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.

Now I'll hand back to Jess. Thanks, Dushar. 2019 represented a very significant period for Barclays. In the course of the year, having resolved major legacy issues, we started to see the earnings potential of the bank as the strategy we have implemented began to deliver. This was evident in the improved performance across the group compared to 2017. Profits before tax were up 20%, driven by ongoing strategic initiatives in our businesses, cost control, and prudent risk management contributing to lower impairment. Our CET1 ratio of 13.2% is at our target of around 13%, and we've grown tangible book value for three quarters now in a row. Our group return on tangible equity of 8.5% for the full year is close to our 2019 target of 9%. And our earnings per share were 21.9 pence. And that compares to 16 pence in 2017 and 13 pence for 2016. What these key performance measures demonstrate is that our strategy is working. And we have a strong foundation on which to achieve our return targets for this year and next. The fundamental strength of this group rests on a diversified, though connected, portfolio of businesses underpinned by a world-class service company. And Barclays today is diversified by product, by geography, by funding, by currency, and by customer and client segments. We have a great position in UK retail and business banking. servicing 23 million customers and a million small businesses in a market where we have roots that go back 328 years. We have an enviable position in cards and payments in the U.K. and in fast-growing international cards in the U.S. and Europe. And we are a strong and profitable global player in corporate and investment banking, anchored in the world's deepest and most sophisticated capital markets of London and New York. Our diversified model is designed to be well balanced and to produce consistent and attractive returns through the economic cycle. But in my view, it's also the most robust model for a modern bank, not least because of the often counter-cyclicality of consumer and wholesale businesses. So a decade after the financial crisis, I'm consequently very confident that Barclays today is well prepared to weather any major shock, as the recent stress test indeed showed. While we're in a much better shape as a group, there is, of course, more to do to further improve performance, including continuing to drive stronger returns in our corporate investment bank, which I'm confident we can do. Our corporate investment bank produced a return of just over 7% in 2018. That is an improvement over 2017, but still not where we need it to be. Competing in the top tier of global investment banking enabled by our size, and commitment across asset classes is important for Barclays' future returns, and we demonstrably do compete in that top tier. It is important to recognize that our markets business in 2018 gained share throughout the entire year. In dollar terms, we saw 2018 market revenues grow by 12%, compared to 5% on average for the top five U.S. investment banks, and a negative 5% for our European peers. In our banking business, we were pleased to finish 2018 ranked in the top five across our combined US and UK home market. And it was also our fourth consecutive year of earning record global advisory fees. It's also a cause for encouragement that the capital market, as a source of funding and investment, continued to grow, carrying on the shift in recent years away from the reliance on bank balance sheets. In the past decade, bank lending to corporates has declined by 14% relative to GDP. At the same time, there has been a surge in capital markets issuance, with global debt capital markets up 75% in the past decade. And we are, of course, a top four player in debt capital markets. Since the financial crisis, growth in the bond market in Europe has replaced 90% of the decline in bank lending. These trends will continue. And as the only non-U.S. investment bank operating at scale in both London and New York, we are well-placed to participate in this critical source of institutional funding. We are focused on key areas within the CIB where returns do not meet our expectations. For example, we are working on driving better profitability from our loan book within the corporate bank, especially those loans priced in a period when this business pursued revenues over returns. This is one of the biggest drags on our overall CIB performance. We will add incremental transaction banking services to client relationships which are less capital-intensive and create resilient annuity-like income streams. We will reduce exposure to clients where we are not clearly able to improve the returns profiles. And we will also invest in areas of strength within our corporate banking franchise to drive revenue growth and enhance profitability. And I'll say more on that shortly. The turnaround we've been working on will take time to accomplish, but it is a priority that we get our CIV returns to cover the cost of capital. We should also see more of the benefits of the 2,000 investments we made in people, balance sheet, and technology come through in 2019, and the effect of our investment in electronic products and markets is already apparent. We increased our share in electronic trading of foreign exchange and rates, including in gilts and sterling swaps. And in the fourth quarter of 2018, we had our best ever quarter in electronically traded equities. Now, it's worth reiterating a point I've made since 2016, which is that I believe we are broadly right-sized in our corporate investment bank. As you can see on the slide, we utilize just 20% of our group risk-weighted assets in the market's business. That is sufficient to compete. and we have enough capital today to win market share from our global peers as 2018 demonstrated. Our first priority, of course, is to attain our 2019 and 2020 return targets. But beyond those targets, we're also focusing increasingly on the bank's medium-term revenue growth. And that's revenue growth which relies on technology rather than capital. We are today in a position to invest in targeted growth across the group, and primarily in technologies that will drive our consumer and payments businesses. Such an investment program was simply not a viable option during the many years of restructuring this company. The capacity to do so now, while still sticking to our cost guidance of 13.6 to 13.9 billion pounds for 2019, has been made possible because of efficiencies driven by BX. The investment spend we are planning may be flexed to a degree if needed to support profitability and to deliver on our ROT targets. We are applying a strategic lens in considering where to place these investments. So let me give you some examples. First, in Barclays UK, where today we have 11 million digitally active customers across online and mobile banking, the quality of engagement with customers on digital platforms such as these is truly impressive. On average, a Barclays customer visits a branch once every six weeks. Contrast that with the data for our award-winning Barclays mobile banking app. On BNB, customers typically go under the app every single day. We are investing in expanding the product and service offering available to customers through this channel. In 2018, over 60% of our everyday saver accounts were open digitally. Soon, customers will be able to open a current account entirely within our mobile banking app, and we will continue to expand the range of products and tools within the app. We are continuing to build out our mobile experience to be a one-stop shop for customers' money management needs. On the back of successful and evolving partnerships, such as Market Invoice, we recently also announced an investment in Bink, a payment-linked loyalty platform. Bank's technology ensures that customers don't miss out on merchant loyalty schemes through connecting those schemes directly to our payments card. Working with Bank, we intend to deliver a groundbreaking service and experience to the 7.4 million customers on the Barclays mobile app. Barclays can in turn derive commercial value in part from driving increased engagement with the merchant loyalty schemes. Second, We're also building a full-service digital proposition for our corporate clients, anchored initially in transaction banking services. We call this iPortal. We have so far deployed it with 15,000 of our existing corporate client base. We want to apply the best of our thinking in consumer mobile banking to deliver an outstanding and easy-to-use digital corporate bank offering. This will positively impact client onboarding, digital accounting and statements, payments and cash management facilities, and client engagement overall. Third, we are investing in our corporate and retail payments technology to extend our capabilities beyond our home base of the UK and into mainland Europe. We are implementing a state-of-the-art single corporate payments platform across 10 European Union countries. In a fragmented European corporate payment landscape, we have a strong opportunity to capture regional business for our UK and international client base. In the 2018 alone, we onboarded 176 new multinational clients in Europe as we rolled out this new platform. Clients including Ferrovial, National Oilwell Barco, Marsh McLennan, and Hammerson. Merchant acquiring, we are also investing to expand our reach in Europe to process in-store payments in France, Germany, Italy, Spain, and Portugal. We handled 268 billion pounds of payments for UK clients last year. That was up 8% on 2017. And on the 21st of December, we actually hit an all-time record when we processed an average of just under 1,200 payments per second as shoppers stocked up on food and presents for Christmas. So for our existing UK customer base, The extension of our geographic footprint and merchant payments means that they will have a seamless experience across more markets with common reporting for multiple countries and cash settlements in their preferred currency and to their preferred account. So these are just three examples of the strategic programs we're investing behind to drive medium-term revenue growth, programs which rely on technology to realize the opportunity, not on additional capital. In my view, making such investments has to be our priority to ensure that this bank remains a leader in the fast-evolving financial services sector. For the first time in years, we are in a position to pursue significant opportunities to grow our business and all within the cost guidance we've given you. Of course, despite all the progress we've made as a group, one area where our performance has unfortunately not been reflected thus far is in our share price. which remains disappointingly low. In common with all European banks, we have been hit hard in this regard by macroeconomic issues which have weighed heavily on investor sentiment. Notwithstanding that, I have repeatedly said that a management team cannot rest while the share price trades below book value, and it is a priority for us to deliver a recovery. Improved returns to shareholders will certainly help in that endeavor. In 2018, we restored the dividend to 6.5 pence, and we redeemed expensive preferred shares dating from the financial crisis. Collectively, that meant that we deployed around 1.8 billion pounds of excess capital, more than double what we did in 2017. That's progress, but it's not yet sufficient. Going forward, the principal call on futures earnings should now be returns to shareholders. we will certainly want to reinvest some of the excess capital that we generate in strengthening and growing our business, as I've said. But it's equally important to us that we use the strong capital generation of the bank to reward our shareholders who have been patient as we went through a restructuring phase. And so it is also our intention to use excess capital to progressively increase the ordinary dividend and to supplement those dividends with additional returns, including share buybacks, as soon as it is practical to do so and when the macroenvironment is a little more settled. So in summary then, and before we move to questions, Barclays is in increasingly good shape today, with a strong diversified model, and we are making progress. The bank is through restructuring. We are well capitalized. The most difficult of our legacy issues are behind us. Performance is improving across our lines of business. We are investing for growth in areas of proven strength for Barclays. The prospects of generating exit capital are good. and it is our intention to return a greater portion of that excess capital to shareholders. Thank you.

