Barclays PLC

Welcome to Berkeley's half-year 2023 Results Analyst and Investor Conference call. This call will be recorded for replay and transcription purposes. These will be published on Berkeley's Investor Relations website in line with Berkeley's Privacy Notice at home.barclays. During the call, Berkeley's representatives may make forward-looking statements within the meaning of U.S. Securities laws. These statements can be identified by the and sometimes use words such as may, will, seek, continue, aim, anticipate, target, projected, expect, estimate, intend, plan, goal, believe, achieve or other similar words. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances and may be affected by various factors which are beyond Berkeley's control. No forward-looking statement is a guarantee of future performance and the Berkeley's group's actual results, financial condition or performance could differ materially from those contained in such statements. Subject to applicable laws and regulations, Berkeley's undertakes no obligation to update publicly or revise any forward-looking statements. For more information on forward-looking statements, please refer to the disclaimer notice in the presentation slides which accompany this call. At the end of the presentation, there will be a question and answer session for those who have joined by audio conference. When audio questions are taken, our operator will introduce each question by name to the speakers. If you wish to ask a question, please press star followed by one on the telephone keypad at the start of the question and answer session. If you change your mind and wish to move your question, please press star followed by two. Please hold the line and we will be placed to the call shortly.

We start by saying we continue to deliver a consistent strong performance quarter on quarter. In particular, our second quarter results show resilience against a mixed macroeconomic backdrop and against subdued market activity. This performance again demonstrates the stability and strength of the franchise which we have built over many years. We generated 6.3 billion pounds in income in the second quarter of 2023, up 6% year on year, excluding last year's impact from the ovations of securities. This growth reflects the diverse sources of income which we have built across the group. Our focus on cost discipline delivered a -to-income ratio of 63% for this quarter, putting us on track to meet our guidance of low 60s in 2023. Our deliberate and prudent approach to risk management over many years is providing protection against macroeconomic uncertainty. As a result, our credit performance continues to be in line with our expectations. Together, these foundations have generated a profit before tax for the bank of 2 billion pounds in the second quarter, earnings per share of 8.6 pence and a return on tangible equity of 11.4%. This second quarter performance means that we have delivered for the first half of 2023 an income which is up 9% year on year, again excluding the over-insurance, and a return on tangible equity for the first half of 13.2%, again in line with our target of above 10% for the year. Despite the mixed macroeconomic backdrop, we continue to invest thoughtfully where we see opportunities to build competitive advantage and to service our customers and clients more effectively. In investment banking, building on our strength in the U.S., we are growing our market share in the U.K. and in Europe, and we have risen to number one ranking in fee share in the U.K. and a number two position in Germany for the second quarter of 2023, as well as our sixth position globally. While announced volumes have been muted, client consideration of M&A alternatives remains active in anticipation of improved market conditions, and we have been deeply engaged in a full range of risk transfer activity. For example, Barclays was exclusive provider of financing for Ares' $3.6 billion deal with PacWest Bank Co-op in the last quarter. We are also seeing continued momentum in financing income within our market business and maintain our top tier rankings in business and credit trading. Despite lower client activity in markets and banking across the street, I am particularly pleased with the growing strength of our client franchise. For several years, our client-centric market business has targeted a greater share of flow revenue from our top 100 clients. As a result, our income from these clients is up over 10% for the first half of 2023. In the Consumer Bank in the U.S., we have built upon the succession of our partnership with SCAP and announced a new long-term collaboration with Breeze Airways, an airline startup from a co-founder of JetBlue. We also continue to make good progress in financing the transition to a carbon economy. We recently provided approximately 100 million