Barclays PLC

Welcome to Barclays Half Year 2022 Results, 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, everyone. I'm pleased to be able to report strong financial results for the first half of 2022 for Barclays. Our profit before tax was 3.7 billion pounds, leading to an attributable profit of 2.5 billion pounds. This came after absorbing a net impact of around 580 million pounds over the half year relating to the over-issuance of securities under our U.S. shelf registration statements. The group income was 13.2 billion pounds. Excluding the income benefit from hedging arrangements related to the managing of the impact of the over-issuance, the group income was 12.4 billion pounds, which is up 10% year-on-year. Our statutory group return on tangible equity was 10.1%. We continue to focus on costs, particularly given inflation pressures. We are also focused on the readiness of our balance sheet to withstand macroeconomic challenges. We remain mindful that we need to continue to support customers and clients through what is an evolving and uncertain economic period. well capitalized, with a CET1 ratio of 13.6%. This is comfortably within our target range of 13% to 14%. It remains one of my key priorities to target the return of excess capital to shareholders. I'm pleased to announce a half-year dividend of 2.25 cents per share, as well as an intention to initiate a further share buyback of up to 500 million pounds. This is in addition to the 1 billion pound share buyback which we announced at the full year and which we have nearly completed. Before Anna and I go into more details on earnings, let me provide a brief update with respect to the over-issuance of securities under our U.S. shelf statements. We are making good progress to resolve this matter. We have agreed the terms of the rescission offer for affected customers, which we announced on the 25th of July and which will be effective on the 1st of August. We continue to engage positively and constructively with the U.S. Securities and Exchange Commission, and as we have done since we discovered and reported this item to them. In addition to an internal review, I have commissioned a council-led external review of this over-assurance matter. This external review will report to the board shortly, and we will consider all its findings carefully and take appropriate actions in response. Anna will cover the financial impact in more depth, but we expect the total first-half impact net of tax of the over-insurance matter to be around 580 million pounds, and this includes an estimated monetary penalty. We have made considerable progress improving our controls since 2016, so the fact that this over-insurance matter occurred in the first place is particularly disappointing. The necessity of a strong controls culture has never been clearer. and we will strive ceaselessly to improve it. Returning now to our performance, I would like to mention one or two highlights from the second quarter. Profitability was strong, with the second quarter profits before tax of £1.5 billion. Our return on tangible equity was 8.7%. This includes double-digit returns in our consumer businesses, Barclays UK and consumer cards and payments, and returns in the corporate and investment bank were impacted by the elevated litigation and conduct charges this quarter. I am particularly pleased that we saw continued income growth across all three of our operating businesses. Income in Barclays UK was up 6%, in consumer cards and payments it was up 29%, and the corporate and investment bank was up 10%, excluding the impact of over-issuance. The CIB income also included a particularly strong performance in FED, our fixed income currency and commodity business, which was up 52% year-on-year in US dollars. Across Barclays, the first half income was up 17% year-on-year. Excluding the income from hedging arrangements related to the over-issuance, it was up 10% year-on-year. The drivers of this growth are varied. illustrating how our diversification strategy is working for the group. It operates at all levels, geographically, in terms of customer type, and in the revenue streams within each of our individual businesses. For instance, Barclays UK has seen an increase in transaction-based revenue, as well as a tailwind from rising interest rates. In consumer cards and payments, we have benefited from balanced growth in our US card portfolio, as well as a pickup in payment transactions activities. And in the corporate and investment bank, global markets income grew across the half year, offsetting a slower period for banking. This is the result in markets of the investments which we have made in our clients' offerings and in the digitization of our trading platforms, allowing us to support our clients during a period of heightened volatility. We've also benefited from growing client wallet share in global markets, while the interest rate environment has helped the corporate bank. As a result of all of these, Barclays has been able to demonstrate steady revenue progress, even in an uncertain economic and market environment. Our focus remains on supporting our customers and clients through this period of economic uncertainty. The market remains volatile in interest rates, equity prices, and credit spreads, There is anticipation of a change in the real economy, which we have not yet seen. And we remain alert to signs of weakness, although we start from historically low levels of unemployment and credit stress. I'm confident that workplace diversification and