Barclays PLC

Welcome to the Barclays Q1 2022 Analyst and Investor Conference call. I will now hand you over to C.S. Venkatakrishnan, Group Chief Executive and Anna Cross, Group Finance Director.

Good morning. I am pleased to report a strong first quarter for 2022 for Barclays. Our strategy is delivering and we saw income growth in all three of our main operating businesses. Group income was up 10% to £6.5 billion for this quarter Profit before tax was 2.2 billion pounds, and group return on tangible equity was 11.5%. This comes after absorbing an increase in costs, and that increase was driven in particular by the remediation of a legacy portfolio, as well as an over-assurance of securities in the US, something which I will talk about in a moment. Our group income has benefited from broadly improved performance in our consumer businesses, Barclays UK in consumer costs and payments assisted by rising rates. Global markets has also performed well as we helped clients navigate the volatility of the first quarter both before and after the appalling invasion of Ukraine. Unsecured lending balances remain well below pre-pandemic levels and impairment was 141 million pounds for the quarter. We remain well capitalized with a CET1 ratio of 13.8% comfortably within our target range of 13 to 14%. Before Anna and I continue talking about the highlights of our quarterly performance, let me start by addressing two matters. The first is the over-issuance of securities in the US, and the second is our exposure to Russia. As part of our structured products business, Barclays is a frequent issuer of structured notes and exchange-traded notes in the US, as well as elsewhere. In March, we identified that the securities offered and sold under our U.S. shelf registration statement had exceeded the registered amount for a period of about a year. As a result, we will be conducting a recession offer to eligible purchasers of these affected securities. Details of this will be published in due course. The quantum of the pre-tax loss due to this recession is about 500 million pounds. Anna will take you through the impact on our financial statement, including the allocation of these losses between 2021 and the first quarter of 2022. This situation was entirely avoidable, and I'm deeply disappointed that it occurred. The necessity of a strong controls culture has never been clearer to me. In fact, we have made considerable progress improving our controls since 2016. and so the fact that this happened is particularly upsetting. I have commissioned an external review of the matter with oversight from the board, and this review is focused on what happened, how it could have happened, and where accountability lies. At the same time, I take some comfort from our response and our ability to absorb this issue financially. The matter was escalated immediately, both internally and to our regulators, with whom we are cooperating constructively. To date, we have not found any evidence of intentional misconduct, and having reviewed all our other issuance programs, we note that they're all within applicable limits. However, the fact that this over-issuance occurred reflects a weakness in our control environment, and we are taking steps to address this. We are also enhancing the internal controls in relation to our debt securities issuance activities as an extra safeguard. In view of our ongoing discussions with the SEC concerning the impact of this issue, we are delaying the execution of our stock buyback until these discussions have concluded. This is not a question of whether we will be proceeding with this buyback, but when we will be proceeding. Our capital position is strong as reflected in the results we have just received, and we expect to be in a position to proceed with the buyback towards the end of the second quarter. Let me now turn to Russia. We have been witnessing a horrific human tragedy unfolding in Ukraine over the last few months. The human element of the conflict is what we feel first and foremost. We have also been dealing with the market repercussions. Barclays itself has no onshore presence in Ukraine or in Russia, following our exit there some years ago. The exposure we do have to Russia is principally through the facilitation of client activities in the corporate and investment bank. As illustrated on the slide, though, we reduced this exposure significantly through the quarter, and we have managed to control it carefully. We know that we need to remain vigilant to protect the group from second and third order risks, which includes fiber threats. We are, of course, working closely with governments and regulators around the world to comply with sanctions. Turning now to some of the highlights of the quarter, I'd like to start first and talk briefly about the strong performance of our markets franchise. Global markets income has been notably higher since 2020. This has been driven by a number of factors, including what is happening externally in the marketplace, as well as the results of a number of strategic decisions which we have made over time. To begin with, the franchise is benefiting from the ongoing growth of the global capital markets themselves. Our margins have also improved, reflecting the higher level of market volatility that we have experienced since the start of the COVID-19 pandemic. We have also benefited from competitor exits in some of the product areas where we have made strategic investments, including in our equity prime financing business. But many of the drivers of our success also results from the positioning of our business, including the investments which we have made in our client offering and the digitization of our platforms. As I mentioned at the end, we have also taken steps to diversify our income