Barclays : Full Year 2021 Analyst and Investor Call Q&A Transcript (PDF 155KB)

Investor Relations

Barclays PLC Q4 2021 Results

23 February 2022

Results call Q&A transcript (amended in places to improve accuracy and readability)

Omar Keenan, Credit Suisse

Good morning. Thanks very much for the presentation and for taking the questions, and I also wanted to extend my thanks to Tushar for all the guidance and wish you the best of luck for the future.

I've got two questions, please. Firstly, on Barclays UK NIM, some of the key sensitivities for the 260-270bps are around the deposit beta assumptions and mortgage margins. You said you're assuming a base rate of 1%, and the market is expecting something higher than that. Could you help us think about what assumptions you have on deposit pass through for these rate hikes and how it compares to the sensitivity figures that you've given us? And, I appreciate your comments, but mortgage pricing has firmed in the past couple of weeks. Could you also help us think about what sort of churn [margin] assumptions you're making in the 260-270bps? So, just a bit of colour around what the key assumptions are behind that.

My second question is on the return on tangible equity target. Thank you very much for the "ladder". I guess the piece that might be missing is, as you said, the further normalisation of loan losses from here and thinking around when the cost: income ratio target of 60% might be met. Obviously, it's very revenue-dependent, but could you help us think a little bit more about the path towards the 60% cost: income ratio? Thank you.

Tushar Morzaria, Group Finance Director

Yes, thanks, Omar, and I appreciate your comments. I'll look forward to seeing some of you next week anyway. Why don't I take both of those questions, and Venkat may want to add some comments as I go along.

On BUK NIM, I think your questions were, how do we think about deposit beta and mortgage churn. So, on deposit betas, you've seen how we've repriced our deposits for the first two rate rises that we have seen, and obviously there's been a relatively muted repricing.

We've given out sensitivity for a further 50bps of increase in base rates. Our sense is that it would still be relatively low levels of deposit beta. In other words, we'd capture a lot of that rate rise. I won't throw out specific numbers, but I would say that as you get higher rates, the chances are that you probably start capturing less and less proportionately of subsequent rate rises that come through. It's hard to be very precise on this because we haven't really got any empirical data on anything like this historically, where we've started from such a low base and with rates rising relatively quickly, and on top of which, obviously, the UK banking system has an awful lot of cash on deposit. But I think for the next two base rate rises, we should be able to capture a reasonable amount of the pass- through, but we'll see.

On mortgage churn, the way I think about it, just so we get our definitions right, is on the flow. In other words, every product that comes for refinancing that's on our back books, let's say a two-year fixed rate product that comes for refinancing, what rate are we refinancing that into? I do think at current pricing levels, that probably will go negative for now. It's really hard to be that precise further out because you've seen how frequently the large lenders have been repricing their mortgage rates and obviously with movements in the swap curves, it's been quite active.

1

So although I'd say near term pressure is from negative churn margin on the flow, on cannibalising front book production if you like, beyond that, it's a little bit hard to tell. But by and large, I think what we're really saying is that we're reasonably optimistic given the current assumptions that we have around rate rises, and what that will do to our income trends, and hopefully you see that in our NIM guidance.

In terms of return on tangible equity, normalisation of loan losses, just to remind folks briefly, and I'm sure you got this from our scripted comments, that although we're not giving out a loan loss rate, it's sufficient to say that we would expect impairment charges to be quite a bit below pre-pandemic levels, really as a function of a very benign credit environment. You can see that in our delinquency data, and the macroeconomic environment, as well as the lower unsecured balances than we had pre-pandemic. On Cost: income ratio, Omar, you're right, it's as much a function of revenues as it is of costs. We've talked about costs being in line with where current consensus is for 2022 and we're quite optimistic on consumer income. CIB income, it is a little bit harder to be precise in the forecast, but again, we think we're well positioned, generally speaking, as that business develops.

I'd also say that for us, 10% [RoTE] is our guiding North Star. We reached a 10% return on a statutory basis this year, and our objective is to try and do that every year. And I think as we do that in subsequent years, you'll see the cost: income ratio just naturally glides down towards that 60% or better. But thanks for your questions, Omar.