pounds in loans to support Moray West Offshore Wind Farm, a development that is expected to supply up to half of the electricity for Scotland. And recently, we extended our popular Greener Home Rewards scheme in the U.K. to help support more of our mortgage customers with financing energy efficiency improvements to their houses. As I have said in the past, shareholder distributions are a key focus for the bank. Our reported CET1 ratio at the 30th of June was 13.8%, up 20 basis points on the first quarter, and solidly within our target of 13 to 14% for the bank. Core to this is our consistently strong balance sheet and the capital generation capacity of our franchise. We are therefore announcing an increased capital return to shareholders with a 20% growth in our half-year dividend to 2.7 pence per share. We are also pleased to announce a share buyback of 750 million pounds, which is an increase on the 500 million pounds we announced at year end and completed in the first half. Over the past 12 months, our combined dividends and buybacks, including those announced today, represent a yield of about 10% at current share price levels. And our buyback programs have in aggregate reduced our share count of shares in issue by over 10% since 2020. And so to reiterate, capital and shareholder distributions are a key focus for us going forward. As we have described for more than 18 months now, inflation and higher interest rates in developed economies have changed both client and customer behavior. We have continued to position Barclays accordingly, and that is driving the consistency and stability in our results. I will briefly describe our approach, and Anna will elaborate on these points shortly. First, we have taken a prudent approach to credit risk management and to our balance sheet, maintaining strong capital and liquidity metrics over the long term. In particular, we continue to balance carefully our credit exposure with the provision of lending and liquidity. Our customers are cautious, but they remain resilient. We have provided incremental and tailored support while also ensuring that it is simple and convenient for them to access the right product to meet their needs. We understand the impact of inflation and high interest rates on our customers, and we want to help them. For our UK mortgage customers, we are providing options to switch to interest-only mortgages for six months or extensions of their mortgage term where appropriate. We are also enabling customers approaching the end of a fixed-rate mortgage deal to lock in a new rate up to six months in advance. Of those customers who have made their mortgage rate switch application directly to us, over a third have done so using the Barclays app. On the savings side, we provide a range of instant access and fixed savings products, which allow our customers to select the right rates for their savings goals. For those customers who rely on instant access to savings, we recently increased the rate on our Everyday Saver by 50 basis points. In addition, since its launch in September last year, our Rainy Day Saver account, which pays 5% up to £5,000, has proven popular with customers. Over 435,000 accounts have been opened as of the end of June this year, of which 95% were opened digitally. We also regularly conduct outreach to highlight where a better savings product might be available to customers, and we have seen some significant shifts in behaviour as a consequence. As interest rates rise, our customers become increasingly sensitive to their impact, and as a result, we have issued further guidance on our Barclays UK net interest margin, which Anna will address shortly. Finally, we have also continued to exercise cost discipline against this backdrop by capturing efficiency savings to manage inflation and by being thoughtful and careful about how we invest in our businesses. Anna will cover costs in more detail, but suffice to say that we have delivered on our cost guidance this quarter and remain committed to driving a lower cost to income ratio over time. So, in summary, we remain very confident of meeting our targets for the full year. Our targets are anchored on a greater than 10% return on tangible equity. I reiterate that this remains a flaw and not the extent of our ambition. We are managing the bank well and generating a consistently strong statutory performance across the range of different economic scenarios and market scenarios which we have been experiencing. This quarter represents another important step towards demonstrating value for our shareholders. We have increased shareholder distributions and remain committed to doing so going forward. And we do this while continuing to support our customers and our clients. With that, thank you for listening. I'll hand over now to Anna to take you through the financials in more detail.

