Barclays PLC

Welcome to the Barclays Q3 2021 Analyst and Investor Conference Call. I will now hand over to Jeff Staley, Group Chief Executive, and Tushar Mazaria, Group Finance Director.

Good morning, everyone. It's been another consistent quarter for Barclays. Tushar will take you through the numbers in more detail in a moment, but at a headline, let me say that I am very pleased with our performance. I return on tangible equity for the group. was 14.9% for the first nine months of this year. We clearly expect now to deliver an ROTE above 10% for 2021. Our profitability remains robust, with year-to-date profit before tax of close to 7 billion pounds. This is our highest pre-tax profit level on record. Earnings per share was 30.8 pence for the nine months. And we remain in a strong capital position with a CT1 ratio of 15.4%, well above our targeted range of 13 to 14%. We were managing our costs appropriately. Our cost-to-income ratio for the first nine months of the year was 64%. And if you exclude structural cost actions, our cost-to-income ratio was, in fact, 61%. Looking at our performance by division, we had another great quarter in the corporate and investment bank. Revenue was driven by the continuing strength of our debt capital markets franchise, as well as strong performance in advisory and equity capital markets. In fact, the third quarter was the best quarter ever in investment banking fees. We continue to evolve the investment bank towards more annuity-like revenue streams, including our important securities financing businesses. Corporate Bank is making good progress on its strategic priorities, including income diversification, growth in higher returning transaction banking, and optimizing the use of loan capital. Its returns are now in double digits. Our consumer businesses, BUK and CCP, have performed well. As we recover from the impact of the global pandemic, both businesses have benefited from positive trends in UK and US consumer spending. While interest earning balances may take time to grow in the UK and US cards, UK mortgage growth remains strong, with mortgages growing by some £2.3 billion in the quarter. We should not forget that in the past years, both Barclays UK and CCP have regularly produced double-digit returns, and they remain very good businesses. Income from payments activity also continues to recover well, up 17% year on year. This is both the result of the pickup in the global economy, as well as early benefits from our strategic initiatives around payments. We're also expanding our unsecured lending in the UK, US, and Europe. We are deepening our engagement with customers through card acquisitions and corporate partnerships, including the exciting collaborations we recently announced with Gap, AARP, and of course, Amazon. We have built our business to be able to deliver double-digit returns through the economic cycle, diversified as we are by income type, by customer and client, and by geography. Our one bank approach, which we call the Power of One Barclays, also allows us to realize synergies across our consumer and wholesale businesses. This means we can target and unlock new growth prospects. Specifically, we are focused on positioning Barclays to capture opportunities from three principal areas. First, as the capital markets grow further to become the dominant financial driver of economic growth, we have built and will maintain our market position of one of the top six global investment banks. Second, as technology transforms consumer financial services, Barclays is building and delivering next generation digital products and services. And finally, we recognize that the transition to low carbon represents a defining opportunity for innovation and growth. We want to be alongside clients as they transition, using our advisory and financial expertise to help them navigate this period of extraordinary change. This week, in fact, I joined a number of our clients at the UK Global Investment Summit in London. The summit could not have come at a better time. Just a month before COP26 conference, And it explored ways that the UK can play a leading role in dealing with the climate challenge. Because we have the last full-service UK investment bank, Barclays can and will play a meaningful role in that aspiration. So Barclays is performing well, while our diversified model and strong balance sheet gives us growth potential for the future. Returning excess capital to shareholders still remains a key priority. We've already returned over 1.5 billion pounds of excess capital so far this year. And our CT1 ratio still stands well above 15%. So we are in a very strong place as we head into the end of the year. Tushar.