If you wish to ask a question, please press star followed by 1 on your telephone keypad. If you change your mind and wish to remove the question, please press star followed by 2. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, press star followed by 1 to ask your question. The first telephone question today comes from Rohith Chandra Rajan from Bank of America, Merrill Lynch. Rohith, please go ahead.

Hi, good morning. Just on a couple of areas, please. So the first one on capital return, you know, the 13.2% CT1 ratio was certainly a little bit better than we were expecting. Seems to put you in a good position in your you're being very clear about your intention to return more capital to shareholders from here. Can I ask a little bit about the policy in terms of, so progressive dividend, it looked like you paid out around 30% of earnings ex litigation and conduct. How should we think about that going forward? So what does a progressive dividend mean? And then on the share buyback, what sort of level are you willing to pay down to? So you target around a 13% CT1 ratio. be willing to pay down to that, and you mentioned in terms of timing, as soon as practical, subject to the broader environment. I mean, is this an annual decision, or will you be a little bit, are you able to be a little bit more nimble around that? So that was the first one, please.

Yeah, first, vis-a-vis the capital return policy, The idea from here vis-a-vis the dividend is to have a progressive dividend policy such that we would keep reasonably in line with our earnings outlook. So that's what I would expect. And your quoted percentage of earnings, give or take, would be consistent with that progressive look. In terms of the share buyback timing, we're obviously, you know, hopefully weeks away from clarity around Brexit and the impact that that's going to have on the economy. You saw the $150 million additional payment reserve we took in the fourth quarter. We're just being, I think, properly prudent, given that we're in the beginning of the year and there's so much uncertainty around the U.K. economy. But if you looked at the 140 basis points of capital generated last year, and look at what we're paying out in dividends. Obviously, if you repeated last year, the capacity to buy back stock is there, and clearly at this stock price level, that's what we want to be doing. I won't really comment on what the long-term policy around buybacks are, although to say that I think most of the major banks around the world that are in excess capital positions are using buybacks quite aggressively to do that. That being said, we also recognize, particularly with U.K. investors, how important dividends are. But first and foremost, our obligation is to keep a secure level of capital. Our in-state goal is at 13 percent. You know, might we at some point for some reason go slightly below? Possibly, but we want to stay at that in-state capital level, make sure that we do well with our stress test with the Bank of England. So first and foremost, it's to keep a strong balance sheet and to be prudent with our capital. But we know after so many years of restructuring, we need to return more of that capital to our shareholders.

Thank you. And is it an annual decision or is it something that you might revisit sooner? Right, it's Tushar here.

It's something that we don't have to just do once a year. We don't really have a set policy on that. For example, you saw that we redeemed some capital instruments, you know, in the fourth quarter of last year. So I'm not sure I'd sort of guide you to being an annual or not an annual decision. I think we'll do it as and when we feel it's prudent to do so.

One thing I would say, you know, one of the binding constraints of every bank is your annual stress test. So I think you do need to do it within the context of your stress testing.

Okay. Thank you very much for that. And then the second area was – You're all right. Go on, Enrique. Thank you. The second area is just on the IB revenues, and FIC in particular was certainly very strong, I think, relative to a weak quarter for the industry as a whole. You sort of called out a good performance in the macro side of the business and largely offsetting the weakness in credit. I mean, how should we think about that going forward? Is the business being repositioned to a certain degree and starting to see some of the benefits of the actions that you've been been taking, coming through, or is it just, or is it something particular to this quarter?

I think, you know, we've gained market share now five quarters in a row. You know, we invested in our people. We've invested a lot in technology, and I think we are well over halfway in terms of upgrading across the markets business or our electronic trading platforms. We did increase during the course of 2018 marginally the balance sheet allocated to the IV, not RWA, I should add. But what I also think is important is we have since March of 16 stated that we are committed to being a both bracket investment bank anchored in New York and London. And I think what you're seeing in the market share is is investors, you know, people that you work for, whether it's, you know, the Fidelities or the Black Rocks or the Brevin Howards or whatnot, they are voting in terms of where they are directing their flow business. And that flow business is coming to us, and we're generating the market share gains as evidence of that. We've got a ways to go. We have to, you know, significantly still improve the profitability of our corporate and investment bank. So I talked about particularly the challenge around the lending portfolio. But we do like the gains that we've made in the markets business.

