Barclays : Q3 2022 Sellside Analyst Meeting Transcript

Investor Relations

Barclays PLC Q3 2022 Results

01 November 2022

Analyst meeting transcript (amended in places to improve accuracy and readability)

Anna Cross, Group Finance Director

We're really pleased with our results from last week. Not only with the financial performance of the Group, but that the matter with the SEC is now behind us. That was good to get that all closed off in the quarter and materially in line with the numbers that we've previously given you. Overall, we saw continued strong income momentum and returns across all of the three operating businesses. Group PBT was £2bn, RoTE was 12.5% and we reiterated our target of greater than 10% [RoTE] for FY22.

On income, I'm going to exclude the over-issuance, it's practically net-neutral at a PBT level but it causes a bit of noise [in the income and cost lines].

Income was up 17%. With BUK up 17%, we see continued benefit coming through there from rising rates, both in terms of product, but also in terms of the structural hedge, and we gave you some guidance as to how those two things separate out in the quarter. CC&P income was up 54%. Of course, the big part of that is US cards, which is growing as we expected it to, organically and inorganically. But the other parts of CC&P are also growing, so you're seeing good traction in the Private Bank and also in Payments. Really, really pleased with that. Then of course CIB up 5% and the knockout number within there was again FICC. But we shouldn't forget the strong performance that we're seeing pretty consistently now coming through in Transaction Banking, which obviously we expect to continue [given rate rises].

[Operating] costs, again excluding the over-issuance, were up 14%, impacted by FX, by our investment plans, and also by inflation. That manifests itself in different places, in different ways, and you might want to talk about that, but that means that we've got positive operatingjaws of 3%. We reiterated our [cost] guidance of £16.7bn for FY22, essentially with that increased FX pressure and some inflationary impact, offsetting the positive that we've seen in the quarter in terms of the L&C [credit].

Turning to impairments, the Q322 Group credit impairment charge was £0.4bn. We did reflect a refresh of our macroeconomic variables in the quarter, a more cautious set, and we had an offset from the PMA for economic uncertainty. That's obviously why we put [the PMA] in place, but we're not seeing any significant signs of stress at all, across any of the portfolios, and the coverage ratios are very strong.

We did call out that based on the sensitivity analysis that we published in the [Results Announcement], Downside 1 would be covered by the £0.7bn PMA that we have in place. Probably the other notable points would be that US and UK cards stage 2 coverage was at 35% and 29% respectively. Both well above the pre-pandemic level.

We gave you a broad [impairment] outlook statement, which is that we would expect to revert to the historic loan loss ratio of 50-60bps over time.

On FX, we provided you some additional disclosure this quarter, so you can see the proportion of our costs, roughly 30% in US dollar, and between 40 and 45% in US dollar on the income line. Assuming the dollar/pound exchange rate stayed at 1,12, and it's obviously recovered a little bit since then, we'd expect our FY23 income to be £1bn higher and costs to be £0.5bn higher, roughly in that ballpark. That's hopefully a bit helpful as you model FY23.

Then lastly, on capital. The Q322 ratio was up 20 basis points to 13.8%. We managed the fair value impact from rising rates well within that and stayed within our target range. We called out that we have returned 15.35p to shareholders per share this year, thus far, equivalent to a yield of around 10.5%. I'm going to pause here to take your questions.

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Joseph Dickerson, Jefferies

Just a quick question on FICC, and probably Equities could wrap into that. The SLR (supplementary leverage ratio) is becoming quite a limiting factor now for the large US banks. What do you see as the opportunity in the financing businesses, so Fixed Income Financing (FIF) and Equities Financing? Is there more leverage exposure you could allocate to that, and find [leverage] savings elsewhere to drive higher returns, and does that factor into thinking about 2023 to 2025 for IB businesses?

Anna Cross

In terms of the Fixed Income Financing and the Prime business, they're growing quite nicely over the last few years. That's largely because of the investment that we've put behind it, in terms of people, but Fixed Income [Financing] and Prime are also very reliant on an extremely robust operating system, very good resilience, and a broad range of products. It's a client servicing business. We feel that's been the cornerstone of why we've been able to pick up share, perhaps as others have stepped back. It's RWA-efficient, but as you say, a bit leverage heavy, so we are thoughtful about how we grow it. But we see it as an opportunity because it provides us stability to the CIB revenue on both counts. Obviously, in Fixed Income Financing in particular, as rates have risen, we've seen some widening of margins. Now that widening might slow down from here, we might expect it to, given the competitiveness of the market, but it does feel like a business that we're good at, and that we can continue to take share if others choose to step back. But we are thoughtful about the leverage burden that it puts on there. So that means we need to have the right clients, we need to have very rigorous margining in that business. So, we'll see how it goes.