Thank you, Venkat, and good morning, everyone. Starting with performance highlights on slide seven. Our return on tangible equity for the quarter was 11.4%, broadly in line with Q2 last year, resulting in a .2% return for the first half. This is in line with our expectations, and we are very confident of achieving our ratey target of above 10% for the year. This takes into account business trends in income and our latest view on impairment. I'll come back to each of these. We guided the costs in Q2 being lower than Q1 and have delivered. The cost income ratio was 63% for the quarter and 60% for the half. And we continue to guide to low 60s for the full year. Although we are still guiding to a loan loss rate of 50 to 60 bits for the full year, we continue to see limited signs of stress across our portfolios. And this quarter, the loan loss rate was 37 bits. This reflects the prudent positioning of our balance sheet, as Venkat mentioned, and we believe our risk management discipline will limit credit risk downside for us if the global economy slows. Our liquid and stable balance sheet positions us well to pursue our returns objective and return capital to shareholders. Accordingly, we are paying a half year dividend of 2.7p and have announced a further buyback of 750 million to start immediately, which is a total return of 7.5p per share for the first half. There was no effect this quarter from the over issuance of securities, which did impact litigation and conduct costs and income for Q2 last year. To provide a more meaningful comparison, we have excluded these impacts from the comparators in this presentation. On this basis, income was up 6% on a strong Q2 last year, whilst operating costs, which exclude litigation and conduct, were also up 6%. Litigation and conduct was 33 million this quarter and profit before impairment was up 12%. The impairment charge increased to 372 million against a low comparator and in line with our expectations, resulting in profit before tax increasing to 2 billion and earnings per share to 8.6p. The tangible net asset value accretion from earnings was more than offset by negative reserve movements, mainly reflecting further rate rises, reducing TNAV by 10p in the quarter to 291p per share. I'm now going to cover the key drivers of our return, income, costs and risk management, starting with income on slide 9. Total income increased 6% or around 335 million year on year, reflecting our diverse sources of income. Barclays UK income grew 14% with tailwinds from higher rates year on year and from the structural hedge, partially offset by lower product margins. Consumer cards and payments increased 18% driven mainly by US card balances. CIV was down 3% year on year at 3.2 billion. The strengths in corporate lending and transaction banking income and stability in financing income in markets partially offset the impact of market conditions, which were less favorable for intermediation income and for deal flow in banking. So we benefited again from our diverse business model within the CIV. Looking at the group as a whole, if you compare our revenue in this quarter with four years ago, you can see that we have grown income by around 400 million in both the CIV and across our consumer businesses. Turning now to costs on slide 10. Total costs were 4 billion, up 2% year on year. Our cost income ratio improved from 65% in Q2 last year to 63%, an increase on 57% at Q1 as we expected, and this is factored into our unchanged low 60s guidance for the full year. We delivered lower operating costs in Q2 versus Q1 at both the group level and in CIV in line with our guidance, and we continue to expect Q1 to be the high point for quarterly operating costs this year, again for group and CIV. We are focused on capturing cost efficiencies across the group. For example, in Barclays, UK, we are investing in transformation to improve service for our customers by automating, digitizing, and simplifying our offering, while also driving a lower cost income ratio over time. CCP operating costs were up 96 million year on year, reflecting growth in our US card portfolio, including the acquisition of Gap towards the end of Q2 last year, and the UK wealth transfer from Buk during the quarter. And CIV operating costs were up 114 million year on year, as we continue to invest selectively in our client franchise through technology enhancements, in talent, and in improved resilience and controls. Moving on to credit on slide 11. We have maintained our long-standing prudent approach to provisioning and continue to hold strong coverage levels. Our impairment allowance at the quarter end was 6.1 billion, a slight decrease from 6.3 billion at Q1. We updated the baseline macroeconomic variables for models impairment from the full year, notably with some reduction in forecast unemployment in the UK and US. However, these remain more severe than the forecast used at Q2 last year. And at the end of the quarter, we retained post-model adjustments for economic uncertainty of 0.3 billion. Our guidance for a loan loss rate in the 50 to 60 bits range allows for some potential credit deterioration and CISX. The 372 million charge translated into a loan loss rate of 37 bits. Looking in more detail by business on slide 12, the Barclays UK charge of 95 million reflects both lower balances and a lower risk book of unsecured lending compared to before the pandemic, as well as our prudent positioning in mortgage lending. There