Barclays Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2023

There are 13 speakers on the call.

Operator

Welcome to Barclays Half Year 2023 Results Analyst and Investor Conference Call. I will now hand over to C. S. Venkatakrishnan, Group Chief Executive and Anna Cross, Group's Finance Director.

Speaker 1

Good morning. Thank you for joining Anna and me on today's call. Let me start by saying we continue to deliver a consistent strong performance quarter on quarter. In particular, our second quarter results to 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.

Speaker 1

We generated GBP 6,300,000,000 in income in the Q2 of 2023, up 6% year on year, excluding last year's impact from the ovation of securities. This growth reflects the diverse sources of income, which we have built across the group. Our focus on cost discipline delivered a cost to income ratio of 60 2% 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.

Speaker 1

Together, these foundations have generated chasmussen, a cash flow of $2,000,000,000 in the 2nd quarter, earnings per share of 8.6p and a return on tangible equity of 11.4%. This second quarter performance means that we have delivered for the first half of twenty twenty three And income which is up 9% year on year, again excluding the over issuance and a return on tangible equity for the first half of 13.2 2% again in line with our target of above 10% for the year. Despite the mixed macroeconomic backdrop, we continue to invest thoughtfully where 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 UK and in Europe, and we have risen to number 1 ranking in share in the UK and number 2 position in Germany for the Q2 of 2023 as well as our 6th position globally.

Speaker 1

While announced volumes have been muted, client consideration of M and A alternatives remains active in anticipation of improved market conditions. And we have been deeply engaged in the full range of risk transfer activity. For example, Barclays was exclusive provider of financing for Ares' 3 $600,000,000 deal with PacWest Bancorp in the last quarter. We're also seeing continued Momentum in financing income within our markets business and maintain our top tier rankings in businesses such as credit trading. Despite lower client activity in markets and banking across the street, I'm particularly pleased with the growing strength of our client franchise.

Speaker 1

For several years, our client centric markets 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 twenty twenty three. 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 low carbon economy.

Speaker 1

We recently provided approximately £100,000,000 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 reward scheme in the UK 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 June was 13.8%, up 20 basis points on the Q1 and solidly within our target of 13% to 14% for the bank. Schuylkill.

Speaker 1

Excluding this is our consistently strong balance sheet and the capital generation capacity of our franchise. We're therefore announcing an increased capital return to shareholders with a 20% growth in our half year dividend to 0.2.7p per share. We are also pleased to announce a share buyback of GBP 750,000,000 which is an increase on the GBP 500,000,000 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 shares in issue by over 10% since 2020.

Speaker 1

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. Street.

Speaker 1

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.

Speaker 1

For our U. K. Mortgage customers, we are providing options to switch to interest only mortgages for 6 months or extensions of their mortgage term where appropriate. We're also enabling customers approaching the end of a fixed rate mortgage deal to lock in a new rate up to 6 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.

Speaker 1

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 are 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 behavior as a consequence.

Speaker 1

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. We have finally we have also continued to 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.

Speaker 1

I reiterate that this remains a floor 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. Thank you for listening.

Speaker 1

I'll hand over now to Anna to take you through the financials in more detail.

Speaker 2

Thank you, Venkat, and good morning, everyone. Starting with performance highlights on Slide 7. Our return on tangible equity for the quarter was 11.4%, broadly in line with Q2 last year, resulting in a 13.2% return for the first half. This is in line with our expectations, and we are very confident of achieving our ROCE target of above 10% for the year. This takes into account business trends in income and our latest view on impairment.

Speaker 2

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 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 bps to 60 bps for the full year, We continue to see limited signs of stress across our portfolio. And this quarter, the loan loss rate was 37 bps.

Speaker 2

Chang. 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. Charisse. Our liquid and stable balance sheet positions us well to pursue our returns objectives and return capital to shareholders. Accordingly, we are paying a half year dividend of 2.7p and have announced a further buyback of $750,000,000 to start immediately, which is a total return of 7.5p per share for the first half.

Speaker 2

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. Chia. On this basis, income was up 6% on a strong Q2 last year, whilst operating costs, which excludes litigation and conduct, were also up 6%. Litigation and conduct was $33,000,000 this quarter and profit before impairment was up 12%.

Speaker 2

C. The impairment charge increased to $372,000,000 against a low comparator and in line with our expectations, Resulting in profit before tax increasing to $2,000,000,000 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 returns, income, costs and risk management, starting with income on Slide 9. Total income increased 6% or around $335,000,000 year on year, reflecting our diverse sources of income.

Speaker 2

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 U. S. Card balances. CIB was down 3% year on year at EUR 3,200,000,000.

Speaker 2

The strength 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 CIB. Looking at the group as a whole, if you compare our revenue in this quarter with 4 years ago, You can see that we have grown income by around $400,000,000 in both the CIB and across our consumer businesses. Turning now to costs on Slide 10. Total costs were $4,000,000,000 up 2% year on year.

Speaker 2

Our costincome 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 CIB, 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 CIB. 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 offerings, whilst also driving a lower cost income ratio over time.

Speaker 2

CTP operating costs were up $96,000,000 year on year, reflecting growth in our U. S. Cards portfolio, including the acquisition of GAAP towards the end of Q2 last year and the U. K. Wealth transfer from BUK during the quarter.

Speaker 2

And CIB operating costs were up $114,000,000 year on year as we continue to invest selectively in our client franchise through technology enhancements, in talent and in improved resilience and controls. Chia. 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 $6,100,000,000 a slight Street from €6,300,000,000 at Q1.