In terms of the Prime business, I would say that's a bit less of a historic business for us. We've always been really big in Fixed Income Financing and obviously the momentum's come back into that business now, not least with the margin. Prime may be a bit more to grow out, but we are thoughtful about the way we grow it.

Joseph Dickerson

Just to clarify, that does explain some of the share gains that you had, relative to some of the other peers?

Anna Cross

Yes, that's right.

Alvaro Serrano, Morgan Stanley

Just a couple of questions. One is quite detailed and the other one more about capital returns. On the marks on the leveraged loans that you're taking through the Corporate Lending line, I think it was £190m this quarter, can you help us think about what to expect in the next few quarters, how to model that going forward, as it's a pretty chunky number? Also, contextualise that with the 35% first loss coverage that you've got, how do we think about that going forward?

Second, on capital return, capital was probably better than feared in Q322, but you've still got a pensions top-up in Q422, and we are not out of the woods in terms of the uncertainty. It does look like, in terms of [consensus], close to £1bn of share buybacks in the second half. Are you comfortable with that and should we be mindful of the [macro] uncertainty when it comes to distribution at year-end?

Anna Cross

Let me start with the leveraged loan position. We took marks at the end of the third quarter, and you can see that we obviously took some marks [also] earlier in the year because we gave you the year-to-date [number]. It's been relatively modest thus far. You can see that from the scale-up, obviously after the impact of the hedges that we've got in place. It's quite difficult to call a forward number because obviously if I thought there was one, then we would've taken that at Q322. It's difficult to tell [in advance]. Also, this is a market that can be a bit lumpy. We saw a window in August where quite a lot of deal activity cleared and cleared at reasonable prices. Let's wait and see what happens over the next few weeks and months. It's difficult to call a forward view on that, so it's something we're extremely mindful of, and we've managed our risk down in that book across the year with this kind of "hiatus" in mind, with a bit of stickiness in the balance sheet. So, we're very focussed on it.

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In terms of the first loss [protection], that's actually different. Within the Corporate Lending line, there's a few things going on. There are obviously the marks, there's the cost of the syndicate hedges that go against those marks, and they're the two offsetting pieces. Then I'll come to first loss in a minute. Those syndicate hedges are largely tail hedges. We get some offset, but they don't entirely offset in the context of the markets we've seen thus far. But if you recall, going back to COVID, when we saw some really extreme movements, then they were extremely effective. They're largely for more tail events.

But then we have this first loss protection. Think of that first loss protection more for ordinary way, corporate and institutional clients' lending, so big IB lending. That's where we are essentially selling the first loss portion to a group of investors. We found that that's something we're able to do well out of our own IB. Investors like that, and we've found a continuing demand for that product. What it does, is it protects us in terms of credit losses that we incur on those books. We have found that to be very effective over the last few years. When you see us report a single name, quite often that is net of a first loss protection we get from that. But the [running] cost of that first loss protection is also going through the Corporate Lending line.

I guess this is part of our somewhat cautious risk appetite that you've seen emerge over the last year or so. You've seen us have a greater level of that first loss protection. We've gone from mid-20%'s to 35%, and on an exposure at default level it's more like mid-40%s protection. Then if you look at the syndicate loan pipeline, we've chosen to hedge more of it because our appetite for stress loss has declined, and obviously the cost of hedging in the current environment's gone up. That's really what's going on in that Corporate Lending line. It's a bit of marks, but then there's also our risk management activity. Corporate lending underlying all of that, is actually quite stable. Hopefully that's helpful. Sorry, what I should say about that first loss is, although it's c.35% across the whole portfolio, if you were to go to specific sectors, it would be higher than that. We try and use it to target [higher risk] sectors.

In terms of capital returns, we were pleased with the 13.8% [CET1 ratio]. For us, really, it's a question of confidence in terms of capital generation, and what do we see at that point in time? At the half-year we were at 13.6% and we chose to do a buyback. I think there were a few folks out there who were perhaps surprised by that. That decision was based on our confidence in generating capital and getting ourselves back to the position that we are now in, so that's what we expected to happen. When we make our decisions, and we will make them at the end of the fourth quarter, going over the year-end, we will be looking at our ability to generate capital. Of course, the individual pieces, like Kensington [Mortgages] or, for example, pensions, will play into that decision. But pensions, for example, is a tiny point. What's more relevant to us is what's the capital generation capacity of the bank?

