Barclays : Full Year 2021 Analyst Call Transcript (PDF 407KB)

Investor Relations

Barclays PLC Q4 2021 Results

28 February 2022

Sell-side Q&A transcript (amended in places to improve accuracy and readability)

Tushar Morzaria, Group Finance Director

Thanks to everybody who has made it here. We have some folks on the dial-in, but it is very nice to see everyone who's here in person.

I'm not going to be doing too much of the talking today. Anna's here and has worked with me for eight years, so is definitely going to be a step up from me! So, I will slip into the background here and let Anna make some introductory comments. And then we'll take some questions.

Anna Cross, Deputy Group Finance Director

Thank you very much. I've been avid reader of your research for many years, so I'm really glad to be here. Looking forward to engaging with you as we go forward.

I think it's worth us starting with the events of last week and over the weekend, and the terrible human cost that, if, like me, you've been pinned to the TV over the weekend, you won't have missed.

So let me make three Barclays-specific points. I'm not going to make broader ones. Firstly, the backdrop is emerging day by day, and is very fluid. To the extent that we see any subsequent effects in the economies that we operate in, we might see some impact, but at this stage, too early to say. I won't comment on that today.

Secondly, we have very limited direct exposure. We've got no physical presence in Russia or Ukraine. We exited that during the period post 2014 when we ran down non-core business.

And then thirdly, on our trading exposure, we're just working through the implications of the emerging sanctions with regulators and authorities here in the UK and elsewhere. But one thing just for you to note, or to remind you of, we don't have a commodities business and, therefore, we would see that as a pretty important point.

Let me move on to happier things and to our results. I'm pleased to report that our diversified model continued to deliver in 2021. And we delivered a RoTE of 13.4%, and a PBT of £8.4bn. That was above our target of 10%, and was in all of our three divisions, in all quarters - so very pleased with that. We also announced a total capital return of 15p, 6p of dividend and 9p of buyback, £2.5bn in total.

You'll also have had an opportunity to hear from Venkat for the first time on the call, where he outlined his three priorities. The first, next-generation consumer businesses, very much focused on digitisation. The second, delivering sustainable growth in the CIB. And the third, what we will do in Barclays to help transition to the low-carbon economy.

So let me just remind you of the essence of Tushar's speech and the key parts of the guidance that we gave. We reiterated our Q3 interest rate sensitivity, almost exactly the same. What we've shown you is an illustrative 25bps parallel shift in the curve. That implies additional income for the Group, starting at £275m in the first year and growing thereafter, in part because of the impact of the structural hedge.

Secondly, we talked about the BUK NIM, and we gave revised guidance of a NIM expectation of between 260bps and 270bps. That's based on an outlook of 1% base rates in the UK by the end of the year. And, essentially, what we're

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doing there is we're seeing the improvement coming from the liability side, but potentially with an offset on the asset side, given the growth of secured lending. Having said that, we are constructive on unsecured lending in both the UK and the US. And that's based on our expectation for consumer recovery.

And, last but not least, the CIB franchise, and one of the things that we discussed on the day is that whilst the volatile equity markets that we've seen make it quite difficult to issue, so there has been some reporting of a fairly quiet January on the Banking side of things, those same macroeconomic environments are actually quite constructive for the Markets businesses.

Moving on to costs, we kept our disciplined approach through 2021, and we said that we expect to deliver base costs of around £12bn, which is what we did. Overall, our costs did increase by 4%, but you'll note that that was in large part driven both by our structural costs and also by our performance costs. And those are reflective of the better returns that we sustained in the CIB in particular.

For 2022, we've guided to a modest increase in those base costs, and we would expect our structural costs to be lower year on year in 2022 versus 2021. And we said that we were comfortable with the overall level of consensus. So, hopefully, that's helpful.

And then turning to impairments, we have a net release of £0.7bn in the year. I'd reiterate our outlook that we would expect impairment to run lower than pre-pandemic for the next coming quarters. And that's driven both by the benign economic environment, with very low levels of real delinquency coming through, but, also, because of the shape of the balance sheet, with less in unsecured lending than pre-pandemic. And just to remind you, we're still carrying £1.5bn of management adjustments on the balance sheet.

On capital, we're at 15.1%. That was down 30bps quarter on quarter, but flat on the year. And then we gave some guidance to say, if we impact all of the regulatory changes that took effect on the 1st January, that was an 80bps move, and then a further 30bps from the buyback, taking us down to the top end of our CET1 guidance range.

But you might recall one of the slides showing that if we continue to generate 10% or above, that's broadly equivalent to 150bps of capital organically driven every year. And we also gave some early indications about what we expect to happen from Basel 3.1, noting that the timing and the content of that is still pretty uncertain. That's why we gave a range of between 5% and 10%.

So I'm going to pause there and take your questions.