Speaker 2

We updated the baseline macroeconomic variables for modeled impairment from the full year, notably with some reduction in forecast unemployment in the UK and U. S. 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 $300,000,000 Our guidance for a loan loss rate in the 50 to 60 bps range allows for some potential credit deterioration and seasonal effects. The $372,000,000 charge translated into a loan loss rate of 37 bps.

Speaker 2

Looking in more detail by business on Slide 12, The Barclays UK charge of $95,000,000 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 U. S. Cards in particular.

Speaker 2

It reflects the normalization of delinquencies with a seasoning effect as balances Grove, 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. Chiang. On Slide 13, we've shown key coverage and delinquency metrics for our 2 largest unsecured books, U. K.

Speaker 2

And U. S. 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 U.

Speaker 2

K. Card book has improved since 2019. We've continued to grow U. S. Cards in an appropriate and controlled way that is 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 GBP150, and this includes GAAP.

Speaker 2

In addition, the proportion of the book better than our FICO of 660 is now 89% compared to 86% at the end of 2019. As we grow, we maintain strong coverage levels across both U. K. And U. S.

Speaker 2

Cards, notably Stage 2 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. 1st, We have applied strict affordability tests since 2013 using rates above current levels. 2nd, looking at the profile for refinancing, the proportion of the book on 5 year and over initial fixed rates has Increased materially since 2019 from 33% to 51%.

Speaker 2

Capital. This shift delays a potential increase in rates for many borrowers, allowing them more time to mitigate the impact. Capital Markets. Fixed rate maturities in half 2 totaled $17,000,000,000 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.

Speaker 2

Street. 3rd, 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 2 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.

Speaker 2

As you can see on Slide 15, commercial real estate as a proportion of our customer loan book is around 17,000,000,000 or just under 5%, which is below the industry average. It is diversified across segments and the 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 €1,900,000,000 Turning now to the performance of each business in the quarter, beginning with Barclays UK on Slide Steen. Profit before tax increased 25%, and the return on tangible equity was just over 20%.

Speaker 2

Income grew 14% to €2,000,000,000 with costs down 1%, improving the costincome show by 9 percentage points year on year to 55%. We expect to improve this further as the benefit from our transformation program feed through. The net interest margin was 3.22 bps, up 4 bps on Q1, in line with our expectations. And this would have been 2 bps higher without the transfer of UK J Wealth to Consumer Cards and Payments. The moving parts are set out in the bridge on the slide.

Speaker 2

We benefited from the steady role of the structural hedge, which again added 13 bps as in each of the last few quarters and from some lagged effects from previous bank rate rises. There was also a 6 bps 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.

Speaker 2

Street. Three recent macroeconomic developments have prompted customers to change their behavior and us to revise product pricing. Street. 1st, inflation is expected to be more persistent. 2nd, base rates are forecast to peak at higher levels.

Speaker 2

And 3rd, swap rates increased further during Q2, increasing mortgage pricing. Chordantal, 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.

Speaker 2

Accordingly, we now expect the BUK NIM to be below 3 20 bps for full year 2023. Our current view is around 315 bps, which reflects our expectation for customers to hold lower deposit balances, Changes in deposit pricing and the 2 basis points impact from the transfer of UK Wealth. Chalk. Of course, the precise outcome will be sensitive to a number of inputs, notably the level and mix of deposit 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 which I'll cover on the next slide.

Speaker 2

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 point $1,000,000,000 expected for this year was already locked in by the half year. We have a further $50,000,000,000 to $60,000,000,000 maturing in each of 2024 and 2025 at yields between 1% 2%. Chang.

Speaker 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 2025. I would remind you that around 2 thirds of the benefit is in the U. K, where the hedge has contributed 13 bps of incremental NIM 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%.

Speaker 2

Income increased $195,000,000 or 18%, reflecting growth mainly in international cards and the transfer of U. K. Wealth. Year end U. S.

Speaker 2

Card balances grew organically by 12% to $29,500,000,000 and average balances were up 27% year on year as the GAAP 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 35,000,000 from the transfer of U. K. Wealth.

Speaker 2

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 CIB on Slide 20. Return on tangible equity was 10%, Whilst income was down 3%, a resilient performance against a very strong prior year comparator, reflecting our diversification within the CIB.

Speaker 2

Corporate lending and transaction banking increased strongly year on year to over €900,000,000 Markets, which was down 20%, Reflected lower market volatility impacting intermediation income, but there were 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.

Speaker 2

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 bps in the quarter, of which 8 bps was applied to the increased dividend accrual. Taking into account the $750,000,000 buyback we have announced, our CET1 ratio would be 13 point 6% in our target range of 13% to 14%.

Speaker 2

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%. Chiang. As shown on Slide 23, we have seen a stable level of deposits overall this quarter at 555,000,000,000 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.

Speaker 2

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 our liquidity coverage ratio well ahead of the regulatory requirements. The liquidity pool of $331,000,000,000 is held 80% in cash with the risk in the residual debt securities Street, 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 11.4% 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.

Speaker 2

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 bps for the full year.

Speaker 2

Capital. 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 2 per person, so we get a chance to get around to everyone.

Speaker 1

Group.

Operator

Thank you. Our first question today comes from Joseph Dickerson from Jefferies. Please go ahead, Joseph. Your line is now open.

Speaker 3

Hi, good morning. Thank you for taking my question. I just have a question, firstly on rate sensitivity, Because I can't find any tables or disclosure in today's releases. I guess, Are you now approaching as regards base rates a position whereby the bank is liability sensitive? Or how should we think about rates rate sensitivity going forward?

Speaker 3

And then secondly, can you discuss your strategy with some of the European consumer businesses such as the German consumer business, I think there have been some press headlines about the disposal of that business That would not that would actually have a relatively significant Contribution to capital presuming you get a gain on it, not game changing, but certainly would free up another call it $750,000,000 or $1,000,000,000 of Capital, if you were to dispose of it. So I guess how are you thinking about those peripheral consumer businesses that you still have? Many thanks.