That will be informed at that point in time, as it always is, by the macroeconomic environment around us. That may be the same as it is now, which might lead to one decision, or that may have deteriorated, or it may be better and we may have some uncertainty behind us. It's quite difficult to call it right now, but that's how I'd think about it. What do we think about our forward earning capability as a business, and how does the environment that we're sitting in inform that?

Ben Toms, RBC

Two on costs, please. When I think about the bridge for costs next year and salary inflation being a large moving part in that, if I think about the salary inflation that happened this year, what's the right way to think about that? Should I be looking at the negotiations that happened last January and thinking about that, for the full year, including the top- up? I think Venkat has described that top-up as almost a pre-payment for next year. I just want to understand those moving parts, without you prejudicing any negotiations that might be going on.

Then, when we talk about costs for next year, I think Barclays has had more of a focus on the positive jaws story, rather than keeping costs absolutely flat. Can you just talk a little bit about how you think about that jaws story, in the event that rates came back down, and the revenue environment isn't necessarily as good, and how you then control the costs?

Anna Cross

We are just starting our negotiations now, in terms of those who are unionised, so difficult to call. But you're right to think of that [£1,200] as a pre-payment and of course that's already in the run rate of BUK from now on. That's where a large part of it sits, there'll be some in Corporate as well, but BUK would be the largest part of it. In terms of salary inflation, I wouldn't necessarily think about it as completely flat through the grade structure. Of course, we'll be very focussed on our more junior grades and particularly move up that group of people. A large part of what we'll be doing will be going through that model over the next few months, but it's difficult to tell. I would say think of it as probably

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more skewed towards more junior colleagues. And you should think of that as a pre-payment in the amount that we've shown so far. There's lots in the papers about where various union settlements are coming out and you can make your own judgments, but we haven't finished those negotiations yet, so I can't say anything further.

In terms of jaws and how we think about it, the answer is it's different by business. Our cost strategy is two-fold, I would say. The first is, as we've said for a while, we're balancing inflation, efficiency and investment. That balance of those three things will be different in every single business. That's because of the second part of the strategy, which is we're putting the weight of investment behind the three strategic priorities. Those two things are really important.

In BUK, you can see the cost discipline there. And it's part because of what you're describing. The income tailwind it has, yes, there's increased transactional activity and a bit of extra mortgages, but in large part it's interest rates. Our focus there and why we took the [structural cost actions] in Q421, was to transform that business, make it more efficient, more effective. But you're seeing that as an offset to some of the inflationary pressures that are coming through, with BUK cost growth in the quarter of 3%. We're very focussed on that sort of shape for BUK. We'll see where we end up but think of that business as our investment being focussed on efficiency and effectiveness and disproportionally on cost takeout, to neutralise the impact of inflation, as opposed to necessarily volume growth.

CC&P is different. In CC&P we've got strong volume growth. That's both organic - and organic growth costs money because we have to put marketing behind it (obviously, there's contra income after that, but starting off with marketing - so, expect to see that continue, subject to the macroeconomic environment - obviously if it deteriorates, it's a setback from that); then we've also put down a lot of costs this year in respect of GAP. There'll be some ongoing tail of marketing for GAP, etc., but we've taken quite a big step change in respect of that this year, but I'd still expect to see cost investment in that business, but more than offset by the volume growth that we're getting on the cards side.

Then the CIB's a little bit different again, obviously less impacted by the rates point that you called out, although back to [Joseph Dickerson's] question about Fixed Income Financing, FIF is impacted by rising rates, it's where we get the higher margins from. Obviously, you also see it in Corporate, in Transactional Banking [specifically], so there's a bit of margin widening there.

But really, our investment pathway in the CIB is being focussed on building out capability. Actually, if you look at the jaws of our CIB, it's very similar to the US peers in the quarter. We may be a little bit more beneficial, that may be currency mix, but we're low negative-teens, whereas they would be higher. You can see that investment through the quarter. In that business, I would say we do have levers. We've obviously got investment prioritisation that we can pull back on and reshuffle, etc., and obviously that's where our performance costs are concentrated. So, there are some levers in there as well, but we are mindful about the rate tailwind.

The last thing I would say there is that one of the reasons that we pursue the [income] strategy that we do around the balance between hedged and not hedged [balances], is so that we can lock in that interest rate benefit as we go. We think that's quite important because that pathway might be shallower, might be shorter than we think. If you think what's happened to the yield curve over the last three weeks, it's quite dramatically different. We think that that strategy is, again, part of our risk management around the income line.