balance sheet readiness puts the group in a good position. We are alert to the pressure that the rising cost of living is having on our customers and our colleagues. We have adopted a range of measures to help them, and we will look to do more. Each month, we assess millions of customer accounts and proactively contact anyone who might be showing signs of financial difficulty. Our frontline staff are trained to support vulnerable customers, including those who are struggling financially. Customers can also use the Barclays app for financial assistance services, including access to an affordability assessment and for more manageable repayment options. We are mindful of the impact on our colleagues as well of this rising cost of living. We recently increased pay for 35,000 of our UK-based staff in customer-facing branch and junior support roles, providing a £1,200 annual increase to their pensionable salaries. We've taken steps to manage our balance sheet conservatively, Our lending criteria remain careful, and we have recently reviewed and updated our affordability models in light of current circumstances. We are supporting our clients to manage their risk. We are monitoring customer behavior as we keep an eye on inflationary pressures in the market. And as I have outlined already, we also continue to see the benefits of diversification. Finally, we are maintaining robust credit card coverage ratios as balances rise. Overall, the group has balance sheet provisions of 6 billion pounds, which includes post-mortem assessments of 1.3 billion pounds. At ERF, I outlined three strategic priorities for the bank. These were to deliver next-generation consumer finance, sustainably to grow our CIB, and to capture opportunities as the world transitions to low-carbon. Across the first six months of this year, we have continued to invest in these priorities. These include two major investments in our consumer franchise, which will deliver high-yielding balances and access to new customers. The first was our acquisition of the GAAP US credit card portfolio. This was completed at the end of the second quarter and added 10 million accounts, doubling our US footprint. It will help us diversify our US card business into retail from its historic weighting towards travel. and it represents a significant expansion of our online platform. The second acquisition was that of a specialist mortgage lender in the UK called Kensington Mortgages. This acquisition is subject to regulatory approval. It will give us access to the specialist residential mortgage market in the UK. As the Barclays mobile app turns 10 years old, it is rewarding to see that more than 10 million customers are now using the app. Last year, we added over 100 features and customer experience enhancements, and these help our customers to manage their money in an accessible and easy way. This year will be no different, and we have already introduced a number of new features to the app. For instance, our new asynchronous chat function means that we are seeing customers resolve around 40% of their queries through self-service options. We also continue to invest in the corporate and investment banks to maintain our ranking of six for both global markets and banking. In global markets, our client wallet share continues to increase. Between 2018 and 2021, we grew this share by about 105 basis points, making us a top five gainer for the period and the only non-US bank in that group. We expect to continue to see good momentum in leading client revenues in the first half of this year. Finally, we are expanding our sustainable finance product offering. During the half year, we acted as lead manager on Austria's inaugural 4 billion Euro green bond, as well as the world's first green sovereign inflation-linked bond transaction for the French Republic. This continues to cement our position as a leading primary dealer and market maker in European government bonds. We have also completed a further £700 million worth of green home mortgages this year in the UK, meaning that we have now completed a total of £1.7 billion since 2018. We've made good progress to advance our ESG Centre in 2022, more detail on which is available in our dedicated presentation online. I'm particularly pleased that the publication of our climate strategy targets and progress, also called Save on Climate, received support from shareholders at the annual general meeting which we held in May of this year. So, in conclusion, Barclays has had a strong first half of the year. We maintain the double-digit ROTE that was a feature of our performance throughout 2021, and we continue to target a statutory ROTE greater than 10% for 2022. We have seen broad-based income growth across all our main operating businesses. underlying the value of the investment which we are making to grow Barclays and to deliver attractive returns. And we are continuing to return excess capital to shareholders. I'm pleased to have been able to announce a half-year dividend of 2.25 pence per share and an intention to initiate a further buyback of up to half a billion pounds across our franchise. And this will continue to be a priority for me as Group Chief Executive Officer. While I'm pleased with the performance we have shown, I'm conscious that we live in unusually uncertain times. This drives our conservative approach to managing our balance sheet, our robust provisions, and our watchful stance on continued weakness in the economy. So with that, thank you very much, and let me hand over now to Anna.