Speaker 2

C. Good morning, Joe. Thank you for your questions. So I'll cover the first one and then hand across to Venkat. So you're exactly right.

Speaker 2

What we are saying is that given where base rates have now got to, we We expect further rate rises from here would have no impact on our net interest margin. In fact, it might be even slightly negative. And that's simply because, as we've said for some time, the higher rates go, the higher the pass through will be. Don't forget, though, that this higher rate environment also impacts The yield curve, and we are seeing that benefit come through and get locked into on our structural hedge. C.

Speaker 2

Venkat, do you want to take the second question?

Speaker 1

Yes. Thank you, Anna. So Joe, yes, we are looking to sell the German credit card business. It's a nice business, but it's not really been it's not really core to our overall consumer footprint. There will be a modest RWA release when that happens, but it is small in the context of the bank.

Speaker 1

I mean, It's something, but it's small.

Speaker 2

Yes. Thank you. Thank you, Joe. Next question, please.

Speaker 3

Thanks, guys.

Operator

Chang. The next question is from Jason Napier from UBS. Please go ahead, Jason. Your line is now open.

Speaker 4

Hi, good morning. Thank you for taking my questions. 2, just to start off with, I guess. First one, A lot of the investors that I talked to would like to see Barclays be clearer about the sort of risk weighted asset growth envisages for the CIB, in fact many of them would like to see no growth in that division at all or perhaps some kind of constraint around the share it represents in the Group. I just wanted your views on that desire.

Speaker 4

And then secondly, just looking at Barclays UK, The division has a better income to loans tally than almost anyone else in the sector, but its costincome ratio is 10% above Lloyd's and 13% above NatWest. You must have done loads of sort of internal work in the past. Can you talk about what it is about the cost structure of that business that Makes it so much less efficient than the major peers that we look at. Thank you.

Speaker 1

Yes. Hey, Jason. I'll chambers. Take the first one and I'll pass the second one on Barclays U. K.

Speaker 1

To Anna. So on the first one, I think I have been pretty clear that when we look strategically at the Investment Bank, it's been a great success. It has been 5 years ago, the question that was asked of us was should you have 1? And if you had 1, would it be any good? And I think we've shown that it's important for us to have 1.

Speaker 1

It's a great diversifying business and if we're pretty good at it, we are the top ranked European Investment Bank, and Markets Centre Trading. However, I also recognize that at approximately 60% to 70% of the bank, It is much more important now to grow the bank that's outside of the investment bank and that is and to get a better balance overall in due course. Now having said that, within the Investment Bank, There are some relatively attractive ROTE businesses such as financing and prime, and we have been within the investment bank investing a lot in those. So the real when you get to the heart of your question, it's something, of course, we would agree with, which is to increase ROTE and to increase the proportion that fee based and relatively capital light

Speaker 2

Chen. Yes, we've thought a lot about this, and I'd put it down to a couple of factors. The first, risk appetite does play a role here. So and that is both around liquidity and credit risk appetite. So you'll know that Barclays U.

Speaker 2

K. Has a lower loan to deposit ratio than some of its peers. And we manage our credit extremely carefully within Barclays U. K, as we do, obviously, across the group. And it's part of Street.

Speaker 2

The group risk appetite that we focus on, obviously, we've got global opportunities to place risk and you know many, many varieties of it. So I think risk is a large part in the way we manage that risk. But of course, it's also about the cost base, which is what the transformation in Barclays U. K. Is about.

Speaker 2

So we're extremely focused on cost and Efficiency. We are working extremely hard on our physical and digital footprint and the benefits that, that gives to our customers. So what you see at the moment is us reinvesting the benefits of that transformation to make it go faster. But over time, we would expect to see the costincome ratio of the business to trend downwards. Hopefully, that gives you some clarity about how we think about it.

Speaker 2

So next question, please.

Operator

Chang. Thank you. The next question comes from Jonathan Pierce from Numis. Please go ahead, Jonathan. Your line is now open.

Speaker 5

Yes, good morning. Thanks for taking my questions. I've got 2. The first is on the hedge. Thanks for the extra disclosure on the hedge maturities in 2024, 2025, particularly the scale of them.

Speaker 5

But I wondered if you could be a bit more precise on the yields that these things are coming off because You've got $100,000,000,000 to $120,000,000,000 in maturities over those 2 years. Makes a big difference if the average yield on the maturities of 1% versus 2%. The range could be as wide as £1,000,000,000 or so. I'm also just, supplementary to that, wondering where all the hedges that were written in 20 20 when the 5 year swap rate was close to 0. Where are those?

Speaker 5

Were one of those coming off?

Speaker 1

I'd have thought there'd be

Speaker 5

a bunch of those in 2025. The second question is a more broader one on distributions. In particular, going forward, the sort of Split of the free capital generation that goes towards dividends versus buybacks. I mean, we can all understand you want to do a lot of buybacks Cheuvreux. The consensus dividend payout ratio is about 27%, I think, over the next 2 or 3 years, and there's an argument, I suppose, the payout ratio could be a bit higher than that.

Speaker 5

I mean, ultimately, cash in pocket today is just as important as enhanced cash in pocket in a few years' time. So thoughts around the distribution split between dividends and buybacks moving forward should be great as well. Thanks.

Speaker 2

Okay. Thank you, Jonathan. Just picking up the first one. I'm glad you like the slide. So we're talking about Slide 18 here.

