the recent PRA publications on Basel 3.1. We remain confident in our existing guidance of GBP 3 billion to GBP 10 billion of RWA inflation from Basel 3.1. Although we are still working through the details regarding the option to delay implementation of the model aspect of FRTB, some elements of the PRA proposals have increased our confidence in this range. For the avoidance of doubt, the range itself reflects fine-tuning of implementation and potential business responses to provide mitigation. It is not specifically related to the FRTB rule set. In addition, I would note that the proposals do not deal with the divergent international position, which is a principle that we will continue to engage with regulators on. As previously noted, we expect some offset in Pillar 2A. We are still awaiting further guidance in this area, which is an important element of the final impact. On the topic of Basel 3.1, we note that European banks have recently provided detail on the effect of the output floor, which for Barclays is not expected to be binding at any point. This reflects our business mix and applies both the group and the ring-fence level. Moving up the capital stack on Slide 8, we show our Tier 1 and total capital requirements as a proportion of RWAs. We continue to target a prudent buffer against each of these requirements, which helps us manage any RWA and FX movements as well as our issuance and redemption profiles. Our Tier 1 ratio is 17.8% with a healthy headroom above our 14.6% regulatory requirement. Within this ratio, we had an AT1 component of 3.8%. We continue to operate with high levels of AT1 versus Tier 2. This reflects AT1's contribution to a number of regulatory metrics, specifically Tier 1, total capital, MREL and leverage requirements. As a result, AT1 supports the deployment of leveraged balance sheet into liquid areas such as financing within the investment bank, which generates returns significantly in excess of the cost differential between AT1 and Tier 2. Clearly, our regular core and issuance schedule provides the opportunity to adjust this, if required. In line with previous guidance, we expect AT1 issuance and redemptions to be broadly balanced over time. For 2025, we've so far issued GBP 2.2 billion equivalent of AT1 against up to GBP 3.1 billion of potential call decisions. Turning now to Slide 9. Our MREL ratio was 35.4% as of H1. We are pleased with the progress made against our GBP 14 billion issuance plan, which is now over 70% complete. Following this, we may look at some prefunding subject to market conditions. We continue to seek MREL currency diversification where it makes sense. For example, during H1, we successfully issued a AUD 1 billion offering and our first offshore Chinese renminbi private placements. We have also been proactive and thoughtful in extending our weighted average life at historically tight spreads when compared to long-run averages. This can be helpful in reducing our overall sensitivity to spreads and annual issuance requirements. Finally, a brief word on our legacy capital. We have made continued progress on redeeming legacy instruments such as the call of the euro preference share announced in May. We remain comfortable with our residual position, which is now less than GBP 1 billion, representing a very small amount when compared to our overall capital stack. The largest position within this is our U.S. dollar preference share where we do not have an initial call until 2034. Given this, you should not expect to hear much more from us on legacy capital. On to the next slide on liquidity. Our average LCR of 178% represents GBP 135 billion in excess of our regulatory requirements and includes the initial effect of methodology changes introduced in June. The average net stable funding ratio was 136%, and the loan-to-deposit ratio was 74%, both demonstrating a continued robust liquidity position. To give a bit more detail on the revised methodology for the LCR, we're making changes to the way we measure outflows from our secured financing activities. These changes result in a higher and more conservative net outflow calculation from modeling a more asymmetric unwind of client activity, which we have not observed in actual client behavior. As this is being implemented prospectively in our reporting, we expect a reduction in our average LCR ratio over time from current levels, which have grown over recent years. Although these changes will utilize some of the group's surplus funding position, we expect the LCR to remain broadly within levels reported in recent years, as shown on the slide back to 2022. We will continue to hold a liquidity surplus well above regulatory requirements and maintain a robust and prudent approach to liquidity. Moving on to Slide 11. Total deposits have increased around GBP 4 billion year-to-date. The diversification of our deposit base has supported this outcome with growth in deposits from corporates and banks offsetting a small contraction in consumer deposits. Corporate deposit growth has been driven by the development of our U.S. dollar offering in the International Corporate Bank and an improved market share in the UK Corporate Bank. In Barclays UK, savings deposit balances reduced slightly as customers took advantage of favorable term deposit rates around the new ISA season. We were disciplined around pricing for term deposits, which was competitive in the first half of the quarter. This dynamic moderated later in the quarter, and our market share in current accounts has remained stable. Moving on to Slide 12. Income from the structural hedge is material and predictable and underpins our confidence in delivering our income targets. We have now locked in GBP 11.1 billion of gross structural hedge income across 2025 and 2026, up from GBP 10.2 billion last quarter. And beyond 2026, we currently expect the structural hedge to deliver multiyear NII growth. As we said in April, our plan assumes that we reinvest around 90% of maturing hedges at a 3.5% yield. In each case, the Q2 outcome was more favorable than these assumptions. On rates, we locked in hedges at a higher rate of circa 3.7%, and we kept hedge balances flat, reflecting the continued stability of hedgeable deposits. Finally, a quick word on credit ratings. Our aim remains for Barclays PLC senior to qualify a single A composite across all indices. We will continue to engage with all credit rating agencies and view this objective as consistent with the delivery of our 3-year plan. Throughout 2025, we have continued to demonstrate the strength of the Barclays balance sheet. We expect our plan to continue to deliver increased capital generation supported by a more balanced business model and growth in more stable income streams. With that, I'll hand back to Anna.