Ed Firth, KBW

Can I bring you back to credit [impairment], which is something that we're all looking at, at the moment? I'm still struggling to square this idea from all the banks that this is effectively the best environment we've had for banking in 50 years probably. With what you see from governments, from Citizens Advice, if I speak to IFAs, if I speak to Nationwide, a big house price drop for the first time. If you'd have given me those [points] separately to talking to you guys, I wouldn't have thought that was a fantastic environment for banking. I'm just trying to get it square, is it that you now just don't deal with customers that get into trouble, or that your systems are so good now that you feel comfortable that, even with your market share, you can separate out the wheat from the chaff, so to speak? Or is it a timing issue, or is it a bit of both? How do you think those two, which at the moment are the widest I can remember in my time covering banks, those two dialogues, how do you feel that those [reconcile]? At some point they're going to have to come together, and I'm just trying to think when do you think that will be, and what are the stresses that we might see as that happens? Does that make sense?

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Anna Cross

Yes, it does make sense. The way I try and think about it is there's a difference between affordability pressure and credit risk. To a certain extent, some of the dialogue conflates the two. There is certainly affordability pressure out there, absolutely certain. You can see that intensifying, as well, [for example] if the energy price cap does reverse in April, that would take the average [energy bill] from about £2,500 over to £3,500, I think, which is not insignificant for households. Although, only around a third of UK households have a mortgage, and then we get a proportion of those who will be refinancing in this environment, for those people it won't be insignificant.

Then again, even though unemployment is very low now, there is clearly a risk of all this pressure building into the corporate area with increased unemployment, that's what we're all forecasting to varying degrees. Then we'll get further clarity on 17th November from the autumn statement. All of that would indicate that there is pressure in the system. But then if you go to the balance sheets, whether that be customer balance sheets or our balance sheet, they're quite different. If you take that environment and you [were to apply it to] where the balance sheets were pre- COVID, you would be getting a different response now.

Customers have had the opportunity to live in quite a different world [through COVID], and pay down their debt. We've never done a stress test where you lock people in their houses for six months. That's never been part of any scenario, but that's what we did, essentially. We've got high levels of repayment at every level of the risk spectrum, all the way through. We've got [relatively] low levels of unsecured lending. We've got house prices that have gone up over the last few years, so even if there is a correction, it would have to go quite a long way to get them back to the pre-COVID level. So, they're in quite a different position and I think the banks are too. To a certain extent, there is a timing point here, I think, but there's also a quality of balance sheet point.

The other thing that we think about is when customers are taken by surprise, and the reason why we tend to use unemployment as a trigger in an impairment model, is that unemployment is shorthand for a very rapid change in your disposable income. That's really what it is. A rapid change in unemployment causes untold damage as a credit matter, but clearly that's not what we're seeing now. We're seeing low unemployment, and very high levels of employment. Customers are feeling an affordability squeeze, but they've definitely got a run at it, there's been some time for adjustment, and we can see them adjusting. They are changing their spending habits, they are repaying their credit cards far more than they need to, [with the result] that our balances are at best flat, as an interest earning matter. We can see them repaying their mortgages very quickly, and overpaying. All of those adjustment behavioural signs are there, so it feels like there's a bit of a waiting game, but there's also a quality position.

Ed Firth

Just a follow-up to that. Is there a risk then, that if everybody is in a much better position, in terms of getting inflation under control, we may have to foresee that interest rates actually stay high for perhaps a little bit longer than people are expecting? Because in a sense, it seems to me we can't get through this, you can't control inflation and have no credit cycle. It's almost like one or the other. I'm just wondering, if we were to see rates, not so much going much higher, but persisting much longer, does that have a big impact in terms of how you look at credit?

Anna Cross

I think that's an interesting question because, to a certain extent, that adjustment by customers right now, you would think is anti-inflationary. They are adjusting their spending now. If you look at pretty much anything non-essential, the only non-essential that they're really increasing their spending on is travel. Everything else is reducing. It's definitely having an impressive impact on customer demand, which I guess is the idea. And we'll probably see that intensify as more people switch, etc., so we'll have to wait and see. At current rates, most customers have been stressed at these rates and well beyond, when they did their initial affordability, so it shouldn't be a significant stretch if they stay here. Having said that, it's really difficult to do averages of averages. There will always be some customers for whom the combination of the mortgage and [other items], puts them under pressure. But as a wholesale matter, if you like, at current rates, our customers, and pretty much everybody since 2014, will have been stressed at a significantly higher rate than the reversionary rate that they would've gone onto. They should, in theory, be able to afford what they're currently experiencing.

Rohith Chandra Rajan, Bank of America

Could I just follow up on the Corporate Lending line, please? Just in terms of that risk management piece. If we put leverage loans to one side, and we think about the first loss protection plus hedging versus the underlying

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