Barclays PLC

welcome to Barclays Q3 2023 results analyst and investor conference call. I will now hand over to CS Venkata Krishnan, Group Chief Executive, before I hand over to Anna Cross, Group Finance Director.

Good morning. Thank you for joining Anna and me on today's third quarter results call. Against a background of mixed market activity and a competitive environment for UK retail deposits, the group generated income of £6.3 billion in the quarter down modestly year-on-year, excluding last year's impact from the over-assurance of securities. Our profit before tax was 1.9 billion pounds, with earnings per share of 8.3 cents. We maintained a strong capital position with our CET1 ratio at 14%, up around 20 basis points on the second quarter, and at the top of our target range. In this context, we delivered a third-quarter return on tangible equity of 11%, taking us to 12.5 percent for the year-to-date, and we continue to target above 10 percent for the full year. We are managing credit well with year-to-date loan loss rates of 43 basis points versus our through-the-cycle guidance of 50 to 60 basis points. Costs reduced by 4 percent in Q3 year-on-year, excluding over-insurance costs last year. And in Q4, we will continue to drive further efficiencies and greater productivity for the bank. We expect this to continue to contribute to delivering enhanced returns for shareholders. We will update you on these and other actions alongside our full year results in February. Now turning to the business highlights, we continue to grow our U.S. cards business with end net receivables up 11 percent year on year. at $30 billion, and we announced a new partnership with Microsoft and MasterCard to issue Xbox's first ever co-branded card in the U.S. The integration of our U.K. wealth business and our private bank is also progressing well. We grew clients' assets and liabilities to nearly 180 billion pounds and invested assets to around 105 billion pounds, with this business making nearly 900 million pounds of income in the year to date. and generating attractive returns. In investment banking, we led some prominent transactions in this quarter, including the ARM IPO in the U.S. However, in the mixed market environment, we've had pockets of underperformance relative to U.S. peers. In part, this has reflected our business composition. We performed well in equity capital markets, which is a smaller business for us relative to others. We were also selective on leveraged finance deals as a risk management matter, which has affected our debt capital market performance. We continue to be cautious about the market backdrop, but are confident in the potential of our business. And as an example, we are acting as sole financial advisor to Capri in their $8.5 billion acquisition by Tapestry, announced in the third quarter and expected to close in 2024. In markets, this was our second highest Q3 income print in a decade, with income average. However, income was down 13% against a record Q3 last year on a comparable basis, in which we supported clients through extreme volatility and guilt in our home UK market. This quarter, we did not benefit to the same extent as our US peers did from the volatility in US rates. As we have said previously, investment in our combined fixed income and equity financing business delivers stability to our overall market's income. Over the past four years, our ranking in equity prime brokerage has moved up from seventh rank to joint fifth, complementing our existing strength in fixed income financing, where we rank jointly first globally for the first half of 2023. Turning now to Barclays UK, we delivered a roti in the business above 20% for the quarter, Both income and expenses were broadly stable, generating a cost-income ratio of 56%, and we intend to improve this over time as we continue to transform the business digitally. There has been an impact on our deposits and margins from retail customers seeking a higher return on their savings, which Anna will cover in more detail. However, at the group level, deposits were up £7 billion quarter-on-quarter, demonstrating the strength of our diversified deposit and funding base. Our performance over the past three years compared to the previous five shows that we have reset and stabilized group returns, providing a solid foundation on which to build even further. Anna and I look forward to providing an investor update in February alongside our full-year results, where we will talk more about our plan to deliver further value to our shareholders. This will include setting out our capital allocation priorities as well as revised financial targets for costs, returns, and shareholder distributions. We have just completed the £750 million buyback announced at the half-year, taking total shareholder distributions to around £1.2 billion so far this year, including dividends and buybacks. This is up over 30% on the first half of last year and reflects our commitment to returning capital to shareholders. Thank you for listening, and I will pass it on to Anna now.

