Barclays PLC

Welcome to the Barclays Half Year 2019 Analyst and Investor Conference Call. I'll now hand you over to Jeff Daly, Group Chief Executive, and Tushar Mazaria, Group Finance Director.

Good morning, everyone. This was another resilient quarter of performance for Barclays. We balanced some headwinds in our UK consumer business with good performance coming from the corporate and investment bank. For the second quarter in a row, Barclays has generated a profit of over 1 billion pounds, and the bank delivered earnings per share of 12.6 pence for the first half of 2019. Excluding litigation and conduct, profit before tax was 1.6 billion pounds in the quarter and 3.1 billion pounds for the first half of the year. A group return on tangible equity of 9.3% for the quarter is a further step towards meeting our 2019 ROTE target of greater than 9%. It's worth noting that we have now produced a group ROTE of over 9% in five of the last six quarters we have reported. Turning to capital, our CP1 ratio increased by 40 basis points to 13.4%, demonstrating the strong capital generation achievable by the bank. In point of fact, if our operational risk-weighted assets were accounted for more like our UK peers, then our CT1 ratio would have actually stood at roughly 14% today. Tensable net asset value grew to 275 pence, representing the fifth quarter in a row of accretion in Barclays' book value. Our cost-to-income ratio rose a touch in the quarter to 63%. reflecting our commitment to invest in the growth of the bank. Management focus on cost control remains a high priority, however, and we expect to see positive jaws across the group in the second half of the year and for the full year. Accordingly, we have this morning affirmed that we now expect to reduce expenses to below 13.6 billion pounds for 2019, which was the bottom end of our guidance range for this year. Barclays UK produced an ROTE of 13.9% in the quarter, despite margin pressure. We continued to grow our mortgage and deposit balances with stable credit metrics. That said, we had a reduction in NIM from increased levels of consumers refinancing mortgages and lower interest earnings from a reduced UK card balance. We continued to invest in our digital capabilities. Online engagement with our UK customers is at an all-time high, with just under 8 million consumers now digitally active on the Barclays app. The corporate investment bank produced a 0.3% ROTE in the quarter. Excluding the trade web IPO gain, markets income overall was down 9% year-on-year on a dollar basis, which was broadly in line with our U.S. peers. Within that, equities had a challenging quarter compared to a very strong preparable last year. However, we did see market outperformance in fixed income, currencies, and credit. Banking fees were down a little, reflecting a reduced fee pool and debt underwriting, which was partially offset by strong performance in advisory. Overall, though, in the half, we gained share in investment banking fees, and our global rank also improved. placing Barclays as the sixth highest earner in investment banking fees globally and the fifth highest in the U.S. Our corporate banking franchise had a decent quarter with income up on the prior period as well as on Q2 of 2018. We are maintaining a strong focus on improving returns in the corporate bank with focused client-by-client plans to grow profitability. One mark of progress on this front is that the return on risk-added assets in our corporate bank has improved meaningfully in the first half of 2019, with transaction revenues up some 15% year over year. Consumer cards and payments continues to progress well, producing an ROTE of 18% for the quarter and 16.7% for the half year. We're happy with the prospects for this business, and we're pleased that in this quarter, we renewed a key U.S. card partnership with Wyndham Hotels and Resorts. Barclays' performance over the course of this year reinforces the confidence which the board and management feels in the capacity of this bank to generate sustained earnings. A key indicator of that confidence is in our announcement this morning regarding the ordinary dividend. As you will have seen, we have declared a half-year dividend of 3 pence per share. In normal circumstances, this would account for around a third of what we expect to pay in total in a given year. As such, this represents a significant increase in distributions over last year, which I hope will be welcomed by our shareholders. As I said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. Consequently, Barclay's capital returns policy of a progressive dividend An intention to supplement the ordinary dividend with additional cash returns, including share buybacks when appropriate, remains unchanged. Now let me hand it over to Tushar to walk you through the numbers in detail.

