Barclays PLC

Good morning, everyone. Barclays generated 1.2 billion pounds of attributable profit in the third quarter of 2019, excluding the litigation and conduct charges, which largely related to our PPI provision. We dealt well with some headwinds in our UK consumer business, while she produced a good performance in our corporate and investment bank, particularly compared to the same period in 2018. The bank generated earnings per share of 19.7 pence for the first nine months of 2019. Profit before tax was 1.8 billion pounds in the quarter and 4.9 billion pounds year-to-date. Our group return on tangible equity of 10.2% for the quarter is a further positive step towards our 2019 target of 9%, which we still feel good about. Turning to capital, our CET1 ratio stands at 13.4%, as we now account for our operational risk more consistently with our UK peers. To reflect the positive impact of that change, we have consequently updated our CET1 target ratio to be around 13.5%. Our cost-to-income ratio for the quarter was 59%, and stands at 62% for the last nine months. Management focus on cost control remains a priority, and we continue to expect to see positive jaws across the group over the remainder of the year and for the full year. Markets UK produced good performance in the quarter, resulting in an ROTE of 21.2%, despite a challenging environment. We grew mortgage balances, though we still see margin compression in what is a competitive market. Therefore, we were pleased to land our net interest margin at 310 basis points, which was slightly up on Q2 despite this pressure. We continued to invest in our digital capability, and we're pleased that in the latest CMA service quality metrics, we were voted by UK consumers as the number one provider of active mobile banking services. In September, we also started the migration of 1.6 million customers from the Barclaycard legacy app through our award-winning Barclays app. Eight and a half million BarclayCard and Barclays customers on one platform means sharing a richer experience with all of them and provides our customers with access to a larger set of products and services. The corporate and investment banks produce a 9.2% return on tangible equity in the quarter and 9.3% year-to-date. Markets income was up 13% compared to Q3 of 2018, which was in line with our U.S. peers. Within that performance, equities income was up a touch on the comparable period last year, while in fixed income, currencies, and credit, we saw a 19% improvement in income year on year. Banking fees were up 33% versus the same period in 2018, reflecting strong performances in advisory and debt capital markets. This actually represents the best third quarter income performance for our banking business on record. Our corporate banking franchise had another decent quarter with income up on Q3 2018. We are maintaining a strong focus on improving returns in the corporate bank with client-by-client plans to grow profitability, especially through increasing higher returning transaction banking revenue. In our consumer cards and payment business, we are targeting growth in U.S. cards. with a particular focus on capturing new partnership opportunities, a core strength of the Barclays franchise in the States. We are confident in our ability to expand the portfolio further, both from finding new partners over time and through organic growth of our existing partnerships. Indeed, we expect to announce a new major partnership shortly. In payments, we are also positioned for growth and are investing in our digital capabilities to drive that. For example, In September, we went live with our new Transact solution for e-commerce merchants. This delivers a smooth and secure customer authentication process compliant with PSD2, which optimizes the transaction experience and helps to prevent fraud for the merchant. This is an excellent demonstration of where we've used our leading position as both an issuer and acquirer to create a hugely welcome solution. And we've already signed a number of agreements with clients paying a monthly fee for this state-of-the-art service. In summary, the numbers we've reported this morning represent another consistent and resilient performance from Barclays. And they show the benefits of our diversified model, one which allows us to weather today's macro headwinds and grow our businesses and profitability over time. They also show that we remain on track to achieve our target of a group return of 9% this year. We continue to target an ROTE of 10% in 2020, though we acknowledge that the outlook for next year is unquestionably more challenging now than it appeared a year ago, and particularly given the uncertainty around the U.K. economy and the interest rate environment. We'll see what transpires, but we are fortunate to have a strong franchise to deal with the challenges when they come. Finally, as I said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. And so, despite the impact of profitability of the 1.4 billion PPI provision, it remains our intention, in normal circumstances, to pay a total dividend for 2019 of around three times the half-year payment of three pence. Now, I'll hand you over to Tushar to walk you through the numbers in detail.