Thank you Venka and good morning everyone. Turning now to slide six. Return on tangible equity for the third quarter was 11% which takes us to 12.5% for the year to date. The cost income ratio was 63% in Q3 and 61% for the nine months in line with our low 60s guidance for the full year. We continue to see limited signs of credit stress as the loan loss rate for the quarter was 42 basis points and 43 for the nine months. And we have maintained strong capital and liquidity positions. As you just heard from Venkat, we will update you with revised financial targets at an investor update alongside our four-year results. As part of this update, we are evaluating actions to reduce structural costs, which may result in material additional charges in Q4 impacting this year's statutory performance. Excluding any such charges, we continue to target a ROTI above 10% for the full year. Focusing now on Q3, starting on slide seven, there was no impact from the over-issuance of securities this quarter, but given the largely offsetting impact to income and costs in Q3 last year, I will again use the adjusted numbers for the prior period. Group profit before tax was around 50 million lower at 1.9 billion, with income down 2% and costs down 4% year-on-year. Within total costs, operating costs were stable, and there were no litigation and conduct charges this quarter compared to 164 million in Q3 last year. Impairment charges were up 52 million to 433 million this with the charge and business mix as we expected, largely driven by growth in U.S. cards. Key NAV increased 25 pence to 316 pence, reflecting our profit and positive cash flow hedge reserve movements broadly offsetting last quarter's downward move. As usual, I will now cover the three key drivers of our returns, namely income, costs, and credit risk management, starting on slide eight. Group income was down 2% at 6.3 billion. The 8% stronger sterling US dollar rate in Q3 year on year reduced our reported income, around 40% of which is in dollars. CIB income fell 6% with lower activity in the investment bank partially offset by corporate income growth year on year. Consumer cards and payments income was up 9%, driven by growth in US cards receivables and the UK wealth business transfer from Barclays UK in Q2. Excluding the transfer, CC&P income was up 5% and Barclays UK income was up 1%. Net interest income across the bank grew by 179 million, or 6% year-on-year, driving a 13 basis point increase in group NIM to 3.98%. Barclays UK contributed around half of group NII this quarter, with approximately 20% from CIB and 30% from CCNP. mostly U.S. cards and the private bank. BUK NII was 17 million higher year-on-year, with NIM of 304 basis points below where we anticipated at Q2, which I will come back to when I cover Barclays UK. CCNP NII increased by 64 million, mainly from U.S. card balance growth, partially offset by private client deposit migration to our higher yielding product. This generated NIM of circa 8.9% in Q3, which was up from circa 8.3% at Q2, and included a small one-off increase in private bank, so we would expect NIM to step back a little in Q4. CIB NII increased 94 million year-on-year, which included an improvement of 9 basis points to 3.65% in NEM, driven by the benefit of rate rises in transaction banking. Moving on to costs on slide 10. We are delivering our operating cost guidance with costs in Q2 and Q3 of around 4 billion below the Q1 high points. The cost-income ratio improved year-on-year to 63%, consistent with Q2. Barclays UK cost-income ratio was 56%, with total costs slapped year-on-year as we progressed our digital transformation and rationalisation of the physical footprint and headcount. Consumer cards and payments operating costs increased by 9%, broadly in line with income, as we invested to grow U.S. cards and our private banks. CIB operating costs were stable year-on-year and below the Q1 levels as guided. As we said, we are evaluating actions to reduce structural costs across the group, and we'll give more detail at our investor update. Moving on to credit on slide 11. We are seeing the benefit of our long-standing prudent approach to provisioning, both in terms of credit decisions we have taken in the past, reflected in our balance sheet provision and coverage ratios, as well as the credit protection we have in the CIV. The impairment allowance increased by 0.3 billion to 6.4 billion. This was primarily driven by our U.S. card portfolio in line with our expectations. We updated the macroeconomic variables from Q2, resulting in a modest impact on expected credit losses. We maintained robust coverage ratios of 1.4% for the group and 8.6% for our card portfolios in aggregate, which I'll cover in more detail on the next slide, starting with UK cards. We continue to see conservative customer behavior across our UK portfolios and credit performance remains benign. Customers are being disciplined about building unsecured balances, with UK cards repayment rates high across the credit spectrum. Although we have grown balances modestly over the past year, interest earning lending balances have decreased, impacting NIMS, but benefiting credit performance. We do expect IELs to grow in 2024, as our more recent customer acquisition activity begins to mature. 