Barclays PLC

Welcome to the Barclays Third Quarter 2020 Analyst and Investor Conference call. I will now hand you over to Jess Bailey, Group Chief Executive, and Tushar Mazari, Group Finance Director.

Good morning everyone, and thank you for joining us today. First of all, let me say that I hope you and your loved ones have been keeping safe and well. It feels like the last time we did one of these calls was a long time ago and in a very different world. Obviously an event like the COVID-19 pandemic changes priorities and inevitably makes individuals and companies like ours focus on what's really important right now. For us that means running the bank safely and properly, helping our customers and clients through the difficulties they face, supporting the UK economy and the communities where we live and work, and taking care of our colleagues around the world. We've been able to do that because of the underlying strength of our business and the resilience of our diversified model. And I've been especially proud of the way my colleagues across Barclays have listened to the challenges of this extraordinary time. So I want to start today by taking a few minutes to set out how we've been responding to the crisis. Our business touches half the households in the United Kingdom. We know that some of our customers are facing very real and very daunting financial challenges. And this is a worrying time for the vast majority, regardless of their circumstances. We've moved quickly to give them the reassurance and support they need. To give you just a couple of examples, so far we've granted repayment holidays on 94,000 mortgages and on over 57,000 personal loans. We're providing an interest-free buffer on overdrafts for 5.4 million customers. And beyond that, we've reduced and capped charges until at least July. We've waived late payment fees and cash advance fees for 8 million Barclays Card customers and granted some 87,000 payment holidays. 655 branches remain open across the United Kingdom, providing vital banking services while our teams are fielding around 260,000 calls a week. That's 44% higher than the typical volume. And I'm really pleased that we've been able to proactively identify NHS and key workers among our customer base and move them to the front of call queues as their time is especially precious at this moment. Getting businesses through this period intact is crucial to give the best chance of a rapid and sustainable economic recovery. It is also in our shareholders' interest. The UK government has put huge resources into supporting that ambition. And it's a central topic of every conversation I have with ministers. It is an unprecedented effort by them and by the Bank of England. And we're committed to playing our full part to help get that support to the businesses that need it. We have now approved some 3,760 civil loans with a total value of 737 million pounds. And we expect those numbers to increase rapidly in the coming weeks. Behind those numbers are stories of businesses and jobs surviving this crisis. Take the Titanic Brewery in Staffordshire, a local favorite selling three million pints in a normal year through its chain of pubs and beyond. We helped them secure a one million civil loan and put in place a 12-month payment holiday on an existing loan with us. That has allowed the business to keep producing and selling beers online, protecting jobs, and allowing them to pay their furloughed workers full wages. Or the Queensberry Hotel and Olive Tree Restaurant in Bath, which I've been to. This family-run four-star hotel has had to shut its doors due to the coronavirus. But with our help, they were able to get a 450,000 civil loan quickly. That loan means that they can cover running costs, their staff are able to be furloughed rather than laid off, and they'd be able to retain their hard-earned Michelin star, which would have been forfeited on closure. Make no mistake, interventions like these are making the difference between survival and failure for businesses. And we're pleased to be playing our part in keeping them going. We've also been central in helping larger businesses to access the Bank of England and Treasury's CCFF program, arranging billions in commercial paper for UK corporates over the past few weeks. In addition to our backing for those government schemes, we've also been able to provide significant help of our own to our business clients. For example, we've waived everyday banking fees and overdraft interest or charges until June for 650,000 of our small business customers. And we've put in place 12-month capital repayment holidays for most SMEs with loans of over 25,000 pounds. And we're continuing to extend credit to companies, and there are 50 billion pounds of lending limits available to our UK clients. We're not stopping here though, and we'll continue to evolve our approach in offering to clients, big and small, to help them through this crisis. Because it is crucial that we preserve as many businesses and jobs as we can to aid the recovery when it comes. Barfield has deep roots in the communities where we live and work, and I'm proud of everything our colleagues do year-round to support the local areas, and never more so than now. That includes going way above and beyond for our customers to help them in any way we can. Whether that's