streams, improving the consistency of our performance, especially during changing market conditions. We have grown our financing income by approximately 40% between 2018 and the end of 2021. And in fact, in the first quarter of 2022, that income growth continued up around 10% on the previous quarter. So our global market business is growing in strength and capability. However, as I said to you in the previous quarter, this growth will not always be monotonically in a straight line. Our relative performance will be stronger in some quarters than in others. For instance, in Q4 of 2021, we underperformed our competitors. While in Q1 of 2022, our performance has been particularly strong versus our competitors. This relative performance is determined by three things. The first is the businesses in which we engage. The second is the strength of our interaction with clients. And the third is particular idiosyncratic opportunities in which we have helped clients manage their exposures. In Q1 of 2022, all these three factors contributed to increased revenue. As I've already outlined, our business mix means that we have relatively limited direct exposure to Russia and to the commodities market. We have managed the exposure, which we do have, proactively and dynamically. Q1 also saw increased trading activity, commencing with rising interest rates in January and February and increasing after the invasion of Ukraine. Thanks to the strength of our client franchise, we were able to help many clients manage their risks and exposures during this period, responding to rising rates and fluctuating equity prices. We were also able to help a number of important clients manage very large currency and debt exposures related to Russia. In summary, the investments we have made over the past few years in this business are now delivering, positioning us to continue to serve our clients when they need us most. Turning now to the economic environment, rising interest rates at both the short end and the long end of the yield curve are leading to higher net interest margins for the bank. we are already starting to see some of the benefits from rises in the base rate flow through to our consumer businesses. However, both the UK and the US economies, while they are forecast to continue growing over the next three years, face a threat from rising inflation. One compensating aspect is that unemployment in the UK and the US remains at low levels. We are very focused on the impact that higher prices are having on our customers and our clients. A great many are facing far harder conditions this year as a result of inflation, particularly from supply chain difficulties and higher energy costs. We will support those who bank with us to navigate this difficult period wherever we can, and we will continue to support the wider economy just as we did through the COVID crisis. We remain focused on our three strategic priorities, which I outlined at the end. The first, to deliver next generation digitized consumer financial services. Second, to produce sustainable growth in the corporate and investment bank. And third, capturing opportunities as we transition to a low carbon economy. Across our Barclays UK and consumer cards and payments businesses, we are continuing to invest in our digital capabilities to enable our customers and clients to transact and interact digitally. We are building out more cost-effective infrastructure, using consumer data more effectively, and we have invested to grow our payments business. Within wholesale banking, we are investing to sustain our position as the sixth-ranked global investment bank. This will allow us to continue to take advantage of the growth in capital markets and to help our clients manage risk, as you have seen in the results this quarter. As I've already touched on, we have also sought to diversify our income in the corporate and investment bank, including by investment in more consistent annuity-type financing businesses in global markets. We are also targeting growth in transaction banking and our corporate banking offering in Europe. Finally, our third priority is to recognize the scale of opportunity in climate-related financing and to realize it. We want Barclays to be able to benefit as we support our customers and our clients to transition their businesses and their activities towards lower carbon emissions. Helping finance this transition is a key part of our strategy to becoming a net zero bank by 2050. We are well on the way to reach our target to facilitate 100 billion pounds of green financing by 2030, having already facilitated over 65 billion pounds. We also recently announced important updates to our climate strategy targets and progress, including our work to reduce our finance emissions. We have set 2030 reduction targets for four of the highest emitting sectors in our portfolio and further tightened our restrictive policies with respect to the financing of thermal coal. As part of our commitment to give shareholders a say on climate, we are offering our shareholders a vote on our climate strategy targets and progress at our annual general meeting in Manchester next week. In conclusion, we had a strong quarter. This is despite the over-issuance of securities in the US, which was a disappointing controls matter and has impacted our costs. We have maintained the double-digit group return on tangible equity that was a feature of our performance throughout 2021. And I am confident in our ability to sustain this on an ongoing basis. and we continue to target an ROTE of greater than 10% in 2022. As I've already mentioned, we will be proceeding with our planned £1 billion share buyback program, and we expect to be in a position to do so towards the end of the second quarter. Thank you, and over now to you, Anna.

