Barclays PLC (NYSE:BCS) Q3 2023 Earnings Call Transcript

Barclays PLC (NYSE:BCS) Q3 2023 Earnings Call Transcript October 24, 2023

Operator: Welcome to Barclays Q3 2023 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, the Groups Finance Director.

C.S. Venkatakrishnan: Good morning. Thank you for joining Anna and me on today’s third quarter results call. Against a background of mixed market activity and a competitive environment for UK retail deposits, the Group generated income of 6.3 billion pounds in the quarter, down modestly year on year, excluding last year’s impact from the over issuance of securities. Our profit before tax was 1.9 billion pounds with earnings per share of 8.3 pence. We maintained a strong capital position with our CET One ratio at 14%, up around 20 basis points on the second quarter and at the top of our target range. In this context, we delivered a third quarter return on tangible equity of 11%, taking us to 12.5% for the year to date and we continue to target above 10% for the full year.

We are managing credit well, with year to date loan loss rate of 43 basis points versus our through the cycle guidance of 50 to 60 basis points costs reduced by 4% in Q Three year on year, excluding over issuance costs last year and in Q Four. We will continue to drive further efficiencies and greater productivity for the bank. We expect this to continue to contribute to delivering enhanced returns for shareholders. We will update you on these and other actions alongside our full year results in February. Now, turning to the business highlights. We continue to grow our US cards business with End net Receivables up 11% year on year at $30 billion, and we announced a new partnership with Microsoft and Mastercard to issue Xbox’s first ever co branded card in the US.

The integration of our UK wealth business and our private bank is also progressing well. We grew clients assets and liabilities to nearly 180,000,000,000 pounds and invested assets to around 105,000,000,000 pounds, with this business making nearly 900 million pounds of income in the year to date and generating attractive returns in investment banking. We led some prominent transactions in this quarter, including the Arm ICO in the US. However, in the mixed market environment we’ve had pockets of underperformance relative to US peers. In part, this has reflected our business composition. We performed well in equity capital markets, which is a smaller business for us relative to others. We were also selective on leveraged finance deals as a risk management matter, which has affected our debt capital markets performance.

We continue to be cautious about the market backdrop, but are confident in the potential of our business. And as an example, we are acting as sole financial advisor to Capri in their $8.5 billion acquisition by Tapestry, announced in the third quarter and expected to close in 2024. In market, this was our second highest Q Three income print in a decade, with income of 4% quarter on quarter better than the US. Peer average. However, income was down 13% against a record Q Three last year on a comparable basis in which we supported clients through extreme volatility and guilt in our home UK market this quarter, we did not benefit to the same extent as our US peers did from the volatility in US rates. As we have said previously, investment in our combined fixed income and equity financing business delivers stability to our overall markets.

Over the past four years, our ranking in equity prime brokerage has moved up from 7th rank to joint fifth, complementing our existing strength of fixed income financing, where we rank jointly first globally for the first half of 2023. Turning now to Barclays UK, we delivered a roti in the business above 20% for the quarter. Both income and expenses were broadly stable, generating a cost income ratio of 56%, and we intend to improve this over time as we continue to transform the business digitally. There has been an impact on our deposits and margins from retail customers seeking a higher return on their savings, which Anna will cover in more detail. However, at the group level, deposits were up 7 billion pounds quarter on quarter, demonstrating the strength of our diversified deposit and funding base.

Our performance over the past three years compared to the previous five, shows that we have reset and stabilized group returns, providing a solid foundation on which to build even further. Anna and I look forward to providing an investor update in February alongside our full year results, where we will talk more about our plan to deliver further value to our shareholders. This will include setting out our capital allocation priorities as well as revised financial targets for costs, returns and shareholder distributions. We have just completed the 750,000,000 pound buyback announced at the half year, taking total shareholder distributions to around 1.2 billion pounds so far this year, including dividends and buybacks. This is up over 30% on the first half of last year and reflects our commitment to returning capital to shareholders.

Thank you for listening and I will pass it on to Anna.

Anna Cross: Thank you Venkatakrishnan, and good morning everyone. Turning now to slide six. Return on tangible equity for the third quarter was 11%, which takes us to 12.5% for the year to date. The cost income ratio was 63% in Q Three and 61% for the nine months, in line with our low 60s guidance for the full year. We continue to see limited signs of credit stress, as the loan loss rate for the quarter was 42 basis points and 43 for the nine months and we have maintained strong capital and liquidity positions. As you just heard from Venkatakrishnan, we will update you with revised financial targets at an investor update alongside our full year results. As part of this update, we are evaluating actions to reduce structural costs which may result in material additional charges in Q Four impacting this year’s statutory performance, excluding any such charges.

