Barclays Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2024

There are 12 speakers on the call.

Operator

Welcome to Barclays Q1 2024 Results Analyst and Investor Conference Call. I will now hand over to C. S. Venkatakrishnan, Group Chief Executive, before I hand over to Anna Cross, Group Finance Director.

Speaker 1

Good morning. Thank you for joining us on today's results call for the Q1 of 2024. At our investor update a little over 9 weeks ago, we set out a 3 year plan to deliver a better run, more strongly performing and higher returning Barclays. To do so, we aim to make Barclays a simpler, better and more balanced bank. We are executing in a disciplined way against this plan, and this is our 1st progress report against our longer journey.

Speaker 1

I am happy with our overall Q1 performance, which keeps pace with our financial targets for 2024 to 2026. These are: 1st, grow returns with a target ROTE of above 12% in 2026 2nd, to rebalance the bank with a target to reduce RWAs in the investment bank from 58% of group RWAs to around 50% in 2026 and third, to distribute more capital to shareholders with a target of returning at least £10,000,000,000 over 2024 to 2026. We also set a target for return on tangible equity above 10% in 2024. And in the Q1, we delivered 12.3%, in line with our plan. Total income for the quarter was £7,000,000,000 of which group net interest income, excluding the Investment Bank and head office, was £2,700,000,000 Our cost to income ratio was 60%, demonstrating ongoing cost discipline as we see the benefit of the cost actions which we took in the Q4 of last year coming through.

Speaker 1

We achieved around £200,000,000 of growth cost efficiency savings in Q1 out of our targeted £1,000,000,000 for the full year 2024. We remain well capitalized. Our CET1 ratio was 13.5%, which is at the midpoint of our target range. And we have completed about 35% of the GBP 1,000,000,000 share buyback, which we announced at full year 2023. Across the bank and within each of our 5 divisions, we are driving an improved operational and financial performance to enhance returns, which Anna will cover in more detail shortly.

Speaker 1

Our business re segmentation and the framework of targets which we laid out on the 20th February have helped to provide both internal and external transparency as well as accountability in our delivery. As Anna and I talked to our colleagues across Barclays, we are encouraged by how the organization has embraced this plan. In February, we described a 3 year plan of measured ambition and disciplined execution. As part of this, we have set up a transformation office, which is responsible for monitoring our delivery across all aspects of the plan. One important aspect was proceeding with the non strategic business disposals that we announced at our Investor Update.

Speaker 1

We have announced the sale of our performing Italian mortgage portfolio and we remain in advanced discussions on the sale of our German consumer business. Turning to the financial side. Overall, we are where we expected to be at this stage. You can see on this slide the returns on tangible equity for each of our divisions and for the group for the quarter alongside our 2026 targets. These are the most important metrics for me and the executive committee team, and Anna will take you through each of them shortly after I cover a few points on divisional execution.

Speaker 1

In the Investment Bank, we are continuing our journey to improve returns. ROTE for the quarter was 12%, broadly in line with the group. As with any quarter, there were some areas of strength, some areas of potential improvement and others where we should do better. We said in February that we will hold ourselves to account in a detailed and transparent way on a group basis and by division. In Global Markets, we did not capture market opportunities to the same extent as some of our competitors did.

Speaker 1

For example, FICC was not as strong as we would have liked, and we will have more to do on European rates, one of the 3 focus areas which we identified in February. On the other hand, we are starting to monetize investments made in the other identified focus areas, securitized products and equity derivatives. I'm pleased about this and Anna will talk to you about this in more detail. In Investment Banking, DCM delivered an improved performance in the quarter and we have the potential to do better. As we said at the Investor Update, we are focused on improving our performance in ECM and Advisory, but there is naturally a longer pathway to success in these businesses.

Speaker 1

As an example of our progress in advisory, our recently established Energy Transition Group has announced 9 transactions since late December, showcasing our active advisory role in one of our focus sectors. In Barclays UK, we expect our recently announced acquisition of Tesco Bank to complete in the Q4 of this year. Our strategic partnership with the UK's largest retailer will help accelerate our planned growth in unsecured lending in our home market. This is an important step in our plan to deploy an additional £30,000,000,000 of RWAs into our higher returning UK businesses, Barclays UK, the UK Corporate Bank and the Private Banking and Wealth Management division. Over the medium term, this will rebalance RWAs between our businesses and support more consistent and higher returns for our shareholders.

Speaker 1

One divisional number that stands out on the slide is 5.3% RoTE in our U. S. Consumer bank. Although this is progress from last year's 4.1% RoTE, we recognize we have a lot more to do in order to deliver returns in line with our overall group target of above 12% in 2026, and we have a detailed plan to do so as we set out in February. There was a notable point of execution in this quarter in this division.

Speaker 1

We announced the sale of $1,100,000,000 of credit card receivables to Blackstone as we manage capital in the business and strive to improve returns. Our UK Corporate Bank delivered a ROTE of 15.2%. We look forward to telling you more about this business in a deep dive scheduled for the 18th June. I'll now hand over to Anna to take you through the Q1 financials in more detail.

Speaker 2

Thank you, Vivek, and good morning, everyone. On Slide 6, we have laid out the Q1 financial highlights for Barclays, and you'll see the same throughout the presentation for each business. I won't go through these slides, but have included them for ease of reference. Starting on Slide 7, the headline message is that Q1 was in line with the plan we laid out at the investor update in February. We delivered a ROCE of 12.3 percent and earnings per share of 10.3p in Q1.

Speaker 2

There were a number of items driving the year on year rating move. Income and returns were lower in the Investment Bank compared to a strong prior year Q1 comparator. Operating costs, which exclude bank levy and litigation and conduct, were down 3%, reflecting ongoing strong cost discipline as well as efficiency savings, including some benefit from the structural taken in Q4 2023. Total costs were up 2% year on year at $4,200,000,000 which included $120,000,000 charge in Q1 2024 from the revised Bank of England Levy Scheme. We expect this to be partially offset by increased income over the course of the year, resulting in a net annualized reduction in PBT of circa $50,000,000 for 2024.