Thank you, Dan. In conclusion, this is the sixth quarter of progress against our 2026 targets that we are reiterating today and remain on track to deliver. We'll now open the call for questions. Operator, please go ahead.

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

Well done on the results today. Two for me, please. Just on the US Consumer Bank, just wanted to understand like how does that -- how do you see that fitting with the rest of the Barclays businesses that they operate? And then synergies, how does it actually fit in? And how should I think about that in terms of its strategic significance given its current size? And secondly, on capital. I know there's a lot of questions this morning. I'm not going to ask what you think is going to happen. But if capital requirements were to say drop by 100 basis points, just a bigger round number for whatever reason. Is it fair to assume that your target CET1 ratio would also commensurately drop by 100 basis points, that's what I'd like to understand. That would be my two questions.

Okay. Thanks for the questions, Lee. Why don't I start and then I'll add to -- I'll ask Dan to add. So strategically, where is the US Bank fit? I mean from our perspective, we believe that this is a business where we can make good returns, and you can see that progress over time. So RoTE that we reported this morning is over 10%. We are focused on getting that business to be in line with the group at greater than 12% for 2026. And beyond that, we think we can get it back to the sort of mid-teens that we operated this business historically. To get there, there's a number of things that we need to do work on the NIM, and you can see that improving through time. We repriced the book last year, and you can see it coming through. And we're also really focused on generating dollar deposits in that business, which are up 27% year-on-year. The cost base is also important. You can see the cost income ratio falling to 48%. We want that to be mid-40s. And delinquency is well under control, as you can see. So we do have confidence in the operating moving parts. Beyond that, how does it connect to the rest of the group? Well, I think it's important to understand that we see this because it's a partnership business, it's not a direct to consumer business in the same way as our U.K. business is. We really see this as a business with 20 million customers, yes, of course, but it's actually 20 significant corporate clients. And we see ourselves as providing consumer credit to those largely IB clients. So that's really what's different about the bank or that part of the bank. So you can see the nexus that it's got to the IB, but it's also important to just stress the amount of connectivity between the 2 cards businesses on either side of the Atlantic. So we share modeling capital approaches. We also are able to use the capability that we have in the U.S. to bring across the Barclays UK. You can see it increasingly running a partnership model, not just with Tesco, but with Amazon and with Avios. All of that capability in attitude comes from the U.S. It's quite a connectivity here. As a stand-alone business, it's customer service record and its level of digitization is very high. So actually, it sets a good track for the rest. Finally, I'll just say in terms of the sort of overall capital efficiency of the bank, what the US Cards business does is it does candidly give us a better CCAR result because it creates diversification within the U.S. So you can see the low point of our CCAR was 10.8%, and our stress buffer is around 3.3, pretty much in line with some of the other diversified banks in the U.S. So that's really important. If we were not to have this business, we would be holding proportionately more capital against the IB in the states. So provided it can wash its face and generate good returns, it provides other ancillary benefits. As to your second question about CET1, we think about CET1 across a really long time horizon. We're satisfied with our target of 13% to 14% now. We're obviously mindful of regulatory change when and if that may come. But there's some significant pieces of that regulatory change that are still outstanding, notably what is happening on Pillar 2 as part of Basel, but also the international alignment. Dan?

Yes. I mean I'd sort of broadly say that it will be a big driver. What the regulatory expectations are will be a big driver of where our target is. But we will take into account a range of other things as well. So we'll look at what investors expect. We'll look at where the peer set is and peer comparisons and we'll look at it through stress as well as BAU. So there's a pretty strong link, but there are other factors as well.

The next question comes from the line of Daniel David from Autonomous.