Thanks, Jeff. I'll begin with the results for the first nine months and then focus my comments on Q3 performance and the 30th of September balance sheet. Reported aid profits before tax were $4.9 billion for the first nine months, generating 19.7 pence of earnings per share, excluding litigation and conduct. I'll continue to exclude litigation and conduct charges in my commentary as usual. The gas strategy profitability was principally the additional Q3 PPI provision of $1.4 billion, which was within the range we announced in early September, and resulted in a statutory EPS of 10.4 pence. Group ROTE for the first nine months was 9.7%, with double-digit returns for both VUK and VI. As Jeff mentioned, we continue to target an ROTE for the full year of over 9% and over 10% for next year. The nine-month return represents a good base for reaching the 9%, despite Q4 seasonality. But the macro headwinds, including the low interest rate environment, are making our targets more challenging, particularly with respect to 2020. Nevertheless, we grew income 2% year-to-date, with the increase in Barclays International more than offsetting the decline in Barclays UK. Costs were broadly flat year-on-year, but with positive jewels in Q3, and expected for Q4 and for the year as a whole. With the income environment, cost control remains a major focus, and we've reiterated our cost guidance of below $13.6 billion. Impairment was $1.4 billion up on last year, which benefited from improved macroeconomic variables, but credit metrics remain broadly stable across both secured and unsecured portfolios. On capital, we've just concluded discussions with the regulators to remove the regulatory flaw on operational risk RWA. This resulted in a reduction in RWAs of $14 billion with an associated increase in the Pillar 2A requirement. Focusing now on the third quarter, income increased 8% despite the challenging environment, particularly in the UK, reflecting a strong performance in CIV, where income grew 17%. The cost sprint of $3.3 billion was down 1% and reflects cost efficiency measures across the group. This resulted in positive jewels of 9%. Impairment was $461 million, up $207 million on the low level we reported last year, and it principally is a non-recurrence of the significant favorable U.S. macroeconomic updates last year. In contrast, the Q3 impairment this year included a $16 million net charge from macro updates covering both the U.S. and U.K. The effective tax rate excluding litigation and conduct was 17% and attributable profits was $1.2 billion. This delivered an ROTE of 10.2% excluding litigation and conduct. PNAV of 274 pence was down 1 pence in the quarter, as earnings per share of 7.2 pence and reserve movements were more than offset by the PPI provision, and payment of the half-year dividend of 3 pence. Looking at the businesses in more detail, starting with BUK. BUK reported an ROT of 21.2% for Q3, despite the challenging income environment, with income down 3%. In personal banking, we saw further strong volume growth in mortgage balances, up 2.9 billion net in the quarter, and healthy application volumes, but also continuing-type margins. Vastly-cast balances were down from 15.1 billion to 14.9 in the quarter, reflecting both our risk appetite and customer behaviour, and I would expect this trend to continue. Despite margin pressure and a continuing growth in secured lending, the NIM of 310 basis points was a slight increase on Q2. We expect NIM for the full year to be close to this level, as the Q4 NIM will be lower, reflecting both the continuing mixed effects of growing secured lending and lower interest-earning lending in cars. Costs decreased 4% year-on-year, as efficiency savings more than offset continuing investment. This includes on-grain upgrades to our bus use app and our digital offering more broadly. Q3 income was up on Q1 and Q2, and I would note that this was achieved without any debt sales, which are part of our no still expect positive jewels for Q4. Loans were up $4 billion overall in the quarter to reach $193 billion, and deposit balances continue to grow to reach $203 billion. Repairment for the quarter was just over $100 million, while down on the run rate of around $200 million we've referenced in the past. This was despite a charge of around $30 million resulting from macroeconomic variable updates. UK car delinquencies were down slightly, and other credit metrics are benign. The lower charge reflects some recalibration of our models to reflect experience of customer behaviour over the last few quarters, as well as lower Stage 2 balances. As a result, although I would expect a higher charge in subsequent quarters, the 200 million run rate we referenced previously is looking like the high end of the expected range, absent significant deterioration in economic conditions. Paying out to Barclays International. In BI, income and impairment were both up while costs were flat, delivering an ROT of 10% for the quarter, up from 9.2% for Q3 last year. You can see the key financial metrics on this slide, and now I'll go into more detail on the BI businesses, starting with CIV. CIV reported an ROT of 9.2% for the quarter, up from 7% last year. Overall, the income was up 17% or close to $400 million at $2.6 billion. This included, within markets, a loss of $40 million from the market-to-market on our residual staking tradeways, and a net benefit of $90 million from Treasury activities, including positives from Treasury sales and negatives from CBA hedging. Stakes had a good quarter of 19%, reflecting strong performance, particularly in rates and securitized products. Equity has increased 5%, despite a lower contribution from derivatives, resulting in overall market income of 13%, ahead of U.S. peers, with good contributions across M&A, GCM, and ECM. The corporate income line was up 1%, reflecting growth in transaction banking, while the corporate lending line remained close to the underlying run rate of $200 million that we've referenced in the past. Costs were flat, despite the stronger dollar, as we continued to implement cost efficiencies. This resulted in positive jewels of 17%. There was an impairment charge of $31 million, which included single-name provisions, compared to a net release of $3 million last year. The most significant movement in CIV assets in the quarter and in Q2 was the result of further flattening of interest rate curves, which led to increases in both derivative assets and liabilities. There were also further increases in prime balances as we continued to expand our financing businesses. RWA has increased by $9.25 billion to $185 billion, reflecting a stronger dollar and levels of trading activity. Turning now to consumer cards and payments. We continue to generate attractive returns in CPP while growing the business. ROP was 14%, down year-on-year, reflecting the unusually low impairment in Q3 last year. Income increased year-on-year by 7% or $78 million, partly due to the non-recurrence of the $41 million loss on Visa preference shares. We grew the U.S. card receivables by 4% in dollar terms, notably in the partnership portfolios. Costs increased 1% as we continued to invest in the growth of the international cards, the private banks, and payments. In payments, we continued to roll out our merchant acquiring proposition in a number of European countries, and this is an interesting growth opportunity going forward. As we flagged at Q2, impairment is significantly higher than the Q1 and Q2 levels at £321 million, which included £30 million from macroeconomic updates, and we expect Q4 to reflect further seasonal balance growth through Thanksgiving and Christmas. However, credit metrics remain well controlled, with not much movement in the 30- and 90-day areas. Turning now to head office. The improved results quarter on quarter was driven by the lower level of income expense, following the redemption of the 14% RCI at the end of Q2. Income was a net negative of £55 million, reflecting £30 million of residual legacy funding costs, hedge accounting expenses and the residual negative Treasury items. These negatives were partly offset by the out-of-the-dividend which is received in Q1 and Q3 each year. RWA decreased to £13.4 billion, reflecting the removal of the operational risk clause. I'm including a cost summary to emphasise our continuing focus on cost efficiencies, to fund the investment spend and to deliver absolute cost reductions when the income environment requires it. As I've mentioned, we remain on track to meet our cost guidance of below $13.6 billion. I would remind you that this was set based on a dollar rate of $1.27, although we had a Q3 cost headwind with an average run rate of 1.23, with the dollar back above the 1.27 level, we still plan to come in slightly under the 13.6 billion figure. Key now decreased in the quarter by one-tenth to 274 pence. Earnings per share of 7.2 pence were partially offset by the payment of the half-year dividend of three-tenths. Net reserves movements were also positive, including the strengthening of the dollar to 1.23 at 30 September. Of course, this may reverse in Q4 based on current rates. The net accretion of 8 pence from these elements was more than offset by the 9 pence hedge win from litigation and conduct. On capital, the CT1 ratio was flat across the quarter at 13.4%, which reflected a 57 basis point increase from the removal of the operational risk floor, largely offset by the 49 basis points from litigation and conduct. Our businesses remain capital generated, with 50 basis points from profits, out of which we accrued 21 basis points for dividends and 81 coupons. The 21 basis points reflect the final clip-on on AP1's recording Q3, and you would therefore expect a lower capital effect in Q4, and a 13 basis points from the FX impact of those redemptions is also not occurring in Q4. This slide shows the build-up of our capital requirement. The removal of the operational risk floor has had a positive effect on 57 basis points on our CP1 ratio. Our CP1 requirement has also increased, with PILA 2A up by 35 basis points and the annual updates. The result is our regulatory minimum capital level is now 12%. We have therefore updated our target CG1 ratio to around 13.5%. The operational risk charge doesn't affect our overall capital requirement, but does give us a little more flexibility in how we meet this. In summary, we are still around our target ratio, and our confidence in our ability to continue to generate further capital is reflected in our capital returns policy. combining a progressive dividend and buybacks as and when appropriate. Our funding and liquidity position remains strong. In Q3, we issued a further billion of AP1, and we called three outstanding AP1s, totaling 2.3 billion sterling equivalent. Our next potential AP1 calls aren't until December of next year. Looking at MREL overall, we have issued 8.2 billion equivalent in the year to date, in line with our plans to issue around 8 billion this year. As usual, we will keep an eye on market conditions for pre-funding opportunities. Our MREL is currently at 30.4%, closer to our expected end requirement of 31.2%, which reflects the Pillar 2A update. Liquidity coverage ratio was 151% at the end of the quarter, with a liquidity fall of $226 billion, with our loans deposit ratio was 82%, continuing to position us conservatively. So to recap, we remain on track in the execution of our strategy, and reported an ROPE of 10.2%, excluding litigation and conduct. the Q3, with positive tools of 9%. We continue to target an ROT of greater than 9% and 10% for 2019 and 2020, respectively. But the macro headwinds, including the low-rate environment, are making it more challenging to achieve these targets, particularly with respect to 2020. Continuing to improve our returns year on year remains a key priority for the group, while also delivering attractive capital returns to shareholders and investing in key business growth opportunities. We are at our updated CP1 target of around 13.5% despite the Q3 CPI provision. And with an ROT for the first nine months of 9.7%, we are well-placed to deliver on these priorities. Thank you. And we will now take your questions. And as usual, I would ask you to limit yourself to two per person so we get a chance to get around to everyone.