Speaker 2

Impairment was broadly flat year on year. And finally, TNAL per share increased 34p year on year to 335p including the effect of a less negative cash flow hedge reserve driven by the rate environment as expected. Overall, we continue to target our statutory ROCE of above 10% in 2024. At our investor update in February, we emphasized the quality and stability of our income. The more stable revenues we generate from retail, corporate and financing in the Investment Bank provides balance to our income profile.

Speaker 2

I will talk about the individual business drivers shortly. Together, these contributed 68 percent of group income in Q1 and are expected to continue to grow above 70% by 2026. Total income was down 4% year on year at GBP 7,000,000,000 and group net interest income excluding the IRB and head office was GBP 2 point 7,000,000,000 as you can see on Slide 9. NII was broadly stable year on year even though the balance sheet composition and rate outlook are very different between those two points in time. Our long term structural hedge tailwinds offset the pressure on NII from deposit movements and mortgage margins as well as rate headwinds going forward.

Speaker 2

We still expect group NII ex Investment Bank and Head Office of circa CHF 10,700,000,000 for the full year and Barclays UK NII of circa CHF 6,100,000,000 excluding Taxco Bank, which we now expect to complete in Q4 2024. Deposit balances were impacted by seasonal reductions in Q1 in part due to tax payments. We expect underlying deposit trends to continue to slow after Q1 and loans to stabilize in the second half. We expect the benefit from the structural hedge, which you can see on Slide 10, to largely offset these product dynamics, resulting in a broadly stable NII. As a reminder, the structural hedge is designed to reduce volatility in NII and manage interest rate risk.

Speaker 2

As rates have risen, the hedge has dampened the growth in our NII. And in a falling rate environment, we will see the benefit from the protection that it gives us. We have around $170,000,000,000 of hedges maturing between 20242026 at an average yield of 1.5%, significantly lower than current spot rates. The expected NII tailwind is significant and predictable. Dollars 9,300,000,000 of aggregate income is now locked in over the 3 years to the end of 2026, up from 8,600,000,000 at the year end.

Speaker 2

As we said in February, reinvesting around 3 quarters of the €170,000,000,000 at around 3.5% would compound over the next 3 years to increase structural hedge income in 2026 by circa 2,000,000,000 dollars versus 2023. Turning now to costs on Slide 11. Total costs were up 2% at CAD4.2 billion including the CAD120 million charge from the revised Bank of England levy scheme. Operating costs were down 3% year on year. Our cost to income ratio was 60% and despite the levy, we still expect it to be circa 63% for 2024.

Speaker 2

We expect a total of €1,000,000,000 of efficiency savings for full year 2024, half of which will be driven by the structural cost actions we took in 2023 and half by prior and ongoing efficiency investments. We have achieved €200,000,000 of this in Q1. These efficiencies have enabled us to offset inflation, regulatory and control spend and created capacity for investments. Turning now to impairment on Slide 12. The loan loss rate of 51 basis points for the quarter was within our through the cycle guidance of 50 to 60 and the impairment charge was broadly flat year on year at £513,000,000 The Barclays UK charge was $58,000,000 equating to an 11 basis point loan loss rate.

Speaker 2

Starting from this low and stable base, we expect to track towards circa 35 basis points over time as we complete the Tesco Bank acquisition and grow the balance sheet as outlined at our investor update. The charge of CAD410,000,000 in the U. S. Consumer Bank increased year on year, whilst the loan loss rate was 6.10 basis points, a slight decrease on the Q4 levels. Slide 13 shows that our actual loss experience in the U.

Speaker 2

S. Consumer bank remains low, although we have seen a sequential quarterly increase in write offs as delinquency rates have increased in line with the industry. As we said before, we expect write offs to increase during the remainder of this year, which is why we have been building reserves. We expect the U. S.

Speaker 2

Consumer Bank impairment charge to remain elevated through the first half of twenty twenty four and to improve in the second half, resulting in a lower full year charge this year. And we continue to guide to loan loss rates trending down towards the long term average of circa 400 basis points. Turning now to the businesses. As I mentioned, you can see Barclays UK financial highlights and targets on Slide 14, but I will talk to Slide 15. ROCE was 18.5 percent and total income was €1,800,000,000 down €135,000,000 year on year, driven by the product dynamics in deposits and mortgages, lower card income and the transfer of U.

Speaker 2

K. Wealth in Q2 2023. NII of €1,500,000,000 was broadly stable on Q4, and we continue to target circa $6,100,000,000 of NII for Barclays UK in 2024, supported by the strength of the structural hedge tailwind. The NII target excludes PESCO Bank, which we expect to contribute circa €400,000,000 of additional annualized NII following Q4 2024 completion. Non NII was GBP277,000,000 in the quarter following the non repeat of 1 offs in Q4 last year.

Speaker 2

We expect a run rate greater than $250,000,000 per quarter going forward as we guided in Q4. Total costs were $1,100,000,000 down 3% due to efficiency savings and the transfer of U. K. Wealth in Q2 last year, partially offset by an increase of GBP 54,000,000 from the revised Bank of England levy scheme. Cost to income ratio was 58%.

Speaker 2

Moving on to the Barclays UK customer balance sheet on Slide 16. Normal Q1 seasonality was a contributor to the GBP 3,900,000,000 deposit reduction from Q4 to GBP 237,000,000,000 dollars Underlying deposit trends were as expected and broadly consistent with Q4. Deposit migration has continued to slow and pricing in the savings market has stabilized. On the lending side, lead indicators such as mortgage applications and card acquisition volumes are largely positive, but will take time to flow into the balance sheet. Growth mortgage lending remains in line with 2023 3 trends with balances of AUD163,000,000,000 However, we grew our flow share in high loan to value mortgages as per our stated ambition.