Congratulations on the results. I just want to touch on a couple of topics. The first one on SRT, and the second one on capital. On risk transfer trades, I appreciate the disclosure. You've got your bigger slide pack. I just wanted to ask, is there a kind of target level you plan to get to, noting that you're kind of one of the bigger users in Europe? And how SRT kind of plays into loan pricing? Is it something you think about when you write new corporate loans? And although unlikely, what would be the impact on CET1, if you couldn't roll over your current risk transfer trades? The second one, I guess, picks up on Lee's question somewhat. And I guess there's quite a bit of excitement growing on whether requirements could be lower for large U.K. banks. I'm just interested in your opinion, is there any areas you think that should be kind of eased, so whether that's leverage Pillar 2 or countercyclical? And then the second part of that, I guess, is on your range. And I think the -- the lower end of the range makes us slightly nervous and then it's less than 100 basis points over the MDA. So do you think you're likely to operate at the lower end of the range, let's say, over the next year? I think we all appreciate that you're intentionally at the higher end at the moment. But just interested to hear your thoughts there.

Yes. Thanks for the questions, Dan. So on SRT, I mean, obviously, we consider market capacity quite carefully in sizing the SRT amount. We're also very aware, which links into the last point of your question about the amount of RWAs that we would have amortizing in any particular period. So we've said that for the Colonnade program that's less than GBP 2 billion. That's something that we will use as a guide. We would always want to make sure that we could respond to any particular stress in the market. And we think we're well position for that at the size that we're at. As we've said before, broadly, that Colonnade program is kind of at maturity in terms of scale. In terms of the loan pricing, we don't reflect it directly into the loan pricing. We don't provide details with the loan originators as to what's going into the call and what's not. And we think that's just very clear that they would not be swayed in their commercial or credit decisioning based on whether we were getting protection or not getting protection on the assets. So we keep those two things quite separate. It's more of a risk management tool rather than a commercial tool. In terms of the capital position, I mean, I think we probably covered this broadly before. We took the decision to guide you to the upper half of the 13% to 14% range. We did that because we thought it was appropriate compared to where the MDA was, which was 12.2%. We think that gives a sufficient comfort buffer particularly bearing in mind both the CET1 generation that we've obviously now demonstrated very consistently and also the flexibility that we have on RWAs. So I wouldn't sort of change your view of where we expect to operate in the range. Do you want to add anything, Anna?

Yes. I mean the only thing I would add, Dan, is that one of the things that we would hope that the regulator is seeking to achieve is actually how these different parts of the regulation fit together. So stress testing plus the capital plus leverage plus GSIB quite frankly, all of those things together need to be taken as a whole. So that's what we will be seeking to discuss and are discussing with the regulators in the background.

The next question comes from Paul Fenner-Leitao from Societe Generale.

I got -- I've got a couple -- actually, the first one -- I've got three, sorry. The first one was, Dan, you mentioned when you were talking about supply, I'm sorry, I missed the comment you made, something about not having maturities or calls until 2034. What was it that I missed about that? That's part one on supply. The second was -- is it fair to assume that you're still going to be doing another AT1 to cover your calls and that you're done in Tier 2, that's -- that on supply. The second question relating to the US Consumer Bank, much of that has been covered. I just got kind of a mechanical question with -- so you've got -- in the non-UK credit card business, you've got 8% NPLs. I think I've got my maths right. If I don't, please let me know. But you've got over 4% cost of risk. What's -- have you just got enormous charge-offs, but that doesn't really tally with your relatively low delinquency rates. What is it -- what's happening with the mechanics there on the cost of risk versus the actual NPL balances, which seem reasonably low? And then the very last question is one I've asked before, but nothing seems to come of it is -- what is it that you're looking for in terms of bad news around consumer behavior that you haven't yet seen? I mean what's the first marker of that you guys care about in terms of our risk metric to tell us that we're in a new and more negative environment?

Thanks, Paul. So I'll take the first supply question, I think Anna will pick up the rest. So just to clarify, the point about the call in 2034 was in relation to our legacy capital. So we haven't got very much legacy capital left, but one of the larger transactions is a dollar preference share. So we were just clarifying that we don't have an issue a call on that until 2034. So not too much more to say on that. In relation to supply for the rest of the year, we haven't provided guidance on specific splits. But we do have, if we were to exercise at the first call, GBP 3.1 billion of AT1 calls, and we've only issued GBP 2.2 billion. So we said we would be a broadly balanced issuer in AT1 as we go through the year.