Thanks, Jeff. As usual at half-year, I'll begin with a slide on the results for the first six months and then focus my comments on Q2 performance and the half-year balance sheet. reported a profit before tax of 3.1 billion for the first half, generating 12.6 pence of earnings per share, excluding litigation and conduct. I'll exclude litigation and conduct charges in my commentary as usual, but the gap of statutory profitability was limited with a statutory EPS of 12.1 pence. We've been paying a half-year dividend of 3 pence per share in September, and we've indicated that our half-year dividends are expected to be around one-third of the full-year total under normal circumstances. Group ROTE for the half was 9.4%, with double-digit returns for both BUK and BI, but the drag from head office does take us to below 10%. As Jeff mentioned, we continue to target an ROTE for the full year of over 9%, based on a 13% CT1 ratio. The first half represents a good base for this, but there is work to be done in the second half. The income environment was challenging and reported income down 1% for the half. Costs were up 1% year-on-year, but we expect positive jewels in H2 and for the year as a whole. Given the income environment, cost control will remain a major focus through the second half, and we reduced our cost guidance based on 30th June exchange rates to below 13.6 billion, which was the lower end of the guidance range we had previously given. I'll comment further on costs as I go through the businesses. Focusing now on the second quarter, Income decreased 1%, reflecting the challenging environment, which affected both CIB and BUK. The cost print of 3.5 billion reflects investment in a number of areas. But as you can infer from our guidance, we would expect a lower cost-run rate in the second half, excluding the Q4 bank levy. Impairment was 480 million, up 197 million year-on-year, due to the non-reoccurrence of favourable US macroeconomic updates and single-name recovery. However, this was just 32 million higher than Q1, Delinquencies remained stable, and the net write-offs in the quarter were just below the impairment charge of $465 million. The effective tax rate was 19.4%, just below our full-year guidance of around 20%, and attributable profit was above $1 billion, as in Q1. This delivered an ROT of 9.3%, excluding litigation and conduct. TNAV of 275 pence was up 9 pence in the quarter, driven by earnings per share of 6.3 pence, and a tailwind from reserve movements due to currency and interest rate moves, and despite the payment of the full-year dividend of 4 pence in the quarter. We reported an increase in the CT1 ratio from 13 to 13.4%, and we are now above our target ratio and continue to be confident in our ability to generate capital. We are now in a position to increase our dividend payout, as just mentioned. Looking now at the businesses in more detail, starting with BUK. The UK reported an ROT of 13.9% for Q2, despite a challenging income environment, with income down 4%. In personal banking, we saw volume growth in mortgage balances of 1.5 billion net, more than offset by margin pressure, including the effect of increased refinancing by customers. In Barclaycard, balances were broadly flat, but interest earning balances reduced, reflecting our reduced risk appetite and customer behaviour, including the impact of current economic uncertainty. Margin pressure and the continuing growth in secured lending resulted in a lower net interest margin of 305 basis points for Q2, but we're expecting them to stabilise around this level for the second half of the year, despite further growth in secured lending. Costs were up year on year as we continued with the first half investment stand we flagged in Q1. This includes a range of upgrades to our Barclays app and our digital offering more broadly. We no longer expect to report year on year income growth for full years, but we are expecting higher income in H2 compared to H1, and positive jewels for H2 as cost reductions come through. Positive balances continue to go strongly to reach £200 billion. With impairment of £230 million, we were just a little above the run rate of around £200 million we've referenced in the past. The UK car delinquencies remain stable, and I think this remains a sensible average run rate to think of for the year as a whole. Turning now to Barclays International. BI delivered an RIT of 10.8% for the quarter, one income of 3.9 billion. The BI cost-income ratio was flat at 62%. The main driver of the year-on-year decline in PBT was the increase in impairment from the low charge of 68 million for Q2 last year. The latter was driven by macroeconomic updates and single-name recovery. Although we are keeping a close eye on the economic outlook in the UK and US particularly, we don't see signs for concern in the current credit metrics. As we said before, we have positioned ourselves conservatively for this uncertain macroeconomic environment. Looking now in more detail at CIB. CIB reported an ROT of 9.3% for the quarter, up from 9.1% last year. Overall income was up 8%. This included a gain of $166 million on our staking trade web in our markets business. Excluding this, income still grew by 2%. We saw a resilient performance, particularly from FIT, which was up 25% or 2% excluding trade web, and that would be down 2% in dollars. This compared favorably with peers and reflected strong performance in credit and grossing securitized products. Equities was down 14% on the record Q2 last year, resulting in overall markets revenues up 7% or down 5% excluding trade web. Banking decreased 1% year-on-year or 5% in dollars, reflecting a reduced industry fee pool, particularly in debt underwritings. Corporate income line was up 13%, reflecting growth particularly in treasury and transaction banking. The significant negative mark-to-market on hedges we highlighted in corporate lending at Q1 did not reoccur. Cost increase by 5% resulted in positive jewels of 3%. We also had positive jewels for the first half overall and expect positive jewels for the second half. We retained significant flexibility on costs, including in performance costs should the income environment in the second half disappoint. There was an impairment charge of $44 million compared to a net release of $23 million last year, but broadly in line with the average run rate we've discussed before. The only significant movement in CIB assets in the quarter was the result of flattening of interest rate curves, which led to similar increases in derivative assets and liabilities. RWAs were broadly flat at $175.9 billion and down around $5 billion year-on-year. The franchise is in good shape and remains focused on delivering improved and sustainable returns, despite periodic fluctuations in market conditions. Heading now to consumer cards and payments. We continue to generate attractive returns in CCT while growing the business. The