Speaker 2

What that shows is that we've seen a strong pickup in yield from FY 2022 to 2023. So our income has gone from €2,200,000,000 to an expected €3,600,000,000 this year. And your question is really how that stage. Difficult to be completely precise about the maturing yield because it does impact on how much we roll into your calculation. But what I would say is that it's probably at the lower end of the range for 2024 and in the range for 2025.

Speaker 2

Typically, these are about 5 year swaps. So you're going to see the benefits coming through of your 2020 vintage sort of from 'twenty five. On your broader question, The way we think about it is we want a progressive dividend, which is why you've seen us grow the dividend at the half year, year on year. So that's up by 20% year on year. And that's really Street.

Speaker 2

That should demonstrate to you our confidence in our ability to distribute capital consistently from here, But we want to be able to supplement that from time to time with a buyback, as you say, particularly given where the valuation of the bank is right now. So at this point in time, we've together those 2 around 1.2 €1,000,000,000 of distribution at the half year, which is 5% of our current market cap. So hopefully, that will underline to you our commitment to return capital to shareholders in dividend and in buyback.

Speaker 5

Okay. That's helpful. Thanks. So sorry, just quickly come back on the hedge point. In 2025, it sounds like you're saying The average yields are maybe around the midpoint in that 1% to 2% range.

Speaker 5

If you've been bar the stuff that was put on during the pandemic, which was obviously Sheridan. You've been putting a hedge on typically at 5 years rolling. Why is the yield on the stuff coming off in 2025 at that level when the 5 year swap rate was pretty close to 0 in 2025 in 2020, sorry.

Speaker 2

There is a blend in there, Jonathan. We can take you through it in a bit more detail. So there'll be a large part of the 2020 Vintage, but they're not all 5 year. So we can take it through you and do it with you in a bit more detail outside of here.

Speaker 5

Group. Okay. Thanks a lot.

Speaker 2

Okay. Thank you. Next question please.

Operator

Our next question comes from Guy Stebbings from Exane BNP Haribar. Please go ahead, Guy. Your line is now open.

Speaker 6

Hi, good morning. Thanks for taking the questions. The first one was just on deposits. In BUK, I think they fell about $4,000,000,000 or $5,000,000,000 in the quarter, presuming that includes some outflows in current accounts and interest bearing site accounts and inflows into time deposits. So perhaps you can help us understand Those moves in terms of the mix of deposits either at Bartus UK or at group level.

Speaker 6

And then as we look forward, it sounds like you expect that headwind to persist at maybe current levels, whereas one of your peers noted the experience thus far in Q3 was maybe a little bit better than May or June and thought that less base rate moves meant less for customers to move money. So I just wonder if you shared those sort of views or not. It sounds like maybe you're embedding slightly more conservatism there. And then on the CIB, I guess we've become quite accustomed to top line beats and market share gains of markets for quite a while. This quarter was a little bit softer.

Speaker 6

I just wondered if you read anything into that, any need to change or pivot, mind if you got a strategy review In the background or do you just largely put it down to 1 quarter and there will always be a degree of volatility and perhaps you're even seeing some green shoots from here? Okay. Thank you.

Speaker 2

Thanks, Guy. So we don't disclose the split of our deposits. But when we look at our peers who've reported thus far, the trends that we've experienced don't look markedly different. And actually, what we're saying at this point in time is the migration behavior is broadly as we expected it to be. What we're seeing is that customers are holding a lower level of deposits, and they're doing that for very positive and proactive reasons.

Speaker 2

We think that The prompt for that behavior is 3 things. Firstly, rates have risen beyond the level that any of us expected secondly, inflation is much higher and more persistent than we Selected. And thirdly, mortgage rates are obviously higher than they have been at any point other than a brief period in the Q3 of last year. So our customers are Churna. Sensitive to these higher levels of interest rates, but not actually in the way that consensus Is assuming.

Speaker 2

It's manifesting itself in them using their deposits proactively to manage their financial position, And we're seeing the benefit of that in our impairment. So we said in the scripted comments that over onefour of our customers are using their excess deposits to pay down their mortgages in advance of a fixed rate change. We think that's the right thing for them to do. And whilst It will impact our income. It's also going to impact our impairment.

Speaker 2

Because those three factors of rates, inflation And indeed mortgage rates we expect to persist. We also expect this deposit behavior to persist into the Q3. And really, that underpins much of the guidance that we've given you around the forward path for the U. K. NIM from here.

Speaker 2

Hopefully, that gives you some clarity on how we are thinking about it. Venkat, do you want

Operator

to pick up the second

Speaker 1

part? I think Guy, thank you for the question. On the CIB, I would very much view this as and I'll explain to you how it's just a quarter Where in the quarter, both in fixed income equities and in banking, we've been in the middle of spec, Right. So our performance is consistent with that of the U. S.

Speaker 1

Peers. We are very much in the middle of the pack. And there's A little bit of a stylistic story in it. If you look at fixed income, where we're off just a little more, we had an excellent quarter in the Q2 of 2022. We also this was a quarter in which securitized products, which is an area of growth for us, Has done very well.

Speaker 1

So banks with big securitized products businesses did better than those without. And equities volatility was a little bit more muted and we have a very derivatives heavy business. And banking has been fine. As I said in my remarks a few minutes ago, ranking share increased in the UK and in Germany, continue to maintain our global ranking. So I think if I take a slightly longer term view, We continue to gain market share with our biggest clients, which is a specific objective of ours.

Speaker 1

We continue to do well within markets and Banking. And then the last thing I want to point out in terms of the diversification of the business and referring to the question that was asked earlier, I think from Jason about the CIB. If you look, our transaction Banking numbers and our Corporate Banking overall has been doing extremely well. So that part of the business, which is in part related to transaction volume, in part related to interest rates, but it's also in part related to just Plain old, good old fee income has been doing very well. So net net, you put it all together, that's what leads to a CIB with double digit RoTE and a continued accumulation and holding of market share.