Speaker 2

UK card balances were stable at circa €10,000,000,000 acquisition volumes are strong and consumer spending was in line with expectations, whilst repayment rates remained high. Moving on to the financial highlights for the U. K. Corporate Bank on Slide 17. This is new divisional disclosure since our resegmentation, so the numbers may be less familiar.

Speaker 2

As a reminder, our U. K. Corporate bank serves midsize U. K. Corporate clients and has relationships with around 25% of the U.

Speaker 2

K. Market and includes our corporate card issuing business. As you can see on Slide 18, the U. K. Corporate Bank ROCE was 15.2%.

Speaker 2

Income was down 6% year on year at CAD434,000,000 primarily due to the interest rate and inflationary environment driving lower returns from the liquidity pool. Total costs increased by 20%, reflecting investment spend to support growth and the impact of the revised Bank of England's levy scheme, which alone reduced ROCE by around 3 percentage points. Turning now to Private Banking and Wealth Management, which is another one of our newly resegmented divisions created following the combination of our private bank and U. K. Wealth businesses in Q2 last year.

Speaker 2

This is a high returning business with opportunities for growth going forward. Moving to Slide 20. ROCE was 28.7 percent supported by growth in client assets and liabilities, Although we have not restated the historical financials prior to the U. K. Wealth transfer in Q2 last year, we have called out the ROTE impact of circa 3.4%.

Speaker 2

Income increased by around €50,000,000 year on year, driven by 48,000,000,000 of balance growth, both from the UK wealth transfer and an underlying CHF 19,000,000,000 increase consistent with strong equity market levels. This was partially offset by continued although slowing deposit migration. Costs increased year on year, mostly as a result of the transfer, but also due to ongoing investments in growing the business. Turning now to the Investment Bank on Slide 22. The Investment Bank delivered a Q1 ROCE of 12%.

Speaker 2

Total income of €3,300,000,000 was down 7% versus a strong year on year comparator. Total costs were down 2% driven by non repeat of last year's European levy, lower performance related costs and included this quarter's Bank of England levy charge of CAD 33,000,000 resulting in a CIR of 60%. RWAs were up GBP 3,000,000,000 on Q4, reflecting normal seasonality. RWA productivity measured by income over average RWA was 6.5%. The plan remains to improve Investment Bank RWA productivity, while keeping RWAs in the division broadly flat, as we set out in the investor update.

Speaker 2

Now looking at the specific income drivers for each business line in more detail on Slide 23. When we think about this business versus our peers, we use a U. S. Dollar comparator. So that's what I will talk to here.

Speaker 2

Markets income was down 5% year on year. Within this, equities was up 30% and FICC was down 19% with both comparisons impacted by specific items. Equities included a non recurring gain with good performance in cash, prime and equity derivatives, one of our focused businesses from the investor update. Fixed performance in Q1 last year included inflation length gains, which we called out at the time, with income down 14% excluding this, driven by industry wide lower activity in macro. We can do better here.

Speaker 2

We have work to do to regain market share in European rates, another of our focus businesses. Conversely, the market for securitized products, our 3rd focus business, has been favorable. And given the investments made, we have been able to monetize this more than we would have done in the past. Excluding the inflation linked gains last year, financing income across FICC and equities remained around 700,000,000 dollars providing the more stable income stream to market that we have focused on. Investment Banking fee income was up 0.6% year on year in dollar terms.

Speaker 2

DCM delivered improved performance across both investment grade and leveraged finance and ECM also showed encouraging signs of recovery. Advisory income was lower against the strong comparator, but we have a healthy pipeline of announced deals, which will add to revenue on completion. As with the U. K. Corporate Bank, international corporate banking was impacted year on year by the changing rates and inflationary environment on deposits and the Pivotal return.

Speaker 2

Turning now to the U. S. Consumer Bank on Slide 25. The U. S.

Speaker 2

Consumer Bank generated Reki of 5.3%, reflecting higher impairments versus the prior year, which more than offset higher income and lower costs. Income growth of 4% included an increase in NII on higher card balances year on year. Total costs were down by 9%, reflecting efficiency savings and lower margin spend, driving our cost to income ratio of 46%. Seasonal trends in Q1 versus Q4 and also exceeded the sale of $1,100,000,000 of own brand credit card receivables to Blackstone, ending the quarter at just over $30,000,000,000 As a reminder, this transaction reduced RWAs through the de recognition of these receivables, which we continue to service for a fee. The late fees legislation, once it comes into effect later this year, will be a headwind to fee income, but we expect to mitigate this through actions to drive higher NII, including from revised pricing, although there will be a lag whilst these actions are introduced.

Speaker 2

We are looking to increase the proportion of core deposits in our funding mix in this business to around 75% by 2026. At 67%, the mix was broadly unchanged on last year, but up sequentially from year end levels. Turning now to head office on Slide 26. Head office income was up 22% year on year at €194,000,000 driven by a gain on disposal of legacy investments and increased German card income, partially offset by lower payments income, hedge accounting and treasury items. The sale of our performing Italian retail mortgage book is expected to complete in Q2, generating a pre tax loss of circa €225,000,000 whilst reducing RWA by circa €800,000,000 The transaction will have a negative 2024 ROCE impact circa 45 basis points, but it's broadly neutral to capital.

Speaker 2

We are also in discussions with respect to the disposals of the remaining non performing and Swiss franc linked portfolios. We expect these disposals to generate a small pretax loss, but again be broadly neutral to capital. Turning now to the balance sheet, starting with capital on Slide 27. The CET1 ratio was 13.5% at the end of Q1, where we expect it to be in the middle of our target range and down 30 basis points on year end. This reflected seasonally higher capital usage in Q1 and the ongoing $1,000,000,000 full year 2023 buyback that comes off the CET1 ratio post year end.