Thanks, Jess. As usual, I'll start with a summary of our year-to-date performance and then go into more detail on the quarter. The strength of the CIB continues to offset the effects of the pandemic on our consumer businesses, Well, we are seeing initial signs of recovery in terms of spending metrics. Overall income was broadly flat year on year, despite a 9% weakening in the average US dollar exchange rate. Costs increased by 0.6 to 10.7 billion, including structural cost actions of 0.4 billion, principally in Q2. This increase also reflected high performance cost accruals due to improved returns, while base costs were flat, and there's no change in the cost guidance we gave at Q2. After the release of 0.8 billion in Q2, we had a modest impairment charge in Q3, generating a net release for the nine months of 0.6 compared to a charge of 4.3 billion for the same period last year. This resulted in a PBT of 6.9 billion, a significant increase on the same period last year's profit of 2.4 billion. The EPS was 30.8 pence, generating an ROTE of 14.9%. Our capital generation year-to-date puts us in a position to pay a half-year dividend of 2 pence and launch a share buyback of up to 500 million in August, flying on from the 700 million buyback completed in April, and still end Q3 at 15.4% CP1 ratio, well above our target of 13% to 14%. I'll say more on the capital flight path later on. Turning now to Q3. Income was up 5% year-on-year to $5.5 billion despite the weaker US dollar. Within this, we saw growth in CIB and BUK partially offset by lower income in CCP. Costs were broadly flat year-on-year, delivering positive jewels. We had an impairment charge of $0.1 billion compared to a $0.6 billion for Q3 last year. As a result, profit before tax was 2 billion for Q3, up from 1.1 billion last year. The attributable profit for the quarter was 1.4 billion, generating an EPS of 8.5 pence and an ROTE of 11.9%. I would remind you again that these are all statutory numbers and take into account a litigation and conduct charge of 32 million. PNAV increased from 281 to 287 pence in the quarter, principally reflecting the 8.5 pence of EPS. Our capital position strengthened further in the quarter, with the CET1 ratio increasing to 15.4%, driven by profitability. A few words on income costs and impairment before moving on to the performance of the businesses. We've mentioned the benefit of diversification throughout the pandemic, and in Q3, we again delivered resilient group income performance. CIB income was up 8% despite the US dollar headwind, and the investment bank continued to perform strongly. We saw a 6% increase in BUK income, with strong performance in mortgages, while the quarter-on-quarter trend in unskilled lending balances stabilised. CCP income was down year-on-year, reflecting lower average US card balances and the weaker US dollar. Recent recovering spending is encouraging, but like many of our peers, we continue to see elevated payment rates. Income from unified payments and the private bank increased year on year. While unsecured lending remains subdued, the income outlook for the consumer businesses, the UK and CCP, reflects a continuing tailwind in secured lending in the UK, plus portfolio acquisitions in US cards and spending recovery in payments. The UK mortgage business had another strong quarter with $2.3 billion of organic net balance growth to reach $157 billion. In unsecured, we saw some balance recovery in U.S. cards and the quarter-on-quarter decline in U.K. cards stabilized, but the balance trajectory continues to be impacted by higher payment rates. I would remind you that in the U.S., we have added $0.6 billion of balances with the acquisition of the AARP backbook at the end of the quarter. We are seeing clear signs of recovery in consumer spending in both the U.K. and the U.S., but the build-in interest earning balances is expected to take time to materialize. Barclays is well positioned for a rising rate environment through the effect of a steeper yield curve on the role of the structural hedge and the effect of potential bait rate space rate increases on deposit margins. The table on the right of the slide shows an illustrative example for a 25 basis point parallel shift in the current yield curve. We mentioned previously an expectation that the role of the structural hedge would be a further headwind in 2022. However, the expansion of the hedge we mentioned at Q2 and the current yield curve should eliminate this headwind, and an increase in base rates would be a clear positive for income. You will recall that most of the recent increase in the size of the hedge will benefit Barclays International rather than BUK. Looking now at costs. Starting with base costs, as we label costs excluding structural cost actions and performance costs, these base costs were broadly flat year-to-date, in line with our expectation for the fourth year. Overall cost increase as a result of the increase in performance costs, which is largely in Q1, and structural cost actions. Just to remind you of the phasing of the structural cost actions through the year, you can see on this slide that we have charged 392 million year to date, including the Q2 real estate charge. You'll recall that the latter is expected