our colleague, Glenis Wilson, who's in a contact center in Sunderland, helping a customer in dire straits to access charitable support, and making a goodwill payment from us to see that customer through a tight spot. Or our colleague, You Know a Mystery, in Hyde, bringing vulnerable customers to see how they're doing, and then getting an ambulance for a gentleman who is obviously having difficulty breathing. Or our colleague, Caroline Pearson, in the Harrow and Edgeware branch, helping an -year-old customer keep a special promise to her grandson by guiding her through buying on his birthday a pair of trainers online. These are just three small stories in hundreds up and down the country where our people are working beyond their professional obligations to support customers. We are carrying on delivering our core citizenship programs such as Life Skills and Connect with Work, with a particular focus on helping mitigate the impact of COVID-19. But we're trying to do even more. For example, where we can, we're now offering colleagues four weeks paid leave to volunteer to support health and social care work, helping those impacted. And as you saw, we launched a 100 million community aid package, made up of 50 million in grants for charity partners in the UK and our international markets, and 50 million to match colleague donations. That equates to up to 150 million pounds from Barclays and our colleagues deployed to help communities and people hardest hit by the crisis, from providing food to vulnerable families to purchasing protective equipment for NHS staff. We understand that our fortunes are intertwined with those of the communities and economies we serve, and at times like these more than ever, our obligation is to support them. And we're going to continue to do that and prioritize that effort throughout this crisis. In recent weeks, we've also taken a huge step towards ensuring our broader sustainability as we laid out an ambition to be a net zero bank by the middle of the century. That means reaching net zero in terms of direct and indirect emissions by 2030. And for the business activities we finance across the world, we're going to align our entire portfolio to the Paris Agreement, starting with the power and energy sectors. We've also committed to increase our green financing to 100 billion pounds by 2030. This represents a comprehensive and bold package of measures which we are putting forward at the annual general meeting on the 7th of May. Finally, and before I hand over to Tushar to take you through the numbers in detail, I want to briefly set out some overall thoughts on our performance in Q1. The impact of COVID-19 came late in what was until that point a very good quarter. That said, the performance of the business since then has demonstrated clearly the resilience of our universal banking model, rooted in diversification by business line, geography, and currency. So while, as you'd expect, returns were down in Barclays, UK, in any consumer card and payments, the corporate and investment bank performed well, producing an ROTE of 12.1%, in particular via support for clients in a period of extreme volatility in the capital markets, where our FIC revenues in dollars grew 98%. Sustained cost discipline and positive jaws in our CIV delivered a group cost income ratio of 52%. That's better than our target of less than 60% of our time, in our lowest quarterly group cost income ratio since 2011. Overall, the group return on tangible equity for the quarter was 5.1%. Given the uncertainty around the developing economic downturn in the low interest rate environment, 2020 is expected to be challenging for our business. That said, we continue to believe that a sustainable group ROTE above 10% is the right target for Barclays and attainable over time. We've taken in the first quarter a 2.1 billion credit impairment charge, of which 1.4 billion is a result of applying a very challenging forecast through our credit models, but we think this is prudent. Even after this, Barclays generated 913 million pounds profit before tax in the quarter, three and a half pence of earnings per share, an attributable profit of 605 million pounds. The group remains well capitalized with a C-31 ratio of 13.1%, and we will manage our capital position through this crisis in a way which enables us to support customers and clients whilst maintaining an appropriate headroom above our maximum distributable amount, which is currently at 11.5%. As you know, in the sponsor request with the PRA, we canceled the 2019 four-year dividend payment. The board will make a decision about future dividends and capital return policies at the end of 2020, when the full impact of COVID-19 on our bank is clear. So to conclude, in summary, my colleagues and I are today primarily focused on what matters right now, which is supporting our customers and clients, our communities, and the wider economy to navigate the pandemic. The strength of our business and the resilience of our model means we can run this bank safely and properly and provide that support until the crisis passes. And I believe that we will emerge on the other side in a strong position to support the recovery and generate attractive returns for our shareholders. Now I'm gonna hand over to C-Sharp to take you through the performance for the quarter in detail.