Edward Firth, KBW

Morning everybody, I just have two questions please. The first one was around CIB revenue outlook and I seem to remember there was a lot of speculation in the press in January that you'd taken a big one-off hit on a particular [Q4] transaction. I'm not particularly worried about the details of the transaction but I wonder, can you give us some sort of idea of the quantum of that in terms of the Q4 numbers?

And I guess more importantly, looking forward, other than that, is there anything particular about your business this year which would mean that, going forward, you would perform any different than what we're seeing from the market as a whole? All the US banks are giving us, recently, their guidance in terms of how the market is operating for Q1 so I guess that would be my first question. Did you want the second question at the same time, or do you want to answer that one first?

Tushar Morzaria, Group Finance Director

Yes, do you want to give us both of them, Ed? And we'll try and do them both together.

Edward Firth, KBW

Yes, sure. The second question was about credit quality. I hear what you say about credit, but if I look at your Stage 3 balances, in Q4 versus Q3, they were up quite markedly in BUK and up quite markedly in International, which surprised me if I'm reading those correctly. And I guess the question there is, it's very easy as a bank analyst, each time we hear about another 25bps of interest rate rises, to shove in another £200-300m of revenue. But I guess the reason for these rate rises is ultimately to slow the economy. And I wondered what sort of work you've done internally about at what level do you start to feel that rates would be a headwind as you'll start to see credit issues coming through in your book, if that's okay. Thanks.

Tushar Morzaria, Group Finance Director

Thanks, Ed. What I'm going to ask is maybe for Venkat to talk a bit about the CIB revenue and the item that you referred to. And maybe I'll come back to credit quality and Venkat may want to add some comments there as well.

C. S. Venkatakrishnan, Group Chief Executive

Sure. Thanks, Ed. I think our CIB, both in our markets and banking businesses, has been making strong and steady progress over the last few years. We have a sixth-ranked markets business. We've got a sixth-ranked banking business. The markets business has gone from eighth to sixth approximately in three years. That's the markets business. Banking has also improved to sixth over the last year and this is with a steadily increasing market share.

2

Now, in that context, you will see some strong quarters and some quarters which are slightly weaker. What I would say, on that specific item, is that part of the strength of our business is now the greater coordination in large transactions which we do between banking and markets. The vast majority of these transactions are very profitable to us and very helpful to the client in managing their risk and getting the return profile that they want.

Occasionally, one of these things does not work out quite as planned. We don't like it when that happens, but we learn from it and we move on. I wouldn't read anything particular into this. And I have great confidence in the continuing trend of strong performance in the CIB, both in banking and markets, and accretion of market share.

Tushar Morzaria, Group Finance Director

Thanks, Venkat. On your second question Ed, in terms of at what point do we start getting concerned about credit quality as rates rise, I'll make a few points there. At the outset, before we make any lending decisions on the consumer side (and obviously we do this in much more detail on the corporate side on a name-by-name basis), we do stress for affordability at the very outset. And to give you a sense, for mortgages we would stress customers to 6% mortgage rates before we feel it's prudent to be extending the mortgage. So that gives you a sense of how we think about where that should go.

The other thing I would say regarding the consumer book, obviously it is dominated at the moment by our mortgage business which is predominantly fixed. That's just the nature of the UK market. So there is obviously rate sensitivity for customers from there, but it's at the point of refinancing rather than instantaneous transmission.

The final two things I'd say, Ed, is that we are seeing relatively low levels of indebtedness generally. So we aren't seeing customers, at this stage, exhibiting real stress in any sort of meaningful way. One thing I would say though is, when you're looking at what point could this be more of an issue, I think it will be unemployment which is probably the best lead indicator. So as unemployment starts trending up, particularly above perhaps what most people would expect to be a regular level of residual unemployment, at that point you'll see credit quality change, and that's the best lead indicator. At the moment, we feel some way away from that. Unemployment is at extremely low levels, both in the US and in the UK, so we're not concerned at the moment but that's probably one area we will watch closely.

C. S. Venkatakrishnan, Group Chief Executive

Yes, and I'll add to that. I think we're at the stage in the economic cycle, and the credit cycle particularly, where buildup balances is more beneficial to us from an income point of view than hurtful to us from a credit point of view. So I see that marginal trade-off of balance build as being beneficial to us.

