Barclays PLC

Welcome to the Barclays Full Year 2018 Results Analyst and Investor Conference Call. I'll now hand you over to Jez Daly, Group Chief Executive, and Tushar Mazaria, Group Finance Director.

Good morning, everyone, and thanks for joining this full year 2018 results call. First this morning, Tushar is going to walk you through the numbers for the fourth quarter and the full year. And then I'm going to provide you with my view of 2018, where we are on our strategic journey and how I see the shape of the group evolving over the next few years as we look to grow our businesses and enhance shareholder distribution and returns. As we began 2018, we had all but reached the end of the huge restructuring of the business, which we commissioned with our strategy in March of 2016. We had closed our non-core unit. We had significantly sold down our interest in Barthes Africa, with regulatory deconsolidation granted in July of last year. We largely completed our work on structural reform, which culminated in the stand-up of our Ring-Pence Bank in April. Now we have created our service company, which we call BX. We have implemented our contingency plan for Brexit, and we were able to resolve the most significant legacy conduct issues for the bank in 2018. Barclays today is consequently in its strongest state since the financial crisis. With our restructuring done and now largely unencumbered by issues which have been such a heavy drag on our performance, we can look forward to enhancing shareholder returns and distributions. This morning, I want to talk to you about our prospects for doing so. Let me hand it over first to Tushar to start us off.

Thanks, Jess. I'll begin with the full year results and then give some brief comments on the fourth quarter. with profit before tax up 20% and ROTE of 8.5%, made good progress towards our targets. These figures exclude litigation and conduct charges, and Jeff and I will exclude them in our commentaries as usual. With a 2019 target of over 9%, of course we still have work to do, in part as the 8.5% reflects a lower impairment charge than we would expect going forward, down 37% year on year. Despite this, we took a specific charge of $150 million in key the UK. However, delinquencies remain reassuring, and I'll come back to these shortly. We delivered positive jaws with stable income and a 2% cost reduction, excluding the guaranteed minimum pension charge of £140 million taken in Q4, and we generated EPS of £21.9. We're pleased with a capital outturn at 13.2% as CT1 is in line with our target of around 13%. This was flat on Q3, despite our decision to redeem the retail preference shares and call an 81 instrument in Q4, which together cost us over 30 basis points. Looking now at income in more detail. Income overall was resilient, stable year-on-year in challenging market conditions, reflecting our diversified business mix. Within this, the UK income was stable as we continued to grow secured lending but remained cautious on unsecured given current uncertainties. However, in CIB, market income was up 9% year-on-year as we consolidated share gains despite challenging conditions. Income was lower in corporate lending as we deployed capital away from low returning lending. Together with a negative net treasury result, formerly reported in head office, this resulted in overall CIB income being down 1%. CCP income was down 5% or 243 million due to a number of one-offs and this year's net treasury results. Excluding these items, income grew 2%. Costs were down 2% at $13.9 billion, in line with our guidance, excluding the GMP charge. This included costs for preparing for Brexit. The bank levy of $269 million benefited from the reduced rate and prior period adjustments, so is likely to increase in 2019. but this has given us the opportunity to accelerate some of our cost-efficiency investments, including optimization of our real estate footprint in BUK and BI. So we're on track for this year's guidance of $13.6 to $13.9 billion, and this range gives us flexibility to adapt to the income environment. I would like to spend a couple of minutes on how we're achieving efficiencies through BX, generating operating leverage. This is designed to allow us to distribute more to shareholders and to invest in our businesses. We're investing because we believe this is the right choice to make for the prosperity and returns of the bank and for our shareholders. Although the initial catalyst for the creation of our group-wide service company, BX, was UK ring-fencing regulation, we saw this as a strategic opportunity to change the way we do business and to address the siloed and product-centric way that Barclays has historically operated. Under the leadership of Paul Compton, BX is driving productivity savings across the group through four primary levers. technology productivity, operational and controls process optimization, smart procurement, and location and real estate. We're not only reducing the overall cost base of BX, which employs around two-thirds of the group's total headcount, but also improving the productivity of the group's spend. The businesses themselves have the capacity to spend more on productive areas, such as marketing, and within BX, the mix of the spend is steadily switching from run-the-bank to grow-the-bank spend. Jeff will describe in more detail some of the medium-term growth initiatives we are working on, which are designed to improve our return and the health of the group in the medium term. But I would emphasize that we remain very focused on overall cost trajectory, and we regularly review the phasing and level of such investment in light of the income environment and continue to prioritize our objectives of improving return on equity and cash returns