ROT was 18% down year-on-year due to the unusually low impairment in Q2 last year, but up on the 15.4% reported at Q1. Income decreased by 19 million year-on-year, reflecting the non-recurrence the gain of 53 million on sale of the OLB partner portfolio. We grew US card receivables by 6% in dollars. Again, the airline portfolios, notably JetBlue and American, reported strong balance growth. Cost increase year-on-year as we continue to invest in the growth of international cards payments and the private bank, but we're down on the Q1 level. Again, we expect positive draws in H2. The payment of $203 million was only slightly higher than the $193 million reported for Q1, but we would expect Q3 and Q4 to be higher, as we have said before, reflecting seasonality and portfolio growth. However, credit metrics remain well controlled, with 30- and 90-day arrears down slightly in the quarter. Heading now to head office. As usual, the head office result was driven by the level of income expense, which was $136 million. compared to last year's positive income of 33 million, which reflected a Lehman gain of 155 million. As in Q1, there was a 90 million impact from legacy funding costs in Q2, which were reduced to under 30 million from Q3 onwards, following the redemption of the 14% RCI in June. The hedge accounting expenses and residual treasury charges will continue through Q3 and Q4, while Q3 income will have a positive contribution from the up to dividends. Those elements are relatively predictable, while the head office cost base has been tracking at around 50 million a quarter. There will always be a few lumpy items in head office, but over time I would expect the loss to decrease. I'm including this cost summary again to emphasise our continuing focus on cost efficiency, to fund investment spend and to deliver absolute cost reductions when the income environment requires it. As I mentioned earlier, we have taken the current environment into account in moving our guidance to below 13.6 billion. That's based on June FX rates, notably $1.27 to the pound. We are confident we can deliver this while still pursuing key investment opportunities that we believe are in the best interest of the group. Key cost levers we are using as we go through the year include flexibility in compensation costs, particularly in the CIB, which depend on the income performance, and we've been prioritizing and adjusting the pace of our investment spend as appropriate. CNAP increased in a quarter by 9 pence to 275 pence, Earnings per share of six pence were partially offset by the payment of the full-year dividend of four pence. Net reserve movements were positive, reflecting strengthening of the dollar, and rate movements which benefited both the fair value and cash flow hedge reserves. I'd also call out the increase in the net pension surplus to 1.6 billion. On capital, we reported an increase in the CT1 ratio from 13 to 13.4%, with an increase in capital on broadly flat RWAs. and that was a 70 basis points increase before taking the deduction for foreseeable dividends, including 81 coupons. Profits contributed 38 basis points, and reserve movements more than offset the Q2 deficit reduction contribution of 250 million. And I'd remind you that the pension contribution reoccurs in Q3. The foreseeable dividend deduction of 22 basis points reflected the increased dividend expectation we indicated earlier. A capital ratio won't increase every quarter, but we are now above our target ratio, and our confidence in our ability to continue to generate further capital is reflected in the capital returns policy, which we have reiterated, combining a progressive dividend and buybacks as and when appropriate. To remind you, with our current regulatory minimum at 11.7%, we remain comfortable with a capital ratio of around 13%. Our reported ratio is based on the current treatment of our CRISPR WA's, As I mentioned at Q1, we are exploring with the PRA the possibility of removing the flaw that was introduced in our operational risk RWAs. This would have the effect of reducing Pillar 1 RWAs, but would be expected to lead to an increase in Pillar 2 requirements. A reported CT1 ratio would thus increase, as Jeff mentioned, as would our regulatory minimum. In assessing the adequacy of our capital, we do factor in future headwinds from regulatory changes in RWAs. Over the next couple of years, We have the PRA's proposed changes to mortgage risk weight in BUK from the end of 2020, and in CIB, changes to securitization risk weightings in early 2020, and changes to standardized counterparty credit risk from mid-2021. We currently expect each of these three changes to result in RWA increases of low single-digit billions. This is based on our current balance sheet and business mix, and doesn't take into account any further mitigating action. We're confident these changes are manageable and they are factored into the way we look at capital distribution. Regarding leverage, there is an expected leverage benefit from SACCR change with a modest reduction in leverage exposure. We already have a strong leverage position. For Q2, the average UK leverage exposure was 4.7%, slightly up on 4.6% for Q1. The spot leverage ratio was 5.1%, but comfortably above the minimum UK requirement of around 4%. Our funding and liquidity position remains strong. In Q2, we issued 1 billion pounds of AT1 to add to the $2 billion we issued in Q1. And we've announced today that we're calling three outstanding AT1s on the 15th of September, totaling 2.3 billion sterling equivalent. I'd remind you that these calls will result in a headwind for our Q3 capital ratio of around 13 basis points. Looking at MREL overall, we've issued 7.1 billion equivalent in the year today, against our current plan to issue $8 billion this year. And our MREL is currently at 30.2%, around our expected end requirement. The liquidity coverage ratio was 156% at the end of the quarter, with a liquidity pool of $238 billion. And our lowest deposit ratio was 82%, positioning us conservatively in light of the continuing Brexit uncertainty. So to recap, we remain on track in the execution of our strategy, reported an ROTE of 9.3%, excluding litigation and conduct, or 9% on a statutory basis, and continue to target an ROTE of greater than 9% and 10% for 2019 and 2020, respectively, based on a CT1 ratio of around 13%. Remain very focused on cost control, and given the challenging income environment, we have reduced our guidance for the year to below 13.6 billion. Reported another quarter of teen arbitration, We are above our CT1 target of around 13% and are reiterating our capital returns policy and paying an increased half-year dividend of 3 pence per share, indicating our confidence in the future of the group. Thank you. I will now take your questions. As usual, I would ask yourself to limit yourself to two questions a person so we get a chance to get round to everyone.