Thank you, Venkat. Good morning, everyone. You'll have seen our announcement about over-issuance of securities in the US a few weeks ago. At the time, we expected the Q1 results to reflect circa 0.5 billion of litigation and conduct costs pre-tax in respect of this. Following subsequent discussions with regulators, we have apportioned 0.2 billion of these estimated costs to 2021. We also have 0.2 billion of customer remediation relating to a legacy partner finance portfolio in CCP, which we weren't expecting at the time of our four-year results. I'll highlight the effect these charges have on Q1 as we go through the presentation. I'll start with a summary of our Q1 performance. Overall, we continue to focus on delivery of our three targets, for ROTI, the cost income ratio and CET1. ROTI for the quarter was 11.5%, despite the impact of the litigation and conduct costs, with both Barclays International and Barclays UK delivering double digit returns. Our cost income ratio was 63%, elevated by the level of L&C costs in the quarter. However, Operating costs were broadly flat against income growth of 10%, demonstrating the operating leverage of the businesses and our cost discipline. The CET1 ratio ended the quarter at 13.8%, comfortably above the midpoint of our target range. This capital print includes the impact of the 1 billion share buyback program announced with full year results. Overall, we delivered a PBT of 2.2 billion and 8.4 pence of EPS. I'm going to focus on income, cost and impairment trends across the group before I briefly summarise the results of the individual businesses. Income was 10% higher than Q1 2021 with all the businesses contributing. CIB delivered growth of 10% demonstrating the diversification within the CIB and its ability to deliver attractive returns in a variety of macroeconomic environments. Markets income increased 26%. This reflects the high level of activity by our clients as we help them reposition in the light of geopolitical uncertainty and rising rates. FIC revenues were up 37%. reflecting increased volumes and attractive bid-offer spreads in volatile markets. Equities revenues were 1 billion, up 13% year-on-year, with particular strengths in derivatives. Quarterly comparisons of market income are affected by various factors, and our Q1 year-on-year increase does benefit from our business mix. But as we look at the development of our market's income over multiple quarters, we are pleased with the development of our franchises on a trend basis. One example is financing activities, which performed well within FIC and equities with increased balances and healthy spreads. Balances in equity prime were up 14% year on year, evidencing our successful expansion of that business over the last few years. Investment banking fees were down 25% year-on-year, reflecting lower primary issuance volumes, particularly in equity capital markets. Debt capital market to income was down just 8%, outperforming the market, whilst advisory was up and the deal pipeline remained strong. Income in CCP increased 10%, reflecting growth across all three constituent parts. In international cards, US balances grew by 13%, or $2.6 billion year on year, although there was, of course, a seasonal decline during Q1. Given this, we are confident of delivering balance and income growth in 2022, both organically and with the acquisition of the GAAP portfolio. which is due to complete towards the end of Q2. However, the income effect of this balance growth will be dampened by the J-curve effect, particularly from customer acquisition in growing portfolios like American Airlines and JetBlue. In the payments business, despite Omicron-related restrictions in January, transactions turnover was up 17% year-on-year, contributing to an increase in income of 44%. The private bank franchise is developing well, with income up 20% year on year, as client balances continue to grow in both banking and investment products. Barclays UK grew income by 5%, predominantly driven by personal banking, where income was up 11% year on year, This reflected the strong origination of mortgages throughout 2021, which continued into Q1 2022 with a further £1 billion of net balance growth. Whilst the mortgage market is always very competitive, personal banking margins have increased overall due to the impact of rising rates on deposit income. Fastly card UK income fell by 12% year on year. Although spend levels have increased by 35%, balances were down year on year and fell 0.3 billion in Q1 because of seasonality and elevated repayment rates. We do expect Q1 to be the low point for UK card balances, with spend recovery generating some growth in lending balances from here. although recovery in interest earning balances is expected to remain slower. Finally, to pull out some key income themes across the group. Loans and advances have grown year on year by 7%, more than matched by deposit growth of 10%. Whilst the market