Speaker 4

Very clear. Thank you.

Speaker 2

Thank you, Guy. Can we have the next question, please?

Operator

C. S. Thank you. The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.

Operator

Your line is now open.

Speaker 7

Good morning. I guess I've got a couple of really follow-up questions. Anna, you mentioned, I think, just now around the it's really the deposit balances driving the structural hedge down and the margin guidance down. In BUK, you've reduced around €4,000,000,000 And Is that the run rate of reduction deposits we that you might expect for the next few quarters that we should expect for the next few quarters? And I guess more than related to the level of rates is Obviously, it's related to the level rates, but I guess clients are focusing on their rollover mortgages.

Speaker 7

So it could last a bit longer than just with rate movements When base rate moves, is that a fair observation, the €4,000,000,000 run rate and it's more to do with the level of rates than the movement of rates? And then the second question, also a follow-up on the strategic review and Venkat, some of the points you've made during the call Of growing sort of balancing the business a bit more outside the Investment Bank. Obviously, the obvious part of the business to grow is U. S. Cards, given I'm I'm not sure there's a lot of room in the U.

Speaker 7

K. When I think about it, that's quite a capital intensive business. And there are some global peers that are pulling back actually from growing cards and payments. Is that The idea to deploy more capital make it become bigger in the U. S?

Speaker 7

Or is it also an option of taking capital outside the investment bank to distribute. Is that another way of balancing the business?

Speaker 2

Thank you, Alvaro. So So the disclosure that we've given you on the structural hedge is actually for the group as a whole. We've included it in that Barclays U. K. Section just because of the impact and the link it has to Barclays U.

Speaker 2

K. NIM. But that reduction in the hedge that you're seeing quarter on quarter actually relates to our corporate business as it has done in prior quarters. And really what we're doing there is, I think we've described before the way we build the hedge, we identify the rate and sense balances and then we maintain a buffer. And it's the we maintain a buffer when we put the hedge together.

Speaker 2

What we're doing in corporate is we are very conservatively maintaining that buffer in the current environment. Again, I think we've spoken before about the fact that our corporate businesses or our corporate clients were really very proactive in moving their deposits and really it's a continuation of that previous story. To date, we haven't actually changed The role of our hedge within the retail book, of course, we are very focused on chat every single month. But I'd just remind you that because of the way that we roll this hedge very mechanically, We have the opportunity every month to reassess it and pause or reduce the size of the roll. So we've got Plenty of room and plenty of time to adjust it.

Speaker 2

But to date, in retail, we have not had the need to do that. And secondly, The pickup in this hedge in 2024 and 2025, we would expect to be pretty strong, simply given the amount that we got maturing and indeed the yield on that maturing level. So that will impact the U. K, will also impact the broader bank, but that's what you should read From Page 18 as opposed to any specific concern about the level of BUK deposits. CIB.

Speaker 2

Thanks, Matt. Do you want to pick up the second point?

Speaker 1

Yes. Alvaro, thanks for the question. So I think one way to look at it is CIB, non CIB. C. S.

Speaker 1

The way I prefer to look at it is to continue to improve the increase the amount we have of fee paying relatively capitalized businesses. There are a couple that exist within the CIB, as I've mentioned to you. Transaction Banking is one of them. Our financing business is one of them, for the remaining outside the CIB. And as far as and you should therefore look for us to continue to put an emphasis on fee paying relatively capitalized businesses.

Speaker 1

I think we would like to grow cards, but I would actually also like to increase the capital efficiency in our cards business. And that's something we're spending some time on. So it's not just growing at current RWA densities, but growing in a more efficient way. And that's an important feature. So Net net net, look for us to be increasing more fee paying businesses and relatively capitalized.

Speaker 1

Thank you very

Speaker 2

much. Thank you, Alvaro. Next question please.

Operator

The next question comes from Chris Karnes from Autonomous. Please go ahead, Chris. Your line is now open.

Speaker 8

Good morning. Thank you for taking my questions. You talked quite a lot about investment J curves in the CC and P segment over the last couple of years, but it feels like the Revenue engine stalled a little bit there in the Q2. Could you talk a bit more about what's going on? Why the revenues came under some pressure there?

Speaker 8

And I guess echoing an earlier question in terms of some of the investor sentiment around some of the strategic headlines we've seen in the last couple of months. If you are wanting to invest outside of the CIB in, for instance, some of those CC and P segments, would you consider providing a bit more Visibility. It's a slightly odd division. There's quite a lot in there. And we don't really see the economics of the different bits of that business.

Speaker 8

I know you give us the revenues, but obviously, we don't see the rest of the P and L. So is that something you would consider to make investors A bit more comfortable with some of the growth aspirations. I had one follow-up please to Guy's question. In terms of deposit trends, You've given us this revised NIM guidance. Have you seen an acceleration in terming out Behaviour in June, July, please, specifically, just in response to the lurch higher in swap rates.

Speaker 8

You've referenced Various drivers of the change in the NIM guide, but I'm particularly keen to understand what you're seeing with respect to terming out. And I guess that feeds then into the Quantum of Hedge maturities you will be able to reinvest looking into 'twenty four, 'twenty five. Thank you.

Speaker 2

C. Thanks, Chris. So let me start with your first question, which was about the quarter on quarter movement in CCP. This is largely about U. S.

Speaker 2

Cards. I wouldn't link it directly to J curves or anything Specific around the momentum in that business, there are some small FX impacts. There's also a little bit of seasonality in there. We typically expect slightly higher income in Q1 and Q4 Just because of the patterns of holiday spending in the U. S.