Speaker 2

Our capital distribution plans remain unchanged. We'll return at least €10,000,000,000 of capital to shareholders between 2024 2026 with this year's total broadly in line with the 2023 level of €3,000,000,000 dollars Moving on to risk weighted assets in Slide 28. RWAs increased by around $7,000,000,000 in line with our expectations, driven by normal seasonal trends versus Q4 in the Investment Bank. There were also some regulatory model changes in Barclays UK, we expect to be partially offset over the course of this year. Our guidance remains for regulatory driven RWA inflation to be at the lower end of 5% to 10% of December 2023 group RWAs as we reiterated in February.

Speaker 2

As I noted earlier, TNAP per share reached 3.35p up 34p year on year, driven by attributable profit and the reduced cash flow hedge reserve drag from shareholders' equity. Additionally, share repurchases reduced our share count by 4% over the same time frame, driving TNAL accretion of 0.07p per share. I won't dwell on this slide, but we continue to maintain a well capitalized and liquid balance sheet with diverse sources of funding and a significant excess of deposits over loans. In summary, we are focused on disciplined execution. This quarter is the 1st step in delivering the targets we laid out in February and which we are reiterating today.

Speaker 2

Thank you for listening. Moving now to Q and A. And as usual, please could you state to a maximum of 2 questions, so we can get around to everyone in good

Operator

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 questions. I just had a question on the a couple of questions on the UK business and then the U. S. Business.

Speaker 3

Just in terms of the UK balance sheet versus the NII performance, I mean, I note that the NIM, which I'm glad we're not talking about as much anymore, was up 2 bps. And it looks like separately, the current account mix shift is starting to settle now with $59,000,000,000 of current account balances versus $60,000,000,000 last quarter. So do you think that we have kind of arrested the mix away from current accounts? I mean, clearly, the Bank of England data shows some flow into noninterest bearing accounts at least for the 1st 2 months of the year. So just wondering what the outlook there is because it seems like that you can easily deliver on your target for this year on the NII guide there.

Speaker 3

So any comments around those moving parts would be helpful. And then in the U. S, I guess, how do we get the trajectory on the credit loss number? I mean, how should we think about that from the 6 10 basis points in Q1 to 400 basis points by 2026 given that I suppose unemployment could deteriorate in the U. S.

Speaker 3

Or what have you, but clearly part of the mix is also going to be coming from the GAAP portfolios. I'm just wondering what's the confidence in the moving parts to go from 610 to around to circa 400 basis points? And on the U. S, could you also just confirm that the fee late fee matter is embedded already reflected within the guides that you've given for that unit at the update in February? Thank you.

Speaker 2

Good morning, Joe, and thanks for the questions. I think just on the BUK question, I think it's worth just reflecting on Slide 16, where we've shown you the balance sheet progression as a deposit matter. And I think you're right. We are seeing some stabilization in underlying deposits. And the way I read that is partly through the current account movement, but it's also whilst you continue to see some movement towards time deposits, that rate of change has definitely slowed down.

Speaker 2

And what we see in Q1 is a mixture of those deposit trends continuing but at a slower pace and what I would describe as normal seasonality. So in Q1, people pay their tax bills, and they also sort of pay off credit card bills, etcetera. And you also see that a little bit in Business Banking. So I think it's as we expected to see. From here on in, I think now in Q2 Q2 and beyond, you get almost beyond the ISA season, which can cause a bit of noise in the U.

Speaker 2

K. I think we'd expect those deposit trends to continue. So that's how I'd characterize those changes in the U. K. As far as the U.

Speaker 2

S. Is concerned, I think worth looking at Page 13, which is a replication of the slide that we gave you at the year end. And what that shows is we expected write offs to increase in the U. S. Because delinquencies had been rising through last year in line with the industry.

Speaker 2

And as the standard requires us to, we reserve in advance. So what you see in Q1 is really a switch around in the balance between reserving and actual write offs. The write offs have gone up, and reserving is now starting to settle back down. So for 2024, we expect higher impairment charges in the first half, lower in the second half and for the year as a whole to be lower than 2023. And in terms of the longer term trend in this business, I mean, you're right in terms of one of our objectives is to have a higher proportion of retail.

Speaker 2

But actually, our GAAP portfolio is very high quality. And the FICO balance that we've got in the book now is no different to what it was pre GAAP. And as we grow that retail proportion in time, what we also see is a roll off of slightly lower FICO portfolios such that the mix remains broadly similar to what it is today. So that's why we're guiding to this longer term position of 400,000,000 and that's what gives us confidence. And just to confirm on your final piece, yes, we did include late fees, the late fee matter in our RoTE projections.

Speaker 2

We'd expect those to come in I mean, obviously, planning for May. They may be slightly later than that. We have offsets to come in the plan, but they slightly lag the imposition of the legislation. So you'll see a bit of a gap there, but that's what we expected.

Speaker 3

Thanks, Anna.

Speaker 2

Thank you, Joe. Next question, please.

Operator

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

Speaker 4

Good morning. Thank you for taking my questions. The first is on the investment plan, please. You noted this morning there's more to do in European rates within the IV. Can you just give us some more color on what's left to do there?

Speaker 4

Is that investments in people or infrastructure or both? And when do you think we'll start seeing some progress for that product line? And then secondly, your NIM was up in the quarter by 2 basis points, but NII was slightly down by about 2%. Could you give us some guidance whether you think that we've now seen a trough in your NII? Thank you.

Speaker 1

Yes, thanks. So let me begin then and then Anna will take up the NII point. So in European rates, it's people and a little bit of dealing with of intensifying the client penetration. So I would expect so we're hiring people. We've already got today a very strong presence in the primary markets in Europe, in DCM and especially with government bond trading.