Edward Firth, KBW

And, sorry just in terms of the Stage 3 balances, is that just something to do with how you add them up at the year- end or something, or why would that be?

Tushar Morzaria, Group Finance Director

Yes. We could probably maybe have a discussion after this call, rather than go through it here. And I'm just looking at the quarter-on-quarter Stage 3 [moves], and they're slightly down, but you may be referencing a different table. So perhaps we can give you a quick call after this one, Ed, just to make sure we're synced up.

Jason Napier, UBS

Good morning, thank you for taking my questions. And congratulations to you, Tushar, as well as to Venkat and Anna. And just to echo what Omar was saying, thank you for the hard work and help over the years in trying to make sense of all things financial.

Two questions. The first please, perhaps for Venkat and for Tushar. The 10% RoTE target implies around 150/160bps of CET1 generation. When we're thinking about how the 10% RoTE and 150bps of capital accretion fit together, I wonder whether you might talk a little bit about what normal RWA growth or consumption the group might demand,

3

and for Venkat, whether you see any changes to the composition of the group in the coming years. So that'd be the first question.

And then secondly, I hear what you're saying about the customer acquisition costs in CC&P. That's something we're hearing from US players quite clearly. Some of the offers in the market are pretty attractive, but it is something you've warned on before. And so I just wondered whether you are signalling it, but consensus is not listening. At this stage, we're at £3.7bn for 2022, so up 13%. I would've thought, with balances growing 5% last quarter and the GAP portfolio coming on stream, that would've been a number that you could achieve. But perhaps you could be more clear about what it is you're saying about CC&P and those headwinds as we go through this year. Thank you

Tushar Morzaria, Group Finance Director

Yes, thanks, Jason, and thanks for your comments at the beginning of your question. Why don't I just cover them both briefly? Then I think Venkat will want to make a couple of comments as well.

On the RoTE, we just rounded it to c.150bps of capital generation, we weren't trying to be super precise. In terms of the gist of your question, about how much of that gets absorbed by growing our balance sheet or putting capital back into the businesses, I think what you'll see is, as the consumer businesses recover, we would very much like to grow consumer assets, both in mortgages and unsecured, obviously in US cards as well as in the UK. Those aren't particularly capital consumptive so I don't think you'll see much RWA inflation as a consequence of growing the consumer side of the balance sheet. That leaves the Investment Bank and we've just been more nimble there. You'd have seen that RWAs have gone up slightly over the course of the year. It's been a pretty decent environment, with super active capital markets as well as in sales and trading. So that may ebb and flow a bit, but I don't think you'll see material differences in the CIB, certainly to the upside. But Venkat may want to talk a bit more about how he sees business composition over the more medium term.

Just a quick word on customer acquisition costs in CC&P and I'll hand over to Venkat. Yes, you're right to point it out and I see this as a positive lead indicator. There's three stages to it. First of all, are people wanting your card? So in other words, are people opening new accounts with you? When we look in the US, account openings are going really well, and I think pretty much back to pre-pandemic levels, and sometimes better in some portfolios, so that's good. People want our card and they're going out and getting our card for the first time.

The second thing, are they using our card? When I look at spend data and gross purchase volume, they're very much in line with most of our US peers when I look at the industry averages. And again, that feels really good for us, because we are more of a partnership business, and we're competing with a lot of open-market brands, so to see our purchase volume very consistent with them is great news.

And the third thing is, at what point do balances grow and people then revolve? And you've seen balance growth now and I'm pretty confident that'll result in revolving balances growing as well, as we get into next year. So overall, I think we're pretty constructive on the US cards growth. And there is increase in customer acquisition costs, which by the way does hit all three line items of our P&L: you'll see some in contra revenue as we give rewards out when people first start using our cards; you see it in the marketing costs in our expense line; and obviously you'll see impairment build as balances and new lines are allocated. So you'll see it scattered throughout P&L. But that, to me, is a very positive lead indicator, and that all feels in the right place. But Venkat, anything you want to add?