We continue to target a Roti above 10% for the full year, focusing now on Q Three. Starting on slide seven. There was no impact from the over issuance of securities this quarter, but given the largely offsetting impact to income and costs in Q Three last year, I will again use the adjusted numbers for the prior period. Group profit before tax was around 50 million lower at 1.9 billion, with income down 2% and costs down 4% year on year. Within total costs, operating costs were stable and there were no litigation and conduct charges this quarter, compared to 164,000,000 in Q Three last year. Impairment charges were up 52 million to 433,000,000, with the charge and business mix as we expected, largely driven by growth in US cards. Key NAV increased 25 Pence to 316 Pence, reflecting our profits and positive cash flow hedge reserve movements broadly offsetting last quarter’s downward move.

As usual, I will now cover the three key drivers of our returns, namely income costs and credit risk management. Starting on slide eight, group income was down 2% at 6.3 billion. The 8% stronger sterling US dollar rate in Q Three year on year reduced our reported income, around 40% of which is in dollars. CIB income fell 6%, with lower activity in the investment bank partially offset by corporate income growth year on year. Consumer cards and payments income was up 9%, driven by growth in US cards receivables and the UK wealth business transfer from Barclays UK in Q two, excluding the transfer, CCNP income was up 5% and Barclays UK income was up 1%. Net interest income across the bank grew by 179,000,000 or 6% year on year, driving a 13 basis point increase in group NIM to 3.98%.

Barclays UK contributed around half of Group Nii this quarter, with approximately 20% from CIB and 30% from CCNP, mostly US cards, and the private bank Buk Nii was 17 million higher year on year with NIM of 304 basis points below where we anticipated at Q Two, which I will come back to when I cover Barclays UK. CCNP Nii increased by 64 million, mainly from US cards balance growth partially offset by private client deposit migration to our higher yielding products. This generated NIM of circa 8.9% in Q Three, which was up from circa 8.3% at Q Two and included a small one off increase in private bank, so we would expect NIM to step back a little in Q Four. CIB Nii increased 94 million year on year, which included an improvement of nine basis points to 3.65% in NIM, driven by the benefit of rate rises in transaction banking.

Moving on to costs on slide ten, we are delivering our operating cost guidance with costs in Q Two and Q Three of around 4 billion below the Q One high point. The cost income ratio improved year on year to 63%, consistent with Q Two. Barclays UK cost income ratio was 56%, with total costs flat year on year. As we progressed our digital transformation and rationalization of the physical footprint and headcount consumer cards and payments operating costs increased by 9%, broadly in line with income. As we invested to grow US cards and our private bank CIB operating costs were stable year on year below the Q One level as guided as we said, we are evaluating actions to reduce structural costs across the group, and we’ll give more detail at our investor update.

Moving on to credit on slide eleven, we are seeing the benefit of our long standing, prudent approach to provisioning, both in terms of credit decisions we have taken in the past, reflected in our balance sheet provision and coverage ratios, as well as the credit protection we have in the CIB. The impairment allowance increased by 0.3 billion to 6.4 billion. This was primarily driven by our US. Cards portfolio. In line with our expectations, we updated the macroeconomic variables from Q Two, resulting in a modest impact on expected credit losses. We maintained robust coverage ratios of 1.4% for the group and 8.6% for our card portfolios in aggregate, which I’ll cover in more detail on the next slide. Starting with UK cards, we continue to see conservative customer behavior across our UK portfolios and credit performance remains benign.

Customers are being disciplined about building unsecured balances with UK card repayment rates high across the credit spectrum. Although we have grown balances modestly over the past year, interest earning lending balances have decreased impacting NIM but benefiting credit performance. We do expect IELS to grow in 2024 as our more recent customer acquisition activity begins to mature. 30 days arrears rates remain stable and low relative to historic levels. The nature of our us. Cards proposition is different. As a reminder, we are the partner card issuer for around 20 client rewards programs, including some of the biggest brands in the US. Given our historic skew to travel and airlines, this is a high credit quality portfolio. Our risk mix has improved since the end of 2019, with 88% of the book above a 660 FICO, compared to 86% at the end of 2019, including the addition of the Gap portfolio in 2022.