Okay. Thank you.

Thanks, Roy. Could I just – we've got a lot of people on the call. Could I just ask those that are asking questions just to keep it to two so we get a chance to get around to everybody? And operator, could we take the next questioner, please?

The next questioner on the line comes from Joseph Dickerson of Jefferies. Joseph, please ask your question.

Hi. Good morning. Just briefly, I know you don't comment on intra-quarter in the IB, but could you just discuss maybe the backdrop, notably in the U.S., with the government shutdown and what's happening at the industry level and how you're thinking about that and how you're responding to that? And then secondly, Tushar, I noticed on page 48 of the release, there's about $7.8 billion of RWA reduction related to methodology and policy. And it looks like on my numbers that about 6.3 of that came in Q4. And it says this relates to an extended regulatory permission to use model exposure measurement approaches. This is something that's That's a permanent feature, or will these RWAs bleed back into the future? I'm just trying to think about how we model it, because it looks like it was about 30 pips of capital in the quarter. Thanks.

Yeah, thanks, Joe. In terms of the government shutdown, I won't comment on, you know, trading or revenue performance, but suffice to say, you know, others have commented that the shutdown obviously means that very hard to get deals registered in the U.S. that require SEC filings or SEC registration. And I think others have quoted that, although that obviously has an impact on deal activity while the government was shut down, you know, others have commented that pipelines remain reasonably robust and asset markets still feel reasonably at good levels. So, you know, I've got nothing further to add than that on that. In terms of your second question, Joe, on the risk-weighted assets. Yeah, that was approval to extend the use of our model to other parts of our portfolio, and it's a permanent approval, so it's not something that will bleed back over time.

It won't bleed back over time?

No, no, it won't.

Okay, that's good. That's helpful. Thanks.

Thanks, Joe. Could we have the next question, please, operator?

The next questioner comes from Raoul Sinner of J.P. Morgan. Raoul, please go ahead.

Hi, good morning. Can I have just two, please? One, maybe just following up on capital. If we go back to slide 10 and look at the underlying capital generation of the business, I think you're quite different from most universal banks in Europe in that you generate a lot of capital on an underlying basis. So I was wondering if I could draw you a little bit on how you think 2019 might look like in terms of net capital generation. And the reason I ask that is because consensus seems to have a buyback expectation of only 15 basis points of CT1. And based on your current position, it looks like you could do a multiple of that. So just wondering, am I missing something? Is there any big one-off negatives that might cause the capital generation to slow down into 19?

Do you want to ask both questions, Rahul, and we'll take the intro? Sure, yeah.

And the second one is just on the ROT uplift from 18 into 19. Obviously, 18 was not quite a normal year, but hopefully 19 will look a little bit more predictable. And you have that RCI step up in the middle of the year, hopefully, built into the ROT outlook. So I was wondering if you can comment a little bit upon what are the other areas you think you could get a step up from in terms of returns, and in particular on costs, you know, what might cause you to hit the lower end of your targeted range on costs. Thanks.

Okay. Why don't I have a go at both of them. Rahul and Jess may want to add stuff as I go along. In terms of capital generation for this year, Thanks for your comment about characterizing us as generating good levels of organic capital. We would, of course, agree with you there. In terms of away from published EPS, I know some analysts have written about free capital flow type analysis. Are there items that are not in EPS that are a drain on capital? You know, the one that does get called out is pensions contributions. We have that. We've published that. That will be at the same level this year as it was for last year. Other items that, you know, you guys are aware of, we obviously transitioning in IFRS 9, so there will be a small pickup of that transitional adjustment. There isn't anything else significant that I would individually call out as a technical matter. Of course, it's somewhat predicated on what the earnings outlook is. You know that we're sort of very focused on generating a 9% return and we'll flex what we can to do that, and I'll come on to that in a second. I think the other thing, of course, is just, you know, we want to run the bank appropriately and prudently, so, you know, we need to take everything in the round. And I think as we sit here and now with all of the, you know, the geopolitical uncertainties, probably now is not the time to be... spending that level of capital. But, you know, we look forward to, you know, it's a priority for the board and it's a priority for this management team to return cash back to shareholders. And I think we're getting closer and closer to the point in time that we, you know, we can talk very openly about that.

In terms of the 8.5 to 9, obviously, you know, this time last year we were talking how do we get from 5.6 to 9. It's a lot nicer talking about how do we get from 8.5 to 9 this year. First, on the revenue side, whether it's U.S. card, whether it's what we see in merchant acquiring on the payment space, whether it's the monetizing, some of the work that's coming through the Barclays mobile banking app, there's growth there. We did increase our secured mortgage portfolio in the U.K. during the course of the year, and we'll continue and believe that we continue to see that happening in 2019. Improvements in the revenue line in the corporate bank, particularly as we improve our offering around the transactional side of that business to leverage the loan extensions that we have there. And then as the markets normalize, our market share gains in the IB should translate into better revenue numbers there. But on the cost side, we've done a huge amount of work in BX over the last couple of years. A lot of it was spending money to reorganize the bank, whether it was setting up the ring fence bank, whether it was setting up the IAC, whether it was getting ready for Brexit. It has cost us a fair amount of money, which we are now ready for a hard Brexit. What we're doing, you know, we closed 2018 at 13.9 billion pounds of expense. We've directed the market 13.6 to 13.9. We have flexibility because all the money that was spent restructuring the bank is now being spent to invest in technology to grow our non-capital intensive revenues. But Tushar and I take very seriously the target of 9%. And if we manage this bank properly, we have now a volume control on cost. That said, if there's a challenge to profitability, we're going to move that volume control with prudence in order to try to hit our profitability target.

Thanks, Ash. Can I just quickly follow up on a technical point, though? In the revenue line, obviously, there's about $300 million of negatives in the head office in 2018, and it seems to me that the Treasury drags are now sitting in the divisions. So, Usha, I was wondering if you could give us some sort of commentary on the revenue drag from the head office for 19.

Yeah, sure. I'll forgive you for three questions there, Rahul. So, yeah, on the head office, the things I'd guide you towards are the legacy funding costs, which you'll see continue to go through. They'll obviously drop out as and when we call in. those legacy funding instruments. The other one I'd call out to you is the negative hedge amortization. There's actually two effects there. You've got the rolling down of the negative hedge amortization from divestitures out of old non-core and you also have the quarterly test that we have for hedge ineffectiveness which again you guys will be familiar with. I'd say the hedge amortization is a negative and we gave guidance last year, no real change to that. The folks in IARC in just a refer you back to the written guidance we gave on that. On the hedge ineffectiveness, that one will trend around zero, but it will be positive or negative in any one quarter. You know, we've had it positive a couple of times, so I'd probably guide towards just the law of averages. It will be negative, but, you know, on a trend basis, if you want to sort of model a full year or two years, I'd model that as around zero. And, you know, that should be it. I mean, there's always occasionally things that, you know, you can't anticipate, like GMP and stuff like that. But, you know, X from that, I wouldn't call anything else out.