Speaker 2

I think the other point, though, just To note is that we have seen an improvement in risk performance, I would say real risk performance quarter on quarter. And that's coming from a couple of things. It's from the stabilization of the delinquency trends. It's also from the fact that GAAP is now fully embedded and is seasoning out and performing well in line with our expectations. So we're seeing that in the impairment line, as you can see, but we also see it in the income line because it impacts these.

Speaker 2

So overall, very happy with it. It's going in the right long term direction. This is a business that we want to grow, As Venkat said, so I wouldn't read too much into the quarter on quarter movement. On your particular point around presentation. We hear you.

Speaker 2

Actually, there are 2 important businesses within CC and PM. We are quite reflective about how we might think about and present those in the future. U. S. Cards is obviously one of them.

Speaker 2

We'd also call out Wealth and Private Banking, which we've now brought together into a single division. So we'll reflect on that and update you in prior in subsequent quarters, but we are very thoughtful about it. And then to your Street. Second question. We're not seeing any real difference in deposit trends Following the exit of Q2, it's been fairly consistent actually through Q2 and into Q3 so far.

Speaker 2

As I say, the trends that we're observing, we don't believe are different to those of the industry. The one that's A bit different from our expectations is this use of sort of more current account deposits, I would say, simply customers proactively managing their financial situation. So I wouldn't call out any specific impact on the hedge.

Speaker 1

And finally, just step in for a second, Chris. And you and some of the previous questions have focused Rightly on sort of where we want to grow, what the balance is, what the investment. Equally, I hope It's clear that not just are we thinking about avenues of growth, but we really value doing it in such a way that creates returns for our shareholders. And we want to prioritize that. And so that's a big part behind continuing with The dividend program and the buyback program is €750,000,000 So it is a balancing act and I just didn't want you to Missed the other side of the balance, which is what we've been returning to shareholders.

Speaker 8

Got it. Thank you both.

Speaker 2

Okay. Thank you. Chris, next question please.

Operator

The next question comes from Benjamin Toms from RBC. Please go ahead, Benjamin. Your line is now open.

Speaker 9

C. Good morning, both. Thank you for taking my questions. Firstly, on mortgage spread compression, it's fairly significant headwinds in this quarter. But if you look at It looks like the headwind fades as we go through half 2 as the spread of mortgages rolling off the book comes down.

Speaker 9

And the pressure looks like Comes back again in 2024, albeit to a lesser extent than we're seeing currently. Is it that the right way to think about the shape of the headwinds is the first question? And then secondly, Back on the structural hedge and my faith, but in terms of the extra disclosure given that's really helpful. Thank you. I guess the key question is the quantum of the total gross income in 2024 and 2025.

Speaker 9

That's not disclosed, but you described as being strong. If we look at latest market pricing, it looks like the tailwind could be something like an additional $1,000,000,000 of revenues in $24,000,000,000 and another $1,000,000,000 of revenues on top of that in 2025. Can you give some kind of sense about whether that's the right kind of ballpark way to think about it? Thank you.

Speaker 2

Thank you, Ben. So you're right about mortgage margins at the moment. The mortgage market is Very competitive, very focused on refinancing. That means that spreads remain Attractive but relatively, relatively thin. We don't see that changing much through 2023.

Speaker 2

Remember, we know exactly who is maturing this year and what rate they're on. And in fact, in the disclosure that we've given you is Many of them have already refixed already. So we've got a very good view about what the forward impact of that is. We would expect it to be much less probably largely neutral actually in 2024 Because what we're really seeing at the moment is the vintage written in 2021, which was on much wider margins and on 2 year fixes. It starts rolling off really.

Speaker 2

So by the time we get into 2024, we'd expect The impact of mortgage compression to be much more neutral. And in many respects, the Margin story for 2024 is much simpler, which leads me to your second question. It's a wee bit early to give very precise guidance around 2024. What I would Chiang. So there is the following.

Speaker 2

Given the scale of maturities that we have and the yield on those maturities. We would expect a strong pickup. And clearly, we would expect that to mitigate any continued depositor behavior that we see through 2024. So I would expect it to provide a stabilizing effect as we go into 2024, noting again that mortgages will be broadly neutral and actually base rates we would expect to be broadly neutral. So it's Really a much simpler picture in margin terms in 2024.

Speaker 2

Okay. Thank you, Ben. Can we go to the next question, please?

Operator

The next question comes from Adam Terolak from Mediobanca. Please go ahead. Your line is now open.

Speaker 10

Securities. Morning all. Thank you for the questions. I wanted to dig into NIM into 2024. I know you just mentioned the hedge.

Speaker 10

Can you give us a sense of the deposit assumptions in this year's guide? And then how much the deposits might be able to move Further beyond 'twenty three and into 'twenty four. So I'm just trying to think about what the kind of the volume of deposit repricing opposite that hedge benefit you're talking about could be to kind of scale the 2024 NIM from the 315 we're expecting this year. And then a second question, completely different topic. U.

Speaker 10

S. Regulation that got a new look on what their Basel III finalization might look like. How does that impact your U. S. IHC?

Speaker 10

How does that impact your cards growth plans there? Because I know at the minute, capital ratios between Your U. K. Business and international franchises are fairly well balanced. Does that change if you're going to see material risk weighted inflation under U.

Speaker 10

S. Regulations? And does that change your growth plans? Thank you.

Speaker 2

Thank you, Adam. So let me talk about our deposit assumptions for 2023 1st. So as I said, in Q2, we've seen that sort of Inc. Increased proactivity from our customers. We expect that to continue into Q4 into Q3 rather.