30-day arrears rates remain stable and low relative to historic levels. The nature of our U.S. cards proposition is different. As a reminder, we are the partner card issuer for around 20 client rewards programs, including some of the biggest brands in the U.S. Given our historic skew to travel and airline, this is a high credit quality portfolio. Our risk mix has improved since the end of 2019, with 88% of the book above a 660 FICO compared to 86% at the end of 2019, including the addition of the GAP portfolio in 2022. On the chart, you can see that 30-day arrears rates are now in line with our pre-pandemic experience at 2.7%, as we expected. Our impairment coverage also increased to 9.7%, with Stage 2 now at 35%, reflecting our expectation of higher unemployment from September's low level of 3.8% to a peak of 4.4%, by Q3 2024. This would, of course, result in increased arrears, which are reflected in our ballot sheet provisioning. Moving on to the impairment charge on slide 13. The impairment charge of $433 million was up around $50 million year on year, giving a low loss rate of 42 basis points. Most of the Q3 charge was driven by growth in U.S. car balances, continued seasoning of the gap book in line with expectations, and the increase in arrears that I mentioned. Our guidance of 50 to 60 basis points through the cycle is higher than the year-to-date experience. We are mindful that Q4 usually sees a higher charge. in part reflecting seasonality and our expectations of U.S. cards growth over the holiday season. This generally leads to higher balances and some build-in impairment under IFRS 9, where increased utilization, even by customers who are making timely payments, can trigger Stage 2 migration. The Barclays UK charge was $59 million, with a loan loss rate of 10 basis points, and this has been below 30 now for nearly three years. Even though our customers are experiencing affordability pressures, this is not translating into credit stress as they manage their finances proactively. The CIB had a small release and we are seeing no real observed credit deterioration with our synthetic credit protection also working well. Moving now to the business performance, starting with Barclays UK on slide 14. Profits were stable year on year, with ROTI of 21% for the quarter. Excluding the UK wealth transfer, income was up 1%. Costs were broadly stable as our transformation plan progressed, resulting in a cost to income ratio of 56% for the quarter. loan growth remained muted, reflecting customer caution in the current macroeconomic environment and our prudent risk positioning. The reduction in business banking assets was driven primarily by repayment of government-backed loan schemes of 2.7 billion. Mortgage balances were stable in the quarter at 166 billion, with remortgaging still contributing most of the activity. Now looking at BUK NIM, which was 304 basis points. As a reminder, BUK NII is around 25% of group income, and one basis point of NIM equates to around 20 million of NII annualized, or less than 0.1% of group income. At Q2, we said that we expected NIM to step down in Q3 and then to stabilize into Q4. Most of the moving parts played out as expected in Q3, with structural hedge tailwinds continuing and mortgage margin pressure somewhat easing. The impact of base rates was also in line, given pass-through rates have increased. However, The step down in NIM in Q3 was larger than expected with deposit balance and mixed trends more pronounced. Average balances quarter on quarter actually contributed a larger deposit effect than period end balances we have shown on the slide. When combined with pricing effect, this reduced NIM by a net 21 basis points compared to a net six basis points in Q2. You can see that we grew deposits during the pandemic by 53 billion to 258 billion by the end of 2022, as customers built up cash with us in their current and instant access accounts. We anticipated that these balances would fall as customers managed their finances proactively, paying down debt and locking in high yields on their residual savings. Our current account moves appear in line with the latest Bank of England industry data, but intense competitive pricing meant we did not capture as much of the flow into higher rate products. We emphasised at Q2 how sensitive guidance is to the level and mix of deposits, and this remains the case. We now guide to a range of 305 to 310 basis points for the full year. To help frame this, if we see similar trends in Q4 as we did in Q3, both in terms of mix and volume, volume NIM would be towards the top end of this range. Turning now to structural hedge income, two-thirds of which accrues to Barclays UK. Slide 16 illustrates the importance of the hedge to the level and visibility of our future net interest income. The hedge is designed to reduce volatility in NII, so in an environment where rates are peaking and eventually start to fall, it will help to stabilize NIM. It also provides a high degree of certainty to future NII. The chart shows that 95% of 2023 growth hedge income is already locked in, and the next two years, portions of locked-in NII have increased significantly. by 3 to 400 million per year since H1, as we rolled a further quarter of hedge maturities. Notional hedge balances reduced by 4 billion in Q3 to 252 billion. Given the trends we are seeing in retail deposits, we expect the notional balance to continue to reduce more