Speaker 1

And what we are doing is supplementing the skills that we have on the trading desks. And I would expect not in months, but in quarters to start seeing some of the improvement. Of course, it's a function of market environment as well, but it's mostly an investment to people.

Speaker 2

Thanks, Ben. On your second question, I think it's worth looking at the new disclosure that we've given you around the NII movement in the U. K, which is on the bottom right of Page 15. And what we're seeing here in the quarter is more stability in margins than we saw throughout 2023. And you can see there that there's still some product margin dilution, which is coming from mortgages, and it's also coming from those deposit changes, but largely offset by that continued strength in the structural hedge.

Speaker 2

And what's really going on here is balance sheet movement. So the reduction in deposits that I talked about before, also just more of a broader market wide movement in terms of reduction in mortgage balances. So we continue to guide to €6,100,000,000 or circa 6 €100,000,000 for the full year. Still confident in that guidance. And I'd just reflect perhaps on the NII across the group more broadly, which was stable year on year.

Speaker 2

And we do think that's taking into account not just BUK, but the Corporate Bank, Private Banking and Wealth as well as indeed our U. S. Cards business. So we're pleased with that as a result. And that's a good position from which we can grow.

Speaker 2

The only other thing I would call out is, of course, that circa 6.1 is ex TESSCO, and we now expect TESSCO to complete in the Q4 of this year.

Operator

The next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is now open.

Speaker 5

Good morning. A couple of questions. 1 on the IB and another one on a follow-up on provisions in the U. S. On the IB, there's a few moving parts that you've called out.

Speaker 5

But I also note your U. S. Competitors, there's been a bit of a mix sort of messages on the pipeline. So I just wanted to pick your thoughts on the seasonality you see during this year considering the one offs we've seen in the quarter and what seasonality could we expect in markets? And also in DCM, maybe the numbers obviously are, but according to Dealogic and other peers, it could have been up more.

Speaker 5

How do you see the pipeline there? Because as I said, some of your peers were a bit more cautious. And on the U. S. Cards, noted your comments, Anna, around the reserve build.

Speaker 5

But in your modeling, you obviously the 400 basis points to trend towards 400 basis points. Based on that, when would you expect the delinquencies to peak? Because conscious that typically the seasonality of provisions is the provisions tend to be higher in second half. So just looking for data points that we could look out for to confirm that 400 basis points, in particular, the peak and delinquencies? Thank you.

Speaker 1

Hi, Abhavar, it's Venkat. So let me begin on the first one on the IB. So on seasonality, I think in markets with 1 provider, which I'll say in a second, you should expect the normal seasonality that you see, which is a little quieter in the summer and then picking up in the 4th quarter. And so far, the second quarter is behaving like 2nd quarters, generally do in seasonality senses. The thought on TCM and the proviso I will make on overall fixed income markets is there is an assumption there about when volatility comes.

Speaker 1

And obviously, that's very, very hard to predict. We've seen since the 1st November, a round trip of about 90 basis points in 10 year gilts and approximately the same slightly less than 10 year treasuries. And so the question really is based on rate expectations, do they stabilize at this level or is there further volatility? I don't know the answer. And but in part, that answer affects the next question, which is on TCM.

Speaker 1

And I think there are 2 parts to this. One is obviously rates are much higher than people might have thought 6 months ago. But at the same time or at the same 3 months ago. At the same time, spreads are much tighter. And so I think the tightness of spreads is going to be one important factor in the thinking of issuers on actually what they bring out to the market.

Speaker 1

So I'm expecting that you will continue to see people tempted by the lower spreads.

Speaker 2

Okay. Alvaro, I'll take the second question. So in terms of modeling, what we expect is for U. S. Unemployment to go up from its current position.

Speaker 2

And you can see that in our IFRS 9 assumptions. What that would tell us is that we should continue to see some increase in delinquency. That said, a couple of things. Our expectations of that peak of unemployment have actually come down quarter on quarter. So we've seen an improvement in the macroeconomic outlook, we believe, for the U.

Speaker 2

S. And actually, that economy remains robust. So whilst we expect to see a continuation of delinquency, we are content that we have very robust coverage. You see that our coverage is now over 11% on an IFRS 9 basis. It's 8.5% on a CECL basis, so we're well covered.

Speaker 2

Where we had concerns probably at the lower end of the FICO scores, we've taken action on credit lines. So we feel like we're preparing well both in terms of provisioning and indeed our credit actions, if you like. But it is progressing as we expect it to and given the IFRS 9 forecast we have for unemployment. But thanks for the question. Next question, please.

Operator

Our next question comes from Rohit Charjawaljit from Bank of America. Please go ahead.

Speaker 6

Hi, good morning. Thank you. I had a couple on revenues, please. The first one's just coming to the Investment Bank, where revenue performance is well below peers even after adjusting for the one offs that you flag. And that's particularly the case for FICC and fees and even equities offer quite a low Q1 2023 base.

Speaker 6

So thanks very much for the color that you've given us in terms of the kind of the product narrative. I was just wondering because you target a lot of market share gain and quite a lot of improvement in return on risk weighted assets. I'm just wondering when we should think about that from a timing perspective. Is that a similar sort of time frame to what Venkat was talking about in terms of the euro rates benefits coming through? So thinking about seeing those market share and ROWA benefits over the coming quarters, is that realistic for the IB as a whole?

Speaker 6

And then the second one is just back on Barclays U. K. Actually. Anna talked about mortgage flows being in line with 2022. I just wanted to clarify what you were talking about there.

Speaker 6

Is that sort of gross lending? Or is it approvals? Because I think approvals, particularly, are up year on year significantly.

Speaker 2

Okay. Thanks, Rohit. I'll take both of those questions. I'll start with the first, Venkat might wish to add. So you're right.

