Barclays PLC

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

Good morning, everyone. I'm joining you from New York this morning while Tushar is in London. I am pleased to report that Barclays has had a strong first half of the year. Our financial performance has been good, with robust revenues and profitability. and we have had opportunities to grow our business further. I'm also particularly pleased that we have been able to increase distribution to shareholders. Throughout the COVID crisis, we have demonstrated support for customers and clients at a time when they really needed it. I'm mindful we will need to continue to do that over the coming months and that this pandemic is not over yet. But we are seeing encouraging signs that the global economy is recovering. and this is reflected across Barclay's businesses. We've had a good start to the year, with group profit before tax of 5 billion pounds. That's quadrupled the same period last year. Earnings per share were 22.2 pence for the first half. For two quarters running, all three of our major lines of business have delivered double-digit returns on capital. Our return on tangible equity for the group with 16.4%, and we expect to be able to deliver our target of above 10% RODI this year. We remain in a strong capital position. Our CT1 ratio is 15.1%, which is above our targeted 13 to 14% range. That strength means we have been able to increase capital distributions. We have provided a half-year dividend of two pence per share, and we will initiate an additional share buyback of up to 500 million pounds, following the 700 million buyback we completed earlier this year. Improved macroeconomic conditions resulted in a net impairment release of 797 million pounds in the second quarter. We will continue to maintain prudent impairment coverage ratios over the coming months, and we will also be careful to gauge the real economy as government support measures are lifted. But it's very important to note that even without impairment releases, the group's return on capital would have been above 10% in both the first and second quarters. We're also managing our costs appropriately, with a cost-to-income ratio of 64%. Our base costs remain stable, but we have taken a number of structural cost actions in the second quarter, most notably reducing our real estate footprint in Canary Wharf, London. Excluding the structural cost actions, our cost-to-income ratio actually, for the half year, was 61 percent, close to our 60 percent target. We're also focused on investing in the right parts of the business to deliver future income growth. That means investing in talent and technology in the investment bank as the capital markets continue to grow. It means investing in the corporate bank, particularly in Europe. It means investing in our U.S. consumer franchise organically and through scaling up our U.S. card partnerships. And it means continuing to transform our U.K. payments capabilities through technology, most notably in merchant acquiring and small business banking. Our performance continues to benefit from the breadth of our business, with our income diversified by type, by customer and client, and by geography. I'm pleased to see the strong performance of the investment bank continue for another quarter, demonstrating the sustainability of the franchise. One of the drivers for this is the continued growth of the global capital markets themselves. Since 2018, there has been a 53% increase in the market capitalization of global equities and bonds outstanding, and we reflect in our business that increase. As more and more businesses and institutions use the capital markets as a source of funding, Barclays is well-positioned to continue to benefit. I'm encouraged by the improved performance we have seen in Barclays UK and in our consumer card and payments business. Both businesses have benefited from the economic recovery and we have taken actions to improve future revenue growth. Many of our leading economic indicators improved in this quarter. UK debit and credit card spend was up 11% in June versus the same month in 2019. US card spend has almost recovered to 2019 levels. It was up 21% in the second quarter compared to this year's first quarter. Unsecured lending balances have lagged spent, with U.K. car balances down 300 million pounds in the second quarter. Recovery in consumer spending in both the U.S. and U.K. is encouraging, but it will take time to rebuild interest-earning balances. Mortgage growth, however, remains robust, with the portfolio up 3.3 billion pounds in the second quarter. And applications continue at elevated levels and pricing is at attractive margins. As I've spoken about before, we're excited about the development of our payment services, particularly our new Barclays Q platform. Taken holistically, payment activities represent some 8% of total group income. As I said in the first quarter, we believe there's a 900 million pound income growth opportunity for Barclays in payment over the next three years. In the first half, we've already seen evidence of this growth, with payments income up approximately 15% year-on-year, or around 120 million pounds. We continue to expand our digital capabilities with merchants, and have worked in collaboration with the CIV to deliver better services. This quarter, we have successfully integrated a number of solutions into our corporate bank iQuartel platform. To take just one example, clients can now manage both their merchant servicing accounts and their bank accounts, without needing separate login credentials or processes. We've also launched a new platform to deliver our franchise FX capabilities to e-commerce merchants. We have established new