Thanks very much, guys.

Thanks, Rahul. Can we have the next question, please, operator?

The next question on the line comes from Jonathan Pierce of Numis. Jonathan, please ask your question.

Hey, Jonathan. Morning. Sorry, I've got two questions on impairment, but can I just get a very quick one in relating to that last question? And so these various negative net treasury numbers dotted around the divisions, how should we think about those moving forward? Should we reset those to zero or would they be a negative?

Yeah, I think, again, on a trend basis, I don't think of these as permanent drags. They're really a combination, really, of funds transfer pricing, sort of timing difference, as well as the net result from our treasury pool and the timing of how we allocate that back to But as a modeling matter, it will bob around, but on a trend basis, I would model them as zero.

Okay. So on impairment, the first question is a slightly more detailed question around the numbers. I mean, obviously IFRS 9 is confusing all of this. If I ignore the Brexit overlay for a moment, the group charge last year, about $1.3 billion, was appreciably below what I think I can see in the Stage 3 book, which was over $2 billion. with the delta largely relating to the releases on Stage 1 and 2, which he called out last year, but also other bits and bobs, FX movements, releases on undrawn commitments, those sorts of things. Would you steer us towards that Stage 3 number as the sort of right kind of starting point for thinking about impairment this year? Maybe you could frame this in the context of consensus impairment charges for 2019, which are currently at 2.5%. £2 billion. So that would be the first question. And I guess related to that, if there were to be sort of noise that hurts the impairment charge this year on stage one and two, would you strip that out when thinking about your ROT target? The second question is more broadly on the credit environment. Can you give us an update on how you're thinking with regard to UK versus US, particularly in the credit card portfolios, ambition for growth there, whether that has changed. And if you're seeing any deterioration, albeit very early stage, we've only got January data out of Grace Church so far, that looks like delinquency formation has picked up quite markedly in the month in the UK. So a few thoughts around UK-US credit quality would be good. Thanks.

Yeah, I'll take the first one, Jonathan. I'll ask Jeff to talk about, you know, how we see current conditions, consumer credit in both the UK and the US. Look, I won't make a direct comment on consensus. You know, it's a year with, you know, we have quite a bit of political uncertainty, so I think it's, you know, we're only six weeks in. It's difficult to have a guide on consensus. But to help you guys out how I think about it, one number that I sort of focus on quite a lot is... is gross write-offs or gross charge-offs. And that's a sort of a reasonable proxy for the cash losses that are running through the book. It's not exactly that, but it's a reasonable proxy. We've called that out at a billion nine. So when you think about the billion nine of charge-offs in 2018, and if you like our accounting charge of a billion five, the bridge to there is against that. We have some recoveries, of course, in our corporate loan book. You know, I wouldn't expect that to be so recurring. Obviously, those are issues in yesteryear that we've recovered against. And then you'll also be aware that we've had some improvements to macroeconomic forecasts under IFRS 9 netted against the additional overlay we took of 150 million pounds. So, you know, none of us have a call on where the economy will go this year. but I think that gross charge-off number, given where we've seen credit conditions, and Jess will talk about that in a second, I think is sort of a reasonable jumping-off point.

So I'd say, Jonathan, first the U.K. Ever since the referendum vote, I'm sure you've noticed that we have held our U.K. receivable portfolio flat. That's been a conscious decision by management to tighten our underwriting standards even though consumer spending actually has increased. So relative to consumer spending, I think we have been properly prudent given the uncertainty of Brexit to maintain at a certain level our exposure there. In practice, we are not seeing any deterioration in that unsecured consumer book. at all. So I think we are being prudent given the whole Brexit uncertainty. But as of now, actually deposit levels both in the consumer and small business area are higher now than one might expect. So I think people actually probably have more cash or they're holding onto it and credit both in small business and consumer has not shown. the weakness that one might expect given the uncertainty. But we wanted to be prudent because we're not on the other side of Brexit yet. Vis-a-vis the U.S. card side, in the U.S. you've got record unemployment. During the course of 17 and 18, we did raise the average FICO score of our U.S. portfolio. In part, that was because of the success we've had around the airline programs, notably JetBlue and American Airlines, where some of the highest quality credit in the U.S. consumer space. That being said, we do have a new management team that we've brought in over the course of the last year and change in the U.S. card business, Shane Holdaway from Capital One. And, you know, we always want to get better at upgrading the analytics around the consumer credit market in the U.S. because I don't think a good risk-adjusted return is necessarily a function of having high FICO scores. And so as we expand our co-brand card and our branded card, we believe we can drop our average FICO scores and still keep a very strong risk return profile. So that's how I'd answer those two questions.

Thanks, Jonathan. Thank you. Can we have the next question, please, operator?

The next question comes from Robin Down of HSBC. Robin, please ask your question.

Hi, yeah, I've got a couple of questions. Can I come back to the buyback issue? I think you've said, you know, one of the issues that's preventing you from doing it is this macro picture. I mean, can we narrow that down? I mean, specifically talking about Brexit here, that we need to get sort of some form of Brexit resolution before you can start the buyback. And then just a second question on the RWA moves. Obviously, we saw that reduction, as Joe has pointed out, in Q4 for a model change. Is there anything that you would call out in terms of RWA steps up or down for 2019? I can't see any reference, for instance, to RFRS 16 within this, or whether or not you see any other sort of model extensions that you plan to take through.

Yeah, thanks, Robin. Why don't I take the second one now, and then I'll ask Jeff to talk about So trigger points for a buyback. Now, there's nothing – I wouldn't – AFRA 16 isn't material, so I wouldn't be concerned about that. It really will be – so there's no, I would say, technical factors that will change RWAs going into 2019. I mean, the kind of things that I guess it will be a function of will be business growth. You know, we want to really grow the consumer side of the business. Those aren't particularly capital-hungry. You know, mortgage book is reasonably RWA-like, and even our cards business in the U.S., which we have been growing, although has a slightly RWA density, of course, you know, these businesses grow at a slower pace. I don't expect the CIV to be changing much. I mean, RWAs year on year were down slightly, and, you know, we don't expect that to be consuming much more. The only other thing I'll just point out in the sort of, you know, time to be prudent and just, you know, run these things with... with everything in the round. You know, if we do see any downturns in the economy, and we're certainly not seeing it yet, but, you know, our WAs can be pro-cyclical, and it's just something to be mindful of. We haven't seen that yet, and we've actually seen a pretty healthy economy at the moment, but it's just something to be mindful of as well. Jess, do you want to talk about buyback triggers?

