Barclays : H1 2021 Analyst Call Transcript (PDF 221KB)

Investor Relations

Barclays PLC H1 2021 Results

03 August 2021

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

Tushar Morzaria, Group Finance Director

Hi, everyone, and thanks for joining us this afternoon. […] I'm also joined this afternoon by Anna Cross, Deputy Group Finance Director. […]

I thought I'd make a few opening remarks, just to underscore some of the main points we wanted to make during the earnings call, and then we'll open up for Q&A.

Please do send us your feedback on whether you find these calls helpful, format, timing or anything else you'd like to include. Do send them to Chris and [the Investor Relations] team and we'd welcome any feedback, good or bad. With that, just a few opening comments from me, before we dive into questions.

The diversified business model is a big thing for us, combining the consumer businesses and wholesale businesses to deliver a smoother earnings trajectory. That's working out well thus far. We had a Q2 RoTE of 18.1%, with an EPS of 12.3p, and a pre-tax profit of £2.6bn. We didn't say it so much on the call, because obviously we had a decent impairment release, but it is record profitability, beating our Q1 of £2.4bn, which was our previous record.

Given the strength of statutory earnings in the first half, it's probably no surprise that we guided to expecting above 10% RoTE for the full year. More importantly, this is a target that we feel, now that we've hopefully crossed the 10% threshold after many years of work in progress, is a target that is the right target for us next year and the year after. This is something we'll try and aim to achieve every year, beginning now and we'll see how we do.

On the top line, just to remind you that income in the second quarter did increase 1% YoY. That was against a pretty material FX headwind. If you neutralised for currency rates, it was a 7% YoY increase, mostly reflecting improved income from the consumer businesses and some in Head Office, offset by the CIB, which obviously had a very tough comparative in Q2 last year.

In CIB, the bright spots very much were in Equities and in Investment Banking fees. Both were at record levels. For fees, it was the best ever quarter, and in Equities, it was the second best ever quarter after Q1. Good performance across the waterfronts there, in cash equities, derivatives and financing, and in Investment Banking fees, in Equity Capital Markets and Advisory. So, really pleased with the performance there.

In the UK bank, mortgages continue to be the bright spot. Again, I don't think we called this out [on the results call] but I think we ran at record levels of net production in the first quarter and our nominal mortgages have hit an all- time high on our balance sheet.

Margins have been pretty decent in the first half, better than we expected, but we are expecting margins to reduce from here as, supply and demand becomes more in balance. So I wouldn't be surprised if we sustained the very robust margins we've had in the first half.

On the "not so good" side, gross UK card balances were down £300m. Hopefully, we will see balances increase in the second half as spending transmits itself more into credit card spend. Even though spend levels are pretty healthy, they're probably more geared towards debit cards at the moment.

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I think that even though you might see some balance increase, it's going to take some time to actually transmit into interest-earning balances - I think that's and that's probably more of a next year story.

We guided to UK NIM to be at the top end of the 240-250 bps range [for the full year]. A few things are going on there. We don't expect a repeat of the first half's mortgage performance, both as a margin matter, but probably also as a volume matter as well. So, that's going to have less fuel in the second half, and of course we're not expecting interest-earning card balances to improve. So, the grinding forward of the mix effect and you've still got some grinding effect from shortfall hedges - that is all working its way through.

The other thing that I think other banks have called out which has some relevance to us, there were some early redemptions on mortgages in the second quarter as well. That can be episodic and seasonal, and some around the stamp duty holiday as well. It is probably not repeatable and that certainly helped margin in the first half. So, just to remind people on that.

In our final segment, in Consumer, Cards and Payments, CC&P, a decent increase there, somewhat driven by Unified Payments, where income was up 17% [on Q1], obviously from a lockdown quarter to a non-lockdown quarter but we also had a gain on a property sale in the Private Bank, so that helped.

US Cards balances, good news and bad news: on the good news, they did end the quarter higher but the average balance was lower. So, I suppose we exited the quarter better than the quarter generally. Most of that increase in balances, though, was transactor balances, full payer balances, if you like.

While I'm hopeful that organic card balances, away from any portfolio additions like the American Retirees partnership that we have, will hopefully tick up, I don't think it will happen until late in the back end of the year. So, probably, again, more of a 2022 story, I think, than something that will see a meaningful impact this year.

On the costs, you'll be familiar with the cost number, 10% up at £3.7bn, mostly driven by the increased structural cost actions, by the property exit that was almost £300m. We are guiding for full year base costs, which is excluding performance costs and excluding the episodic structural cost actions, to be about £12bn. It depends on currency rates and partially volume-related activity, as well, but it should be somewhere around £12bn.

Q2 performance costs were broadly flat YoY and the first half, the bulk of the increase, in fact all of the increase, was really put through in Q1. I think that is probably just a more seasonal shape that we look like we may have this year, where most of the comp [year-on-year] difference will be accrued in the first half of the year. We'll see how we do for the second half but I think that's probably more likely to be the shape, more front-loading of comp.