client relationships, as well as strengthened existing ones. I'm delighted that a leading UK supermarket has recently decided to consolidate all of its famous processing with Barclays. Like so many of our partners, they're also leveraging some of the next-generation services we offer through Barclays Q, including things like point-of-sale finance, using data, and analytics. We remain focused on the sustainable impact of our business and on our role in society. I'm extremely proud of what we've been able to do to help people during the pandemic. To date, our 100 million COVID-19 community aid package has supported over 219 charity partners around the world. Our colleagues have raised more than 13 million pounds using our matching gift program. All that money has gone to charities delivering COVID-19 relief. As we approach the COP26 meeting in the second half of the year, we also continue to think deeply about our environmental impact, specifically how we can best support the global economy's transition to low carbon. The Paris Agreement sets us on a clear path to make that transition, and the world has come together behind it. Barclays shares that commitment. That is why we were one of the first banks to set an ambition to be net zero by 2050, not only for our own operations, but across our entire portfolio. That means we are accelerating the transition through the way we deploy finance, helping companies of all sizes, from startups to global corporations, At the smallest scale, via Barkley's principal investments, we have a sustainable impact capital initiative to invest 175 million pounds in new companies. This helps these new companies get the early stage capital they need to finance their growth and to innovate new technologies. Companies like AirX, a clean tech company helping to reduce energy consumption in homes. So far, we've made seven similar equity investments. all over the world, and we have a very strong pipeline. At the other end of the scale, we're using our financial and capital market expertise to support large companies. We're helping them raise money through the equity and bond markets and advising on M&A transactions. Take electric vehicles as one example. This year, we helped a company called Blank, who make charging equipment, raise over $200 million through the equity markets. We also led a $400 million placement for an electric bus manufacturer called Proterra. Both these companies are making a significant contribution to scale up low-carbon transport networks in the United States. So let me close by repeating how pleased I am with our first app performance. It provided a strong platform on which to build in the second half of the year and beyond. Our balance sheet has never been stronger, and we will remain focused on returning excess capital to shareholders. As the global economy continues to emerge from the pandemic, Barclays remains fully committed to playing our part. Now we're going to take you through the quarterly numbers in more detail.

Thanks, Jess. As usual, I'll start with a summary of our H1 performance. We again saw the benefit of our diversification as the strength of the CIB continued to offset the effects of the pandemic on our consumer businesses. Overall income decreased 3%, but this reflected the weaker U.S. dollar. And on a constant currency basis, income was up around 2%. Costs increased by 0.6 billion to 7.2 billion, including the structural cost actions we flagged at Q1 of 0.3 billion. It's also reflected higher performance cost accruals due to improved returns. I'll go into more detail on the other cost drivers shortly. After a small impairment charge in Q1, we had a large release in Q2, giving a net release for the half of $742 million compared to a charge of 3.7 billion for last year. This resulted in a PBT of 5 billion, a significant increase on H1 last year. The EPS was 22.2 pence, generating an ROT of 16.4%. The CT1 ratio ended a half at 15.1%, well above our target of 13 to 14%. This has put us in a position to declare a half-year dividend of 2 pence, and announced a further share buyback of up to 500 million, falling on from the 700 million buyback completed in April. Turning now to Q2. Overall income was up 1% on Q2 last year, but was up around 7% on a constant currency basis. We saw some increase in the consumer businesses and the CIB performed well against a strong comparator. Cost increased by 10% or 0.3 billion, reflecting the structural cost actions principally a charge following the real estate review we mentioned in Q1. The improved macroeconomic outlook and lower unsecured balances resulted in a net impairment release of 0.8 billion compared to a charge of 1.6 billion last year. The profit before tax was 2.6 billion, up from 0.4 billion last year. In light of the corporate tax increase scheduled for 2023, we have recorded a benefit of about £400 million through the income statement for re-measurement of UK deferred tax assets, although this will largely reverse in the course of next year if the proposal to reduce the bank's surcharge is enacted. As a result, the effective tax rate in the quarter is lower than we would expect on a normalised basis. Of the income statement benefit, close to half is offset through reserves. The tributable profit for the quarter was 2.1 billion, generating an EPS of 12.3 pence, and an ROTE of 18.1%. I would remind you, these are all statutory numbers absorbing a litigation and conduct charge of 66 million. PNAV increased from 267 to 281 pence, principally reflecting the 12.3 pence of EPS, and also one pence from the completion of the April share buyback. A capital position strengthened in the quarter with a CQ1 ratio increasing to 15.1%, driven by robust