Yeah, Robert, on the macro side, or on the buyback side, you know, we have been, since March of 2016, trying to be very consistent in delivering on the commitments that we put in front of our shareholders and our investors. And also recognize that in 2017, we distributed about a half a billion pounds of capital to our shareholders. Then early on in 2018, we announced that we would more than double our dividend Then in the fourth quarter of 18, we announced basically using 700 million pounds of capital to retire. The dollar prefers early. We're in the early part of 2000, and so that allowed us to triple the capital return from 18 to 17. We're in the early part of 2019. We have daily uncertainty around Brexit, and hopefully we are coming close to the end of that uncertainty. We recognize the importance of returning capital to shareholders, but we want to do it in a measured way and not get over economic events. I do think you also have macro issues going on in Europe, but let's see during the course of 2019 the appropriate time to return capital to shareholders or to make an announcement of returning more capital to shareholders.

Thanks.

Thanks, Robbie.

Can we have the next question, please, operator?

The next question on the line comes from Chris Kant of Autonomous. Chris, please go ahead.

Good morning. Thank you for the call. It's Chris from Autonomous.

I had a question... Hey, Chris, do you mind just speaking up a little bit? You're a little bit hard to hear.

Sorry, is that better?

Yeah, that's much better.

Thanks. I just wanted to come back to the other capital ratios we haven't discussed yet on the leverage side of the equation. Looking at your... UK spot leverage exposure, it was down 6% or 64 billion in the fourth quarter. But your average UK leverage exposure was down by less than 1%. And that seems to imply a lot of exposure was taken down pretty close to the balance sheet date. And I note that your spot exposure only fell 1% in 4Q17 on 3Q17. So it's quite a big move. It's bigger than the 50 billion leverage balance sheet deployment you talked about in the CIB as part of your strategy update last year. And that prompts two questions, please. First, what drove the drop around the balance sheet date? Will that reverse into 1Q19? And is this in any way a reversal of thrust on the CIV leverage deployment, please? And then secondly, the stress test does operate on the spot ratio. And that's obviously, you know, what's happened here has obviously meaningfully helped your starting ratio for next year's stress test. because of the drop in the exposure. Are you at all concerned that the regulator will look at the now pretty large 60 basis points difference between your spot and average leverage ratios and seek to adjust for that in some way in the stress test? Thank you. Yeah.

Thanks, Chris. Why don't I take them? You know, most people have called out that, you know, the back end of December was a particularly, I guess, quiet month and tricky month from... client flows. So I'd say the drop-off in leverage was somewhat driven by that, perhaps bigger than usual seasonal decline, where we usually see, because of the Christmas and New Year holiday period, activity levels tend to be a bit low as the quarter closes in the fourth quarter. I'd say it's probably even slower than usual, and you've heard many people call out how difficult a month of December was for client business. So I would just say that there's a usual seasonal decline. You see it in most fourth quarters. probably a little bit more than you would usually see. In terms of deployment of leverage to the investment bank, we try and run the place as efficiently as we can. So, you know, we want to design the bank such that we live to a risk-weighted asset constraint and use leverage as a backstop measure. And, you know, so we'll therefore try and soak up leverage where we can because if we're running to that sort of frontstop constraint that's not capital, we can... get back to shareholders' hands in any way. So we try and put it to productive use. I think on your second point, you know, average leverage is actually what we manage to. You know, when we're sort of going through our numbers on a daily and weekly basis, the number we manage to is actually our average leverage exposure. The spot number becomes less and less, I guess, as a sort of a management ratio to think towards. It is helpful for stress testing, I guess, for the Bank of England customers annual cyclical stress test, but it's not something that we sort of, you know, first and foremost, we are managing to the average, and of course, you know, we have to be above, materially above the average on a minimum basis every single day, and that's what we're really focused on.

So if I could just follow up. On the seasonality point, I appreciate December might have been slow, but that was why I referenced what happened in 4Q17. It was a 1% decline in 4Q17. It's a six-fold increase on that this year. And I appreciate what you just said on the average leverage ratio being more in focus, but in terms of whether or not this is a binding constraint, I appreciate that you don't believe it will be in the future, but the spot ratio is what matters for the stress test, and it does look to me like this very large gap I mean, it is something that the regulator might look at and just say, you know, your average ratio, we need to factor this in in some way when thinking about whether you're passing a stress test. You only just passed really on leverage, I think, last year, starting with a 5-1 from memory spot ratio position. But your 4-5 average, it looks quite low now. I mean, your CRR leverage ratio, and again, I appreciate this isn't the binding constraint, but as a point of comparison, You're now only 20 bits ahead of one of your large European peers on CRR leverage ratio at 4.3%. The leverage ratios do look quite tight to me. Where does the confidence come from that the regulators won't actually consider this a binding constraint to you at some point in the future?

Yeah, I just go back to what I've said before, Chris. I don't really have much more to say apart from we run the place as efficient as we can, soaking up leverage where it's sensible to do so and to run the place to a risk-weighted assets constraint. As you say, for annual cyclical stress testing, it is the spot leverage ratio that counts, not the average. So that won't affect our stress test results. But on any measure, When we look at leverage, we feel very comfortable with our position. The other thing I'll just point on the stress test itself. Last year, of course, we still had a very significant conduct component in our stress test, which, of course, is now settled as well. So that will help on both measures, both the risk-weighted and the leverage. But, you know, it's something that, you know, we feel very comfortable with and continue to run the place as efficiently as we can.

Okay. Thanks.

Thanks, Chris. Can we have the next question, please, operator?

The next question on the line comes from Edward Firth from KBW. Edward, please go ahead.

Good morning, everybody. Just two quick questions. The first one was, can I ask you about funding costs? And in particular, I noticed that if we look at some of your credit ratings, particularly on the holding company, they are quite tight. And I wonder to what extent is that a consideration in terms of your buyback plans and the correlation potentially between what is quite a big MREL issuance that you've got and how that might be impacted if the credit ratings and credit agencies were to take a more, I guess, a more cautious view on the outlook. So that was my first question. And then the second question was about your return target. I mean, if I get that right from your slide, you're currently making $8.50 and you're targeting this year greater than $9,000, To be honest, it's pretty close. I mean, I hear all the good things that are going on, but you've got 60% of your capital in a business that's making, what, 7%. So if you're only targeting your best, well, I suppose it's somewhere around a 50 basis point improvement, it doesn't sound like we're looking at a big transformation in profitability across the group this year. Or are there some headwinds that I'm missing somewhere?