Thanks, Jeff. I'll summarize the results for the first quarter, which as Jeff mentioned, demonstrates the benefits of our diversified business model. We are facing a period of great uncertainty, which make it particularly difficult to give forward-looking guidance. But where possible, I will try to give pointers for the coming quarters. We reported a statutory profit before tax of 0.9 billion, generating 3.5 pence of earnings per share. Litigation and conduct was immaterial this quarter, but as usual, I'll reference the numbers excluding litigation and conduct for consistency with prior periods. Profits were down on last year, reflecting a material increase in the impairment charge, resulting from the estimated effects of the COVID-19 pandemic. But the ROT of .1% is underpinned by a strong income performance, which demonstrates our diversification. However, given the uncertainty around the economic downturn and low interest rate environment, we expect 2020 to be challenging. We continue to believe that above 10% ROTE is the right target for Barclays Overtime, but we need to see how the downturn plays out before giving any medium-term guidance. The grew income 20%, reflecting strong performance in CIB and resilience in BUK and CCP going into the downturn. Costs were stable year on year, delivering strong positive draws. As a result, pre-provision profit increased by 1 billion to 3 billion. However, the impairment charge increased by 1.7 billion to 2.1 billion. This increase comprised 0.4 billion single name charges and 1.35 billion Net of IFRS 9 model-driven increases, reflecting the effect of running a revised COVID-19 scenario as our basic case estimate and an oil price overlay, which I'll come back to later. The forward-looking nature of IFRS 9 requires that we estimate expected credit losses. So we have taken significant additional impairment above that implied by current credit metrics, many of which do not yet reflect the effect of the pandemic. The CET 1 ratio was down from the year-end level of .8% to 13.1. This reflects strong pre-provision profitability and the cancellation of the fully N19 dividend payment, more than offset by higher RWAs as a result of market volatility and increased client activity and the effect of impairment. There's a strong quarter for PNAV, which increased to 284 pence, reflecting 3.5 pence of statutory EPS and net positive reserve movements of 19 pence. Before I go into the performance by business, a few words on income, impairment, and costs overall. The quarter showed the benefit of the diversification of our income across consumer and wholesale businesses. The increase in group income reflected 44% growth in CIB, driven by a particularly strong quarter for markets, which was up 77%. While our consumer businesses showed resilience in Q1, with income declined to just 4% in both CCP and BUK, we expect those businesses to experience further material pressure on income as the effects of the pandemic feed into consumer behavior. On the next slide, I'll go through some of the income headwinds we have seen across these consumer businesses. We have seen interest rate reductions in Q1 in response to the COVID-19 pandemic, which are affecting both BUK and our US consumer businesses. This will result in margin compression and lower contributions from our structural hedges. On spending, as you see on the right-hand chart, we have started to see significant reductions in spend on credit cards and across payments more generally in March. We've seen a continued reduction in interest earning lending in UK cards and now also in US card balances, which will feed into lower income, although this may also be expected to mitigate the risk of increased impairment on extended balances. To support customers in BUK, we have taken specific actions that will reduce income, notably from overdrafts and support for SMEs, as well as starting to feel the effects of the lower spending on customer balances. Looking now at costs. With a 20% increase in income and stable costs, the group delivers strong positive jaws and the cost income ratio reduced from 62% to 52%. Given the income headwinds I've referred to, we don't expect the cost income ratio to remain at this level through the rest of the year. There are also additional costs relating to the crisis, excuse me, including the 100 million community aid package, suspension of future redundancy programs, and incremental operating costs. On the other hand, travel expenses and marketing, for example, will be lower. We have relatively limited short-term flexibility in costs outside the CIB, particularly in the current circumstances. We will be in a position to implement additional cost plans if appropriate, as we get a clearer picture of the length and depth of the downturn. Cost efficiency certainly remains very important to us, whatever the environment, and we continue to target a group CIR of below 60% over time. I've mentioned the significant increase in impairment resulting from implementing the COVID-19 scenario and from single name losses. As you can see, the increase is most pronounced in CIB as a result of the single name corporate losses and estimated effects of a sustained period of low oil prices. And in CCP, where the US unemployment assumptions have a