is some increase in the provision against mortgages, and I'll come back to why we remain comfortable with our credit risk here, despite the significant rise in interest rates. As expected, the majority of the charge is again in consumer cards and payments and US cards in particular. It reflects the normalization of delinquencies with a seasoning effect as balances grow, and this includes the gap acquisition, which is performing as we expected. The next three slides illustrate why we are confident in our provisioning and our prudent approach to risk. On slide 13, we've shown key coverage and delinquency metrics for our two largest unsecured books, UK and US cards. Repayment rates in UK cards remain high across the credit spectrum and arrears rates remain stable and very low by historical standards. Overall, we are confident that the credit quality of our UK card book has improved since 2019. We've continued to grow US cards in an appropriate and controlled way that is consistent with the opportunities we see there. As we expected, delinquencies at all FICO levels have been increasing, but our risk mix has improved with our average FICO for the book strengthening slightly since the end of 2019 to over 750, and this includes gap. In addition, the proportion of the book better than a FICO of 660 is now 89% compared to 86% at the end of 2019. As we grow, we maintain strong coverage levels across both UK and US cards, notably stage two coverage of around 18% and 33% respectively. Moving on to the mortgage book on slide 14, there are a number of factors that contribute to our comfort in the higher rate environment. First, we have applied strict affordability tests since 2013 using rates above current levels. Second, looking at the profile for refinancing, the proportion of the book on five-year and over initial fixed rates has increased materially since 2019 from 33% to 51%. This shift delays a potential increase in rates for many borrowers, allowing them more time to mitigate the impact. Fixed rate maturities in half too total 17 billion, and as you can see from the chart, a significant proportion of these borrowers have locked in rates ahead of the end of their fixed rate term. So our mortgage customers are taking thoughtful and appropriate action. Third, and as a credit backstop, the book is conservatively positioned from a collateral point of view with balance-weighted loan to value of 52.8%. Only 2% of mortgages which are refinancing over the next two years have LTVs in excess of 85%. Given the market-wide focus on commercial real estate, we also wanted to share more detail on the portfolio to highlight our position. As we have followed a prudent lending policy here for over 30 years, this is not an area of concern for Barclays. As you can see on slide 15, commercial real estate as a proportion of our customer loan book is around 17 billion or just under 5%, which is below the industry average. It is diversified across segments, and a weighted loan to value of 49% provides significant headroom for a potential stress in prices. No individual segment has an LTV of higher than 58%. We know the office component has received particular attention, and this is just 1.9 billion. Turning now to the performance of each business in the quarter, beginning with Barclays UK on slide 16. Profit before tax increased 25%, and the return on tangible equity was just over 20%. Income grew 14% to 2 billion, with costs down 1%, improving the cost-income ratio by 9 percentage points -on-year to 55%. We expect to improve this further as the benefits from our transformation program feed through. The net interest margin was 322 bits, up 4 bits on Q1, in line with our expectations, and this would have been 2 bits higher without the transfer of UK wealth to consumer cards and payments. The moving parts are set out in the bridge on the slide. We benefited from the steady roll of the structural hedge, which again added 13 bits as in each of the last few quarters, and from some lagged effects from previous bank rate rises. There was also a 6-bit increase from the reversal of some of the Treasury headwinds, which we called out at full year. These positive impacts were moderated by both mortgages margins and the developing deposit dynamics. On the next slide, I'll cover how we see NIM evolving from here. Our customers are cautious and resilient, and we see benefits in our credit performance, but this also affects our income outlook. Three recent macroeconomic developments have prompted customers to change their behavior and us to revise product pricing. First, inflation is expected to be more persistent. Second, base rates are forecast to peak at higher levels. And third, swap rates increased further during Q2, increasing mortgage pricing. In this environment, our customers are behaving rationally and have started to use surplus deposit balances to manage their finances more actively. For instance, business banking customers are drawing down on deposit balances for use in their businesses and to pay down debt. In personal banking, over a quarter of our customers with mortgages have been making excess repayments, reducing their loans ahead of potential remortgaging. And throughout the book, customers are seeking higher yields for their savings, and we have changed our pricing in response. Accordingly, we now expect the Buk NIM to be below 320 bits for full year 2023. Our current view is around 315 bits, which reflects our expectation