to result in annual cost savings of about 50 million from 2023. We are evaluating planned structural cost actions for Q4, although the precise size is still to be determined. These are likely to include the continuing transformation of the BUK cost base, as you mentioned at Q2. There'll be some structural cost actions into next year, but I wouldn't expect a charge as large as this year. As I indicated at Q2, we aim for full year base costs to be broadly in line with 2020 at around 12 billion. Within this, we continue to make investments And there is underlying cost inflation, but we aim to offset these increases through efficiency savings and are getting a tailwind from the weaker US dollar. Last year's costs were $13.9 billion. Allowing for increases in performance costs and the structural cost actions, I'm broadly comfortable with the current cost consensus of between $14.4 and $14.5 billion. Looking forward, as the recovery strengthens, we'll continue to manage the balance between growth and investment spend and cost efficiencies with the aim of delivering positive tools in order to achieve our target sub-60% cost-income ratio in the medium term. Moving on to impairment. We reported a net charge for the group of £120 million for Q3, with charges in BUK and CCP offset by a net release in CIB. On the right, we've shown the split of the charge for the recent quarters into Stage 1 and 2 impairment and the Stage 3 impairment on loans in default. As you can see, the charge in Q3 is principally on Stage 3 balances after large book-ups last year and a net release in Q2. On the next slide, we've shown the macroeconomic variables and post-model adjustments. The MEVs used for the Q3 modelled impairment are shown in the upper table, and you can see the improvements in the baseline GDP and unemployment forecasts. However, the MEVs used for the downside scenarios broadly offset these improvements in terms of the modelled outputs. In addition, we want to make sure that we don't lose sight of the risks as the wind-down of support schemes feeds through. The result is that we are maintaining a significant economic uncertainty PMA at around 2 billion in the quarter, as shown in the table. This continues to leave us with materially higher unsecured coverage ratios than pre-pandemic, as you can see on the coverage slides we've included in the appendix. With these levels of coverage, the lower unsecured balances and improved macroeconomic outlook we expect the quarterly impairment charge to remain below historical pre-pandemic levels in the coming quarters. Turning to Barclays UK. The UK income increased 6% year-on-year with a continuing strong performance in mortgages and non-recurrence of last year's customer support actions. Costs decreased 6%, generating positive draws of 12% this quarter. As we showed on the earlier slide, Credit card balances were flat at Q2 at 9.6 billion, but still down about 20% year on year. The level of Q3 card balances reflects the high payment rates, and we expect the spend recovery to take time to feed into interest earning balances that drive net interest income growth. Mortgage balances again grew, with a net increase of 2.3 billion in Q3. Margins for the mortgages booked in the quarter were attractive, but the pricing on new mortgages is very competitive, and we do expect the churn margin to turn negative next year. NIM for the quarter was 249 basis points, down on the 255 reported for Q2. Our outlook for full year NIM is now around 250, at the top end of the 240 to 250 range we previously indicated. This still implies a Q4 margin in the low to mid-240s, as a result of the mixed effect from the depressed level of interest earning card balances and the continued growth in mortgages, complying with the moderation in mortgage margins. The decrease of costs of 6% reflected efficiency savings and lower operational costs, which more than offset investment spend. There was an impairment charge for the quarter of 137 million, almost half last year's charge, reflecting the low levels of delinquency and reduced unsecured exposures. Customer deposits increased further by a further 1 billion, and the ROTE for the quarter was 12.7%. Turning now to Barclays International. BI income increased 4% year on year to 3.9 billion, despite the US dollar headwind, while costs were slightly up. Impairment was a net release of 18 million, resulting in an ROTE of 15.9%. I'll go into more detail on the businesses on the next two slides. The momentum in the CIB continued with income up 8% on Q3 last year to 3.1 billion. Cost increased by 2% delivering positive tools. There was 128 million net impairment release compared to a charge of 187 million last year. This generated an ROTE for the quarter of 16.6%. Global markets income decreased 8% overall in sterling or 3% in dollars, but equities reported its best Q3 up 10% at 757 million, with strong performances in derivatives and equity financing, including further growth in prime balances to reach a record level during the quarter. FIC decreased 20% against a 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 £971 million, up 59% year-on-year. We were pleased with our increase in diversification as advisory, equity capital markets and debt capital markets