profitability and reduced RWAs. A few words on income, costs and impairment before moving on to the performance of the businesses. I've already mentioned the benefit of diversification, which is visible in the Q2 income performance. CIB income was down against a tough Q2 comparator, but the investment bank performed strongly versus peers. Meanwhile, we saw some increase in BUK income, which was up 11%. In terms of outlook, the CIB remains well-positioned despite the currency headwind and some moderation in FIC activity so far this year. The income outlook for the consumer businesses, BUK and CCP, reflects a continuing tailwind in secured lending in the UK with the prospect of a slower recovery in unsecured lending in both the UK and the US. The BUK mortgage business had another strong quarter with 3.3 billion of organic net balance growth. In unsecured, we saw further balance reduction in UK cars by $0.3 billion to $9.6 billion, and although the US car balance has ended the quarter up at $20.1 billion, this increase is weighted towards full-payer balances. We are now seeing clear signs of recovering consumer spending in both the UK and the US, but as we flagged at Q1, the building interest earning balance is expected to take some time to materialise. And to remind you that the translation of recovery in card balances into income and profits will be affected by the so-called J-curve as we invest in partner and customer acquisition and in card utilization. This is expected to dampen returns initially as we reinvest, but over time will leave the consumer businesses well-placed to generate attractive risk-adjusted returns. We still expect a headwind to NII from the role of the structural hedges, given the low-rate environment, However, the recovery from the trough in yields since year end, plus a slight extension to our hedge maturities, mean we currently expect the headwind from the roll of the hedges to be around 300 million this year. The low end of the range I referred at Q1. Based on the current yield curve, any further headwind next year would be materially lower. Note that this is based on the current sizing of the hedges. We are still considering whether to increase the hedges and have identified 20 to 25 billion of additional potential capacity. Were we to do this, the headwind next year would reduce further. I would note that most of this potential increase would be in Barclays International rather than the UK. Looking now at costs, we plan to keep our base costs close to flat this year. That's costs excluding structural cost actions and performance costs. In Q2, we implemented the structural cost actions we mentioned at Q1 results. The charge was 0.3 billion, resulting in Q2 costs being up 10% year-on-year at 3.7 billion, and a 67% cost income ratio. Across the first half, the cost increase was also 10%, and you can see on the right-hand chart of this increase reflected those structural cost actions in Q2, and the increase in the performance accrual, the bulk of which was reflected in Q1. The structural cost actions in Q2 primarily related to real estate. Following the review we flagged at Q1, we took the decision to vacate 5 North Colonnade Building in Canary Wharf by the end of 2022. This is expected to result in annual cost savings of about $50 million from 2023. Other structural cost actions will continue through the second half of the year, including a continuing rationalisation of the BUK cost base. So overall, the total for this year will clearly be higher than the $368 million for last year. Cost actions will continue next year, but I wouldn't expect another real estate charge the size of the Q2 charge. The next slide shows the key drivers of the base costs. Last year's total costs were $13.9 billion. Excluding structural cost actions and performance costs, the base costs were around $12 billion. We've shown here the key drivers, which we expect to be broadly offsetting each other this year, assuming the June 30th sterling dollar rate of 1.38 applies through the second half of the year. First, increases in costs associated with volume-related or demand-led growth, for example, UK and US card origination, and taking advantage of the high levels of activity in the primary and secondary markets in the investment bank. Although these drive higher costs, we would expect to see associated income generation, and we believe the start of a new economic cycle is exactly the right time to be leaning into growth. Secondly, investment spend, including the strategic investments we've talked about previously, like in growing payments, our US partner cars expansion, and parts of our global markets and investment banking businesses. This also includes ongoing investment in technology as we continue the transition to cloud-based technology and migration to digital channels across the bank. Capacity for these investments is created by continuing to improve the way the bank is run, driving cost efficiency savings. These actions include decommissioning applications, the optimization and automation of processes, and more selective use of suppliers. Finally, we also have some specific tailwinds this year from the weaker dollar, lower bank volatility and non-repeat of the community age package, which gives us greater capacity for gross cost investment at an early point in the cycle. I'm not going to give forecasts for each of these elements, but I would expect them to result in the aggregate base costs for the year being in the region of 12 billion. Looking beyond that, as the recovery continues, we'll continue to manage the balance of growth and investment spend and cost efficiencies with the aim of delivering positive jewels to achieve our target sub-60% cost-income