Speaker 2

By the time we get to Q4, normally what happens is we actually see a build of deposits in Q4 because People save up on their way into the holiday period. We're not assuming that this year, but we are assuming The movements in deposits will somewhat stabilize in the 4th quarter. So that's our version of that Seasonal effect in this forecast. So what we're expecting in NIM term is that for NIM to step down in Q3 3 and then be a bit more stable into Q4. And remember, we've got really good visibility on the hedge.

Speaker 2

So of the €3,600,000,000 in gross income this year, we've already locked in €3,300,000,000 of it. We know who our mortgage customers are and when they're going to refinance. So really, what we're doing here is answering 3 questions. The first is what happens if and when base rates go up again. And we are clearly saying that we expect that to not have a positive impact on NIM.

Speaker 2

It might actually be slightly negative. And that's because At these rates and beyond, we'd expect pass through to be high. The second question we have is around deposits. And I've just told you what we think. That's down again in Q3, somewhat stable thereafter into Q4.

Speaker 2

The third and really important question is what do we expect to happen to unsecured lending? In the current environment and given the productivity that we see from our customers, we are not assuming that, that is going to grow. You're Seeing some headline growth, but that's not interest earning growth. Now as I say, this is having Some downward pressure on our BUK canin, but it is also impacting the impairment, And we are seeing very strong low levels of impairment coming through in the U. K.

Speaker 2

Hopefully, that gives you a bit more clarity. I think they have a lot

Speaker 10

Can you say anything on deposit migration In 'twenty four and changes in mix beyond 4Q or is it too crystal ball?

Speaker 2

So too early to tell. As I noted before, all I would say is that given the strong pickup in the structural hedge, we would expect those two things to be offsetting.

Speaker 1

So I just want to emphasize the point Anna made at the end about the relationship between NIM and impairment. Having spent a lifetime in credit markets, what I will say to you is the NIM you want is not the highest NIM, but the best kind of NIM. The one that balances your return with risks of credit impairment. We think We increasingly see the evidence that we've got a very good kind of NIM because what you're seeing is a reduction in it, but reduction for the right reasons. And the reasons are that people are using extra balances to pay off mortgages and reducing the impairment risk on the portfolio.

Speaker 1

So as you think through these numbers and as you think through our credit portfolio, I would urge you to keep it in mind because that's the way Anna and I think about it. And that's the way we've been targeting and developing and shaping the credit profile of this bank.

Speaker 2

Absolutely. Thank you, Venkat. On your second question, Adam, which is about Basel 3.1 in the U. S, again, it's a bit early. We're expecting that guidance today.

Speaker 2

So it will take us a while to work our way through that. We've guided to the overall expected impact from Basel 3.1. And of course, we'll Chen. Can we have the next question please?

Operator

The next question comes from Rohith Chandra Rajan from Bank of Gurut Shah. Please go ahead. Your line is now open.

Speaker 11

Thank you. Good morning, both. I had a couple on CIB, please, if that's all right. The first one was just on Transaction Banking, where there was clearly a very strong revenue trend last year as rates were rising. That's come down slightly over the past couple of quarters.

Speaker 11

So is Transaction Banking now is that margin piece Done. And this is now a kind of volume driven revenue line. That will be the first one. And then just on cost management in CIB. So costs have been coming down, but they've not kept pace with the revenue trends.

Speaker 11

I was just wondering how we should think about the cost trajectory there Going forward, is this should we expect the investment spend to drop out at some point or efficiency improvements to kick in? Or is this more about share gains and revenue growth and market recovery going forward, so the revenue line more than the cost line. Thank you.

Speaker 2

Thank you, Rohit, and thank you for the question, which, of course, is on another very Strong NIM story for Barclays. So the one we talk about a lot is Barclays U. K, which is half of our net interest income. Corporate is a quarter of it and CCP is the other quarter. So thanks for the question.

Speaker 2

What's happening in Transaction Banking is continued stability in deposits. These are very long, Sticky relationships with our corporate clients. We've seen earlier Migration there, as we would expect, that's a bit more stable now. And really, what you're seeing over the last couple of quarters is They're both slightly odd in their day counts. So Q1 is relatively small in business days.

Speaker 2

Q2 has got more calendar days, but fewer business days Because of the bank holidays that we have through May, so it's actually a slightly odd quarter. So we saw probably fewer fees Coming through there because of the fewer business days, but higher deposit income because of the more calendar days, if you can Decode all of that. But just stepping back from all of it, given that it's based on corporate relationships and given That our structural hedge also impacts this business. We see it as being Pretty stable, actually, as an income line. And corporate lending is a much cleaner picture this quarter as well because it doesn't have any Leverage loan marks in it.

Speaker 2

So that's a much closer picture to what I would expect that to be a clean quarter. On CIB costs, we've clearly been investing in our CIB for the reasons that Venkat's gone through. What you're seeing at the moment is that, that cost trajectory around investments It's reaching maturity, really. And what you're seeing over time is the income growth. Whilst there might be differences quarter to quarter, that income growth It's coming through behind it.

Speaker 2

So you're seeing what were quite strongly negative jaws now alleviating somewhat. I won't talk about specific quarters, Rohit, but clearly, our objective here is for this business to have strong returns and costincome ratio is a key part of that. So we are focused on it. And you'll see that it's part of our overall story, but we don't think that our CIR is out of line with our peers. And clearly, we're seeing the benefits of the growth coming through, but very ROTE focused.

Speaker 2

So just noting, we've had double digit RoTE in this division now for 10 out of 14 quarters. So we feel like we're investing in the right things.

Speaker 1

Capital.

Speaker 2

Hopefully, that helps. Thank you, Rohit. Can we go to the next question, please?

Operator

Our next question comes from Edward Furth from KBW. Please go ahead, Edward. Your line is now open.

