Barclays : Transcript (PDF 159KB)

Investor Relations

Morgan Stanley European Financials Conference

16 March 2021

Jes Staley Q&A transcript (amended in places to improve accuracy and readability)

Alvaro Serrano, Morgan Stanley

Thank you everyone for joining this second session of the conference with Barclays. Very happy to introduce Jes Staley, CEO of Barclays Group. As always, we're going to do a survey question first. The question is, "Where do you think Barclays is more likely to surprise positively in 2021?" Number one, in CIB revenue performance with ongoing strong markets and banking fees; number two, faster than expected recovery in consumer lending as the economy rebounds; number three, beating a conservative UK NIM guidance; number four, provisions below the 74 basis points expected by consensus; and number five, shareholder remuneration over the 5p and £700 million buybacks that consensus is expecting for this year.

It does look like 50% are expecting a beat in provisions. Maybe with that, we can start our conversation, Jes. Maybe as an opening question, 2020 has been a pretty difficult year, but I would say the banks have managed pretty well considering the COVID-19 challenges. Maybe you can run us through your thoughts on 2020 and where you stand now?

Jes Staley, Barclays Group Chief Executive

Yes. I think it was, all things considered, a good year for the banks. First, I think you have to acknowledge the work by regulators and the central banks around the world, particularly in the ECB, the Fed, the Bank of England and Her Majesty's Treasury. The banks went through an enormous recapitalisation in the last decade. The recalibration of risk has been significant, all the way from applying a risk weight to AAA securities, to applying a risk weight to just operating a bank.

We need to remember that, in 2009, the banks were really the catalyst for a lot of economic pain and for the [global financial crisis]. This time, I think the banks found themselves in a financial position whereby, if this all works as I think it's working now, hopefully the banks will be seen in part as agents to allow for a swift recovery.

In the case of Barclays, as you know, for the previous four years, we were arguing that consumer banks and wholesale banks act differently depending upon where you are in an economic cycle. We stayed committed to our investment bank and, as we said at the year-end numbers, despite a pandemic and the economic contraction that was almost unprecedented, the investment bank generated 13% RoTE in 2020 and really allowed us to do three things. One was really try to help the consumer and small businesses. During the pandemic we waived over £100 million of overdraft interest last year; we set up a £100 million charitable foundation to help people impacted by COVID-19; we participated in some £26 billion of government-supported lending programmes to small businesses and mid-size corporates. I think we stayed with our customers and our clients in a very difficult period of time and yet remained profitableevery quarter, and ended the year with the highest level of capitalisation ever at the bank. I think that's a function of the diversified strategy, which we launched in March 2016.

Alvaro Serrano

Obviously, when we come out of COVID-19, the attention is going to quickly turn back to the strategic narrative. In your CEO Review in the Annual Report, you reiterated ambitions to grow in transaction banking, in Payments and in Wealth Management. Maybe you can expand a little on the progress you're making there and what opportunities you see ahead.

Jes Staley

One, there are some pretty interesting valuations for a company that I know quite well called Stripe, which is written quite a bit about today. I've known Patrick and John for a long time, and we are actually partnering with them as a supporting bank in Europe.

One of the attributes of Barclays, which we want to talk more about and underscore more, is that we are one of the largest merchant acquirers in Europe, and one of the very few banks that has a sizable merchant acquiring business alongside small business banking, corporate banking, etc., let alone the consumer franchise that we have. So, we applaud the attention that's being given to the internet sales space and to those that are digitally offering merchant acquiring services to internet sales companies, and Stripe is doing an exceptional job at it, but we are all-in investing in our merchant acquiring capabilities. We're seeing very strong growth where we provide it for e-commerce. So, the payment space I think is very promising for Barclays, and we're going to underscore that more and more.

Alvaro Serrano

In terms of the investment bank, it's come a long way over the last three years. Your market share in the IB has increased, you flagged in your results up 35% since 2017 and credit to you. We all look back to where you were a few years back and you've clearly done better than the market expected. Your focus you've said is to continue to grow market share in capital markets. Maybe you can spend a bit of time on that and what areas in particular are you investing in, product-wise and geography-wise, and what sort of market share gains are you aiming for over time?

Jes Staley

Well, the first thing is I think the market share gains of the last couple years reflect the fact that, particularly amongst the European banks, we were resolute in our support of remaining a bulge bracket bank and, aside from commodities six years ago, we have not stepped away from any asset class or any market as a bulge bracket player.

I think a lot of the buy side believe that, if I do a five-year interest rate swap with Barclays, they'll be here five years from now to write another one. So, I think we convinced the buy side that we were going to stay as a very robust counterparty in the capital markets and it's sort of an irony, I think being British helped us in that regard versus the five major US banks.

We have been investing in personnel. One of the areas where we've seen significant growth and want to continue to invest is in Equity Capital Markets. We brought in, a little over a year ago, two new heads of our Equity Capital Markets business. One used to work at Morgan Stanley, a guy named Taylor Wright,who's co-Head with Kristin de Clark, who's based out in Palo Alto and I think one of the best technology ECM bankers. The two of them have had a huge impact on that market for us.