for customers to hold lower deposit balances, changes in deposit pricing, and the two basis points impact from the transfer of UK wealth. Of course, the precise outcome will be sensitive to a number of inputs, notably the level and mix of deposits and other macroeconomic factors, including inflation and rates. At the same time, the high swap rates are providing a tailwind to future years from the structural hedge as we lock in fixed receipts at meaningfully higher rates, which I'll cover on the next slide. Slide 18 illustrates the importance of the hedge to the level and visibility of our future net interest income. Swap rates increased sharply during Q2 to around 5%, and reinvestment rates are materially above the yield of 1% on hedges maturing this year. As a result, gross hedge income is increasing, and over 90% of the 3.6 billion expected for this year was already locked in by the half year. We have a further 50 to 60 billion maturing in each of 2024 and 2025 at yields between 1% and 2%. The precise level of reinvestment will depend to an extent on customer behavior, but the building effect of the hedge roll gives us confidence that gross income from the hedge will grow strongly in 2024 and 2025. I would remind you that around two thirds of the benefit is in the UK, where the hedge has contributed 13 bits of incremental NEM in each of the last few quarters. Looking next at consumer cards and payments on slide 19. The return on tangible equity was 11.8%, income increased 195 million or 18%, reflecting growth mainly in international cards and the transfer of UK wealth. Period end US card balances grew organically by 12% to $29.5 billion, and average balances were up 27% year on year, as the gap acquisition was completed late in Q2 last year. We delivered positive operating jaws, despite operating costs which exclude L&C being up 14%, reflecting continuing growth across the businesses. Both income and costs included around 35 million from the transfer of UK wealth. As I discussed earlier, the increase in impairment was in line with our expectations. We've included a summary in the appendix on the wealth transfer. The combination with the private bank creates a top five UK wealth management business, and we believe we can develop the business more effectively as a single entity. Looking next at the CIV on slide 20. Return on tangible equity was 10%, while income was down 3%, a resilient performance against a very strong prior year comparator, reflecting our diversification within the CIV. Corporate lending and transaction banking increased strongly year on year to over 900 million. Markets, which was down 20%, reflected lower market volatility, impacting intermediation income, but there was some offset from financing income, which grew 9%. As I mentioned last quarter, we are benefiting from the effects of higher inflation and financing. Investment banking fees were down 15%, reflecting a lower industry fee pool. Costs decreased 2%, but operating costs which exclude all litigation and conduct increased 6%. As I mentioned earlier, this reflected selective investment in our client franchise. Turning now to capital and liquidity. As you can see on slide 21, we continue to maintain strong capital funding and liquidity. Looking in more detail, beginning with capital. Our capital generation from profits was again strong, contributing 39 bits in the quarter, of which 8 bits were applied to the increased dividend accrual. Taking into account the 750 million buyback we have announced, our CET1 ratio would be .6% in our target range of 13 to 14%. Our MDA has increased in July from 11.4 to 11.8%, and we remain comfortable with our target range. Looking forward, we expect strong organic capital generation, supporting attractive returns to shareholders. We have grown deposits substantially ahead of loan volumes for many years, and have a low loan to deposit ratio of 72%. As shown on slide 23, we have seen a stable level of deposits overall this quarter at 555 billion. This reflects an increase in international deposits and treasury offset by some decline in retail and business banking deposits, in line with the market trends we discussed earlier. We are comfortable with the stability of the group's overall deposit funding base, and our diversified sources of deposit funding. Our franchise deposit strategy means we remain highly liquid, based on both our internal stress framework and a liquidity coverage ratio well ahead of the regulatory requirements. The liquidity pool of 331 billion is held 80% in cash, with a risk in the residual debt securities tightly managed. So to recap and summarize the outlook on slide 25, we delivered earnings of 8.6p per share in Q2, and generated an .4% return on tangible equity, and are very confident of achieving our target of above 10% for the year, underpinned by our diversified sources of earnings. The cost income ratio for the quarter was 63%, and we expect to deliver a statutory ratio in the low 60s this year. We remain focused on risk management, and while we expect an increase in impairment year on year as we grow U.S. cards in particular, we are confident of delivering a loan loss rate within our guidance range of 50 to 60 bits for the full year. Our capital ratio remains strong at 13.8%, and we expect to deliver attractive capital returns to shareholders, balanced with selective investments to drive profitability. 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.