Thank you, Venkat, and good morning, everyone. For half one, our broad-based income growth partially offset the increase in costs, which reflected an elevated level of litigation and conduct charges. Impairment remains low, reflecting the quality of our books and level of provisioning. As a result, we were able to report an EPS of 14.8 pence, generating a statutory rating for the first half of 10.1%. Today, I want to focus on three themes. Our continued revenue momentum, our focus on costs given inflationary pressures, and our readiness for any macroeconomic deterioration. Before I do that, I will give you a short update on our progress on the over-issuance of securities under our US shelf registration statements. We flagged previously that the cost of the rescission offer in relation to the over-issuance would be sensitive to equity market movements, but also that we had hedging arrangements in place to mitigate the impact substantially. Whilst the net impact post-tax on the Q2 income statement is 176 million, the gross impact on the income and cost lines are significant, as markets have fallen sharply in Q2. The hedging income is £758 million and is in equities in CIB and the increase in the estimated cost of rescission is £984 million within litigation and conduct costs. We have announced that the rescission offer will complete in Q3 Whilst there may be some movement in the final gross effect, we don't expect material changes to the net impact. We have also progressed our discussions with the SEC in relation to a potential monetary penalty, and we've taken a charge of £165 million in Q2 in anticipation of this, giving a total net impact on Q2 of £341 million from the over-issuance. In Q2, we achieved a statutory ROTI of 8.7%. Income was up 24% or 10% excluding the hedging arrangements, while operating costs, which exclude L&C, were up just 3%. So the operating jaws were significantly positive. Total costs reflected both the further over-issuance provisions and a charge of 165 million relating to settlements in principle in respect of industry-wide devices investigations. The CET1 ratio ended the quarter at 13.6%, and that's depressed by 19 basis points temporary effect of holding the hedge RWA. This remains above the midpoint of our target range and we are announcing a further share buyback of up to 500 million and a half year dividend of 2.25 pence per share. TNAB increased 3 pence in the quarter to 297 pence per share as the 6.4 pence of EPS outweighs the net movement in other reserves. I'm now going to focus on the three themes of revenue momentum, cost management and our readiness for any macroeconomic deterioration before I summarise the Q2 results of the individual businesses. Q2 continued the broad-based income momentum of Q1 and this slide highlights some key drivers. First, loans and advances have grown year-on-year by 14% overall and matched by deposit growth of 14%. Second, increased economic activity has driven transactional fees across consumer and corporate businesses. Third, whilst the market for primary issuance remains challenging, that same environment has driven high levels of client activity across both financing and trading in the market's businesses. Finally, we have a tailwind from rising interest rates, which impact product margins across our franchises and increase the gross income from the structural hedge. We flagged the latter in Q1 and are benefiting from the recent increase in the structural hedge and the roll into higher long rates. With Q2 gross hedge income of 501 million, an increase of 123 million, on Q1. Q2 income growth was 10% excluding the over-insurance hedging. In the CIV, a diversification helped to generate 10% growth in income, excluding the benefit of the hedging arrangements. The standout performance was markets, where income increased 31% in sterling. FIC revenues were up 71%, reflecting increased client flow in credit and macro. Both offer spreads remain attractive and we have managed risk well. As in Q1, we have helped our clients reposition themselves in a volatile rate environment. Equities revenues were down year on year, excluding the over-assurance hedging, However, we don't judge success on single quarters, and we are happy with the continued development of our franchise in trading and financing, and increases in institutional client wallet share over recent years. Investment banking fees were down 37% year on year, reflecting primary market conditions. Advisory was up 8%, and the deal pipeline remains strong. Corporate income was up 24%, with strong growth in transaction banking more than offsetting the corporate lending income expense. The latter reflected marks we took on specific leveraged finance deals and the cost of macro hedges as we prudently managed our leveraged finance pipeline. Income in CCP increased 29%, reflecting growth across all three constituent parts. In international cards, income was up 34%. US net balances grew by $6.1 billion year on year, including $3.3 billion from the gap back book and significant organic growth, continuing the momentum in the business. In payments, transaction turnover was up 10% year on year, driving income growth of 35%, which was up 10% on Q1. Barclays UK grew income by 6%, predominantly in personal banking, where continued deposit growth and a strong tailwind from rate rises are offsetting very competitive mortgage margins. Barclaycard balances were broadly flat year on year and marginally up quarter on quarter as we managed the income risk trade-off carefully, given