Barclays PLC

Welcome to the Barclays Q1 2021 Results Analyst and Investor Conference Call. I will now hand you over to Jeff Daly, Group Chief Executive, and to Shah Mazaria, Group Finance Director.

Good morning, everyone, and thank you for joining us. A year on from the start of the COVID crisis, with vaccination programs advancing globally, we can start to see the beginning of the end of this terrible pandemic. My hope and expectation is that during the course of this year, we all can start to return to a more normal way of life. The last year has been one of the most difficult periods Barclays has faced. Our customers, clients, communities, colleagues, and families have all been through extraordinary challenges, and we face challenges as a business too. As I reflect on that, I want to once again thank our thousands of colleagues for the extraordinary commitment they have shown to Barclays. I'm incredibly proud of the way we stood tall during the crisis, delivering on the priorities we set for ourselves at the start of this pandemic. We've tried to support our customers, clients, and communities, particularly those that were most vulnerable to the impacts of COVID-19. That support continues where our help is needed. This week, our Community Age Package, the 100 million pound foundation formed just last year, bought medical supplies for communities still facing real hardship in India. We've also supported our employees, recognizing the challenges they face both on a personal and professional level. Their commitment and the resilience of our diversified business meant we preserved our financial integrity as an institution and were able to stay profitable in every quarter 2020. We have carried that strong performance into the first quarter of this year. Our group return on tangible equity was 14.7% in the first quarter, well above our target of 10%. Indeed, each of our major lines of business delivered a return on capital of greater than 10%. Income for the group was 5.9 billion pounds, and group profit before tax was 2.4 billion pounds. We remained focused on costs and continued to apply discipline while still investing in growth, achieving a cost-to-income ratio of 61% for the quarter. And we remained strong in our capital position with a CT1 ratio of 14.6%, well above our target of 13% to 14%. The strength of our business allowed us to reestablish capital distributions, including a 700 million pound share buyback that we completed earlier this month. We will be providing a further update on capital distributions in due course. Our performance continues to benefit from a business model as a British universal bank, balanced between consumer and wholesale banking. For example, 60 percent of group income came from banking, markets, and corporate clients this quarter, partially offsetting the pandemic-related headwinds that affected our consumer businesses. The corporate and investment bank had another very strong quarter, achieving a return on tangible equity of 17.9 percent, with income basically in line with the strong performance of the CIB in the first quarter of last year. The return on tangible equity for the investment bank in the first quarter was over 20%. Geographically, roughly half of our income comes from outside the UK, while 69% of our income this quarter was non-interest income, continuing to position as well in the current low-rate environment. This income composition continues to show our British Universal Banking Model working well. It has helped the group deliver resilience overall performance. We remain focused on growing the business. I've spoken before about our strategic advantage as one of the few banks competing at scale in the global capital markets. Global capital markets are growing as businesses and institutions increasingly turn to them for funding. We are also accelerating our growth strategy in a number of key markets around the world. including in Australia with our investment in Baron Joey Capital Partners. And I was delighted to see Matthew Grounds join the team as co-executive chairman. We remain focused on sustainable impact of our business and on meeting our ambition to be a net zero bank by 2050. Only last week, we were pleased to join other banks in forming the Glasgow Financial Alliance for Net Zero, the head of the COP26 Climate Summit later this year. As part of our commitment to aligning all of our financing to the goals of the Paris Agreement, we announced in November that we had started to apply our Blue Track methodology to the energy and power sectors in our financing portfolio. This quarter, we announced we are extending Blue Track to include two further subsectors, cement and metals. We're also actively helping clients with the transition to a low-carbon economy. For example, we have recently advised National Grid on a series of large transactions which will significantly enhance their central role in the delivery of the UK's net zero targets. As the global economy begins to emerge from the pandemic, I'm optimistic about the trajectory for recovery. We are seeing some positive signs in our spend data. drawn from our UK consumer cards and from merchant acquiring, which together tracks nearly 40% of all consumer transactions in the United Kingdom. In addition to the improving Q1 trend, we saw a 72% uplift in the number of payments processed by businesses in the first two weeks of April compared to last year. Encouragingly, spending in some of the hardest-hit sectors, including hospitality and travel, is starting to pick up. As consumer spending increases, we expect there will be growth in unsecured lending balances, though it will take time to rebuild interest-earning balances. Mortgage growth has remained robust, with applications continuing at elevated levels through Q1 and pricing at attractive margins. We've grown the mortgage book by 3.6 billion pounds in the first quarter, one of the strongest quarters we've ever had. Our Q1 impairment charge was lower than the previous