to shareholders. Moving on to impairments. I mentioned that the charge for the year of 1.5 billion, down 37%, is likely to rise in 2019. In fact, we have already taken that specific charge of 150 million in Q4. This was because of economic uncertainty around the UK, and I would note the Bank of England recently downgraded their forecast. However, it isn't because of a concern of the observable credit metrics. In fact, underlying delinquencies remain reassuring, as we show on this slide, reflecting our prudent risk management. The gross right us for the year were 1.9 billion for those who like to track this metric. We continue to grow UK secured lending without compromising on risk profile, but we remain cautious on the expansion of unsecured credit, and you can see the result in the delinquencies for UK and US cars with the 30 and 90-day figures stable for both portfolios. There's additional IFRS 9 disclosures on sensitivities in the results announcements and in the annual report, which I hope you'll find reassuring. Moving on to the balance sheet and the strength of our capital and funding position. First, a quick word on TNAV. Q4 showed a two-pence increase, the third successive quarter of TNAV accretion after the Q1 headwinds. Accounting charges took 13 pence off TNAV, principally IFRS 9 on the 1st of January and litigation and conduct 13 pence, mainly RMBS and PPI, also in Q1. Excluding this, there was an underlying 12 pence increase as a 22 pence from profits was partly utilised with dividends and for the preference share redemption and AT1 call, whilst overall TNERV was down by net 14 pence. Q4 was also a positive quarter for capital. The 33 basis points cost of redemptions was offset by other movements, which kept the CET1 ratio at the Q3 level of 13.2%. We showed good RWA discipline, with group RWAs down 4 billion and CID down 5 billion and a quarter. Across the full year, we generated 140 basis points from profits, broadly offsetting the 71 basis points from litigation and conduct, our decision to redeem legacy instruments, and dividends and other movements. Having resolved important litigation and conduct issues through the year, we feel increasingly confident in our ability to generate capital and continue to be comfortable with a capital ratio of around 13%. Our current CT1 ratio of 13.2% gives us headroom of 150 basis points above the MDR hurdle, which is 11.7%, and we're also comfortable with a fully loaded ratio of 12.8%. Of course, passing stress tests is also important. In the latest Bank of England stress test, our drawdown was 440 basis points to a level of 8.9%, which gave us a comfortable pass above the 7.9% hurdle rate. We take comfort from the Bank of England's comments in the stress test results, and their approval for our decision to redeem those capital instruments in Q4. We have a strong leverage position. At the year-end, the UK leverage ratio was 5.1%, flat year-on-year, and comfortably above the 4% UK minimum requirement. We continue to view leverage as a backstop capital measure, with the risk-based measure being the binding constraint for the group. As you know, we're paying a dividend of 6.5 pence for 2018 and remain confident that going forward, our capital generation will fund both our investment plans and increase distributions to shareholders. We have a strong funding and liquidity position. A loan-to-deposit ratio of 83% is conservative. We have diversified funding sources, including 63% coming from deposits of various types in both BUK and BUK. so we aren't over-reliant on wholesale funding markets, either at a group level or in the businesses. We are well on track to meet our future MREL requirements, currently at 28.1%, compared to an expected 30% requirement. The current plan is to issue around 8 billion in 2019, compared to the 12 billion we issued in 2018. As most of you will be aware, we issue MREL out of our hold code, in line with the Bank of England's preferred structure, and MREL represents just 8% of our overall funding. The liquidity coverage ratio was 169% at year-end, with a liquidity pool of $227 billion, which represents over 20% of our balance sheet, positioning us conservatively in the light of Brexit uncertainties. Turning briefly to Q4, I would remind you of the guaranteed minimum pension charge of $140 million that I mentioned earlier, and the $150 million specific impairment charge. As usual, we are including an appendix slide summarizing these and other items of interest affecting Q4 and for the full year. Dedication and conduct is also excluded from these numbers as usual, over 60 million in the quarter. We generated positive jaws, with income up 1% overall, while costs were down 2%, excluding the GMP charge, despite the continued cost investments. Of course, we had the bank living in Q4, which was down year on year. Previously guided, impairment was up on the low levels we reported for Q2 and Q3, brought up to £70 million year-on-year. Looking at individual businesses now, and starting with Barclays UK. The UK reported an ROT of 10.1% to Q4, still in double digits, despite taking £100 million of the specific impairment charge, as well as the bank levy. Income was stable, and costs were also broadly flat, despite our continued investment, which included a charge for branch optimisation, as well as other aspects of the digital transformation of our business. We expect the 2019 investment spend to be weighted towards the first half of the year, so we would expect negative jewels in the first half and positive jewels in the second half. We continue to grow our mortgage book, focusing on prudent LTVs, and added another $600 million of net balances this quarter. Despite intense competition, these are at margins which still earn an adequate