I think that's all we wanted to say on cost. The only other message was that £12bn of base costs is probably an okay planning assumption for now into 2022. We'll obviously see how the recovery goes and the balance of investment spend and efficiency programmes, but we think £12bn is about right for now.

Impairment, a fairly significant release of about £1.0bn, against an ongoing run rate charge of about £200m, leading to net impairment benefit of £800m. A few things there: I think the most important thing is probably the run rate level.

It feels, given the size of the balance sheet and the quality of the books at the moment, that run rate impairments will be below the historical levels. I think most of you have probably modelled somewhere around £500m or so a quarter in the past, pre-pandemic, when I look at old consensus tables.

I think we'll be a bit under that but probably not as low at the £200m or so we may have had in the second quarter, simply because we do expect the recovery to pick up and with IFRS 9 it's a forward-looking balance, so you will start building impairment as assets come on, but still overall I think much, much lower than we've had in the past.

We're still carrying a decent sized management adjustment or management overlay. The number I call out there is the £2.1bn that really is there for our view that there is [considerable] economic uncertainty. That means that as the government schemes are withdrawn, we will digest that reserve against credit performance. If that [provision] is not required, obviously there's potential for more P&L that may make its way there and, indeed, more capital possibly.

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But, our view is that we'll probably need that management adjustment. We'll probably know the answer to this over the next handful of quarters. The government schemes are beginning to be withdrawn now. So I think as the next several quarters, two, three, four quarters go on, we'll have a better sense of where we come out.

On capital, we're still targeting a 13-14% range and our half year number was significantly above that, at 15.1%. There are some mechanical headwinds that we called out. You've obviously got the share buyback that we announced. We've got a Q3 scheduled pension contribution. The buyback is worth 17 bps. The pension contribution is worth 11 bps [pre-tax].

We should see stage three balances pick up a bit, and I talked about the impairment run rate. That will feed in [against] capital, as well.

We had quite a low RWA print, and that sometimes happens, mostly in the investment bank. This is the way the banking deal calendars work out and activity levels work out. I wouldn't take that as a new jumping off point. That's probably a bit lower than we would have anticipated.

We've also got 2022 headwinds. You've got the software benefit reversal, and you've got a further grinding down of the amortisation of the IFRS 9 transitional release. The software reversal is about 40 bps in round numbers, IFRS 9 transitional relief about 15 bps, and then you've got regulatory changes, standardised approach to counterparty credit risk. That's worth somewhere between 10 and 15 bps. Then, a further pension deficit reduction in 2022, another 10 bps.

So, there's a few headwinds there. Having said all of that, I still think we should be comfortably above the top end of our stated [target] range of 13-14%. It is probably meaningfully above 14% and it should give us the capacity to make decent returns of capital to shareholders.

On that, we did announce a 2.0p interim. We've been quite open to say we're accruing for a 6.0p full year dividend. I wouldn't take that as gospel. The board will make a final decision on dividend levels obviously at the full year results, but that is what we're accruing for now.

The buyback of £500m will begin, I believe, this week. That's with our brokers to start executing, and you'll see that through the RNSs that we put out and, of course, that's in addition to the £700m buyback we completed during April of this year.

One of the things you'll see on our performance highlights and on our tables, is that we are calling out share count more prominently, and I think that's just to let you know that these buybacks are a genuine reduction in share count, and hopefully will improve not only tangible book value but EPS accretion, particularly at these share price levels.

I will pause there. That's a lot of messages out there but I'm sure you've got plenty of other questions.

Raul Sinha, J.P.Morgan

I just have two areas that I wanted to come back to. The first one was going back to your slightly more cautious view on UK unsecured recovery. I think you flagged that on the call, that you were probably a bit more positive on the US side than the UK side. I was trying to understand, within that, what are the drivers you are assuming for the second half of the year.

One question around whether the market share of credit cards within overall unsecured including point-of-sale finance is reducing, and whether you're seeing any disruption because of other companies, particularly in the Buy- Now Pay-Later space, which might be taking over some share from you. Are you seeing any signs of that? Is that partly driving some of your caution?

The other question I had was around structural costs. I was just trying to understand how to think about the right run rate for this beyond this year. When I look at the branch optimisation potential, 755 [branches] still looks like a very high number of branches in the UK given the amount of digital utilisation.

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How should we think about the pacing of the branch optimisation costs from next year? Is there potential for that to pick up along with the UK transformation, or do you think this is something that is going to be quite episodic and quite difficult to have any predictability on?

Tushar Morzaria, Group Finance Director

I'll make a few comments on unsecured and I'll ask Anna to comment on that, as well. Anna, for those of you that may not know, used to be the UK bank's CFO, so she's well-versed in some of the customer dynamics and the drivers around UK unsecured lending. I'll just make a couple of comments on that. Then, I'll cover costs and then I'll ask Anna to talk more about the unsecured UK market.

I think that other people have definitely sounded more optimistic than us, and in some ways it is great if they're right and we're too cautious, because obviously it will be beneficial to us.