quarter. This reflects lower balances, but more importantly, reduced stage three credit losses, which is a reflection of how we are managing risk. We are maintaining coverage ratios while we gauge the impact of government support measures being lifted in the second half of this year. I'm pleased that we have negotiated new opportunities that will position Barclays well as the U.S. and U.K. consumer recovery gathers pace. In the U.S., our consumer bank has just signed a long-term partnership agreement with Gap to be the exclusive issuer of their co-branded and private-labeled credit card program, beginning in May 2022. After the launch of our point-of-sale financing partnership with Amazon in Germany, we now have extended that partnership to the United Kingdom as well. This will grow our presence in e-commerce in two of the largest markets in Europe. Our partnership with Amazon reflects our growing focus on payments. This is an area I think it's worth spending a few minutes talking about. Looking at our business by activity rather than division, Barclays income now comes from one of three sources, lending, transacting, and payments. Lending encompasses all the lending we do across Barclays UK, our corporate bank, and our consumer cards and payments. Transacting includes markets and banking revenues and income from deposits across the bank. The third leg is payments, which is a broad complex of activities carried out by multiple businesses across Barclays. These activities now account for 8% of the group's total income, or 1.7 billion pounds last year. Taken as a whole, we believe our payments complex can generate an additional 900 million pounds of income over the next three years. That means we are targeting strong double-digit growth across our payments franchise. First is unified payments, by which we mean supporting businesses of all sizes, from corporates to SMEs, to make and take payments. It includes core payment areas such as merchant acquiring, gateway services, and business-to-business card issuing. The second is next-generation commerce, including point-of-sale installment financing with large corporations, as well as fee-based data and digital services that connect merchants and consumers together. Third is wholesale payment fees, where we expect to grow annuity income streams with corporates in the UK and in Europe. And finally, interchange and FX fees, which we expect to grow as the economy recovers from the pandemic. There are a number of reasons we believe we can realize these growth ambitions over the next three years. The first is because we are already one of the most connected banks in the UK. We have a significant portfolio of the largest corporate clients in the UK. We have 1.1 million small business clients in the United Kingdom, and we have millions of British consumers. The second is because we are the only major bank owned acquirer in the UK. While our peers have largely sold and partnered to provide their payment services, we've strengthened our commitment to our proprietary business, investing more than 500 million pounds in our payments capabilities. Thanks to this investment, we have seen improvements in a number of areas, including our data and analytics capabilities, as well as the capacity to onboard and serve our merchant customers. In 2019, we had a paper-based onboarding process, and the quickest time to onboard a customer was 14 days. We've now reduced that to just two days, and while the number of days until the first transaction is now five, that's down from 23 days in April of last year. That said, we still have a long way to go. We must get more advanced digitally with the SME market to fully tap the economics of payments in the sectors. Perhaps the most important investment Barclays will make in the next five years is to connect our small business banking and our merchant acquiring businesses, particularly as it relates to e-commerce. Another reason we think we are well positioned to realize this growth is that we've made the strategic decision to integrate payments within our business banking and corporate banking businesses. Just as we offer integrated services like FX management through our NetFX platform, we are now able to offer a unified payment stack that gives customers a consolidated payment provider all in one place. Another exciting opportunity is in our work to reimagine the next generation of commerce services through an initiative we are calling Barclays Cubed. We recognize that commerce and the digital economy has the power to be more than simply an online version of traditional shopping transactions. We are beginning to use technology and data to better connect consumers with merchants, adding value to their transaction experience in a way a bank has never done before. Let me give you just one example. A merchant is able to connect with a consumer digitally by offering a discount via their Barclays mobile banking app. That consumer can then make a purchase on their merchant's website, and if they choose to, we can instantly approve them to pay for the shopping using installments. Finally, the digital receipts and the loyalty points are automatically added to their Barclays wallet. The merchant also benefits. Using our merchant acquiring and consumer data, we can share useful analytics and insights to guide marketing, bringing the merchant closer to the consumers. We will have more to share on this in the coming months, but I'm incredibly excited about the opportunities for Barclays in this area. So in summary, let me say again how pleased I am with our performance this quarter. Barclays remains well positioned with a strong balance sheet and competitive market positions across the group, as well as encouraging prospects to grow our business and provide improved returns for shareholders. As the economic recovery takes hold, we now have an opportunity to play our full part in supporting it. With that, let me hand over to Tushar to take you through quarterly numbers in more detail.