significant effect on the ECL build. I've shown on the next slide a breakdown of how we built up the charge. The model impairment calculated during the quarter prior to running the COVID-19 scenario generated a charge of 0.4 billion. In addition to this, we charge another 0.4 billion in respect to single name wholesale charges in the CIB, some of which have been affected by the onset of the pandemic. The remainder of the increase reflects the 1.2 billion net impact from using the COVID-19 scenario as our base case, reflecting forecast deterioration in macroeconomic variables. We've shown on the slide some of the key UK and US macroeconomic variables used, including peak unemployment rates of 17% for the US and 8% for the UK. We've also included in this net impact the estimated effect of government support and central bank actions in both UK and US. Finally, we included an overlay of 0.3 billion to reflect the increased probability of a sustained period of low oil prices. The 150 million overlay for UK economic uncertainty held at year end is observed within the COVID-19 scenario. The modeling is subject to inherent uncertainty with respect to forecasting incremental credit losses, so there are likely to be further elevated impairment charges in the coming quarters, depending on how the economic downturn translates into cash losses. We'll provide an update at Q2, but it's difficult to give more precise guidance at this stage due to the level of uncertainty. However, I did want to highlight how the increased impairment provisioning has increased our coverage ratios. This slide summarizes the loan books, impairment bill and resulting coverage ratios for the wholesale and consumer portfolios. You can see that the impairment bill in wholesale is largely driven by the effect of the oil price overlay and provision for stage three single name balances. In unsecured consumer lending, however, I would highlight the increased coverage ratios of both stage three and stage two loans. Many of the latter are not yet delinquent, reflecting our conservative risk positioning over recent years. However, we have provided .4% coverage under the COVID-19 scenario, and close to 23% on stage two balances overall. Turning now to the individual businesses. BUK reported an ROT of .8% for Q1, with income down 4%. I mentioned some of the income headwinds BUK's facing earlier. Going into a bit more detail on these. In Q1, we saw further reduction in interest earning lending in UK cards, and we expect the decline in spending to contribute to that trend. In addition, the expected headwind from the change in overdraft pricing will now be amplified by the suspension of certain overdraft charges to support our customers during the pandemic. The recent rate moves in response to the developing downturn also started to affect the latter part of Q1. This is expected to have a negative effect of around 250 million for the full year. I highlighted at Q4 the debt cells in BUK, which were concentrating in the second half of 2019. With a total of over 120 million across the year. We had immaterial debt cells in Q1, and in the current environment, our program of debt cells planned for 2020 may be pushed into 2021. One positive in Q1 was the continuing growth in mortgage balances, up a further 1.8 billion in the quarter, and pricing also improved compared to previous quarters. The downturn is obviously having a significant effect on mortgage applications, although we still have a flow remortgage business. Meanwhile, deposit balances continue to grow maintaining the loan to deposit ratio at 96%. Overall, as I indicated at Q4, NIM was already expected to fall to below 300 basis points and reach 291 basis points for the quarter. We now expect the additional headwinds and further decline in interest earning lending on cards to take our full year NIM into the range of 250 to 260 basis points. Cost in the quarter increased 2%, reflecting higher restructuring spend. While cost efficiency remains important, we have limited flexibility to reduce costs until we have a clearer picture of the nature of the downturn, and also some additional costs coming in as a result of the pandemic, as I mentioned earlier. One of the effects of the current difficulties is to increase digital banking engagement. We remain committed to the digital transformation of the business, but we'll look closely at phasing of investment spend given the income environment. And payment for the quarter more than doubled to 481 million, reflecting the COVID-19 scenario, although arrears rates at 31st of March do not yet reflect the developing economic downturn. The charge going forward will depend on the length and depth of the downturn and the effectiveness of government support schemes. Turning now to Barclays International. The BI businesses delivered an ROT of .5% for the quarter, down year on year as income increased by 1.1 billion, more than offset by an increase of 1.4 billion in impairment. We'll go into more detail on the businesses on the next two slides. CIB delivered an ROT of .1% in Q1 as a strong performance in markets, more than offset the increased impairment provision. Income was up 44% at 3.6 billion, while costs were up 4%, delivering positive draws of 40%. Markets grew income to 2.4 