Speaker 2

There are 2 particular quirks, if you like, in both equities and our FICC numbers. In equities, there's a one off in the current quarter, which we've called out. Actually, excluding that, the business is up 11% in dollar terms, which we actually believe compares very favorably to our U. S. Peers and demonstrates that we're making progress.

Speaker 2

And we called out cash, and we also called out prime, and we called out equity derivatives, which, of course, is one of our focus areas. FICC, on the other hand, you might recall this time last year, we were talking about some inflation specific income in there. That does color the comparative a little bit. But even after we split that out, it's down 14% in dollar terms, which we don't believe lines up too favorably against our U. S.

Speaker 2

Peers. There's a few things going on in there. We are pleased with the progress in securitized products. And in previous quarters, we would have said we're small in that business. We still are.

Speaker 2

But we've been able to monetize it much more effectively because of the investments that we've stand back When we stand back from it all, this is 1 quarter in a 12 quarter plan. And we do believe that we have the right plans to grow this business, but we're not going to see the results after 1 quarter. So I won't give you a time frame, but hopefully, we'll be able to show you regularly how we are making progress. That's one of the reasons why we set up the reporting that we have so that we're not seeing a huge change in that revenue over RWA number yet, but it's important to us. And therefore, we're just showing you that.

Speaker 2

And on BUK, you're right to call me out on this. So let me be very specific. I was talking about gross flows. Apps are up 22% for the market in the Q1. And interestingly, what we're seeing is the purchase market coming back in the U.

Speaker 2

K, which is really good after '23 being very much remortgage dominated. So that's really good. We think that's helped helpful for us, although it will take time for that to flow into the balance sheet. One thing I would call out is we feel like we've taken share in higher loan to value mortgages, which again was one of the areas we were seeking to do. But just to be really clear, this is going to take time to flow into the balance sheet.

Speaker 2

But thank you for the questions. Can we have the next question, please?

Operator

The next question comes from Ed Woodbursts from Stifel. Please go ahead. Your line is now open.

Speaker 7

Yes. Thanks very much, and good morning, everybody. Could I just ask you about capital? And firstly, could you just update us if there is any update on the U. S.

Speaker 7

Cards business? I think it's Q3. I think we had $16,000,000,000 I'm not sure if that was my number or your number, but additional risk weighted assets, which I guess if you put on a pro form a now, that takes you really down to $13,000,000,000 or a little bit below. So I guess the first question is, is that still the right sort of number? And then the second question is, I sort of thought that the German consumer disposal would sort of pay for some of that, if that makes sense.

Speaker 7

And therefore, you'd still have a sense of capital in the second half. But it sounds like that's not going to be so likely now. So am I right about that? Should we really be thinking is Q3 is going to be a sort of low point for capital really? And should we how should we think about that in terms of capital discipline in the second half?

Speaker 7

Thanks very much.

Speaker 2

Thanks, Ed. There's a lot in that, but let me try and keep up. So no change to our guidance around the U. S. Cards regulatory model changes.

Speaker 2

So still expecting 16, still expecting that in the Q3. So in terms of the numbers that you read out, I understand so I understand the math behind it and the pro form a ing. The thing I would say is there are obviously a lot of moving parts here. There's the organic generation of capital, which you can see in the Q1 has been strong. There's some seasonality in RWAs, which will obviously move as the year goes on.

Speaker 2

And typically, we would expect Q1 to be in the middle of the range or maybe even slightly below the middle of our range because of that. You've then got inorganic actions. I'm not going to comment on the specific timing of the German card disposal, but I would say it continues to progress. And then you've got business mitigants. So I'd call out the Blackstone transaction, and you can imagine that we continue to work hard on RWA efficiency across the group more broadly.

Speaker 2

So in terms of sort of capital generation and distribution, our plans remain as they were on the 20th February in terms of both the priority. Priority is 1st reg, 2nd shareholder distribution, 3rd investment in the business. And we are still planning to distribute greater than €10,000,000,000 across €24,000,000,000 to €26,000,000,000 And we're still expecting deliver broadly what we did last year, so around $3,000,000,000 in the current year. So capital wise, we're on track to where we expect it to be.

Operator

The next question comes from Guy Stebbings from BNP Paribas. Please go ahead, Guy. Your line is now open.

Speaker 8

Hi, good morning. Thanks for taking the questions. I had one on Barclays U. K. And then one on U.

Speaker 8

S. Cards. Yes, thanks for the new disclosure on Slide 15 on the NI bridge, as it were. Just looking forward, some of the dynamics look quite encouraging, but still the guidance implies a slight headwind versus the Q1 run rate on NI. So I guess I would have thought the hedge and the product margin dynamics are pretty neutral from sort of Q2, perhaps even slight benefit beyond that as think about the hedge benefit and support from higher LTV lending perhaps outweighing some of the headwinds.

Speaker 8

So I'm just trying to understand what's the what is the headwind? Is it deposit volume component still being a drag even post the seasonal effects that you called out in Q1? And then on U. S. Cards, you highlighted the increase in core deposit percentage balance.

Speaker 8

I just wondered how much of that is a sort of dollar increase or how much of that been impacted by the fall in lending balances and perhaps a reduction in other funding? And sort of how are you going to grow the growth drive that growth in core deposits as we look forward? Is it really about the changes in providing deposit proposition the same after some of the lending? Or is it pricing? And if I can just squeeze in a follow-up on U.

Speaker 8

S. Cards. You talk about mitigating the late payment fees. I just wondered how much of what's embedded in the plan is sort of the market reacting to that versus what's more in your control? Thank you.

Speaker 2

Okay. Thank you, guys. So just reflecting back on Slide 15. I mean, I'd just reiterate what I said before that really, 'twenty four, we see about a bit more stabilization in the margin because of the factors you call out and the strength of that hedge. And then also, you've got continued deposit migration.