Thanks, Jess. Our Q1 performance continued to demonstrate the benefit of our diversified business mix. Income headwinds from the pandemic and low-rate environments again affected our consumer businesses, but the CIB produced another strong performance. The overall income decline of 6% was more than offset by the low impairment charge, which was down over $2 billion year-on-year, resulting in a profit before tax of $2.4 billion and an ROTE of 14.7%. This has allowed us to continue to invest in our businesses while also pursuing cost efficiencies rather than cutting overall costs at a time when we should be investing. The resulting cost-income ratio for the quarter was 61%. I would stress that these are all statutory numbers with litigation in conduct of just 33 million. PNAV decreased from 269 to 267 pence, reflecting 9.9 pence of EPS, offset by reserve movements. mainly the effects of steepening yield curve and currency moves. Our capital position remains strong with a CET1 ratio of 14.6%. The reduction from full year reflects the expected Q1 effects we highlighted in February. Last week, we completed the 700 million buyback announced through the full year results, and this has already been reflected in the Q1 capital ratio. Given the average price paid in the buyback, this has been accretive to TNAF per share. As you know, for regulatory capital purposes, we are required to accrue a foreseeable dividend each quarter. For this quarter, we have used a placeholder of 0.75 pence, equating to 3 pence for a full-year dividend. You shouldn't take this as a forecast, as the Board will consider the appropriate capital distributions and mix of dividend and buyback as we progress through the year, taking into account all relevant factors, including share price evolution. A few words on income, costs and impairment before moving on to the business's performance. I've already mentioned the benefit of diversification, which is visible in the income performance. Although income is down 6% overall, the consumer businesses, the UK and CCP, were down 8% and 22% respectively. CIB, on the other hand, was close to flat on last year's very strong Q1. In terms of outlook, the CIB remains well positioned despite the currency headwind. However, conditions remain challenging for the consumer businesses. There are signs of recovery in spending in recent weeks, as Jess referenced earlier, but unsecured balances have declined further, as we show on the next slide. The income outlook for the consumer businesses BUK and CCP reflects the tailwind in secured lending in the UK, the continuing headwinds in unsecured lending in both the UK and the US. The UK mortgage business had a record quarter for organic net balance growth, with a net increase of 3.6 billion to reach a total of 151.9 billion. In unsecured, we've highlighted in the top chart the balance reductions in UK and US cards, which are the largest portfolios. We would generally expect a seasonal reduction in Q1. The extent of the reduction indicates the effect of further lockdown and government support measures. We are seeing signs of recovery in consumer spending in both the UK and the US, But given the increase in consumer savings through the pandemic, the building interest earning balances isn't expected to materialize until the latter part of the year. The translation of recovery in card balances into income and profits will be affected by the so-called J-curve as we invest in customer acquisition and card utilization. This comes through as both contra income and in the cost line, and there would also be some initial IFRS 9 impairment provisioning as balances build. On rates, I would remind you that the effect of a steepening yield curve on the structural hedge role is gradual. You can see in the chart on the top right, the recent increase in the five-year swap rate. We can also see that the maturing hedges were put on at higher rates than current. So this remains a headwind, particularly for BUK. So despite the steeper yield curve, we still expect a three to 400 million headwind across the group on the gross hedge income in 2021 versus 2020. Looking now at costs, costs were up 10% overall at 3.6 billion, resulting in a 61% cost income ratio. The increase reflects higher variable compensation accruals in light of improvement in returns and continued investment for growth, partially offset by efficiency savings and currency moves. We expect costs in 2021 to be higher than 2020, including higher variable compensation and ongoing COVID-19 related expenses in 2021, plus further structural cost actions, with the review expected to be concluded in the coming months of real estate, particularly office space, given evolving ways of working. Moving to impairment, as usual, we've shown the split of the charge for recent quarters, into Stage 1 plus Stage 2 impairment, mostly relating to balances which aren't past due, which I refer to as book-ups, and the Stage 3 impairment on loans in default. As you can see, most of the elevated impairment in Q1 and Q2 last year was from book ops. As you will recall, we had an impairment charge of $4.8 billion in total for the full year 2020, but increase in the levels in default in wholesale or retail that might have been expected haven't materialized. In fact, in the quarter, we actually saw a decrease in defaults as government support schemes, particularly in consumer, were extended, and we had no material single-name wholesale charges. As a result, we charged just $55 million in Q1, with significant year-on-year reductions in each of the businesses. This comprised Stage 3 impairment of $177 million, well