If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove the question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, press star followed by one to ask your question. Your first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, please go ahead.

Hi, good morning. Two questions for me. So obviously you had a very striking quarter in CIB in particular. I was just interested if you can give us a bit more color about the competitive environment during the quarter. Obviously you mentioned the last call you had gained 20 billion, the last is from Deutsche. But some of your competitors have been calling out Europe as being quite tough. So maybe you can give us a bit of sense how things are evolving and a sense for the pipeline Because given that revenue beat and things being quite solid, you've cautioned around 2020 despite that good performance. So maybe can you reflect on that as well? And what divisions are you particularly worried about where visibility is lower now than you anticipated before? Thank you.

Thanks a lot. Jeff, do you want to take the CIB one? And I'll maybe talk a little bit about 2020.

Yeah. On the CIB... It was a good third quarter for us, particularly in the M&A advisory and debt underwriting side where we think we landed the strongest third quarter in the history of the bank. There's always a degree of volatility in the markets business. We did reasonably well in FIC. We'd still like to be doing stronger in equities than we are right now. Fourth quarter last year, as everyone recalls, had a very tough end of December, and you can't count that out again. We feel good in terms of the market share gains. We continue to see gains in prime brokerage, both on the equity side and on the fixed income financing side. So let's see how we compare with the European peers as they report next week. All the dialogue we have with the buy side is quite good. There's still certain markets where volatility is at very historic lows. And obviously, we'd love to see the course of 2020 a more normalized level of movement in the financial markets. But maybe that's too short.

Yeah, sure. Thanks, Jeff. And now, Varo, just 2020. I think really the comment that we put in our release this morning is, It's just been realistic about the operating environment that we think we'll be entering into as we get into 2020. You'll recall when we set our targets in the third quarter of 2017, obviously a lot has changed since then. Things I'd call out is the rate environment is obviously significantly lower than we would have thought. We've also been taking a relatively... defensive posture on unsecured credit in the UK, growing our mortgages business more aptly relative to unsecured credit. So I would expect that to be reflected in our net interest margin, coupled with a low rate environment. I think it's just where we are. Of the famous last words, we didn't expect Brexit to still be ongoing. Now, what does that do for our business? It does create some uncertainty, particularly in our traditional banking businesses. So you'll see that Liability balances actually have been growing quite nicely, but there's less demand for credit than we would have anticipated. You can see that, for example, business banking, corporate banking, consumer credit. So I think a combination of just sort of lower asset growth as we get into 2020, a more difficult rate environment, and perhaps a bit more uncertainty as to the sort of path of the macroeconomy is just a dose of realism. We think we still, you know, we have a good diversified business. In some ways, the 9% and 10% are important to us, but perhaps what's more important to us is sequential profit growth, and that's something that, you know, both Jess and I are very focused on. I hope that gives you a little bit more context. Yes, thank you. Thanks, Alvaro. Can we have the next question, please, operator?

The next questioner on the line is from Jonathan Pierce from Numis. Jonathan, please go ahead.

Hello there. Two questions. They're both on CIB essentially. The first question is the comment around the £90 million of net benefit from Treasury sales and counterparty credit risk hedging. Can you give us a flavour as to what the gross components of that were? Because the reason for the question is the fair value in OCI reserves fell by over £200 million in the quarter despite bond yields going down. So I'm just wondering whether actually the Treasury gains were really quite large and then there's a big negative in the other direction on counterparty credit risk hedging. If that's the case, what exactly is this hedging CCR issue? That's the first question. Second question is just to get a bit more colour around the movement in CIB risk-weighted assets in the course that they were up about £9 billion. Can you give us a sense as to how much of that was FX-driven? And there also looks like there were some model and methodology changes in the quarter that were quite big as well. I'm really trying to get to the bottom of the extent to which the book itself, the book size has driven up CIB as opposed to other issues like FX and model changes. Thanks.