I'll ask Jeff to talk about the... the improvement in profitability and the ROT target. And I'll just cover the funding costs. You know, we have plans to issue about $8 billion of MREL this year. Funding costs are a little bit higher as I sit here today. I mean, it will sort of ebb and flow over the course of the year. But if I go back to maybe some of the tighter spreads that we experienced, you know, several months back, I'd say, you know, if we were to issue at today's spot level compared to several months back... and the difference between the debt that would roll off and the new debt that we'd put on. I'd characterize the additional funding cost for that in the very low sort of tens of millions of pounds. So, you know, as a planning matter, that sort of does really nothing in terms of... That's for the whole 8 billion, is it?

I'm sorry? The low tens of millions would be for the whole 8 billion.

Yeah, that's right, yeah. So it's not something that I think is significant. you know, here and now today. But, you know, it's something that's relevant and important and something we do pay, you know, very close attention to. But the spread at these levels, it feels very reasonable to us at the moment. So nothing that I'm too concerned about.

But in terms of your credit, sorry, Tushar, in terms of your credit ratings, is that, I mean, I guess that's one of the considerations in terms of looking at your share buyback plans. I mean, is there a level at which you have a problem or not or is it all Are we miles away from any issue on that front?

I don't think the credit rating agencies are around our level of capital. I think they have, as much as the Bank of England have been supportive of our capital levels being very robust, their issues, as they write about it, is around profitability. And that's where they're focused on. And so going from the 5.6% RTE capital 17 to the 8.5% and 18, I think, will make for a constructive dialogue with the rating agencies in the earlier part of this year. To your second question about the 9%, as I said earlier, it's much more comfortable sitting here with 50 basis point gap versus last year with the 300 basis point gap. And so I think a lot of progress was made on the cost side, et cetera. One of the things that we are mindful of is we did have a good year in impairment in 2018. Although I want to highlight that the vast majority of that improvement in impairment versus 17 was a function of management access and not accounting issues around IFRS 9, as some people have talked about. You know, in 17 we had two big impairment issues, one being Carilion, which did not repeat. anywhere like that in any other name in 18. We also remember in 17, we took a pretty significant hit in selling the bottom 10% of our U.S. credit card portfolio. So not recurring that also helped the impairment number in 18. And then when we reduced risk-weighted assets in the corporate bank by about 10 billion pounds from 17 to 18, a lot of that was focusing on credit that we had concerns about. And quite frankly, we missed a number of credit issues which happened in the year. Let's hope, you know, that we are as successful in managing the impairment challenges in 19. You know, we obviously want to hit 9% or better, and we hope you guys start, you know, modeling returns higher than 9% so maybe we'll reconsider the target.

But as we look through Q1, is this like a – should we be seeing a better revenue picture? Is that really where we're going to be seeing it? And then the offset might be on the impairment. Is that – Is that how we should look at it? Because I guess in three months we'll get your Q1 numbers.

Yeah, look, you know, we don't have, you know, a crystal ball on the economy over the years. So, you know, we're going to be sort of driven by that. I think what we have is a lot of self-help measures. You know, we have legacy funding rolling off that you know about. We have some more very expensive debt that is available for calling that you also know about. We have a lot of cost flex that we've talked about. We've sort of guided to that and... You know, Jeff said in his opening remarks that, you know, now that we, you know, are focused on sort of the medium-term prospects of the bank, you know, we have a lot of choices around investments and phasing and timing of that. Including our 8.5%, we have the GMP charge. So, you know, that probably won't happen again. And, you know, impairment, you know, we don't know what the full year will be with impairment, but we've tried to be prudent in our provisioning at year end. So hopefully that provides some... some support for whatever we face over the course of the year. And, of course, you know, we are growing parts of our business that you'd expect us to grow, whether it's U.S. cards or it's mortgages. Jeff talked a lot about the corporate lending business and trying to get more transactional business from that from all sources. So, you know, there's a lot of levers that we have, and we feel pretty confident we'll get there. Great. Thanks very much. Thanks, Ed. Can we have the next question, please, operator?

The next question on the line comes from Andrew Coombs of Citi. Andrew, please go ahead.

Good morning. One question on US car growth and then one follow-up on the ROT walk. On the credit card growth, 4% underlying if you exclude the partner disposal you had in 2Q, and yet you refer to Air and JetBlue as being double-digit growth. Please correct me if I'm wrong, but I thought airlines counted for about half of your partnership card base there. So I'm slightly surprised there's only 4% underlying growth. What's been the offset? Is that the own brand shrinkage or are there other partnerships where you're seeing a contraction in receivables? That would be the first question. The second question, on the ROT, the 9%, I just want to approach this slightly differently. When you came out with the 9% target in 3Q17, it was, I think the word you used was underpinned on a 60% cost income target. That 60% cost income target, correct me if I'm wrong again, but is now deemed to be over time as opposed to for 2019. So it seems to suggest that you have a more conservative revenue outlook compared to back then. So I'm just trying to work out what the offset is, what's coming better than your expectations, that you haven't had to change the 9% ROT target. Is it lower loan losses? Is it a lower capital base tax? If you could just clarify. Thank you.

Thanks, Andrew. Yeah, I'll take the questions in the order you gave them. So on credit card receivables, yeah, it's the 4% growth. I don't think airlines, at least those two portfolios, are going to get to half our book. I mean, you've got to remember we're about $27 billion of receivables, so it is reasonably well diversified. And although airlines themselves make a good proportion, you know, we've got Hawaiian, Frontier, Alaskan, as well as JetBlue American, We also have other sort of partnership programs as well, things like Apple and various other retailers. So I wouldn't sort of overplay the concentration in American and JetBlue. The only thing I would say is that those portfolios, because they are traditionally very sort of low risk and where we are in the cycle and the sort of uncertainty we have are probably ones that we're very comfortable let grow in double digits. you know, we're a little bit cautious on the rest of the book. We are keen on growing the book, and you've seen it's great, you know, virtually every quarter and every year, but just being careful with do you sort of pay attention to credit conditions. Of course, income growth, you know, on that business was 6%, so that's a pretty healthy rate, I think, where we are at the moment. In terms of the cost-income ratio and sort of ROT targets, We've always said it's over time, and I think of cost-income ratio very much as an output rather than an input. You know, we have plenty of levers that we just talked about on the earlier question. In terms of what's different from the third quarter of 2017 to now, I mean, virtually everything's different, as you guys will be aware of. Obviously, the rate environment is significantly different. The economic environment is significantly different. The geopolitical uncertainty is significantly different. Tax rates are obviously different, and that's been helpful to us. So it's sort of lots of swings and roundabouts. And in terms of the way we manage our places, we have levers to sort of take all of those things in the round and make sure we generate the right level of return. We think that over time, as we generate a 9%, 10%, and better percent return, that will result in a cost-income ratio of 60%. And you can see we're getting closer to that. But think of that as sort of an output. We're really mostly focused by getting to the right returns level. Thanks, Andrew. Could we have the next question, please?