below previous quarters, largely offset by credit on Stage 1 and Stage 2, driven by reductions in balances. We've shown on the next slide the macroeconomic variables, or MEVs, we've used in the expected loss calculation. The MEVs used for Q1 modelled impairment are shown on the left-hand side. These are simply a roll forward of those that we used at full year, but using the 2020 actuals as the updated baseline comparators. Consensus forecasts have now started to improve, and we've shown for comparison the current MEVs on the right. If we were to rerun the models using these MEVs, this might generate roughly 0.5 billion reduction in provisions, other things being equal. On top of this, there remains significant uncertainty as to the level of default we'll experience as support schemes are wound down for any particular set of MEVs that we input. Therefore, we also continue to hold significant post-model adjustments. These total $1.2 billion net at the end of the quarter. The charge of $55 million offset by write-offs in the quarter of just below $500 million and other balance sheet movements reduced our total impairment allowance from $9.4 to $8.8 billion. However, given the reduction in balances, we have at least maintained our levels of coverage, as you can see on the next slide. Unsecured balances have come down significantly, from 60 billion to 43 billion since the beginning of last year, including a 3.3 billion reduction in Q1. Despite the low Q1 impairment charge, coverage was roughly flat over the quarter at 12.2%, well above the 8.1% pre-pandemic level. The wholesale coverage ended the quarter at 1.4%, close to the level at the end of 2020, again, well up on the pre-pandemic level. Coverage on home loans was maintained as a big group by over 8 billion since the start of last year. We've included this quarter the detailed slide on unsecured coverage across the major portfolios, as I wanted to highlight the prudent ratios. For example, in UK cards, coverage actually increased to 17.5%, well above pre-pandemic levels, And in US cards, we maintained coverage at 14.3%. Turning to Barclays UK. The headwinds we've referred to in the previous quarters continue to affect the UK, with income down 8% year on year. As I showed on the earlier slide, unsecured balances reduced further in Q1, with card balances down to 9.9 billion, a decline of 34% year on year. This contrast with mortgage balances, we've reached a record level of 151.9 billion with a net increase of 3.6 billion in Q1. Pricing continues to be attractive, and mortgages are a positive factor for their interest income, albeit at lower NIM than for unsecured lending. There was a significant year-on-year increase in business banking lending, principally relating to bounce-back loans and C-bills. In total, the UK loan balances grew by 10 billion year-on-year to 206 billion. Deposit balances also continue to grow, resulting in a loan-to-deposit ratio of 88%. The expected continued growth of mortgages and slow recovery of unsecured balances in the UK will dilute the BUK NIM from the Q1 level of 254 basis points because of the mixed effect. So our current full-year outlook is now for a NIM in the 240 to 250 basis points range, a little better than indicated at full-year results. Costs were broadly flat year-on-year, as high servicing and financial assistance costs and the transfer of the partner finance business last year were offset by efficiency savings. Payment for the quarter was £77 million, reflecting reduced unsecured exposures. Turning now to Barclays International, BI income was down 5% year-on-year at £4.4 billion, reflecting a strong performance in CIB, offset by lower income in CCP. Impairment was a net release of $22 million compared to a charge of $1.6 billion last year, resulting in an ROTE of 17.7%. I'll go into more detail on the businesses on the next two slides. CIB income was broadly flat on last year at $3.6 billion, despite the currency headwind, while impairment was a small release compared to a charge of over $700 million. ROTE for the quarter was 17.9%, with costs up to $200 million the increase being attributable to the variable compensation accrual, which reflects improved returns. Although market income decreased 12% overall in sterling, or just 4% in dollars, equities reported its best-ever quarter, up 65% at over $900 million, with strong performances across all business lines and continuing growth in prime balances. FIC decreased 35% as an increase in credit was more than offset by a reduction in macro. This percentage decrease is by reference to a quarter which was up almost 100% on Q1 2019. That delta in FIC also reflected our product mix, with lower activity and tighter spreads for flow products in rates and credit, areas of strength for us in Q1 last year, and our relatively low share in securitized products, which faced a challenging market in Q1 last year, but good conditions this quarter. Banking fees are up 35% year-on-year at a record level, with equity capital markets increasing nearly fourfold, and growth also in debt capital markets and advisory, and the pipeline is looking strong. Corporate lending income of $206 million wasn't distorted by the volatile market-to-market moves we had in Q1 last year, around the $200 million run rate I've referenced in the past. But we continue to see limited demand for corporate lending following the drawdown and then repayment of revolving credit facilities in the course of last year. Transaction banking income was down year-on-year, but up on Q4 at $393 million. The increase in CIB costs was largely attributable to the variable