Omar Keenan, Credit Suisse

Could I start with questions on costs? Can you talk to the modest increase on the £12bn and give us a bit of colour on what underlying inflation Barclays is experiencing? We hear anecdotally wages are going up, CPI going up, IT, CPI- linked contracts etc. So just want to get a better idea of how hard Barclays is having to run to keep to a modest increase in the £12bn.

And just a second question on costs. So the variable comp closed out the year at about, I think, £1.7bn or £1.75bn. And could you perhaps give us some colour on what the inbuilt operating leverage is on that number? Should the markets environment vary this year, what is truly flexible? Just so that we can understand how that operates.

Anna Cross, Deputy Group Finance Director

If you look back over recent history, what you'll see is that actually we've been holding that base cost position flat for a number of years. We always experience some degree of inflation, and we always invest in the businesses every year. So what we're used to doing is leveraging efficiency programmes and working really hard to keep that number flat.

I guess what we've seen this year, or the backend of last year and into this year, is a step up in UK and US inflation, which makes that position more difficult. So we will still drive those efficiency programmes. And we have got levers within our investment plans in order to manage that base cost number as best we can. So it's difficult to say what

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modest means. I think it's a reflection of the inflation forecast we see, but, also, the levers that we have. So we'll continue to run those programmes.

In terms of where we would expect to see inflation to show up, our cost base is dominated by people, property and IT. As an IT matter, those costs are more fixed in their nature. So you wouldn't necessarily expect to see an immediate inflationary effect. But it's pretty much on the people side more than anything else that we would expect to see it.

Tushar Morzaria, Group Finance Director

You're probably somewhat thinking about what 2023 costs will be like, what's the flowthrough. So we used the word modest very deliberately. Cost discipline, cost control is very, very important, particularly as you go into… Let's see what happens to the real economy with the challenges going on in Ukraine. So I think you'll expect us to exert appropriate discipline where that's warranted.

Anna Cross, Deputy Group Finance Director

You'll note that in the fourth quarter we took a charge in respect of the UK. That's to help us reshape that cost base towards the way customers are behaving, and the way they want to be served, so more digitisation, less physical presence.

That will start to reshape the cost profile of the UK. I'd expect less of an impact in 2022, because we've made the commitment to take those cost actions but haven't actioned them yet. There's a payback, from the point of action, and that will be 2023 and beyond.

And I would say across our investment estate, we do consider how the businesses are trading as we make incremental investment decisions. To the extent that we see a business not performing as we anticipated, we have the opportunity to slow down investment. We also have the opportunity to accelerate it if we really want to lean into a particular part of the business. We're quite fluid in the way we manage that investment portfolio, and it does give us some levers to pull.

Onto the second part of your question, which was around comp. We had a value award of about £1.9bn, with £1.7bn going to the P&L. I'd remind you that even on the deferred element, we're taking a substantial part of that in the current year P&L, about 35% of it. And the disclosure is quite clear about what is subsequently deferred into future years.

But whilst it's not a formulaic approach, we do take the returns of the businesses strongly into consideration as we are paying those bonuses. You've seen us in the past reduce and increase the CIB comp. We'd expect to do that through the current year. And we'll see how the business trades. At this point in time, I don't think we've seen enough in terms of CIB performance to want to call that number specifically.

Alvarro Serrano, Morgan Stanley

My question is around the sanctions and maybe to help us think through what the repercussions could be, more than an absolute answer which I realise is going to be difficult. I noted your comment that there's no subsidiary, and you don't have any commodities business. But I don't know if there's any amount of trading business or volumes that you've done with Russian counterparts that you could share with us, or something like that.

And more conceptually, some of these entities being blocked from SWIFT and the central bank's assets being frozen. In terms of practicalities of your trading business, have these sanctions put any problems to closing some of the trades, making margin calls or seizing some of the collateral?

And I'm trying to think through if that's going to be an issue from a counterparty risk perspective. Is there anything that you could reassure us with on that. Because, presumably, volatility, you mentioned on the call that volatility's good for business, but just reassure us that you don't think there are trading accidents.

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Anna Cross, Deputy Group Finance Director

Yes, it's a very live situation with the sanctions list firming up. So it's really too early at this point to make a specific comment much more than I said previously.

Just to reiterate that we've been very thoughtful, very careful as we've on-boarded clients over recent years, as you would expect us to. So I don't think there's anything specific that we can say at this point in time. Anything you would add?

Alvarro Serrano, Morgan Stanley

Maybe what you are looking through at the moment?

Tushar Morzaria, Group Finance Director

We wouldn't call out something specific. But, as Anna mentioned, Russia, I think we exited Russia in the 2014 non- core run down. That gives you a sense that our footprint is limited, as you'd expect, given we're not onshore Russia, we don't have commodities business, so you wouldn't be dealing with some of the corporations that have those kinds of businesses and they have exposure to.

Obviously, applying sanctions, central bank restrictions, that's a way of life for us. We've been doing that for years. So nothing specifically I'd call out. But it's a very modest part of what we do. So that's why it's not something I think we should say much more than we already have.