environment for primary issuance has been challenging, that same environment has driven high levels of client activity across both financing and trading in the CIB's markets business. Increased economic activity has driven transactional fees across consumer and corporate businesses. And lastly, of course, there is a tailwind from rising interest rates, which impact product margins across our franchises, but also income from the structural hedge. We expect this effect to be more meaningful in coming quarters. and you'll find our usual slide on sensitivity to rate increases in the appendix. Looking now at costs. The cost performance this quarter is of course dominated by the L&C charges. We manage our statutory costs and we're not going to adjust all our performance metrics to exclude L&C. However, we do view this quarter's L&C as exceptional So we focused particularly on the trends in operational costs. These were broadly flat as we exercised good cost discipline and delivered strong positive jaws. Base costs, which exclude structural cost actions and performance costs, were up by 0.6 billion, mainly due to the 0.5 billion increase in L&C. The Q1 allocation of costs relating to the over issuance of 0.3 billion is charged to the CIB. And the 0.2 billion relating to a legacy partner finance portfolio is in CCP. Looking now at the cost trajectory for the year. When we set our guidance for base costs for the year, we didn't anticipate L and C costs of 0.5 billion in Q1. There has also been some increase in expectation for inflation and the dollar has strengthened further since full year results. So we have seen some increase in our outlook for all in costs for the year. Efficiency and cost discipline remains crucial and we continue to seek to balance capacity creation with investment for growth. We are reviewing expenditure plans in the light of the expected cost of the L&C for the year and the impact of both inflation and FX, and may postpone some investment programmes. As we mentioned at full year, based on current plans, we would expect structural cost actions to be materially lower than last year's total of 0.6 billion. You will appreciate that there are a number of moving parts this early in the year, but I'm currently comfortable with the published market consensus of around 15 billion for all in costs this year. Moving on to impairment. We reported a modest charge of 0.1 billion for the quarter. This is stage three impairment relating to net charge off. and some expected migrations through the impairment stages as economic activity recovers. Delinquency rates in the businesses are stable at low levels, with 30-day arrears in UK cars at 1% and US cars at 1.6%. Whilst we are seeing some recovery year on year in unsecured lending, balances are well below pre-pandemic levels. We are tracking customer and client behavior very carefully, including patterns of spending in order to identify early signs of pressure from affordability. So far, we haven't seen any particular worrying indicators, but we have specifically considered affordability risks and have broadly maintained coverage level with UK cards at 12.8% and US cars at 10.4%. Further details on coverage ratios are included in the appendix. Turning now to the performance by business. BUK income increased 5%, while costs decreased 3%, reflecting lower operational costs plus efficiency savings, partially offset by increased investment spend. We have started to implement the cost actions we reflected in the Q4 results, but it will be a while before we see the full expected benefit, given the timing and payback. The BUK roti was 15.6%, and we're feeling good about the momentum in the business. Finally, a few words on forward margin expectations for BUK. The NIMS for the quarter was 262 basis points, up 13 basis points on Q4, principally reflecting the effect of rate rises. There are still a lot of variables, but given the pass-through on the initial rate rises and the expectation of further rises, we're increasing our NIM guidance for the full year to 270 to 280 bps. That assumes the UK base rate reaches 1.75% by the end of the year. Turning now to Barclays International. BI income increased 10% to 4.8 billion, while cost increased as a result of the conduct and litigation charges. Despite this, strong business performance delivered a ROTI of 14.8%. I'll go into more detail on the next two slides, beginning with the CIB. Income was up 10% to 3.9 billion. Excluding L&C, operating costs increased by just 2%, delivering strong positive jaws. In total, costs increased by 19%, reflecting the Q1 portion of the provision relating to the over-issuance. There was a 33 million net impairment release, reflecting an improved view of the watch list. Overall, the CIB generated a ROTI for the quarter of 17.1% despite the LNC charge, which impacted the ROTI by around 3 percentage points. Turning now to consumer cards and payments. Income in CCP increased 