The next questioner comes from Farhad Kunwar of Breadburn Partners. Farhad, please go ahead.

Hi to you, Charlotte. Hi, Jess. Thanks for taking the question. Just wanted to circle back on a point you made on the pro-cyclicality and risk weights. What we saw from a lot of your peers was a pickup in market risk-based assets for increases in their stress-to-bar assumptions. It looks like you avoided this in the quarter. How should we think about that? I mean, how did you avoid in the quarter versus your peers? And how should we think about that going forward if we do see more of these volatility spikes? And I can give you my second question now as well.

Yeah, do you want to do that? And we'll take them back.

Yeah, the second was quite simple. Just a clarification from an earlier question. So should we take this, the point you made earlier, that there are no kind of advanced model approvals sitting with the regulator now waiting for approval? So they're kind of 7 billion, 7 to 8 billion swing that you saw in this quarter from the advanced model improvements. There's nothing else in the pipeline. That's kind of categorical. Thanks.

Yeah, I'll take both of them, Fahad. Pro-cyclical RWA, yeah, we didn't see what Some other banks have seen in terms of a spike up at the fourth quarter. Many of our models are sort of average-based. So I think if you, you know, some models run very much on a spot calculation. If it's an average-based calculation, obviously it has a short spike right at the back end of the quarter will have less of an effect. Likewise, if it's a dip at the end of the quarter, we wouldn't see that benefit. But the pro-cyclicality is just, you know, could affect us as well. On an averaging basis, you know, things... do get more choppy or more deteriorate, our models will start reflecting that. RWA models under the Basel III framework globally are designed to do that. So we won't be immune from that. I think it's just something that we have to be mindful of. In terms of model approvals in the pipeline, we do have model approvals in the pipeline. I wouldn't guide to that resulting in a lower or higher RWA. We take these in the round. So don't think of just every advanced model that we get approved. Actually, you lowers RWA, that's not true. Sometimes they do increase RWA, but that's just down to us to manage that and stay within our capital tram lines. And in terms of that, I guess I would guide to, I wouldn't expect to see much difference in CIB, and we wouldn't want to grow the rest of the bank over time. But the rest of the bank isn't hugely capital consumptive as we want to grow those balance sheets. Cool. Thank you very much. Thanks, Fahad. Can we have the next question, please, operator?

The next question comes from David Wong of Credit Suisse. David, please ask your question.

Good morning. Just two questions, if I may. Firstly, apologies if I missed it. So in terms of the U.S. Cards book, your growth expectations, would you still be looking to grow that book at a double-digit rate underlying for 2019 and 2020, or rather the near term? Second question was just on the returns within the CIB, the overall 7% rate is a blended one. I'm surprised that you seem to suggest that the lack is within the corporate business rather than in the pure investment banking business. Within that 7%, are you suggesting that actually the pure investment banking type business actually makes a higher than 7% return in 2018 and the vanilla corporate business is actually the lower returning part? Many thanks.

Yeah, thanks, David. Why don't I take the cards question, and I'll ask Jeff to talk about the CIB sort of double-click, if you like. U.S. cards, we have an ambition, and we believe we can grow that business in terms of receivables by 10%. We're just not going to do that just to hit that target, though. We are very focused on doing that in a safe and appropriate way, and it's more of a statement of sort of ambition rather than a sort of slavish target run. You've seen we've been a bit below that, And that's okay because we really like the risk-adjusted characteristics of that business. We like the credit profile that we have in that business. To the extent we see opportunities to grow it further with paying, you know, due attention to credit control, we will do that. I believe we can do that over time, but, you know, I wouldn't guide to expecting us to do that in the near term. Jess, you want to talk about that?

Yeah, the second one, David, on the On the loan book, and maybe for now focus on the corporate loan book, that is, you know, any particularly evolving line of credit, whatnot, to a corporate generally is a drag on achieving our target cost of capital. So what you need is to augment the lending with transactional business, be it payments, foreign exchange, trade, et cetera, et cetera. And that's what we're focused on, and that's what's led to, the investment in technology to take that transactional business to Europe, which I spoke about, and then take that transactional business to improve it here in the U.K. as well through the whole iPortal platform. So we're making investments to grow our transactional business to get the proper returns on the back of the lending book, which as a gross generalization is generally where you're, as a product specific, you're generating returns normally below your cost of capital, and that's industry-wide. But we just have to get more of that transactional flow there. Vis-a-vis the markets business, the only thing I'd say there is, you know, with the CIB returns of 7% for the year, the markets business in the IB is accretive to that number. So the contribution is over that 7% level.

Thanks, David. Could we have the next question, please, operator?

The next question on the line comes from Martin Leitgeb from Goldman Sachs. Martin, please go ahead.

Yes, good morning. Two questions from my side, please. And the first one on the liquidity coverage ratio and I think the comparatively sharp increase in the fourth quarter. And I was just wondering... what's driving that? Is this essentially what you earlier mentioned as a kind of prudency in terms of more uncertain macro that you just are more comfortable having a bit more liquidity on the side or is this also to do in some form with the impact of ring fencing, obviously the split in particular within the UK ring fence and non-ring fence bank during last year and related to the question of How do you think has that split into wing fans, non-wing fans changed your funding structure and are there further changes to come or do you think at this stage you have essentially reached pretty much the end state? And the second question is more broad on your growth ambition and what excites you the most probably in terms of growth going forward. And I find your slide 25 here in the deck really helpful. And is the message here essentially that the focus is on the more capitalized part of growth, so digital banking, payments, transaction banking? And if so, could you just comment on how your payments and digital banking proposition have evolved over the year? Thank you.

Yeah, thanks, Martin. I'll cover the liquidity question briefly, and I'll ask Jess to talk about the growth objectives that we have for ourselves. You know, our increase in liquidity coverage ratio, there's nothing I'd read too much into that. We want to stay very liquid and very prudent as we go through, obviously, the geopolitical uncertainties that are sort of with us at the moment. And I think you'll probably see most banks adopt a similar stance to us. It's not a direct consequence of ring fencing or anything sort of technical like that. It's very much a discretionary choice and We like to be very liquid, and I think that's the right thing to do. So not much more to add than that. Jesse, you want to add to that?