Raul Sinha, J.P.Morgan

Maybe two questions. The first one, staying on costs, could you give us a sense of what your normal run rate of structural costs might be in the medium to long term? I appreciate it's difficult to quantify these things, but just thinking about the broad buckets of structural change that are happening across Barclays, and you've been through a big body of work around ways of working and property, could you give us a sense of how much you've done of that agenda?

And then on the branch side, if there's any other big things that you might be able to look at that would obviously ultimately improve efficiency but might result in more structural costs?

The second one is on the very helpful Basel IV guidance. I just wanted to clarify whether that is a pre-mitigation number. This is before you think about how you might adapt to the new rules. And could you give us a sense of how much potential mitigation there might be against this kind of regulatory pressure?

Anna Cross, Deputy Group Finance Director

By their nature, the structural costs are episodic and a bit lumpy, so it's difficult to call out what we think a natural run rate would be. And, in fact, pretty much until 2020, we hadn't really called them out. They were included within our base cost position. They weren't sufficiently material.

Now, last year, we did two big things. The first was our London real estate footprint in relation to 5NC. So I guess the next time you come here, it'll be a whole load busier, we hope. So I think I can't see another big chunk like that one, in terms of London at least.

The other big chunk that we took was in the fourth quarter, in relation to BUK primarily, but also operations. And that's really about the digitisation of those operations and customer interactions and also, with that, getting some branch footprint. We've been closing branches for a very long time. I think when I got here, there were about 1,800, or at least 1,700.

Raul Sinha, J.P.Morgan

And the branch cost closures were previously in base cost, is that right?

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Anna Cross, Deputy Group Finance Director

We never really called them out because we've been in a natural rhythm. I guess [we have now] just because we've stepped up the pace a little more. So it's not lost on us that we had an opportunities during the year to take those costs. So we've tried to time it so that we're generating the right return. I would say they'll be episodic. And we'll also look for opportunities to take them, not just in respect to the cost actions themselves, but the earnings capacity to do so. So that's probably how you should think about it.

In terms of Basel 3.1, it's difficult to say how much we'll be able to mitigate because at this point in time, we don't really know what the rules are going to be. So I guess we're waiting for the exact letter of rules and their extent. We're waiting for the timing of implementation. We're waiting for whether or not there'll be any transition effect, and the extent to which there might be any Pillar 2A offset. So there's quite a few unknowns, which is why we've given that that range.

What I would say is that, to date, as we've leaned into these regulatory changes, we've done so pretty successfully. We've got a good track record of being able to generate the capital to absorb them. I think once we understand those rules more fully and the timing more fully, then we can be more precise. But, you're right, that's a pre-mitigation number. The extent to which we can mitigate it will depend on the nature of the rules and the timing.

Tushar Morzaria, Group Finance Director

Yes, it's mostly in the Markets side of the Investment Bank, and that's where we're very good at adapting and getting ready for those changes. So I think Anna's right, that's pre-mitigation. Let's see what the real rules are, let's see what the implementation date is, and we'll do what we normally do with these things.

Andrew Coombs, Citi

Can I have three questions, all completely different?

So the first is on the margin guidance. You talked about some pressure around the asset spread side, but then benefits and higher rates coming through. One of the things that's since happened post your results is that Lloyds came out with their targets, and they also gave us numerous assumptions as to what they've pinned to those targets. And, within that, they were assuming quite significant further mortgage rate compressions. So anything you can say, quantitatively or qualitatively, on where you think completion spreads will move relative to Q421 in your expectation would be useful.

The second one is a strategic question. If we look back over the last couple of decades, we've had various strategies as new CEOs have come in, one growing-the-investment-bank, one shrinking-the-investment-bank etc. And I was interested that Venkat's strategy really seems to be, keep the status quo. You are sixth [in IB] on your metrics. The ambition is to be top six. Am I reading the tea leaves right? Is it, this is what we want, this is where we are, we don't really plan to change it from here?

And then the third one, just going back to Alvaro's question, and I appreciate it's very early to say, you've talked about how your direct Russia and Ukraine exposure is small. But from perhaps an indirect risk perspective, what areas are you most focused on, particularly within the investment bank? Is it a potential decline in the ECM, DCM, M&A pipeline? Is it margin calls? Where's the focus when you go into your Risk Committee meetings at the moment?

Anna Cross, Deputy Group Finance Director

So let me start with margin. The mortgage margin, the portfolio margin, I think about it in two ways. There's the impact of customers maturing from a fixed rate and then refixing. You would expect that market to be fairly active in the current environment, in the rising rate environment.

The impact that you tend to get on the mortgage portfolio as a whole is the impact of people staying or not on a reversionary rate. So they come to the end of their fixed-rate period, they might look around and decide from there on in. I would expect in the current environment that period to be short simply because reversionary rates will be

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