billion, up 77%. This quarter included some net benefit from hedging counterparty risk, but the increase was driven by flow trading with increased client activity and the trading businesses capturing a good portion of the widen bid offer spreads as a result of the heightened volatility. Client flows have continued at healthy levels in April. While it's too early to guide for the quarter or indeed comment on the outlook for the rest of the year, our revenue run rate for markets is well above that of the second quarter of last year. First Macron Credit had a strong quarter with FIG income roughly double last year. Equities increased 21% driven by flow derivatives, which benefited from high levels of volatility. Banking increased 12% reflecting improved performance in DCM and advisory despite a lower fee pool. Looking forward, the industry deal flowing banking overall has reduced as the downturn has started to develop, although some areas such as investment grade DCM remain active. I've talked before about the effect of mark to market moves on loan hedges on the corporate income line. This quarter, we have had significant positive marks on hedges, but also significant downward marks taken through the income line on our leverage loan commitments. Overall marks on the leverage commitments were 320 million negative, while marks on the hedges were 275 million positive. Both these elements are likely to be volatile over the coming quarters, so I'll highlight them when material. The increase of 4% in CID costs included an appropriate crawl for performance costs. Impayment increased to 724 million driven by single name charges and the effect of the scenarios modeled, including the low oil price overlay. RWAs increased by 30 billion in the quarter to 202 billion, reflecting a stronger dollar and both increased client activity, including drawdown of loan facilities and the effect of market volatility. I'll come back to that when I talk about capital progression. The result of this, average allocated equity for the quarter increased to 27 billion, which generated significantly improved ROTE. Turning now to consumer cards and payments. While income in CCP was resilient in Q1, down just 4% year on year, the significantly increased impairment charge resulted in a loss for the quarter. US card balances were down 5% in dollar terms. While the effect of the downturn is uncertain, with reduced spending trends emerging in March, it is unlikely that balances will grow over the coming quarters and the income environment is expected to remain challenging. Costs were down 10%, resulting in positive draws and a reduced cost income ratio of 52%. However, if further income weakness develops, there is a limited amount of further cost flex we can implement in the short term. While the REIS rates have not yet responded to recent sharp increases in US unemployment, we have taken a very significant additional impairment provision, up almost 700 million as a result of running the COVID-19 scenarios at base case, including a peak unemployment rate of 17%. I'd also remind you that 84% of our US card balances were above our 660 FICO definition for prime lending. The payments businesses experienced a reduction in income following growth in recent quarters as a result of the reduced spend levels principally in the UK. Turning now to head office. The head office loss before tax of 99 million was down on the Q4 loss of 167 million and down significantly year on year. The negative income reflects the main elements I've referenced before. 30 million of residual legacy funding costs and residual negative treasury items, but hedge accounting this quarter generated significant positive income. This is expected to turn negative again in Q2. Q1 also included some mark to market losses on legacy investments and the final dividend will come into Q2 rather than Q1 this year. Going forward, there'll continue to be quarterly fluctuations but the negative income run rate is likely to be clearly higher than in Q1. Cost of 11 million contrasted with the usual 50 to 60 million run rate, driven by provision release related to the historic sale of a non-core portfolio. Going forward, we'll also be accounting for the 100 million community aid package within the head office cost line, which will take costs above that run rate in certain quarters. TNAV increased in the quarter by 22 pence to 284 pence. This reflected profits of 3.5 pence despite the very significant impairment build plus positive net reserve movements of 19 pence. The strengthening of the dollar contributed to a six pence movement in the currency translation reserve or the combination of lower interest rates but wider credit spreads, the positive effects on the cashflow hedge and pension reserves. The fair value reserve was affected negatively by the fall in the absolute share price and the rand. On capital, we began the quarter at a CT1 ratio of .8% and had guided for a Q1 move towards our previous targeted level of around 13.5 to be driven by the seasonal increase in client activity in the CIV. We closed the quarter at .1% as the expected seasonality was enhanced by the higher than anticipated client activity both in markets and in drawdown of credit facilities and the effects of market volatility under the Basel