10%, reflecting growth across international cards, payments and the private bank. The increase in costs was largely due to the L&C charge of close to 200 million. There was also an increase in investment and marketing spend relating to the expansion of the business, including preparations for the GAP partnership. The impairment charge was 134 million, reflecting the flow through to delinquency in US cards. The ROTI was minus 1.5%, But excluding the L&C charge, the ROTI would have been in double digits. Turning now to head office. The income of 23 million included a one-off gain from the sale and leaseback of UK data centres of 86 million. Costs were broadly in line with the usual run rate, and the loss before tax for the quarter was 73 million. Before I moved to capital, Quick summary of our liquidity and funding. We remain highly liquid and well funded with a liquidity coverage ratio of 159% and a loan to deposit ratio of 68%. Moving on to capital. The CET1 ratio ended the quarter at 13.8%. comfortably within our target range of 13% to 14%. At four-year results, we flagged the effect of the announced buyback programme and the regulatory changes which took effect on 1 January. These two elements reduced the year-end ratio on a performer basis to 13.9%. The apportionment to Q4 of part of the charge relating to the over-issuance doesn't affect the headline year-end ratio. However, there was a further 19 basis points impact from the Q1 charges relating to the over-issuance and associated RWA moves and a six-bit headwind from the fair value reserve movements principally caused by the higher rate environment. We would expect circa 12 bits of the over-issuance impact to reverse when the related hedges are no longer required. Underlying capital generation was strong, with 51 bps accretion from profit. This was partially offset by increased RWA deployment, as we would expect in Q1. Looking at our capital requirements, our MDA hurdle is 11%, so we have comfortable headroom at current levels. There are a couple of factors affecting the ratio over the balance of the year that I want to mention. Firstly, our recent disposal of ABSA shares adds around 10 basis points to the capital ratio in Q2. Secondly, we expect to go into the triennial pension valuation at 30 September in a surplus position, both from an IFRS and a funding point of view given the recent announcement from the pra on structured contributions we expect to unwind 1.25 billion of contributions in q4 which would otherwise have been spread over 2023 24 and 25 from a capital point of view absent other impacts from the triennial This could bring forward around 30 basis points reduction in the ratio. I would note, however, that given the surplus position of the fund, the element of our Pillar 2A requirement for pension risk may reduce. Going forward, we are confident in the organic capital generation of the group. We announced with our annual results in February that we would be launching a one billion buyback. In view of our ongoing discussions with the SEC concerning the impact on last year's 20F filing of the over-issuance of US securities which we announced on 28th of March, we are delaying the execution of the buyback until we have concluded these matters. To be clear, This isn't a question of whether we will be proceeding with a buyback, but when, and we expect to be in a position to start towards the end of Q2. As we've said previously, the Board considers capital distributions regularly throughout the year. It isn't just a matter for annual discussion, as you saw in 2021. Finally, on leverage, our spot leverage ratio was 5% and the average UK leverage was 4.8%. So, to recap, we reported statutory earnings per share of 8.4p for Q1 and generated an 11.5% ROTI, despite the litigation and conduct charges. The business performance is robust. and we're focused on delivering our target of double digit ROTI this year and on a sustainable basis going forward. We have an income tailwind from expected balance growth and rate rises in the consumer businesses and the CIB franchise is in good shape after an excellent Q1 performance. Given the 0.5 billion of litigation and conduct in Q1 2022, the increase in expectations for inflation and the strengthening of the dollar, we have seen some increase in our outlook for costs for this year. But we'll continue to review our expenditure plans and it's early in the year. But overall, we're comfortable with the current consensus of around 15 billion for all in costs. Reflecting macroeconomic uncertainty, we have maintained strong coverage ratios and expect the run rate for impairment to be below the pre-pandemic levels over the coming quarters. Our capital ratio remains strong despite the Q1 L&C charges and we remain confident of delivering attractive capital returns to shareholders whilst also investing for future growth. Thank you and we will 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.