Paul, just in terms of your question about cost of risk, I mean the way I think about it is cost of risk covers two things. It covers the piece that you've called out, which is your sort of real experience sort of true risk, if you like, which is the NPLs. But it also, in very large part, covers the sort of procyclicality of IFRS 9. So what that requires us to do is basically to use macroeconomic forecasts to imagine what would happen to our portfolio in a range of economic scenarios. And to give you an idea, the weighted average unemployment rate that we are looking -- that we are using in our U.S. portfolio right now is 5.1%. And then you might recall, in Q1, we took an additional charge because of the uncertainty. All in all, that basically means that we are running a cost of risk here that is imagining a 5.75% unemployment rate in the U.S. It's just that procyclicality point about IFRS 9, I think that's drawing that distinction for you. The second question that you've got, which is what really is it that we are looking for. I mean be reassured, we look very hard at all of the data that we see, both in terms of our owned portfolios, but also high-frequency data more generally. We see nothing either in the U.K. or in the U.S., and that includes retail and wholesale. And specifically for cards, the kind of thing I would be looking for would be either a market change in the way people were spending their money. And if anything, in the U.K., in particular, I would say people are getting a little bit more confident. We're seeing credit card spend outstripping debit card spend. In the U.S., we haven't really seen a huge change in spending patterns despite quite a lot of speculation about inflation and potential of inflation, but nothing significant. And then the other thing I would be looking for is change in payment rates. So are customers going much more to the sort of minimum payment level that we asked them for. The answer to that is we're not seeing that either. If anything, they remain higher than pre-COVID levels. That's true both of the U.K. and the U.S., and it's true all the way through the risk stack. So we're seeing quite conservative consumer behavior that's pretty reassuring at this stage. Hopefully, that helps and answers your questions, but -- Thanks for that, Paul.

Our final question today comes from the line of Robert Smalley from Veriton Fund Management.

And a lot have been asked and answered. So just a couple. First, you talked a little bit about the LCR and the LCR calculation. Can you talk about why these numbers went up so much? And what you think the proper running rate should be, if it should be in the 150s? Also, you're running pretty hefty NSFR as well if you could address that? Secondly, I talked about this on the last call, but NDFI exposure, exposure to non-depository financial institutions. Could you give us an update on that specifically what kind of exposure you have to alternative asset managers and BDCs? I know there's a lot of nomenclature issues around that, but that's really what I'm looking for as we continue to see banks lend more to their non-depository peers competitors? And then third, you talked about raising deposits in the U.S., pretty active in the Yankee CD program. Can you see doing more larger transactions, market transactions from the US Bank, the same way that some of your Visa peers do bank level issuance in market size.

Thank you, Robert. I'll make a start on those. So you're right, we have operated at a pretty high level of liquidity. I'd say that's partly a function of the macroeconomics and money supply and to some extent, that's seen in banks globally. I think specifically as well, in terms of our case, we have got a strategy that kind of puts deposits at the center of the relationship in a number of different business lines. So I'd call out the growth of our US Transaction bank that has obviously seen growth in deposits. Obviously, our private bank and wealth management has got a good deposit franchise as well. So we're probably a significant beneficiary of that overall trend in money supply and in deposits. We called out today that we're making some changes in the LCR calculation. That will bring the LCR down a little bit. But I think you should expect it to remain at high levels. And we're kind of calling back, if you go back to '22 or '23, it was 156% or 161% LCR ratio. So just to sort of have that sort of in your mind. Generally, we view it as -- it's still economic to run at that level of surplus liquidity just because the liquidity to us is low cost and therefore, it's efficient. Your second question on NDFI. So there's obviously been a bit of a push in the U.S. For the U.S. regulators to disclose more information on that. So you can see some disclosure from us on those specific lending types. There is almost no exposure in our Barclays Bank Delaware or in our HC entities. There is some exposure in our New York branch, which is where we would do a lot of that type of activity. And the number there is about $20 billion. It will be to a range of NDFI. But maybe, Anna, you want to pick up on kind of why we do this type of activity.

Yes. Thanks, Robert. I mean, we do think that occupies a really important part of the lending infrastructure more generally. And stepping back, regulation and impending regulation tends to penalize illiquid risk as it sits on bank balance sheets. But yes, the world, both in the U.S. and in the U.K. needs this sort of longer-term infrastructure spending. So we think they do perform a really important part of that infrastructure. And we do have a very intertwined relationship with these parties, which doesn't mean that we -- we know them well, and we can choose the ones that we really want to do business with. So some providers are our competitors on the lending basis, but we may lend to them. We bring their companies to market. We are quite often offering bespoke risk management transactions for them. So it's like any other counterparty really. We choose those counterparties carefully, and we monitor their interactions with us carefully over time.

And then, Robert, your last question on -- just on U.S. wholesale funding. So look, we've got no plans to change the mix of U.S. wholesale funding that we do. Generally wholesale funding would be at the more expensive end of our liability sources. So we wouldn't do that unless we had a big push to. Look, if anything, as we've discussed on this call, the funding strategy for Barclays Bank Delaware is actually to do more deposits, more retail deposits, if anything, sort of less CDs in that mix. So no real change on the overall mix of the U.S. funding.

Thank you, Robert. Thank you for asking the questions. And thank you all for joining the call. Thank you for your continued interest and support for Barclays. We hope to see many of you on the road, if not over the next few days, then perhaps into September. But thanks very much. Operator, we can now close the call.

Thank you. That concludes today's conference call. You may now disconnect.