rules. Impairment took 69 basis points off the capital ratio as transitional relief on the charge for the quarter was limited and the rate of transitional relief on applicable impairment stock reduced from 85% to 70%. The downward pressure on the CT1 ratio was partially offset by the cancellation of the full year dividend which added 35 basis points to the ratio. We expect pro-cyclicality of RWAs to affect us further in Q2 and I'll say a bit more about the way we are looking at our capital requirement in a moment. But first I'll go into more detail on the RWA increase on the next slide. Here we've broken down the elements of the 130 basis points effect from the increase in RWAs. Lending in March, including drawdown on revolving credit facilities added 7.2 billion to RWAs accounting for 33 basis points of the ratio decrease. We've seen immaterial further drawdown so far in April. Counter-party and market risk RWAs each increased by around 8 billion respectively from a combination of normal seasonal pickup and the pro-cyclical effects of the Basel framework plus some currency effect. The overall effects impact on RWAs is broadly matched by the effect on CT1 capital. We expect some further pro-cyclical effects in Q2. Looking at the next slide at our capital requirement and how we are thinking about utilization of buffers through the developing stress. We've shown here our current capital requirement and how it has reduced to reflect the removal of the counter-cyclical buffer by the Bank of England in response to the COVID-19 pandemic. As a result, our MDA has reduced to 11.5%. So our Q1 ratio of .1% represents 160 basis points buffer currently. As I mentioned, we expect some further pro-cyclical increases to RWAs in Q2 as the downturn develops which will take the CT1 ratio to below 13% in Q2. We also expect some further reduction in our MDA hurdle in percentage terms over the stress period through some reduction in our Pillar-2A ratio requirement. With regards to Hedrum, our capital ratio has been strengthened over recent years to put us in a position to absorb precisely the type of stress we are now experiencing. In this environment, we will manage our capital ratio through this stress period to enable us to support customers while maintaining an appropriate buffer above the MDA. We are comfortable operating below our previous CT1 ratio target as the stress evolves and we'll continue to manage capital having regard to the servicing of more senior securities. Our UK leverage ratio at the end of Q1 was .5% on a spot and daily average basis while above our UK leverage requirement which is currently just under 3.8%. I would note that we expect the advanced implementation in Q2 of CRR2 rules on treatment of settlement balances to provide a meaningful benefit to our leverage position which pro forma would have increased our Q1 ratio to 4.7%. Finally, a few words about our liquidity and funding which position us well to withstand the stresses that are developing and to support our customers. Our liquidity metrics are strong and in the quarter with an LCR of 155% close to the year end level with a liquidity pool assets of 237 billion. This represents 16% of the group balance sheet with 66% of the pool held as cash at central banks. Our loan to deposit ratio reduced further to 79% with growth in deposits more than offsetting loan growth. On the loan side of the balance sheet, the main increase was in corporate lending including drawdowns on credit facilities, particularly in March. Deposit base continues to reflect our diversified sources of funding with most of the growth being in wholesale deposits including some deposits by corporates following drawdown on those facilities. Our funding profile remains in good shape with diversified sources and reduced reliance on short term funding. We have issued two billion equivalent of MREL debt in the year to date. Although spreads reflect the current economic environment, we still plan further issuance of roughly five to six billion across the current year subject to market conditions. Our MREL is at .3% close to our expected end requirement. So to recap, despite the initial effects of the COVID-19 pandemic, notably the elevated impairment chart of around two billion reported an ROT of just over 5% for the quarter. The performance from the markets business drove a 20% increase in group income on a stable cost base resulting in strong positive draws. Given the uncertainty around the economic downturn and low interest rate environment, we expect 2020 to be challenging. However, we continue to believe that above 10% ROTE is the right target for Barclays over time. We need to see how the downturn plays out before giving any medium term guidance. Our PT1 ratio of .1% reflected initial effects of the downturn when we expect some further pro cyclical increases in RWAs to reduce the ratio further in Q2. We plan to maintain an appropriate buffer above our MDA as we absorb the stress caused by the pandemic. Our funding and liquidity remains strong and put us in good position to support our customers and clients during this difficult period. Thank you, and we'll now take your questions. And as usual, I would ask that you limit yourself to two per person so we get a chance to get around to everyone.