I think that what we're seeing though is the increase in spend in the UK has definitely been more debit card orientated, and we're not seeing as yet credit card spend levels get to a level where you'd automatically expect to see balance formation in interest earning lending.

I think we will see balances pick up but not necessarily driving revolving balances. We need to see more on card spend and more on discretionary items, particularly travel. I will get Anna to talk more about the dynamics there and also on whether we're ceding market share to Buy-NowPay-Later and other forms of unsecured credit.

On the structural cost actions, it is really good question. It is striking what's been going on here. When I joined the bank, I think we had something like 1,700 branches and we're somewhere around 700-750 [branches] now and yet, like you say, I think there's plenty more that is going to carry on. So, it's quite extraordinary what's been happening in the last handful of years.

In terms of modelling structural costs, I would say that the best guidance I could give you for 2022 would be probably not that dissimilar to 2021 but probably not with a repeat of the large real estate charge we took in Q2. We took about £260m as a result of the exit of 5 North Colonnade here, in Canary Wharf.

It's unlikely we're going to do anything as individually significant as that but I do think that if you go in the previous year and the year before that, where we've called out, we've done something like £300m in the past.

I think we will do some more actions, probably in the fourth quarter this year. Again, probably accelerating some of the work around our UK bank transformation. You mentioned real estate. I think there's other things that we'd look to try and get going quicker, so that we can get those cost savings in as soon as possible.

As and when we do these, we'll call out some of the benefits where they're individually material, so example the exit of the property of 5 North Colonnade in 2023 onwards will give you a £50m benefit for every year from that point on. These are good actions.

1. That hopefully, gives you an anchor to try and estimate what that may look like next year, so something like a historical number. This year it will be in that zip code, excluding the Canary Wharf exit, is probably a little bit unusual in terms of scale.

We will measure our performance on a statutory basis. You get a sense of what we're trying to do with our cost base but when we talk about our overall returns, we're trying to include all those costs in there, so maybe that gives you a sense of the profitability objectives that we're setting for ourselves.

We think of these things as episodic and non-recurring. We don't want to be sitting here in three years' time, constantly putting through some sort of structural cost action every quarter. In my mind, it becomes run rate, but hopefully that gives you at least some anchor for modelling.

Anna, do you want talk more about the dynamics around unsecured credit market share and what we need to see to see balances tick up, etc?

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Anna Cross, Deputy Group Finance Director

Tushar has called out the fact that we are seeing a gradual increase in consumer spending, particularly towards the back end of the quarter. As he said, though, that is biased to debit rather than credit. I'd also remind you that we see out there pretty high levels of current account and savings balances.

Those two things taken together suggest that we're going to see more transacting behaviour in the shorter term. I'd expect that to be our lead indicator to subsequent IEL growth, but it will take a while for the transacting behaviour to transmit through to IELs.

I think the other factor to consider is that the zero balance transfer market is alive and well and very open, so I would expect to see a pick-up in balances there. Again, that will probably hold interest earning lending back a little in the short-term, because we'd expect to see customers get their new zero balance before they start purchasing and building an IEL balance. But, also, it will take a while for those balances to mature through those promotion period.

Even if you spent some money today [and don't pay down], it takes broadly 60 days to flow through to IEL. So, even in the ordinary course of business, it's not immediate transmission, but I think those other factors of preponderance to debit card, the large savings balances, and also the reopening of the zero balance transfer market are probably relevant.

I think the other thing to consider is that the pandemic has coincided with quite a significant regulation shift in credit cards in the face of persistent debt regulation. So, what will have been happening in the background is that you would have seen a gradual moving down of interest earning lending balances anyway, I think, so you should probably factor that in too.

As concerns other forms of unsecured lending, to your specific question, I would say that the economic factors I've called out are bigger in scale than any significant move to other forms of unsecured lending and we would see it more as an opportunity for us to participate fully across that spectrum of unsecured lending that goes from cards all the way through to overdrafts.

I think we've spoken before about the new consumer products and we would see increased regulation in that space as being more of a tailwind for us. So, I think it's an opportunity rather than something we see specifically right now as dragging those cards balances down.

Raul Sinha, J.P.Morgan

Anna, can I just follow-up on the persistent debt regulatory impact? Do you think that's totally washed through in terms of its impact for the industry, or is there still some lagged impact ahead of us as you help these customers?

Anna Cross, Deputy Group Finance Director

There's perhaps still some lagged impact. It is probably more of a detailed matter we can discuss further, but I would say the majority of it will have washed through by now but maybe a little bit more to go. If you recall the regulations, there are two time periods. There is the 18 [month] and then the 36-month time period, so I think we're coming up on that one now.

Tushar Morzaria, Group Finance Director

I think balances that are beyond 18 [months] are really small. I think Anna is right. Most of it is small. I would say, just final comment to Anna's point, while we're cautious for this year, this isn't the death of the credit card or anything like that, we feel pretty good about it going into next year, more so in the US probably. But, I think it is just a timing factor rather than whether this business is ever going to come back. It will come back and it will come back pretty well, I think. It will just be more into next year.

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