Yeah, on the addition side, Martin, for sure the – I'm not sure there's another financial institution in the U.K. that crosses the payment waterfront as broadly as we do. From, you know, seven-some-odd million consumers on the Barclays mobile banking app to the position we have in both debit cards and credit cards, to being one of two dominant merchant acquirers in the UK, to being very connected with small business banking and then corporate banking in the multinational market. That gives us a waterfront where we can apply technology to increase our transactional volumes and increase the engagement with our consumers, be it a merchant acquiring corporate client or be it a consumer banking on the mobile banking app. That is an enormous possibility for the bank, and that is probably one of our greatest ambitions. And to your point, nice for us, it's capital light. And obviously, I think we'd like to drive more of our revenues in the future from activities that require less risk-weighted assets than we may have had in the past. We also recognize, however, that particularly the corporate market is a global market, and So we strategically have said to ourselves, we need to extend the transactional businesses and the payment business very much to Europe, but also then to utilize this footprint we have in the US. We've got one of the, we think a very competitive card offering. We've launched a digital bank in Delaware. We're gathering about $15 billion in deposits now, and the opportunities to take from the technology innovation and understanding that we've developed in the U.K. and extend that into the U.S. to grow the payments business there is also something that we are keenly focused on. So you pick up on a very good point there.

Thanks, Marty. Can we have the – I'm just conscious of the time. Should we take two more questioners, please? Can we have the next question, please, questioner operator?

The next questioner comes from Guy Stebbings of Exane BNP Paribas. Guy, please ask your question.

Morning. Just a couple of questions on capital, please. Firstly, coming back to RWA, good performance in Q4 and sounds like you're not calling out any big changes in 2019. As we look a bit beyond that, clearly regulatory changes are on the horizon. Would you be able to provide any sort of update on your views around Basel finalisation, as some of your peers have now, sort of any reason why we should think of Barclays as being an outlier on this? And does clarity here inform your views around buyback size or timing at all, or does the phasing mean that it's less of a consideration for you? And then secondly, was just really a clarification on Pillar 2A. I think it was 2.4% in Q3. and then went up alongside the stress test at 2.6 and then 2.7 today. Is this simply a reflection of the RWA movements, or is there something else going on that you're able to comment on? Thanks.

Yeah, thanks, Guy. Yeah, we're not really comfortable yet to be in a position to guide to the effects of, you know, Basel 4 or Basel 3.1 or whatever, you know, it's labeled out these days. And there's a few reasons for that. I think there's quite a bit of national discretion that will get applied today, So we'd like to understand that more, and it probably sounds like it'll be applied in 2022, possibly with a transitional phase. You know, we're three years away. I really want to understand the national discretion and the effect it may have on us wanting to adapt our balance sheet, as you've as you're sort of aware, banks have got pretty good once they have two or three years' notice of adapting their balance sheets accordingly to get to the right impact. So there'll be a time and place when we talk about it. It just feels a bit early at the moment. In terms of Pillar 2A, I mean, that's actually sort of in some ways partly related to the first question. You would have thought, the bank has said in the past that they were very comfortable with the level of capital in the UK system, not necessarily by institution. So You know, there may be some flex simpler 2A as other changes get rolled in. In terms of the tick up from Q3, nothing other than it's just a percentage. It's a fixed component, so when it translates to a slightly lower group RWA, it's just a higher percentage. So nothing other than that, as I think you pointed out.

Okay, thanks. And given your comments on buzzer finalization and the timing, can we – Can we take that to mean that it's really not a consideration in terms of buybacks in the next year or two, given that phasing effect, as you mentioned?

Yeah, certainly not in 2019. Yeah, and we'll sort of keep you updated, but certainly not for the next 12 months. Okay, thanks. Can we have the next and I think final question, please, operator?

Our final question today, gentlemen, comes from John Cronin of Goodbody. John, please ask your question.

Hi, guys. Thanks for taking my questions. Look, just a follow-on question on the growth point, Jez. Look, I hear you in terms of the initiatives to strengthen non-interest income over time in terms of the attractiveness of that, but I suppose my question on that is by holding on to a 13% CET1 capital ratio target, given all of your peers are at 14%, and look, moreover, I guess, the potential for a not insignificant degree of volatility, in terms of your annual internal capital generation capability, does that more fundamentally steer the board or is there a risk of such in longer-term strategic capital allocation decisions away from new returns-enhancing growth initiatives and towards things like one-offs, like buybacks that can be delivered, but away from any substantive kind of investment on a longer-term basis? Thoughts on that would be helpful. And then a very quick second one on... any trends you can call out on UK deposit pricing and competition in the market. Thank you.

Yeah, I'll take the first one. I'm too sure to pick up on the second question. On the first one, you know, one, I think we were the second best bank in the UK in terms of stress test this year at roughly a capital level that we ended the year on and began the year with. Also, you need the PRA approval to make the payment or the repurchase of the U.S. dollar preferred that we executed in the fourth quarter with our capital level at around this level. I personally don't think there's anyone out there saying that banks are undercapitalized, or at least banks in the U.K. are undercapitalized today. I think, you know, one of the reasons why we can run at 13 and very comfortable is because we have a very diversified business model. In fact, you know, you run a stress test where you, you know, strike down sterling by 25%, you've got to focus on the fact that over 40% of our revenues are in a currency, the U.S. dollar. So that diversified model, I think, gives us an advantage in What is the binding strength around capital, which is ultimately the stress test? So that's why we have said for quite some time we think the in-state target level is 13, and we think the Bank of England has been very supportive of that. If you look at the quality of our balance sheet, the amount of liquidity that this bank carries, the level of capital today versus the level of capital two years ago, four years ago, six years ago, it's hard-pressed for me to come up with an argument saying that we are undercapitalized. So I think we have the right capital level, and I think that avails us the opportunity, like we did last year, to triple how much capital we return to shareholders versus the previous year. Now, that all being said, if we can increase our revenue, which is capital light, I think that's a healthy thing for the bank. You look at Our bank in the UK, 85% of our revenues are NIM. We obviously would like to get that number to a low level by taking technology and investing in the payments business and increasing our capitalized revenue base for the bank overall.

John, on deposit trends in the UK, I'd say deposits are increasing really across everything, whether it's UK corporates, whether it's SMEs, whether it's consumers. We're not seeing real sort of marginal pricing. We see a lot of sort of interesting headline offers and new entrants, but as far as we're concerned, it doesn't seem to be making any difference in terms of our ability to attract what we call franchise deposits. I mean, these are high-quality deposits coming into our current accounts, you know, operating accounts for our small businesses, etc., If anything, deposit growth is probably outstripping asset growth, and that may be sort of a function of people just keeping cash rich as we go through the current environment. But at the moment, deposit-wise, it's a pretty healthy environment. Thanks, John, and thank you, everybody, for joining us. I think that's it for today, but I'm sure we'll... get a chance to meet many of you on the road over the next few days. So see you around, and thank you for joining us.

Thank you. That concludes today's conference. This presentation has now ended.