Yeah, thanks, Jonathan. I think I'll take both of them. So on your first one, the sort of, if you like, the gross components of the $90 million benefit that we call that. Really what we've tried to do here is, you know, we've disclosed TradeWeb as well. It just helps folks that find this useful just to try and isolate out for you what are the non-recurring items. And I think there's three this quarter. TradeWeb, as you pointed out, Treasury gains given the very strong rally in rates that, of course, has reversed already in Q4. and counterparty credit risk hedging, CBA hedging, as a lot of people noted. You are right that the growth gains are obviously, you know, reasonably well offsetting. We haven't disclosed what those growth gains are, but, you know, they're meaningful. If they were that significant, I think I would have sort of called them out in the release. I won't sort of throw out a number on the call, but you're right that the Treasury gains were larger than the losses on counterparty credit risk hedging. But if they were that significant, I would have called them out.

I'm sorry, just a follow-up. Do you think that will be a negative then in the fourth quarter in terms of the combination of those two? I guess it will just be Treasury losses in Q4.

Yeah, I mean, it depends on the rate environment and a whole bunch of factors, Jonathan. So at the moment, rates have backed up a lot. I guess look at it in the sort of glass half-full way. If we were able to take some gains in Q3 as rates rallied and able to add backing to our liquidity pool as rates sold off, that turns out to be quite fortuitous for us because obviously the carry on the liquidity pool will show up in subsequent quarters. So, you know, it's just way too early to be sort of, you know, extrapolating those things, I think, Jonathan. You had a question on what sort of the counterparty credit risk is. I mean, it's nothing cleverer than, you know, we have a whole bunch of counterparty credit risk out there from both collateralized and non-collateralized counterparties, and we need to manage the risk effects of that. That does get harder as you get into, particularly when forward rates in things like euros go negative, that becomes quite hard to hedge. So it's just some of the effects you have in a low-rate environment. You also had the question, I think, on risk-weighted assets in the CID. Yeah, I put it in the half just coming straight out of FX. The table that we have in the disclosures is there, but it doesn't really do a great job of stripping out the FX component. You'll probably see that in our footnotes there. But to try and be a little bit more helpful, I'd say half of the growth in CID came from FX. You know, FX has obviously moved quite a bit since Q3, so that will be what it will be probably the other way at some of these rates. The other half I would put in a combination of a little bit of book growth and sort of effects that you have as we close the quarter at the end of September. Perhaps a more helpful measure for folks is what was the average RWA through the quarter, and that's a bit lower than the spot print that you have there. So very modest, I guess, period end book growth, but I put that into the regular way. I don't think there's anything sort of asignificant in the sort of perpetual flow just as trading activity changes.

Okay, that's helpful. Thanks very much.

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

The next questioner on the line is from Joseph Dickerson of Jefferies. Joseph, please go ahead.

Hi, good morning. Thanks for taking my question. Just two quick areas. On the net interest margin in the UK, was the benefit quarter-on-quarter primarily from funding costs coming down, and therefore that's what is guiding the commentary around the Q4 movement, firstly. Secondly, just coming back to the caveats around the ability to deliver on the ROE target, it's not exactly like the street is there, first of all. in terms of estimates, but good to have the caveat, I suppose. I guess in terms of considering offsets, how would you think about in a lower for longer environment, and I suppose certainly part of your business may be impacted by whatever the Bank of England does or doesn't do, post any resolution on Brexit, but how would you think about pacing things like investment spend and variable comp? Because I noticed the quite robust cost performance in the investment bank in the quarter. So how would you think about those two dynamics in terms of attempting to deliver on the ROE aspiration set out for next year?

Yeah, thanks, Joe. Why don't I take the question on them and I'll hand over to Jeff to talk a little bit more about our investment spending for a longer rate environment. The net interest margin, I wouldn't say it was funding cost as much. You may recall in Q2, we made an adjustment to reflect the customer behavior that we've been seeing, particularly in the mortgages businesses. We've seen the refinance at much quicker levels than refinancing into longer fixed products. So we reflected that, and that sort of catch-up, if you like, to actual customer behavior resulted in probably a slightly lower NIM in Q2 than you would have on an underlying basis. I would say that's probably the bigger... Delta from Q3 to Q2. Some people may not pick that up. In Q4, though, and I think this one is important, if we're to hold NIM, I think, close to these kind of levels, it would probably be a touchdown. But I would expect Q4 NIM to be lower than the Q3 headline number. Now, what's driving that? There's really two aspects that I'd call out there that we can see at the moment. One is we continue to grow our secured book. relative to our unsecured books, so just the mass of a lower margin product growing at a quicker pace than a higher margin product. And the second thing is we have seen a very deliberate decrease in our interest earning balances in the card business, and I expect that to continue to roll into Q4 as we continue to position ourselves in the right way for that business. So I think a combination of those two factors will have a lower Q4 NIM, but over the full year, it'll be probably a touch lower than we've had for Q3. And with that, Jess, do you want to cover the... Yeah.

For sure, lower for longer, I think, makes it challenging for the financial industry, whether it's a bank or an insurance company, particularly if the yield curve is flattening. One of the realities with a European bank, UK bank, or a US bank, we all have to manage... very sizable liquidity pools now, and those liquidity pools basically get trapped in those low interest rates, and obviously that's going to have an impact on your performance. In Europe, you've got negative interest rates, and that so is particularly acute for the European banks. The 10-year here is well below 100 basis points, and so that has an impact, and we wish we had the 10-year that they have in the U.S., On the other side of that, however, low interest rates on one level should help the outlook for your credit environment. And so as we look at impairment, particularly in the small business and corporate side, those lower interest rates can translate into improvement in your provision line. And the open question, I think, for all of us is if we are facing economic headwinds in Europe and possibly in the U.S., is there going to be a fiscal response in Europe the way you've seen the fiscal response in the U.S.? And so I think that's one of the things that we're looking at in addition to obviously hoping to get the Brexit uncertainty behind us. But a lot of the headwind that we talk about for the 10% target for next year is much more focused on the UK, the Brexit uncertainty, and the interest rate environment here, particularly versus the environment when we set this target in the fall of 2017. But on the other side, you know, we hope that the diversification of our business model, the sizable position we have in the U.S., both in the U.S. consumer business, but particularly in the IB, currency plays in our favor there. So, There are pros and cons, but we didn't want to leave a degree of caution for next year.