So, we're going to continue to invest and hire talent. But I think now, given where the bank is, and given where profitability is lying, it's really important to underscore what we're seeking to do; really good business for the right reasons and for the right clients. I don't want to chase our market share. I think in investment banking, that's a dangerous thing to do. So, let's just do the right business with the right clients, and we have a position that's strong now. I think we're all recognising how significantly the industry is growing. The size of the capital markets has doubled in the last decade. The [combined] debt [and equity] markets have grown by 40% in the last two years alone. So, it's a much bigger pool that we're all swimming in, and I think that's healthy for everyone who is acting as an intermediary in the capital markets themselves.

Alvaro Serrano

That resonates very well. If I think about 2021, despite all the things you've laid out, consensus is still forecasting CIB revenues to be down 10%. You pointed out in your full-year results, and Tushar flagged it as well, that you think you can do better than that, but Markets are obviously very difficult to predict.

What does make you so optimistic? The comparator YoY is pretty difficult, particularly with FICC up more than 50% last year and markets up 45%, but you remain optimistic. What's driving that optimism?

Jes Staley

One footnote I would say, Alvaro, is we do have to recognise the real strength of the pound, so, when you look at these comparisons, recognise that a significant percentage of our revenues in our investment bank are in US dollars. So when you hear statements by other financial institutions about how they're doing one period versus another, they generally use a constant-currency of US dollars.

We're not going to make a prediction or a statement about the first quarter. I think the important thing for us is, obviously, the stock price is responding well. We announced the 5p capital return to shareholders. We want to get in a consistent basis of returning excess capital to shareholders.

We have two consumer franchises, one in the US and one in the UK, which for [around] a decade printed high-teens returns on capital until 2020. Then, the pandemic hit, […]. Those franchises are still there, and those levels of profitability will recover over a period of time. If we can stay engaged with the capital markets, continue to make improvements in our corporate bank, which is around the transaction banking that you mentioned, I think we are in a very good place over time to deliver that RoTE target of north of 10%.

Alvaro Serrano

One of the things that caught people's attention I think with the full-year results was your UK NIM guidance of 240bps. It does feel conservative, given the activity we've seen in the UK market and given the steepening of the curve. What makes you more cautious? And when do you think you'll see margins trough in the UK?

Jes Staley

I think it is fair to say, Alvaro, that when we made that statement, we did not have the yield curve that we currently have now, and that's a positive for our NIM as you mentioned. The mortgage market is far more robust now than it was when we made that NIM prediction and spreads are quite strong. So, those two factors I think would lead you to believe that NIM quite possibly [could] be stronger than the guidance we gave.

The only cautionary note I would give you is that it's going to take a while to translate consumer spending into a recovery in the balances we had in our credit card business. The highest NIM for the bank is that unsecured lending book that comes out of credit cards and that's just going to take a period of time to recover. [Balances are down] north of 20%. It will recover, but that will take a period of time and that does weigh down on the NIM. But you're right, when we gave the 240bps guidance, the yield curve wasn't where it is today, and the mortgage market hadn't demonstrated the robustness that we have witnessed.

Alvaro Serrano

Maybe we can touch on that sort of consumer that you pointed out. Last year, there was a big contraction in credit card balances. How are spending trends progressing and what are you seeing at the moment?

You've mentioned that it's going to take time before they recover but, if we think about the last global financial crisis, it took several years for balances to rebound. Do you think this time it's going to lag the recovery or is it going to bounce back much faster? Maybe you can give some thoughts about what we could expect in terms of what the recovery is going to look like.

Jes Staley

On the back of the economic crisis in 2008/2009, the recession lasted six years. It was six years before GDP got back to pre-crisis levels. I said a couple months ago that there's a chance we're going to have a mini-roaring '20s on the back of the end of this pandemic, because I think the consumer did react very differently in this crisis than they normally do in a recession. In a normal recession, the consumer and small businesses will probably borrow a little bit more and use a little bit of their cash in order to maintain a lifestyle or maintain an investment in their business.

This time, when the pandemic hit in February, March and April, the overwhelming emotion of the consumer and small business owner was fear. What we saw was a dramatic move by the consumer to pay down unsecured debt; if they needed to, borrow secured to make that happen, and raise cash. In many cases, they left it on deposit with Barclays.

The consumer protected its balance sheet. Then, you had this massive response in terms of fiscal policy and a massive response in terms of monetary policy, built up into the system. Once this pandemic is really behind us, I think you're going to have a very quick recovery in spending. I think you're already starting to see it in the spending numbers. So, I don't think this is going to go for six years. Maybe it goes for 18 months, maybe a little bit longer. Now, recovering those balances to pre-pandemic levels will simply take time but you're going to see it, I think, very quickly in the spend data.

Alvaro Serrano

Obviously provisions are turning out to be a lot lower than what we would have feared this time last year.

Your coverage in the UK cards portfolio is over 16% when compared to total stock. It's probably the