ratio in the medium term. Moving to impairment, there was a net impairment release in each of the businesses, with the largest release being in BUK, as you can see from the chart on the left. On the right, we've shown the split of the charge for recent quarters into Stage 1 and 2 impairment and the Stage 3 impairment on loans in default. As you can see, there was a significant Stage 1 and 2 book-ups in Q2 last year, whereas the charges in Q3 and Q4 were principally on Stage 3 balances. In Q1 this year, we had some release of Stage 1 and 2 book-ups resulted in a small net charge. In Q2, we've seen a large net release of stage one and two impairment amounting to just over a billion, with the stage three impairment was just 221 million, resulting in the net release of 0.8 billion. The stage one and two release was driven by the improved macroeconomic variables we've used and the level of unsecured balances, but our coverage ratios remain above pre-pandemic levels. The MES was used for the Q2 modeled impairment as shown in the upper table. And you can see the improvements in the 2021 and 2022 forecasts. However, there still remains uncertainty as to the level of default we'll experience as support schemes are wound down despite the improved economic forecasts. We want to make sure that as we apply improved MEVs, we don't lose sight of this risk. Therefore, we've made refinements to our post-model adjustments to focus them more on the cohorts of borrowers we believe are most at risk from the tapering of support. The result is that we're maintaining a significant economic uncertainty PMA, which has increased slightly to 2.1 billion in the quarter, as shown in the table. As I mentioned, this still gives us materially higher coverage ratios than pre-pandemic across wholesale and unsecured consumer lending, as you can see on the next slide. Unsecured balances haven't increased materially in Q2 and are still down by 28% year on year. Despite the impairment release, coverage was still 10.2%, well above the 8.1% pre-pandemic level. The wholesale coverage ended the quarter at 1.1%, also well up on the pre-pandemic level. Coverage on home loans was maintained as the book grew by $12 billion since the start of last year. With these levels of coverage, the lower unsecured balances and improved macroeconomic outlook, We expect the quarterly impairment charge to remain below historical levels in the coming quarters. Turning now to BUK. The year-on-year comparison for Q2 was dominated by the large impairment release compared to the charge taken last year. Income also improved year-on-year, but the outlook remains challenging. The income growth overall was 11%, primarily non-repeat of prior year COVID-19 customer support actions, plus increased mortgage balances and improved margins. These are partially offset by the lower unsecured lending balances. As we showed on the earlier slide, card balances reduced a further 0.3 billion in Q2 to a quarter at 9.6 billion, a decline of 26% year on year. We expect some increase in aggregate card balances in the second half of the year, but the spend recovery will take time to feed in through to interest earning balances that drive net interest income growth. This contrasts with mortgage balances, which again grew strongly, with a net increase of 3.3 billion in Q2. Mortgage pricing continues to be attractive. Although we expect some erosion of margins over the coming quarters, mortgages should remain a positive factor for net interest income, but we'll dilute the NIM. NIM for the quarter was 255 basis points, broadly flat on Q1. Our current outlook for full-year NIM is now at the top end of the 240 to 250 basis points range we mentioned at Q1, but with NIM reducing in Q3 and Q4 due to the mixed effect from continued growth in mortgages and the level of interest earning card balances. Costs increased 7%, reflecting investment spent and higher operational and customer service costs, in part due to ongoing financial assistance, partially offset by efficiency savings. Impairment for the quarter was a release of 0.5 billion, reflecting the improved MERS, low levels of delinquency, and reduced unsecured exposures. Turning now to Barclays International. BI income was down 5% year on year at 3.8 billion, and the impairment was a net release of 271 million compared to a charge of 1 billion, resulting in an ROT of 15.6%. I'll go into more detail on the businesses in the next two slides. CIB income decreased 10% on Q2 last year to $3 billion, reflecting the headwind from the 13% depreciation in the US dollar and cost decreased by 4%. There was a $229 million impairment release compared to a charge of close to $600 million last year. ROT for the quarter was 14.8%. Although global markets income decreased 22% overall in sterling, or 13% in dollars, Equities reported its best-ever Q2, up 15% at $777 million, with strong performances across all business lines, including further growth in prime balances, which reached a record level. FIC decreased 39% against a very strong comparator last year, however our franchise is proving robust despite the lower levels of market volatility. Investment banking fees, on the other hand, reached a record level at $873 million, up 19% year-on-year. Advisory, equity capital markets, and debt capital markets all contributed well to the record performance. Despite the strong deal flow, the pipeline increased still further during Q2. Corporate lending income of $38 million was affected by single-name market-to-market write-off, which goes through the income line rather than impairment for technical reasons. Without this, the income would have been nearer the run rate of close to $200 million, which I've referenced in