Can I just ask on the point that you made on liquidity? It's just another macro level point on the need to hold liquidity. It seems that is part of what is exacerbating the repo market in the U.S. and prompting the Fed to have to open the windows. Is there any way that that is impacting your business? You have an incredibly liquid balance sheet, particularly relative to some of the other primary dealers. Is that providing any opportunities for you in terms of market making in the U.S.?

We have a very sizable repo book in the U.S. I think we're one of the largest banks in that market. All I'd say is obviously no one likes to see a market like that break out the way it did for those two businesses. But they were actually quite active for us and we stayed in the repo market quite strongly and were there to provide the ultimate financing for our clients that needed it.

Joe, the only other comment I'd make on that is we probably don't have the G-SIP pressure that maybe some of the money center banks in the U.S. have called out in recent times. So it probably makes it a little bit easier for us to navigate through that. Thank you for your questions, Joe. Could we have the next question, please, operator?

The next question on the line is from Ed Feth from KBW. Ed, please go ahead.

Good morning, everybody. Can I just ask about international consumer and particularly some of the credit matrix? And I'm just trying to square your comments about optimism in that market and in that sector. But when I look at your credit, the actual underlying dynamics look to have deteriorated significantly. certainly Q3 versus Q2. And if I look at your coverage, you've let your coverage come down Q3 versus Q2, certainly on your Stage 3 assets. So I'm just trying to assume we've got a challenging environment. It's an overseas market, which intuitively one imagines one's not as close to, but I know that's probably a little bit unfair. But also it's an area you're growing at the same time as credit seems to be deteriorating. I'm just trying to square all those factors, if you could help me there.

Yeah, sure, Ed, I'll take that one. The impairment charge sequentially is something I sort of called out earlier on in the year, and I think sort of most people picked up on that, and that the shape of impairment for that business is going to follow really the sort of seasonal spending patterns. So there is a build-up in balances in the latter part of the year and a sort of flat to pay-down in balances in the early part of the year. So Q3 impairment was certainly expected to be higher than Q2, and I think Q4 you would expect it to be a touch higher again as we get into the Thanksgiving and Christmas period, which tends to be the most active period. When you step away from the dynamics of how the accounting charge works, we're not really seeing really any flashing lights or anything that gives us too much concern about in U.S. consumer credit from, if you like, more leading indicators, be they delinquencies, be they affordability, be they spending patterns, spend behavior even. So I think it looks okay at the moment, but we are cognizant that we are growing that business in what appears to be a record-length expansion in the last year of a presidential cycle and may or may not be a good year, but for the first years of following presidential cycles do tend to have an adjustment period usually. And so when you're looking in the consumer credit business, we're almost as much interested in what 2021 looks like than 2020 in and of itself. And as a consequence of that, we are much more focused in growing our affinity business, our partnership products, particularly in the airline space, which tend to have relatively high FICO scores and relatively low sort of risk, so lower margin, lower risk product, and have not been growing sort of the high-risk parts of our portfolio much, particularly our own branded books at the Barclaycard branded business in the U.S. if anything shrunk slightly. So I know the accounting can be a little bit odd, but looking through it, I think that's how we're thinking about the business. Is that helpful?

Yeah. No, I wasn't thinking so much of the accounting. I was thinking if you look at the arrears, they've gone from 2.4 to 2.6, which is I know in itself it's not a big number, but that's sort of odd when, as you say, you're growing the lower risk part of the business rather than the higher risk part, and it's at a time when the balances have grown quite strongly anyway, so the percentage of areas you would have thought would be coming down.

Is it like one thing, or is it a... No, look, I think it's small differences on small numbers, so I don't read too much into them, and as you say, we've been growing the portfolio reasonably steadily at sort of mid-single-digit percentage. You're going to have a seasoning effect... as those cards sort of season out, the actual revolving begins. So I think it's one of those things, Ed, that we're all looking for that canary in the coal mine. Trust me, we're looking as hard as anyone. I'm not sure we're seeing it yet, but I would absolutely caution everybody that these are short-term indicators and what feels relatively well-controlled and where we'd expect it to be now. three, six months later to feel different. So we are very vigilant around that space.

And as Sujar said, I think over the medium and long term, our focus increasingly on the co-brand space and less on the branded space should improve the credit profile.

Okay. Thanks very much. Can we have the next question, please, up right up?

The next question on the line is from Robin Down from HSBC. Robin, please go ahead.

Good morning. Good morning. couple of questions from me just looking ahead slightly to 2020 keeping with the 10% plus target consensus is at 8.4% for 2020 so quite a big gap there I guess a couple of things that I would just highlight and want to get your views on you seem to be suggesting kind of a slightly lower run rate now for UK car losses going forwards but if you look at the overall group and pennant charge in consensus next year, it's kind of 20% up on this year. And just whether you kind of feel that that's a realistic outcome, barring any sort of major UK economic disaster. And the second question, I guess what you're really flagging up in terms of the challenging environment is what we're kind of all expecting, which is that the revenue environment is going to be that much weaker kind of going forwards. Can I ask you about the corollary of that? Do you see any cost flexibility in 2020? And how much flex do you have there if revenues do turn out to be weaker than expected?

Thanks. Yeah, thanks, Robin. Why don't I talk a little bit about impairment and your question around consensus and Jessica can cover cost flexibility. Look, I wouldn't comment on next year's consensus. It's quite an uncertain environment we're going into. But to try and be helpful We've always said that the UK business, for having my scripted comments, that we've glided to around 200 million a quarter. I think that'll be probably slightly at the upper end of performance from here, somewhat because our interest earning balance is in cars. We have reduced somewhat. I see that trend continuing a little bit. So I don't think it'll be much lower, but they will be a bit lower than the 200. We've always talked in the past in CIV, which is much more of a name-specific type of Again, hard to predict because, you know, when it's in single names, it's always a little bit hard to tell. But somewhere around 50 a quarter is a good sort of benchmark to have out there. And then US cards, a slightly more different shape, probably not as even over the year. It starts off lower and ends up higher. But, you know, if you take sort of the average of where we've been running, once you see Q4, it's probably a reasonably good jumping off point into next year. Of course, added to that, we do expect the book, unlike in the UK cards business, we do expect the US cards business book to grow. So you should layer on some growth as well when you're doing your forecast. And all of that is a subject to all things being equal. Any sort of changes in unemployment, revisions down in GDP, et cetera, the IFRS 9 is sensitive to that, so it will capture those effects pretty quickly.