compensation accrual, with the cost-income ratio increasing from 47% to 53%. Turning now to consumer cards and payments, income in CCP was down 22%, reflecting reduced payments activity and lower U.S. card balances. These were down 22% year-on-year in dollar terms, including a further 8% reduction in Q1 slightly more than the usual Q1 seasonality as we continue to see elevated repayment levels, particularly in late March. Costs were up 8%, including an increase in litigation and conduct, resulting in a 71% cost-income ratio. Impairment was just $21 million, well down on last year, reflecting reduced balances. The low impairment resulted in an ROT for the quarter of 16.5%. Looking forward, as Jeff mentioned, we are seeing some signs of spending recovery, but the timing of recovery in interest earning balances remains uncertain. With the addition of the GAAP portfolio in the first half of next year and the development of other new partnerships, the prospects for the US cards business are good, but it will take time to generate consistent attractive returns given the J curve on new business and the gradual recovery of interest earning balances with existing customers. Turning now to head office, The head office loss before tax was $32 million after a one-off of $123 million in the other net income line. The negative income of $75 million was in line with the quarterly run rate that I guided to at full year. Q1 costs of $18 million were a little above the run rate I referenced before of $50 to $60 million, but now include litigation and conduct. The other net income of $123 million is mainly a fair value gain in our investment along with peers in the Business Growth Fund. Moving on to capital, the CT1 ratio reduced from the year-end level of 15.1% as we trailed at the time of the full-year results and ended the quarter at 14.6%, still well above our target range of 13% to 14%. Of this reduction, 46 basis points was from the regulatory changes on the 1st of January and the share buyback. The normal Q1 seasonal RWA growth and other headwinds broadly offset the capital generation from profits. The seasonal increase in CIV took RWAs to $313 billion at the end of the quarter. We've shown some elements of the future capital progression on the next slide. As I mentioned, the $700 million buyback is already reflected in the Q1 ratio. We've shown here a number of future headwinds to the ratio. We're expecting the software benefit, which increased the ratio in Q4, to be reversed at some point this year by the PRA, potentially at Q2, and that is expected to be a reversal of about 40 basis points. This year's pension deficit reduction contributions are scheduled for Q2 and Q3, each with an effect of a little over 10 basis points before tax. You'll recall that the updated funding deficit as of September 2020 was $0.9 billion. These factors will reduce the 14.6 ratio in Q2 by around 50 basis points, and we have sufficient headroom above our target range of 13% to 14% to practically deploy capital to the businesses if we feel market conditions are right. Our MDA hurdle is currently 11.1%, and we included the usual slide in the appendix showing how this is calculated. We've also shown here some regulatory changes that come in next year on counterparty credit risk and mortgages. The two additional elements that are most difficult to forecast remain the migration of impairment into stage three defaulted balances, which will not qualify for transitional relief, and potential procyclicality, which could inflate RWAs. These didn't materialize during 2020 in the way we had expected, and recent developments suggest less impact than we had expected, but we may see some effect from credit migration during 2021 or in 2022. We are confident that the balance of these elements will leave us with net capital generation to support attractive distributions over time to shareholders and be comfortable within our CT1 target range. Both spot and average leverage ratios are around 5%, reflecting the usual seasonal reduction in Q1. Finally, a slide about our liquidity and funding. We remain highly liquid and well-funded with a liquidity coverage ratio of 161% and a loan-to-deposit ratio of 69%, reflecting the continued growth in deposits. So to recap, we have generated a 14.7% statutory return for the quarter, despite the continuing effects of the COVID pandemic on income in the consumer businesses. The CIB income was very close to last year's record level, and impairment was down by over 2 billion. This allowed us to continue our cost investments in our franchises as we feel this is the right time in the cycle to invest. I've summarized on this slide the various comments on the outlook we've made, While the income outlook for the consumer businesses remains challenging despite early signs of economic recovery, the CIB is well placed through 2021 and beyond. We've seen lower defaults in Q1 while maintaining coverage levels and expect a materially lower impairment charge in 2021 than in 2020. Although costs in 2021 are expected to be higher than 2020, including the results of our real estate review, Overall, we are confident of delivering a meaningful improvement year-on-year in ROTE. In April, we completed a $700 million buyback announced in February, and capital remained strong at 14.6%. We expect some further dilution in this ratio in Q2, but expect to be in a good position to pay attractive capital distributions to shareholders over time. Thank you, and we'll now take your questions. And as is usual, I would ask that you limit yourself to two per person so we get a chance to get around to everyone.