the economic outlook. Looking now at costs. We manage our statutory costs, including litigation and conduct charges, but the gross impact of the over-issuance risks obscuring our underlying cost control. In this inflationary environment, we are particularly focused on operating leverage. To that end, it's helpful to start by looking at the cost-income ratio, excluding the effect of the over-insurance charges, which showed positive underlying jaws. Income growth, excluding the hedging arrangements, improved the ratio by 4.4%. Given our dollar profitability, FX also improved the ratio after the reduction in structural cost actions. This gives us the headroom to invest in the business and absorb inflation and other L&C charges. Together these factors reduce the ratio to 62%, two percentage points better year on year. The net effect of the over issuance took the ratio back to 69%, but we do view the level of LNC in half one as exceptional and are encouraged by the trend in the underlying cost income ratio. We continue to face inflationary pressure, but seek to manage the cost investments with efficiency savings and remember that inflation does have a positive effect on nominal income. Overall, we continue to target a cost-income ratio of below 60% over the medium term. We'll look at the cost trajectory in more detail on the next couple of slides. The chart on the left shows that the rise in half-won costs was mainly attributable to the increase in L&C charges, excluding which costs were up just 2%. we reduced structural cost action significantly, whilst increasing investment spend within base costs, which were up by 8%, excluding L&C. We've shown on the right-hand side some of the factors behind this increase of 0.5 billion, of which 0.3 billion was the result of inflation and FX movements. However, I would also highlight the deliberate increase in investment spend which is partly funded by a further increase in efficiency savings. As you would expect, they are closely aligned with the three strategic priorities Venkat has highlighted, including gap and areas of the CIB where we see sustainable growth opportunities. Of course, it also reflects the business growth we're enjoying already and enhanced technology, cybersecurity and fraud detection. Looking next at our updated cost flight path. On the left, you can see our cost progression by quarter, split by business. Q2 costs, excluding LNC, were up 3% year on year, focused on investment for growth in CTP and CIB. The strength of the dollar, combined with the increased LNC charges, are the main factors behind our updated cost guidance. At Q1, our guidance for statutory costs was around £15 billion for the year. This assumed a dollar rate of £1.31 to £1. We were also not anticipating this level of L&C in Q2, although we are pleased to have made progress in resolving these matters. I would highlight that a strong dollar is a net profit tailwind and that the additional decision costs are substantially offset in income. Assuming an average dollar rate of 1.23 for the second half, we now expect total operating expenses of around 16.7 billion for 2022. I'm not going to give absolute cost guidance for 2023, We will continue to manage the trade off between cost efficiencies and investments, and we would expect ONC to be materially lower next year. Of course, the full year effect of inflationary pressure will be a headwind in 2023, but I would also remind you that we are investing in future income growth, for example, with a gap partnership and the proposed Kensington acquisition. Moving on to impairments. The net charge for the quarter was £200 million compared to a release last year. A lot of factors feed into this net charge, so I want to focus first on our risk experience and the quality of our portfolios. Delinquency rates in the businesses remained stable at loan levels, with 30 days arrears in UK cards at 1%, and in US cards at 1.4%. We continue to track customer and client behaviour very carefully. Given the heightened concerns over an affordability crisis, in order to identify early warning signs, we have not yet seen worrying indicators and payment rates continue to be high as customers have reacted rationally to the economic environment. As a result, cards balances in both the UK and US are down on pre-pandemic levels on a local currency basis, although the latter has started to grow again this quarter and we believe that the quality of these books is higher than before the pandemic. As a result, despite the macroeconomic uncertainty, we are comfortable with our coverage levels with UK cards, for example, at 10.9%, and US cards at 8.4%. Our total impairment allowance was 6 billion at the end of the quarter, of which 1.3 billion represents post-model adjustments, or PMAs, as shown on the next slide. The macroeconomic variables, or MEVs, we have used at Q2 for modelled impairment are based on consensus forecasts. However, we are conscious of concerns that there could be further downside credit risk. Therefore, we are retaining significant PMAs totaling 1.3 billion. As an illustration, I would also point out that when we model impairment using the MEVS for the downside one scenario, the implied increase in modeled impairment is 0.5 billion. which is significantly less than the PMAs for economic uncertainty we are still holding. Taken together with our coverage ratios, this supports our expectation that we will continue to have quarterly impairment charges below the pre-pandemic level in coming quarters. The 6% growth in BUK