Speaker 8

Securities. Thanks very much, and good morning, everybody. Venkat, I just wondered if I could bring you back to the strategy question, Because I think that probably is the key one at the moment. I mean, I heard what you said about the success of the CIB over the last 5 years. And For what it's worth, I agree with you.

Speaker 8

But if I look at your share price over that time, it's down between 10% 20%. So I guess, although we agree, the wider market clearly disagrees or clearly doesn't see the value in what you've created. And so I guess in that context, I also heard your comments about the strategic review and perhaps fee income being a focus. But C. S.

Speaker 8

How sure are you that, that is enough to start closing the valuation gap on the peers? And at what point are we not approaching the point now Perhaps 5 or 10 years of this strategy where we start to think, doesn't something more radical need to happen to actually start closing the gap? Because you're now at a Huge discount. I mean, Lloyd's is on one time book. NatWest is on 0.8, 0.9.

Speaker 8

You're down 0.5 or less. And I'm just Is there sort of a sense as to how we can do something to close that? Does that make sense? Sorry.

Speaker 1

Yes. So What I want to say to you is obviously we first of all, thank you for your comments on the CIB. I'm glad you agree that we've been making progress Shneur, it's clearly insufficient, right? That's what the price to book would tell you. And I think there are 3 or 4 aspects of that.

Speaker 1

One aspect is the proportion of the bank's revenue profits risk weighted assets that are sitting in the CIB. It does feel that, that is a drag on the overall valuation when it's at 60% to 70%, right? So in other words, the success of the CIB has been great, but It's now the rest of the bank has to put its own weight. That's the part again where I say both within the CIB and the rest of the bank that we've got to We've got to increase the proportion of relatively capitalized, relatively fee making revenues. And We are putting in place the pieces that allow us to think about this and operate this in a good way.

Speaker 1

So the merger of the private bank and the wealth business from the U. K. Is one such piece. The investments we continue to make Cheuvreux. Although I repeat the point I made earlier, not just to make investments in the card portfolio to pivot, make it more capital efficient on another part of that piece.

Speaker 1

And I think it's important also that we have we don't surprise the market In the way we did last year with that securities issuance problem. So we're spending a lot of time improving internal end to and efficiency so that we don't have negative surprises. But then ultimately, you come to the last part, which is to run the businesses at a very high level of operational efficiency, which includes in some parts scale. So that people believe that you can produce these higher returns sustainably and over long periods of time and guide you to how we might do that. And I think we're spending time thinking about that, and at the right time, we'll share.

Speaker 2

Chang. Thank you. Did you have another question or

Speaker 8

Well, I guess just as a follow-up to that is I mean, I get what you say about the sort of balance of the business, but sort of growing organically, changing organically, it's not really going to change that materially in the next 5 years, I don't imagine. So unless you're going to do something really material in terms of buying some retail banking or Buying a big stable banking part to rebalance it and or sell or close down a significant part of the CIB. Surely the balance is not going to change materially, is it? I mean, it's been pretty much 6040 for 7, 8 years, I would imagine.

Speaker 1

Look, I think you've got to approach it in a very careful, careful and deliberate way. That's what we're doing.

Speaker 2

Capital. Thank you, Ed. Can we go to the next question, please, which will be our last question for this call?

Operator

Our final question today comes from Robert Down from HSBC. Please go ahead, Robin. Your line is now open.

Speaker 12

Good morning. Just a couple of quick ones for me. Firstly, apologies if I missed this earlier, but the webcast kept cutting in and out. But Could you give us any sense as to where mortgage completion margins were for you in Q2? And the second question, perhaps a little bit more A slightly philosophical question about the structural hedge.

Speaker 12

Why are you reinvesting at the moment? Because If you reinvest in the structural hedge today, 5 year swap at kind of 4.8 percent on Europe, probably after next week's base rate rise is going to be around 5.5%. There's a negative spread there. And it feels like you've gone beyond hedging your current accounts and equity, and you're Partially hedging now sort of deposits where you have effectively 100% deposit beta. So just philosophically, why are you reinvesting in a structural hedge now?

Speaker 12

Why are you not actively looking to kind of run it down when it's a kind of negative to some near term income? Thanks.

Speaker 2

Okay. Thank you. Thank you, Robin. On your first point on mortgage completions, I think we've been pretty consistent in not quoting spreads. All I would say to you is that the mortgage market is extremely competitive, largely intermediated, and you wouldn't expect our spreads to be markedly Churn.

Speaker 2

Different from the market as a whole. What really matters though in mortgages is the current churn impact that we're getting, which as I said, we'd expect to lessen into 2024. As to your second question on the structural hedge Chalk. And the philosophy around that. So the reason that we have the structural hedge is to smooth the income of our banking book businesses over time.

Speaker 2

It is not there to be an expression of where we think rates Schaller, go either up or down. It's there to protect and smooth the income pathways on those really important banking businesses Schulte. For us, whether they be in corporate or in retail. And what it's done is it's led to a slower income pathway on the way up. To the extent that we keep reinvesting in it, it will stabilize our longer term income.

Speaker 2

And At any point when rates start going back down again, it will protect income on the downside. So for us, It's not an expression about how we feel on rates. It's actually an expression about how we manage our income and how we think about our risk Critical franchise businesses. But thank you for the question. With that, I'd like to thank you all for your questions this morning and your continued interest on and focus on Barclays not only for Q2, but the great questions on our longer term strategy.

Speaker 2

If you've got further Solutions. Please follow-up with the IR team or I will see many of you the week after next at our analyst breakfast. And to everyone, I really hope you have a great summer break, and we will see you soon.

Speaker 1

Thank you.

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Earnings Conference Call
Barclays Q2 2023
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