C. S. Venkatakrishnan, Group Chief Executive

Yes, I obviously endorse what Tushar has said. I think on overall business mix, as Tushar has indicated, we would like to see more balance growth and the modest capital consumption that goes with that from the consumer side, especially in cards. On cards in particular, we like the onboarding of accounts with GAP and AARP. They diversify the portfolio, which has been a travel heavy portfolio, and so it brings in more retail and a different spending mix.

And then on the Investment Banking side, we continue to have, what we call sustainable organic growth. And I think, in many ways, on the markets side where capital flow is nimble, it's a function of where the trading volumes are which we are pretty constructive on, as this quarter has begun and we would tend to see growth continued in equities and securitised products and, of course, in macro, where there's been an active amount of volatility.

4

The biggest area over the last couple of years that has grown, which has been rewarding to us, has been Equity Prime, where that business has increased balances tremendously. There's [relatively] little capital that goes with it because they are very well structured balances, but that's been a major area of increase. The bottom line is that we believe we have the capacity to absorb what we think is the expected growth in our trading businesses and banking businesses overall.

Jonathan Pierce, Numis

Hello. Good morning, folks. A couple of questions. The first one is a numbers question around Equity Tier 1 in the first quarter. And I was particularly looking for some guidance on whether there's going to be an impact with the big move in the swap rates that we've seen so far this year. Your reporting account shows there's about a £500m pre- tax hit on the FVOCI for every 25bps [upward] move. And I guess that scales up to about £1bn pre-tax, based on what we've seen so far this year. But you don't split it between pensions, which obviously don't hit capital, and other things which do, so if you can give us a bit of help, please, on any Q1 headwind that's coming from that, that would be really helpful.

The second question is much broader, and it's on the distribution profile of dividends versus buybacks. Is it your intention to just move the ordinary dividend up over the next few years to 40-50% of EPS? Or are you going to be a bit more dynamic than that, and if the shares continue to trade at 0.65x book, and I note your LTIP pays out in full only if the RoTE hits 12% next year, so clearly if you think the shares are pretty cheap, will there be a big bias towards buybacks versus ordinary dividends in the nearer term? Thanks very much.

Tushar Morzaria, Group Finance Director

Yes, thanks, Jonathan. Why don't I take both of them? On your question about CET1 headwinds from AFS/FVOCI, of course, there are some headwinds there. There's so many things that go into the CET1 ratio, with business activity, tailwinds, headwinds, etc., so the best thing I would say is, a typical profile for us would be we are net users of capital In the first quarter. It tends to be a very active quarter for us, obviously in our Investment Bank, a lot of deal activity, a lot of sales and trading opportunities. And then we tend to accrete capital over the remaining three quarters.

So rather than getting into the wherewithal of the individual components of the ratio, because although a move back up in rates may be detrimental to AFS, it may be better for income, it may be better actually for fixed income financing spreads in the IB, and there's all sorts of things that change. But generally, to be net users of a small amount of capital in Q1 and then generate capital from that point on, is a typical year for us.

On the distribution profile, we've guided to a progressive dividend policy, so I think it's fair to say that the assumption is, all things being equal, you would expect that dividend to grow at a reasonably healthy rate from where we are today. You rightly point out that given the share price where it is today, buybacks look incredibly attractive. We absolutely do feel, as we've said a number of times, we believe we're a 10% double-digit earning bank, and that's our objective to try and do that every year. That isn't reflected, we believe, in our share price. The buybacks look incredibly attractive at these levels, but the dividend is a progressive dividend. I'm not sure the board would look to "reset" the level of dividend until perhaps the shares are at a different price I think, but hopefully that answers your question, Jonathan.

Joseph Dickerson, Jefferies

Hi, thank you for taking my questions. Just a couple of longer-run type of questions, probably more for Venkat at this stage. But I guess, when you look at the US CC&P business, how meaningful is the business extension into adjacent businesses, and the resulting revenue augmentation from that? So leveraging the GAP portfolio and whatever future store card deals you may do, how meaningful do you see that opportunity in the context of the group?

And then related to that, just coming back to the near term, costs were up 13% year on year in CC&P. How much of that is competitive landscape, and how much of that is more idiosyncratic to Barclays?

And again, linked back into those two points is, Venkat, as somebody who used to wear the risk hat, do you feel that the group has taken enough risk in some of the areas in unsecured finance?

5