income was accompanied by broadly flat costs. delivering strong positive jaws. The BUK roti was 18.4% and we're feeling positive about momentum in the business. Before I go on to Barclays International, a few words on margin expectations for BUK. The NIMS for the quarter was 271 basis points, up nine basis points on Q1, as we saw benefits from rate rises. The expectation for further rises has increased since Q1, so despite the pressure on mortgage margins and the expectation of higher pass-through on later rate rises, we're upgrading our guidance for the full year to a range of 280 to 290 basis points, and we're now assuming a base rate of 2.5% by year end. Costs and income for Barclays International included the elevated L&C charge for the quarter and the income from the hedging arrangements related to the over-assurance. Despite the negative net effect from these, strong performance across the businesses delivered a rating of 8.4%. I'll go into more detail on the next two slides, beginning with the CIB. Income excluding the hedging arrangements was up 10% and was up 35% on a statutory basis. Excluding L&C, operating costs increased by 15% driven by investment in talent, systems and technology to support income growth initiatives and the impact of inflation. Overall, the CIB generated a ROTI for the quarter of 7.1%, and without the effects of the over-issuance, this would have been 11.4%. Turning now to consumer cards and payments. Income in CCP increased 29%, reflecting growth across international cards, payments, and the private bank. Costs increased by 11%, delivering strong positive jaws. The impairment charge was $144 million compared to a small release last year. This reflected an increase in US card balances, including the acquisition of the GAP portfolio in late June. The ROTI was 17.8%, turning now to head office. The income expense of $132 million included a 42 million loss on sales from the partial disposal of our stake in ABSA and the loss before tax for the quarter was 180 million. Before I move on to capital, a quick summary of our liquidity and funding. We remain highly liquid and well funded with a liquidity coverage ratio of 156% and a loan to deposit ratio of 70%. Finishing with capital, The CET1 ratio ended the quarter at 13.6%, comfortably within our target range of 13 to 14%. Our capital generation from underlying profits was strong, contributing 42 basis points. This excludes the effect of the over-issuance, which we've called out separately on the bridge. The net reduction from 13.8% in the quarter was the result of a number of factors. Over time, increases in interest rates are a tailwind to profitability, but in the quarter, the effect on reserves caused a headwind of 17 basis points, principally through the fair value effect on bond holdings. The over-assurance had an overall impact of 17 basis points in the quarter, from the net loss of £341 million including the estimated SEC monetary penalty and the temporary increase in RWAs associated with the hedging arrangements. Other factors increasing RWAs were £2 billion for the GAAP portfolio and investment in business growth, particularly in CIB. There was a £9 billion RWA increase from FX movements. This had little effect on the ratio due to its positive effects on the currency translation reserve. We've shown on the right-hand side the effects of the further share buyback, which will come off capital in Q3, and the removal of the RWAs on the over-issuance hedging arrangements, which together would be a small net positive. Looking at our capital requirements, our MDA hurdle is 10.9%, so we have comfortable headroom at current levels. the Bank of England expects the introduction of the counter-cyclical buffer at year-end to be followed by a further increase in July next year. This would take our MDA to 11.9%, assuming no offset from reductions in Pillar 2A requirements. Going forward, we remain confident in the organic capital generation of the group, and our capital ratio target range remains 13% to 14%. Finally, on leverage, our spot leverage ratio was 5.1% and the average UK leverage was 4.7%. So, to summarise, we reported statutory earnings per share of 6.4 pence for Q2 and generated an 8.7% rating, despite elevated litigation and conduct charges in the quarter. We've made considerable progress against resolving the over issuance of securities in the US and we have confidence in the continued revenue momentum across all of our businesses. We are well provisioned in readiness for potential deterioration in the macroeconomic environment and expect the run rate for impairment to be below pre-pandemic levels in the coming quarters. We are particularly focused on the cost trajectory given inflationary pressures. Given FX movements and the Q2 L&C charges, we have updated our cost guidance for the year to around £16.7 billion. Overall, the business performance is robust and we're focused on delivering our target of double-digit rates this year and on a sustainable basis going forward. Our capital ratio remains strong and we're confident of being able to invest for future growth and delivering attractive capital returns to shareholders. As a result, we have announced a half year dividend of 2.25 pence and a further share buyback of up to 500 million, which we expect to begin shortly following completion of the current buyback of a billion. Thank you. and we will now take your questions. And as usual, I would ask that you limit yourself to two per person so that we get a chance to get around to everyone.