On the cost side, I guess the first thing I'd say is I think we've done a pretty good job over the last three, four years of managing our costs down, and we've pretty much delivered every year where we've guided to in terms of bringing our costs down. That being said, like in this quarter where we outperformed the consensus by quite a bit, almost driven entirely by the revenue lines. And so as we think about headwinds as a management team, what we'd always like to do is to deal with those headwinds by delivering higher revenues than by necessarily focusing on the cost side. And I do think there are a lot of investment opportunities for the bank that we are making and that we need to make. We spent a lot of money the last year bringing in new algorithms for all of our electronic trading, whether it's cash equities or interest rate swaps. We do have the highest valued banking mobile app in the UK and put a lot of investment in that. Part of the improvement in our corporate bank is through our transactional volumes coming out of Europe, which is all based on a new operating technology for our corporate bank in Europe. So what we'd like to do is to continue to invest particularly around technology in order to grow our revenues and not try to achieve these profitability targets by hitting on costs too hard. So, you know, like we've done in the last couple of quarters, we want to grow our revenues in the face of the interest rate environment that we're dealing with and take cost efficiencies and use them to invest in the business.

Thanks for your question, Robin. Could we have the next question, please, operator?

The next question on the line is from Martin Leichter of Goldman Sachs. Martin, please go ahead.

Yes, good morning. Firstly, I would like to ask you on what your view is on capital return. And I was just wondering, in terms of the new threshold, is your intention essentially to return capital as and when your Q1 ratio is above that new 13.5%? but then threshold, and do you think the supervisor would grant you the permission for that? And related to that, what is your view at the present time when you're considering dividends versus buyback? I know you obviously increased the dividend outlook for this year. How do you gouge between the two, given where the stock is trading? And the second question, more broadly, on... the equities business in Europe and about the industry as a whole. Just looking at recent news flow, we had one competitor pulling out of equities last quarter. There is reports out there that another major competitor is considering to reassess its equity franchise. And I was just wondering how you see the equities industry evolving from here and what do you think the right positioning here is for Barclays going forward? Thank you.

Sure. First, on returning excess capital to shareholders, you know, obviously, you know, the negative note for the third quarter is by returning excess capital to shareholders, we had to return excess capital to PPI claimants to about 1.4 billion pounds. Yeah, we think our CT1 ratio at around 13.5%. is appropriate and over that level. As we generate capital, we think that we can increase the return of capital to our shareholders. As you note, we have tripled the dividend in the last two years to roughly nine-tenths this year. Let's see. Our payout ratio is around 40%, and we'd probably like to keep that. But for sure, with the stock paying out where it is, buybacks are something that you would like to see. But we're not going to talk about them until they start to happen. In terms of the equity franchise for the IB, I think to be a bull's bracket investment bank in the two deepest capital markets being Europe and the U.S., I think you have to be across all asset classes. which includes equities. As I said, we've been investing in the electronic trading on that platform. We like the franchise that we've got. We think we've got a very good research product. We believe that we can compete with the major U.S. players as we are. So we're going to stay fully invested in that business.

Thanks, Monty. Could we have the next question, please, up right here?

The next questioner on the line is Guy Stedding from BNP Paribas. Guy, please go ahead.

Good morning. Two questions coming back to costs and capital. Firstly on costs, the sub-13.6 for the full year you've reiterated is looking quite tough. I appreciate currency was a headwind in Q3 and currently ought to be a tailwind in Q4, as you say. But even adjusting for this appears to require a step down in the run rate of costs beyond what we've seen so far this year. So I'm trying to understand where that could come from. It seems like you're guiding up on head office versus expectations, presumably not enough for Delta in Barclays UK. So is it really the CIB we should be expecting this to come from? And with that in mind, if Q4 was quite strong in the CIB and you found it hard to justify cost takeout there, would you be content missing the 13.6 target? So that's the first question. And then on capital, to come back to other forms of potential capital return, Looking at the movements in Q3, you're now 10 basis points below the new target, and Q4 doesn't tend to be a strong quarter for capital generation. RWAs have been growing, although that's partly FX-related, and you're accruing a larger ordinary now than was the case previously. Should we therefore assume any discussions on excess capital repatriation beyond the ordinary is really a topic for first half 2020 at the earliest, or is there something else going on that's perhaps missing? Thanks.

Yeah, thanks, Guy. On cost, All things being equal, you know, you've done the math and you're absolutely right and you'd expect a step down. Having said that, the only thing I'd just maybe to help with the modelling, bank levy, we were probably a little bit lower than a run rate would imply last year. We had some benefits that were from prior sort of tax periods that we were able to recognise in the fourth quarter of last year. So, you know, the bank survey actually may be up year on year, but that's really just a function of some catch-up components that were just one-timers in Q4 of last year. So when you're doing your modelling, you might find that a bit helpful. So, you know, bank survey is probably in the $300-ish million, maybe a bit higher. So the rest would be an implied sort of step-down in run rate operational expenses. All things being equal, obviously, there's an FX component there that none of us know what will be for the rest of the year. I think you would expect that to be, through most of the divisions, I certainly see UK being a touch lower, as well as the CID being a touch lower. It's a high-cost problem, the one that you sort of threw out there, which is if we have a very strong performance in CIB, how would we think about incentive compensation in that business? You know, we are a pay-for-performance culture. We look at everything in the round. We look at the overall group's profitability. We look at the division's profitability. We look at where we are competitively. You know, we'll just do the right thing. I sort of go back to what I said at the beginning. While sort of the 9% sort of type targets are important to us, They're more sort of, you know, way markers for us rather than, you know, you absolutely need to sort of hit specific levels. What's more important to us is continued sequential profit improvement. And so we'll do the right thing in terms of managing the company for the medium term rather than just doing short-term decisions for the sake of it. On your second question around capital and... Should we be entertaining any other forms of distribution in the first half? I think Jeff probably answered that in the earlier question. You know, we'll keep you updated as we go along, but I don't think there's anything we're intending on sort of guiding or commissioning at the moment. You know, something we'll keep you posted on as we progress.