all contributed strongly to the record performance. Despite the healthy deal flow, the pipeline remained at the high level we referenced at Q2. Sponsor activity continued to be high and our overall fee share of 4% continued the momentum we have achieved over recent quarters. Corporate lending income was 168 million, reflecting lower average balances and higher cost of credit protection. Transaction banking income was up 16% year-on-year, 430 million, and also up on Q2 with an improvement in deposit margins and increased client activity. As I've mentioned before, the increase in variable compensation accrual, reflecting improved returns, was skewed towards Q1 this year. Overall, costs were up 2% at 1.7 billion, resulting in a cost-to-income ratio of 56%. Turning now to consumer cards and payments. Incoming CCP decreased 8% to $0.8 billion, reflecting lower income from U.S. cards, partially offset by growth in unified payments and the private bank. The decrease in U.S. cards income reflected the weaker dollar, the 4% reduction in average card balances year on year, and higher customer acquisition costs. As I mentioned earlier, like our peers, we have experienced high payment rates. However, quarter end balances were up on Q2 at around $21.1 billion. This growth includes $0.6 billion from the AARP acquisition and organic balance growth of $0.4 billion. Another positive trend is that new accounts have increased over the first nine months, and this has contributed to the increased balances, but also means increased customer acquisition costs. Unified payment income was up 24% year-on-year and also up on Q2 as we saw the initial effects of the spending recovery. Private bank income increased 10% year-on-year, and client balances grew. Investment and higher marketing spend was reflected in an increase of 5% in CCP costs. The payment charge was $110 million, and the ROTE was 10.5%. With the recent developments in our partnership portfolios, the prospects for the US cards business are encouraging. I will 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. We're pleased with the recovery of the unified payments income as we pursue our growth ambitions across payments. Turning now to head office. The negative income of 110 million was a bit above the 75 million run rate I mentioned at Q1, reflected some hedge accounting losses driven by interest rate volatility. Costs of 114 million included some costs related to discontinued software assets, while the other net income line was a positive, with another fair value gain on business growth fund. The loss before tax for the quarter was 147 million. Moving on to capital. The CT1 ratio increased in the quarter to 15.4%, well above our target range of 13 to 14%. Profits generated approximately 54 basis points of accretion. Offsetting this, the further buyback of up to 500 million launched in August reduced the ratio by approximately 16 basis points. The Q3 pension contribution had an effect of 11 basis points before tax, and the dividend accrual in the quarter amounted to 8 basis points. RWAs were up slightly in the quarter, reflecting some headwinds from FX moves. We've shown some elements of the future capital progression on the next slide. As we indicated at Q2, we expect to end the year well above our target range of 13% to 14%, and we've shown on this slide the three specific headwinds which will reduce the ratio at the start of 2022. This would reduce the current ratio by around 75 basis points. Going forward, we are confident that the balance between profitability, investment in growth, and remaining capital headwinds will leave us with net capital generation to support attractive distributions to shareholders over time and be comfortably within our CT1 target range. Both spot and average leverage ratios were around 5%. 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 an 11.9% statutory ROTE for the quarter and 14.9% for the year to date. Although Q4 is generally the weakest quarter of the year for ROTE, we expect to be clearly above our target of 10% for the full year, and we are focused on delivering this on a sustainable basis. We are seeing some recovery in lead indicators for consumer income and the CIB performance remains strong. Although costs in 2021 are expected to be higher than 2020, cost control remains a critical focus, and we expect costs, excluding structural cost actions and performance costs, to be around 12 billion this year. We reported a modest impairment chart for the quarter, but have a net release of 0.6 billion for the year to date, and we expect the run rate for impairment to be below pre-pandemic levels over the coming quarters. Despite the two buybacks announced earlier in the year, totaling up to 1.2 billion, and the half-year dividend of 2 pence per share, our capital ratio of 15.4% at the end of the quarter remained comfortably above our target range of 13% to 14%. Although there are some capital headwinds to come at the start of 2022, we remain confident of being in a position to make attractive capital returns to shareholders while also investing for future growth. Thank you, and we'll now take your questions. And as usual, I'd ask that you limit yourself to two per person so we get a chance to get around to everyone.