the past. Transaction banking income was up slightly year-on-year at 396 million. As I flagged at Q1, the increase in the variable compensation accrual reflecting improved returns is expected to be skewed towards Q1 this year. Overall costs were down 4% at 1.6 billion, resulting in a cost-income ratio of 55%. Turning now to consumer cards and payments, the ROTE for CCP was 21.8%. compared to a loss last year with the big driver being an impairment release of $42 million against a charge of over $400 million last year. Income in CCP increased $146 million to $0.8 billion, reflecting two one-offs, the non-recurrence of the circa $100 million visa loss and the property disposal in the private bank this year. U.S. cards income was down slightly year-on-year, reflecting the weaker dollar. The reduction in U.S. card balances year-on-year was 9%. Encouragingly, quarter end balances were up on Q1 at around $20 billion, but average balances over the quarter were lower. The increase in payments income reflected the non-recurrence of the visa loss, but was also up year on year adjusting for that and up 17% on Q1 as we saw the initial effects of the spending recovery. Costs increased 18%, some of which was accounted for by the litigation and conduct relating to a legacy portfolio in the quarter. Threats of the increase reflected investment and higher marketing spend. We are seeing clear signs of spending recovery, but the timing of recovery in interest earning balances in unsecured lending remains uncertain. With the recent development in our partnership portfolios, the prospects for the US cards business are encouraging. But as I mentioned in Q1, it will take time for the new business 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 main point to highlight in Q2 head office result was the structural cost actions, which include the property charge for the building in Canary Wharf. The negative income of £27 million was a bit below the £75 million run rate I mentioned in Q1, reflecting small positive one-offs. Excluding the £266 million property charge, the Q2 costs were £59 million, in line with the usual run rate. The loss before tax for the quarter was $338 billion, including that charge. Moving on to capital. The CT1 ratio increased in the quarter from 14.6% to 15.1% flat on the end of last year. We had flagged at Q1 that the reversal of the software benefit might come in Q2, but this is now expected to be implemented at the start of 2022. We had strong profitability in the quarter, but in this bridge we separated out the effect of the reduction in IFRS 9 relief RWAs were down more than usual at the quarter end, a reduction of about $7 billion compared to March, adding 34 basis points to the ratio. We've shown some elements of the future capital progression on the next slide. We've shown here a number of future headwinds to the ratio. The further buyback of up to $500 million will reduce the ratio by approximately 17 basis points. There's a pension deficit reduction contribution scheduled for Q3 with an effect of 11 basis points before tax. These factors will reduce the 15.1% ratio by close to 30 basis points. Overall, the balance of the year, we expect some further decline in the ratio, as impairment on Stage 3 balances feed through to the ratio, and as we see some increase in RWAs from the 30th of June level. However, we'd expect to end the year comfortably above our target range of 13% to 14%, with a software reversal which is expected to be circa 40 basis points, plus other regulatory capital headwinds reducing the ratio at the start of 2022. We are confident that the balance between profitability and these elements will leave us with net capital generation to support attractive distributions to shareholders over time and be comfortable within our CT1 target range. However, we will take into account the residual uncertainty as to the extent and pace of recovery from the global pandemic in determining the size and timing of such distributions. Both spot and average leverage ratios are around 5%, and as you know, we'll be focusing on the UK leverage rules rather than CRR, following the recent publication of the leverage framework by the regulator. Finally, a slide about liquidity and funding. We remain highly liquid and well-funded with a liquidity coverage ratio of 162% and a loan-to-deposit ratio of 70%, reflecting the continued growth in deposits. So to recap, we've generated an 18.1% statutory ROT for the quarter. That reflects the net impairment release of close to 800 million while maintaining good coverage levels. We won't see this sort of release every quarter, but we do expect the quarterly impairment charge to be below historical levels in the coming quarters. We are seeing the start of a slow recovery in consumer income and the CIB performance remains strong. Although costs in 2021 are expected to be higher than in 2020, Cost control remains a critical focus, and we expect costs, excluding structural costs and performance costs, to be around $12 billion this year. We expect ROT for this year to be above our target of 10%, and we are focused on delivering this on a sustainable basis in the medium term. In April, we completed a $700 million buyback announced in February, and capital at the end of the quarter remained at 15.1%, comfortably above our target range of 13% to 14%. This has allowed us to declare a half-year dividend of 2 pence per share and announce a further share buyback of up to 500 million. Thank you, and we'll now take your questions. As Jess is in New York and I'm in London, we'll do our best to coordinate our responses. And as usual, I'd ask that you limit yourself to two per person so we get a chance to get around to everyone.