Speaker 2

So even though it's slowing down, we still expect it to be there. And in terms of the mortgage market, while we're seeing encouraging signs in terms of the market, it is going to take a while for that to start flowing into the balance sheet. So you see a balance sheet that contracts before it starts to expand, and that's really what underpins our circa 6 point 1. So it's playing out in the Q1 sort of as we expected it might. In terms of your question 2a on dollar deposits, it is exactly what you say.

Speaker 2

So we're expecting really this is a product led. And actually, the way we go to market with those dollar deposits reaching more directly to consumers. And again, this is the Q1 and the 12 quarter plan. It's going to move around a little bit. And actually, I've been looking for longer term trends there really, but it's product propositionally driven.

Speaker 2

And then finally, just in terms of the market on late fees, I think we do see some price changes coming through, which is sort of what we anticipated and we would expect to participate in that, which is why I said late fee legislation happens first. The pricing changes will drip through over time. The only other thing I would say is, of course, given the nature of our business, we are able to share the impact of those late fees with some of our partners. So you might expect the impact for us to be slightly less than it would be more market wide. But overall, we considered all of that and included it in the ROTE sort of pathways and guidance that we gave you on the 20th February.

Speaker 2

So no change.

Operator

The next question comes from Chris Can't from Autonomous. Please go ahead, Chris. Your line is now open.

Speaker 9

Good morning. Thank you for taking my questions. One very quick one to follow-up on the last question, please. Could you just give us some quantification of the expected annualized impact around the late fee changes for your U. S.

Speaker 9

Consumer business? I think it would be helpful to understand what the sort of initial impact you're expecting there is even if you expect some kind of industry wide and idiosyncratic mitigations over time. That would be the first question, please. Secondly, on NII, just conscious that you do have this $120,000,000 Bank of England Levy, you're indicating that there's a 70,000,000 offset in revenues this year, I think. You said £50,000,000 net impact year 1.

Speaker 9

And I understand that's going to go through the NII line. When I think about what swap markets have done since your guidance would have been struck at the full year, I guess it's a bit more supportive, slightly higher average base rate for this year, slightly higher average swap rates than have $70,000,000 or so of benefit to come through relative to plan from this Bank of England funding adjustment. Why hasn't the NII guidance been nudged higher? Is that just prudence or is there something else going on in there, which is maybe a little bit worse than expected? And I guess related to that, what is your guidance around NII sensitivity to base rate at this point, please?

Speaker 9

You haven't given us anything in the slides quite some time. And given the relative size of your hedge versus peers and some of the commentary you gave at 2Q results last year, I do wonder actually whether in the very short term base rate not coming down as much as negative for very near term NII trends?

Speaker 2

Okay. Thanks, Chris. I will take those. So on the first one, we haven't quantified it publicly. However, on 20th February, we did include it in the flight path.

Speaker 2

You can see that it's actually a net negative over the period, so you can see it being a drag on the RoTE, but it is part of that. But I'd just reiterate, I would expect it to be slightly less than other market participants are calling out just because of the impact from the partners. So in terms of NII more generally, we continue to guide to circa 10.7 for the full business, excluding the IB and head office and to circa 6.1 for the U. K. And you're right, there have been some movements in swap markets.

Speaker 2

But of course, they do move around a great deal. And what we did on the 20th February was try and underpin our targets with prudent macroeconomic assumptions. Of course, we monitor those very regularly. We consider the impacts on the business, but we're not going to mark to market those targets on a quarterly basis. Just mathematically, you're right.

Speaker 2

We would expect some offsetting income from that Bank of England levy. I think we've called that out around €75,000,000 But 1 quarter in, we're not going to adjust the targets that we've given you. In terms of your specifics around the sensitivity, I would say given the scale of our hedge, we are and always have been less sensitive to immediate changes in base rates. That remains true. The any sort of near term change in rates is less important to us than just the mechanistic rolling of that hedge quarter in, quarter out.

Speaker 2

And there's nothing that I would call out as a negative in terms of rates being higher for longer. Of course, you might expect some benefits in liabilities, but there might be some offsetting matters in terms of asset formation, for example. So that's why at this stage, we're really happy with the 6.1% and the 10.7

Speaker 10

percent.

Speaker 2

Okay. Thank you, Chris. Perhaps we could go to the next question, please.

Operator

The next question comes from Robin Down from HSBC. Please go ahead Robin. Your line is now open.

Speaker 11

Good morning. Just 2. Just to quickly follow-up on Christa's. So just to confirm, the €300,000,000 reduction in NII within BUK, that was set before the BOE levy kind of changes. I guess you're going to get about a 50,000,000 dollars NII benefit within BUK.

Speaker 11

Just to completely clear that up. Second question, a much broader question. Obviously, you've got an RoTE target for this year of greater than 10%. I think consensus is currently around 8.8. When I look at the numbers, it looks like you need about 1,000,000,000 dollars revenue growth based on your 2024 RoTE bridge.

Speaker 11

And that's just not something that consensus or my own forecast currently have factored in. I think consensus has about €250,000,000 of income growth. I guess, of great disparity, there must presumably be in the IB given you've given us fairly precise guidance on things like NII elsewhere. I'm just wondering if there's any kind of anything hard and fast you kind of point to and say, look, I think consensus is just wrong on this number when you look at our models. Any color there, that would be greatly appreciated.

Speaker 2

Okay. Thanks, Robin. So on the first one, our circa 6.1 for BUK struck for the February 20, which was before these BOE changes. So just mathematically, that is true. But we are in the 1st quarter, which is what I'd reiterate we're happy with our progress thus far.

Speaker 2

In terms of your RoTE of greater than 10%, the 12.3% that we've delivered in the 1st quarter is exactly where we thought we would be. So and within that, the constituent parts are what I was looking for. So number 1, real stability in income, particularly in NII and particularly in our financing businesses. They provide real ballast to our income overall, the 63% of income in the quarter, and that's what we're focused on growing. It gives a really good base for us to deploy the RWAs into the U.