Okay, thanks. Can I come back to your comments there on cost and the 9% return? I mean, just Could you foresee a scenario where CIB revenues were strong in Q4 and you therefore felt you had to pay for that, so you didn't want to take the cost base down too much in CIB in the fourth quarter, but you still missed the 9% return? I mean, is that a scenario that you could envisage playing out still?

Look, I think that's too specific. I mean, you can look at the CIB cost numbers in the third quarter where we had a pretty good performance. So we're not going to slavishly be held to 9%, but obviously we all recognize that we need to deliver a good return to our shareholders, and that compensation is a variable that you can manage to deliver that return.

Okay, understood. Thanks.

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

The next questioner on the line is Farhad Khanwar of Redburn. Farhad, please go ahead.

Hi, morning. Thanks for taking the questions. I have two, actually. Just one, just back on the balance sheet deployment to the investment bank. So you said half the RWA's and the CIB were kind of activity and trading and half were FX. And then also if you look at the leverage, is it a leverage increase of around 21 billion at group level, which I assume is the prime balances that you talk about. If I look at the share of the CIB, the percentage of group capital has gone from 55% to 59% of the quarter. Where does that tap at at the moment? I mean, do you think to carry on taking market share, should we think that you need to carry on deploying costs and capital to that business? Or do you think realistically, in the current environment, without a kind of cycle pickup, you can take share while not deploying capital and costs to that business? That's the first question. And the second question, just on the structural hedge, can you give us a sense of how much we've dragged that year on year? You know, we're setting our UK and I targets. you must know the answer to where the starting point is. How much of this kind of flat yield curve does that drag on? And also, if the yield curve inverts, do you just stop at reinvesting the hedge or do you carry on reinvesting it as it goes negative?

Thanks. Thanks, Fahad. So why don't I take both of them. Yeah, the potential risk-weighted assets in the group sort of going up from 55, 59, you've got to remember that's nearly all driven by the fact that the operational risk-weighted assets in Pillar 1 have reduced by $14 billion and have been sort of included in pillar two. So I think that's just a feature of the changing treatment of risk-weighted assets, which makes it more comparable to other banks. So we're comfortable with that. The book growth that we saw in the CIB this quarter, I mean, it's just regular way stuff. And as I say, average RWAs are actually lower than the spot number. I wouldn't characterize this as some sort of net increase in capital to the CIV and nor are we intending to do that. I think we've been over the last I think probably two years and have all this sort of time history in front of me but we've been operating at this level of risk weight plus or minus several quarters now and you've seen we've been picking up market share both in investment banking fees where you know we had our best third quarter ever we were sort of fifth in the US ahead of one of the larger American peers which we're very pleased with and If you look at coalition data, I think you'll see that we're picking up market revenue share as well. So for us, it's the same again, continuing to do what we can there. In terms of hedge drag, to try and help you out, if we take the yield curve as was at the beginning of the year, and I look at where it is now... And, of course, it's a bit lower now than it was earlier in the year. Earlier in the year, I threw out a number of about negative 50 in hedge contribution. That's probably nearer 100 now at these rates. But, you know, rates will go up and down. You know, I have no idea which direction they're going in. And, you know, they've sort of doubled since late September in terms of yields. So who knows where they'll go from here. And I think that sort of answers your sort of final part of the question, if curve inverts or whatever. You know, we're not running sort of a rate view here as management. All we're doing is rolling our structural hedge to provide some stability to our income profile. So we'll continue to roll that rather than trying to get too clever and time the market as part of our structural hedging activity.

Thanks, Peter. Sorry, just one quick follow-up. On the CIV as a representative group risk-based assets going to kind of close at 60%, So do you have a cap in mind as to how much the CIB should consume of group capital?

Well, we don't sort of have these sort of artificial caps because, you know, things will ebb and flow. All I would say is I don't think you'll see a net capital addition to the CIB on a trend basis at all. We've got enough and we'll do what we need to do with what we have. I would expect as a trend basis over time our consumer businesses The growth, you know, they're relatively slower moving, but, you know, you see we're growing our U.S. card business, for example. We're growing our mortgage business, so I would expect to see our U.S. consumer, sorry, our consumer-oriented business is growing quicker than you'd see I'd be holding roughly where it is. Perfect. Thank you very much. Thank you. Can we have the next question, please, operator?

The next question is from Chris Kant of Autonomous. Chris, please go ahead.

Good morning. Thank you for the call and taking my question. Two on head office, please. Just looking at the quarterly print, you've got the minus 55 million revenue print for the quarter, and that includes the benefit of the bagel dividend and obviously reflects the absence now of the RCIs. If I take that 3Q level as a steer, allowing for a bit of improvement on the drag from legacy derivatives and the annual effect of the bagel dividend, it looks to me like that would point to something like 250 million of revenue drag in 2020. Is that reasonable, please? And then on costs in head office, again, you seem to be settling into a circa 50 million a quarter run rate there, ex levy. Should we be assuming 200 million per annum going forwards as head office costs, please? Thank you.

Yeah, thanks, Chris. On the income side... Your characterization is right. If you back out the bagel dividend and try and get to sort of X that sort of one-off, the numbers in front of you are nearer to 100 million, I would have thought. Now, within there, you've got the talk of go back in time here. You've got the hedge accounting effects going on in the head office, and these are a sort of unwinding of the hedge accounting effects that we had from the sale way back when of our non-core So these are sort of technical accounting effects. It ought to come down a little bit over time to just sort of ebb away, I guess. I think what I'll do is, rather than now, but perhaps at the full year results, I think probably give folks – I know it's very hard to model from the outside – give some guidance on what head office income profile looks like. Generally speaking, you should see a slight sort of ebb away for those underlying hedge accounting relationships as they just expire. And on the cost side, the one variable item there, we've got the Italian mortgages in our portfolio, and there are servicing costs and various other things that sort of flow through the cost line as a consequence of that. To the extent we're able to divest of them, you would see a commensurate sort of reduction in cost. sort of where it is, but, you know, to the extent you see us exceed any of the Italian mortgages, I should allow you to see the cost sort of drop out there. Those are the two effects I'd call out.