ROTE, but we did chase volume in Q4, and we maintain pricing discipline. Although the focus on secured lending naturally has a mixed effect on NIMH, Q4 NIM was down just two basis points on Q3 at 320, and full-year NIM was 323 within our guidance range. This mixed effect, as we continue to focus on growth in secures, results in some downward pressure in NIM in 2019, but I expect this to be modest. On the liability side, customer deposits continue to grow, up 1.5 billion in the quarter, again demonstrating the strength of the franchise. Impairment was 296 million, and without the 100 million specific charge, would have been at the run rate of around 200 million we've referenced previously. Overall, BUK continues to leverage its strong market positions while maintaining a suitably prudent risk appetite and continues to invest in the future to deliver sustainable and attractive returns, not just for 2019, but over the longer term. Turning now to Barclays International. The BI result reflects CIB's seasonality, as well as 50 million of the specific impairment charge. The year-on-year income was affected by the negative Q4 Treasury results. Costs were down marginally, reflecting in part the reduction in bank levy and despite continuing investment in businesses. Looking now in more detail at CIV and CCP. Total income for CIV was down 4% year-on-year to $2.2 billion, but market income was down just 2% in a challenging quarter, reflecting share gains over the last 12 months. FIC was down 3%. Banking overall was flat, within which banking fees were up 3%, and we closed the year with record advisory income premiums. As usual, we've also shown the dollar report a comparison. Corporate lending was down 10% as a result of the deployment of capital we previously flagged from low returning lending to high returning areas within the CIB, but was up on Q3 as the negative effects of hedges was lower. We've seen growth in corporate deposits over the years, an important source of funding for the CIB. Costs were down 5% despite continuing reinvestment of cost efficiencies in order to drive returns. Among the Q4 cost drivers, I would call out real estate restructuring costs in New York and costs for preparing for Brexit. I would note that we've already moved three of our seven European branches into our Irish bank subsidiary. The ROTE for Q4 reflected seasonality, including the bank levy. The ROTE for the year was 7.1%. and I'm happy with the progress we're making in cost efficiency and our investment to improve returns. We're also improving capital efficiency with RWAs down over $5 billion year-on-year. Moving on to CCP. Although headline income in CCP was flat, this year's Q4 reflected a negative treasury result of around $60 million, which in previous years would have been in head office. Including this, CCP income was up 6%. U.S. card net receivables grew 4% underlying in dollars as we continue to expand, with an emphasis on our prime portfolios given the state of the economic cycle. Among U.S. card portfolios, American Airlines and JetBlue continue to achieve double-digit balance growth. In comparing receivables, we have taken into account the Q2 exit from a U.S. partnership, which reduced the book by $1.5 billion. And I would remind you that around 70% of the partnership book is now covered by agreements that last through to 2022. Costs increased 11%, reflecting continued investment across CCP and growth initiatives. In U.S. cards, we're investing in marketing and product development. In our payments business, the new merchant and acquiring platform is an important development for the future as we expand our payments offering. And we've also moved our European cards operations into our Irish subsidiaries in preparation for Brexit. Impairment increased to $319 million after two quarters of unusually low charges. I would remind you that Q4 tends to reflect seasonal increases in balances through Thanksgiving and Christmas, and a seasonal reduction in balances is likely to result in lower quarterly charges in H1, absent macroeconomic changes. Going now to head office. Head office again reflects some idiosyncratic items in Q4, as well as the more predictable ones that we've previously guided on. The £140 million pensions charge is included in head office. Excluding this, the loss before tax was down by over 200 million year-on-year, as income improved significantly to 11 million negative. Ongoing hedge amortization, which I've highlighted before, has continued to track to around 200 million for the full year. However, the quarterly effect of this was more than offset by hedge ineffectiveness gains in Key 4. This periodic hedge ineffectiveness is hard to predict and can be positive or negative in any particular quarter, but on balance I would expect a negative contribution from hedge effects through 2019. Other predictable elements are the legacy funding costs, which continue to run at 90 million a quarter, but which would reduce by over two-thirds were we to call the 3 billion 14% RCIs in June, with some offset from outside dividends. Below the TBT line, the preference share redemption will reduce the non-controlling interest charge from Q1. So to recap, remain on track in the execution of our strategy. reported an ROTE of 8.5%, excluding litigation and conduct, and continue to target 2019 and 2020 ROTE of greater than 9% and 10% respectively, based on a CT1 ratio of around 13%. We reported three consecutive quarters of TNAV accretion, with a CT1 of 13.2%. We are at our end-state target of around 13%. Approval of our redemption of the legacy instruments and the results of the Bank of England stress test and reinforce our confidence and our capacity to deliver attractive cash returns to shareholders over time. Thank you.