or less in line with lower hedgeable deposits. Swap rates currently at around 4.5% means reinvestment rates remain well above maturing yields of around 1% to 1.5% for the next two years. And with 50 to 60 billion of hedges maturing annually over this period, we expect the reinvestment effect to outweigh notional hedge declines. Turning now to consumer cards and payments on slide 17. Growth in our U.S. card balances and the U.K. wealth transfer drove a 9% increase in CC&P income, partially offset by FX. We grew U.S. card balances by 11% year-on-year to $30 billion. In the private bank, total invested assets were $105 billion, up 27%, excluding U.K. wealth, as clients moved deposits to money market funds and other investments with us. Payment income was modestly down year on year, as customers adjusted their spending to lower value essential items, which have lower margins, offsetting the 9% increase in payments processed. ROTI was 9.6%, reflecting both higher income and operating costs year on year, as we grow these businesses. Moving on to the CIB. CIB income fell 6% year-on-year in sterling terms, in part reflecting the stronger sterling US dollar rate. The more stable elements of our CIB income performed as we expected. In markets, the relative stability from our combined fixed income and equity financing businesses was visible again compared to the downward move in intermediation. and corporate delivered strong year-on-year income growth, reflecting higher rates in transaction banking and the non-repeat of leveraged finance marks this time last year in corporate lending. As you heard from Venkat, markets were down 13% in dollars versus a record third quarter in 2022. SPIC fell 19% in dollars as we benefited less from US rates volatility compared to gilt volatility in the UK this time last year. Fixed income financing income reduced due to a normalisation of inflation-linked benefits, as we have mentioned previously. And we have smaller and securitised products, which was an area of strength for some of our peers. Equities was up 3% in dollars, as derivatives and cash performance was partially offset by equity financing, as client balances continued to grow, albeit as spreads tightened. Banking fees were down 24% year-on-year, with a better performance in ECM not sufficient to offset weaker DCM and advisory, given the relative scale of those businesses for us. Combined with stable costs and a small impairment release, ROTI was 9.2%, which, even in a mixed quarter like this one, does not reflect the potential of our franchise. CIB RWAs were relatively stable, with the increase to 219 billion on Q2, largely driven by FX. Turning now to capital, funding, and liquidity, starting on slide 19. we continue to maintain a well-capitalized and liquid balance sheet with diverse sources of funding and a significant excess of deposits over loans. Looking at these metrics in more detail, starting with capital in slide 20, our CET1 ratio increased around 20 basis points to 14%. Attributable profit generated 37 basis points, totaling 128 basis points over the last three quarters. As we indicated previously, our MDA hurdle increased to 11.8% from the increase in the UK counter cyclical buffer and we continue to operate with ample headroom. Whilst Basel 3.1 remains at proposal stage, we continue to guide to the day one RWA impact to be at the lower end of the 5% to 10% range. This reflects what we see from all the proposals across the jurisdictions we operate in, including the US. As a reminder, the PRA's rules remain the most relevant on a group consolidated basis. Our total deposit position remains stable, as we have a diverse deposit franchise across consumer, UK, and international corporate customers. Within that, the decline in The UK deposits that we discussed earlier was more than offset this quarter by inflows from global corporates. And this places us in a strong position to manage seasonal fluctuations that we often see around year-end from balances held for financial sector clients. Our LCR of 159% represents a surplus of $116 billion above our minimum regulatory requirements. We continue to be comfortable with our liquidity position, and we have demonstrated its robustness throughout the market disruption earlier this year. So concluding with our outlook, we are evaluating actions to reduce structural costs to help drive future returns, which may result in material additional charges in Q4 impacting this year's statutory performance. Excluding any such structural cost actions, We continue to target ROTI above 10% in 2023 and a cost income ratio in the low 60s. Our low loss rate guidance remains 50 to 60 basis points. This is higher than the year-to-date experience, allowing for some potential seasonality in U.S. cards in Q4. As of now, we are not seeing anything that concerns us, and we would view the guidance as a through-the-cycle range. Our CET1 ratio was at the top end of our target range, and strong capital generation in the year-to-date supports our commitment to return capital to shareholders. We will provide more details at an investor update of our full year results in February, including our capital allocation priorities and revised financial targets. Thank you for listening. We will now take your questions and as usual, please limit yourself to two per person so we get a round to everybody.