If I could just clarify, Tushar, and I appreciate you said you'd give some clearer remarks for your results, but were you indicating that it was a $45 million benefit from the bagel dividend in the quarter, so the current run rate for revenues is... minus 100 million a quarter pre-Bagel dividends. Is that what you said there?

It's a bit lower than that, I think. It's more like 30, I think, from memory, 30, 35 million, the Bagel dividend. We can even get it across to you if you like. I'll send it to you. But I think it's in the 30 to 35 million zone. Okay. Thank you. All right. We have the next question, please, operator.

The next question on the line is from Andrew Coons from Citi. Andrew, please go ahead.

Good morning. Two, please. The first on the UK consumer loan losses, only 49 million. I think it's the lowest quarter on record. If I look at your IFRS 9 disclosure, I think it's stage two, not past due. It's come down quite materially queue on queue. So it looks like you've refined some of your models around the UK card book. Let's elaborate a bit more on exactly what's happening there, please. And then the second question is on the transaction banks. I'm actually interested in the outlook there and the sensitivity to U.S. rates.

Thank you. Yeah, I take them, Andrew. On U.K. cards, you may have picked it up on my scripted comments. It is a lower impairment charge than you would normally have on a sort of a regular basis. The reason for that is that we periodically recalibrate our models from time to time. And IFRS 9 was introduced in the early part of 2018, a year and a half sort of experience, and we recalibrate those models to actual experience. And as a result of that, there's some sort of catch-up, if anything, our actual customer behavior. has been better than was forecast, so there's that sort of one-time catch-up, and that just feeds into, if you want to get into the guts of these models, estimates around exposures at default, and probably at the defaults, get recalibrated down in line with actual experience. That's the non-recurring component. I did guide a little bit earlier on, so if you look at the UK in total, I've always said sort of 200 million is a reasonable sort of quarterly run rate. I think that's probably at the higher end of what I was expecting, than the $200 million.

On the transaction bank, I just got very little correlation, I think, with interest rates. I'd say what you're seeing in transaction banking for us is the impact of two initiatives. One, importantly, is the new platform we have for transaction banking for corporate relations in continental Europe, which we rolled out a little bit a year ago, and we've already seen quite an uptick in balances and deposits being left with us, some foreign exchange trade coming out of that, our clearing business there. So extending our corporate platform from the U.K. to Europe has started to pay dividends. And then, secondly, and equally important, as we talked about last year, we've gone client by client, particularly with our largest clients, where we have a return on risk-rated assets because of the extension of credit principally non-drawn revolvers. And where we have a low return on risk-weighted assets, we've gone to those customers and said, either we have to increase our transactional volume through Treasury or we may step away from the facilities. We are about halfway through a two-year process to do that. We've had a significant update in our return on risk-weighted assets for each of those clients. and that has been translated through the transaction volume line. So we don't see that, you know, and one of my things about that business is very capital light and very straight and sensitive.

Yeah, and I think just to add to just this point on that, you know, we're able to offer transaction banking services on the continent of Europe now, I think in five or six countries, and we've got a few more coming online this year. We've added about 200 new clients over the course of this year that are leaving cash management business with us as a result of those rollouts. So, you know, it's sort of early steps, but the client acquisition rate's been very good. The other thing that's actually quite exciting for us in that business is joining that up with some of our payments capabilities. So another thing that we have rolling out is merchant acquiring capability over the I think about five or six countries in Europe with several more coming online, countries like Poland, Austria, et cetera, coming online. And the referrals between the corporate bank and the merchant acquiring business, we've had 19% increase in referral rates across that business. So I wouldn't say this is going to make any sort of huge difference to next year's numbers or perhaps even after, but when I look at the medium term, the ability for us to attract these clients with no physical sort of footprint in Europe and the cross-referral activity going on is a really nice trend. You know, extraordinarily capital-like, not heavily regulated, and very additive to us. So more of a medium-term thing, but hopefully that gives you some other color. That's very clear. Thank you, Ben. Thanks. Could we have one more question, please, operator, and then I think we'll wind up the call.

The last question today comes from Anka Rankin from RBC Capital Markets. Anka, please go ahead.

Thank you very much for taking my two questions. Firstly, to follow up on the NIM and into 2020, from your comments you made about the structural drivers, is it fair to assume that we could assume a further decline into 2020 from the Q4 levels? And then on PPI, I'm sorry if I missed it, but just to get a bit more of a sense on how comfortable you are with the $1.4 billion, how far have you gone through the claims? Thank you very much.

Yeah, thank you, NK. On your first question, yeah, look, I think Q4 NIM will be lower than Q3 NIM, and, you know, it's a little bit hard to tell when you're sort of projecting out too far out, but there's sort of two forces in play for us, or perhaps even three forces in play. One is growing our mortgage business quicker than our cards business, so that's dilutive to NIM just as a mathematical construct. Secondly, I do think our interest earning lending balances in cards are reducing and continue to reduce a bit more. That obviously lowers our NIM. And the third thing is the rate environment. Obviously, we have a lower sort of rate environment that we appear to be entering 2020, and then we enter 2019. So, you know, those are factors that are probably, you know, downward pressure on NIM for into next year. But I wouldn't extrapolate too far into the future, obviously, where mortgage margins and various other things go. It's very difficult to forecast. PPI, we feel good with our provision of $1.4 billion. We've given some sensitivities in our release, which do have a look at. It gives you a sense of the assumptions that we're making and were those assumptions in real life to be different to our forecast. You get a sense of what this range of outcomes are. But as we sit here today, everything that we've seen suggests that we're doing okay. In terms of progress through PPI, we had an

Dallas, if you correctly, you said two-thirds.

About that, yeah. Okay. So this is two-thirds. If you look at the sort of claims that came in the July and August period, and I wouldn't say claims, sort of literally every piece of information that came in, and we're about two-thirds real as an initial processing matter, just to sort of sift through those are real and those are not real, but that's kind of where we are.

Thank you very much.

Okay, and I think we'll wind up the call there. Thank you very much for joining us and see you next time.