Speaker 2

K. And to focus on those areas within the IB. The second thing I was looking for was delivery of cost and efficiency. We said €1,000,000,000 for the full year. We delivered €200,000,000 of that in the Q1.

Speaker 2

So we're on track there. 3rd thing was continued good credit conditions. And again, we've seen that. So good credit performance at 51 basis points, really at the bottom end of our sort of through the cycle range, which again gives us a good base to grow from. And then finally, the capital position.

Speaker 2

So there's nothing different in our performance versus what we expected when we spoke to you on the 12th on 20th February. However, there probably are some changes in shape relative to last year. So last year, we had an income sorry, we had an impairment profile that was very back end loaded. This year, it's pulled forward, driven very much by that U. S.

Speaker 2

Positioning. The second thing is we did see quite a sharp change in NII sorry, in NIM last year, driven by the deposit mechanics that really started to kick in, in the second and the third quarter. The third thing is we did see a drop off last year driven by the cash flow hedge reserve and the way that was impacting the tangible equity of the group. And then finally, I'd also call out, in the current quarter, that Bank of England levy has a 70 basis points impact. Now we expect that to be not quite neutral, but nearly neutral over the year as a whole.

Speaker 2

So that is depressing the first quarter, RoTE. Now of course, last year also, after a strong Q1, we saw a dramatic fall off in IBC, in particular, to a decade low year for the whole market. And we're seeing more positive signs this year. So I think it's quite a nuanced question. But overall, we still believe that we can hit greater than 10% for the year, and we're exactly where we thought we'd be at this point.

Speaker 11

Great. Thank you.

Speaker 2

Okay. Thanks, Robin. Next question, please.

Operator

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

Speaker 10

Good morning, guys. Couple of questions, Bonnie. Back on the hedge and then a broader question for 2026, please. On the hedge, I think you probably put us on about a quarter of this hedge now since medium term rates moved above 3%. Yet the yield on it is still only 1.8%.

Speaker 10

And it sort of implies that the rest of the hedge, the Saudiholder hedges earning closer to 1%. And I'm just trying to square that with the 1.5% maturity guidance yield guidance that you've given over the next few years. Is that just a prudent number you've thrown out there? And actually, the maturity yield on the hedges over the next few years is closer to 1% rather than 1.5%? Or is there actually a fairly decent tailwind expected into 2027, 'twenty eight as well?

Speaker 10

The second question is not entirely unconnected. When I look at 2026 consensus RoTE and I rebase for a $30,000,000,000 revenue number rather than where consensus is in the mid-28s, you get into your target. So I assume on that basis, you recognize the consensus TNAV numbers out end of 2025 and into 2026? And then as a sorry, final question on this, maybe to the Venkat. The LTIP targets, incredibly commendable, but you don't get pay downs in full unless you hit the 14% RoTE in 2026.

Speaker 10

But I'm just wondering what's your thinking there? It looks extremely aggressive given consensus doesn't even believe you'll make the 12%. So why did you put a 14% RoTE target into that latest health care? There?

Speaker 2

Okay. Jonathan, thanks for the questions. I think there are 3. So let me deal with the first two, and then I'll pass the third one to Venkat. So on the hedge, no, it wasn't prudent.

Speaker 2

It's the actual number. So we do expect the average maturing yield to be 1.5%. We do expect €170,000,000,000 to roll €24,000,000 to €26,000,000 inclusive. And we haven't talked about the tailwinds for 'twenty seven and 'twenty eight. We talked about the tailwinds for 'twenty six, which we said given the assumption that we gave you or the indicative number rather that we gave you of 3.5 percent swap rate, that would add €2,000,000,000 or around €2,000,000,000 of income by 2026 relative to 'twenty 3.

Speaker 2

And you can see the progress that we've made in the quarter. So for 2024 alone, when we were at the year end, we'd locked in £3,800,000,000 Now we've locked in £4,000,000,000 and that compares to a total gross hedge income of £3,600,000,000 last year. So there is a very powerful tailwind that comes from this hedge. To your second question, we do I won't specifically comment on the consensus numbers that far out, but we do expect an increase in the tailwind sorry, an increase in TNAV. We're seeing it grow as we expected, both because of the mechanics of the cash flow hedge reserve.

Speaker 2

And you might recall, we called that out specifically on the 20th February. It was one of the moving parts as a headwind to ROTE, both in 2024 and beyond into 2026. So it's being driven by just reduced share count over time. And that's really why we're seeing it move forward. And clearly, as a management team, we're most focused on the loss of those 2, just noting that the cash flow hedge reserve can move around quite a bit.

Speaker 2

So it's AP accretion and really that buyback value creation that we're focused on. And Venkat?

Speaker 1

Yes. I mean I would just say, Ana, to pick up on that point on TNAV, it is a very important fundamental improvement in the bank when you just see the TNAV go up. And as Anna said, we emphasize the second two parts, which is AP accretion and share count. Coming back to the LTIP. Well, first of all, as should be clear, the LTIP targets and the LTIP and the composition and levels of compensation for both Anna and me are set by the Board.

Speaker 1

And normally, there is in the LTIP, it's aligned to obviously these financial targets. But there's always a little bit of stretch in them so that incentivization of management. And that's all there is to it. So I think with that, our questions are over. If I may, I'd just like to say thank you very much for your time.

Speaker 1

As Anna and I have emphasized throughout, we are on track with the 3 year plan which we laid out in February 2024. We both, Ana and I look forward to seeing many of you on the road and on the 18th June for our business deep dive with the UK Corporate Bank. So thank you very much.

Operator

Thank you everyone for joining. This concludes today's call.

Powered by Quartr
Earnings Conference Call
Barclays Q1 2024
00:00 / 00:00