On the chart you can see that 30 day arrears rates are now in line with our pre pandemic experience at 2.7% as we expected. Our impairment coverage also increased to 9.7%, with stage two now at 35%, reflecting our expectation of higher unemployment from September’s low level of 3.8% to a peak of 4.4% by Q three 2024. This would of course result in increased arrears, which are reflected in our balance sheet provisioning. Moving on to the impairment charge on slide 13. The impairment charge of 433,000,000 was up around 50 million year on year, giving a loan loss rate of 42 basis points. Most of the Q Three charge was driven by growth in US. Card balances. Continued seasoning of the Gap book in line with expectations and the increase in arrears that I mentioned.

Our guidance of 50 to 60 basis points through the cycle is higher than the year to date experience. We are mindful that Q Four usually sees a higher charge, in part reflecting seasonality and our expectations of US cards growth over the holiday season. This generally leads to higher balances and some build an impairment under IFRS nine, where increased utilization, even by customers who are making timely payments, can trigger stage two migration. The Barclays UK charge was 59 million with a loan loss rate of ten basis points, and this has been below 30 now for nearly three years. Even though our customers are experiencing affordability pressures, this is not translating into credit stress as they manage their finances proactively. The CIB had a small release and we are seeing no real observed credit deterioration, with our synthetic credit protection also working well.

Moving now to the business performance, starting with Bartheon’s UK on slide 14, profits were stable year on year, with roti of 21% for the quarter. Excluding the UK, wealth transfer income was up 1%. Costs were broadly stable as our transformation plan progressed, resulting in a cost to income ratio of 56% for the quarter. Loan growth remained muted, reflecting customer caution in the current macroeconomic environment and our prudent risk positioning. The reduction in business banking assets was driven primarily by repayment of government backed loan schemes of 2.7 billion. Mortgage balances were stable in the quarter at 166,000,000,000, with Remortgaging still contributing most of the activity. Now looking at Buk NIM, which was 304 basis points.

As a reminder, Buk Nii is around 25% of group income and one basis point of NIM equates to around 20 million of Nii annualized, or less than 0.1% of group income at Q Two. We said that we expected NIM to step down in Q Three and then to stabilize into Q Four. Most of the moving parts played out as expected in Q Three, with structural hedge tailwinds continuing and mortgage margin pressure somewhat easing. The impact of base rates was also in line given pass through rates have increased. However, the step down in NIM in Q Three was larger than expected, with deposit balance and mix trends more pronounced. Average balances quarter on quarter actually contributed a larger deposit effect than period end balances we have shown on the slide. When combined with pricing effects, this reduced NIM by a net 21 basis points compared to a net six basis points in Q Two.

You can see that we grew deposits during the pandemic by 53 billion to 258,000,000,000 by the end of 2022. As customers built up cash with us in their current and Instant access accounts. We anticipated that these balances would fall as customers manage their finances proactively, paying down debt and locking in higher yields on their residual savings. Our current account moves appear in line with the latest bank of England industry data, but intense competitive pricing meant we did not capture as much of the flow into higher rate products. We emphasized at Q Two how sensitive guidance is to the level and mix of deposits, and this remains the case we now guide to a range of 305 to 310 basis points for the full year to help frame this. If we see similar trends in Q Four as we did in Q Three, both in terms of mix and volume, full year NIM would be towards the top end of this range.

Turning now to structural hedge income, two thirds of which accrues to Barclays UK. Slide 16 illustrates the importance of the hedge to the level and visibility of our future net interest income. The hedge is designed to reduce volatility in nii, so in an environment where rates are peaking and eventually start to fall, it will help to stabilize NIM. It also provides a high degree of certainty to future nii. The chart shows that 95% of 2023 gross hedge income is already locked in, and the next two years portions of locked in nii have increased by three to 400 million per year since H one. As we rolled a further quarter of hedge maturities, notional hedge balances reduced by 4 billion in Q Three to 252,000,000,000. Given the trends we are seeing in retail deposits, we expect the notional balance to continue to reduce more or less in line with lower hedgeable deposits.

Swap rates currently at around 4.5% means reinvestment rates remain well above maturing yields of around one to one and a half percent for the next two years, and with 50 to 60 billion of hedges maturing annually over this period, we expect the reinvestment effect to outweigh notional hedge declines. Turning now to consumer cards and payments on slide 17, growth in our US cards balances and the UK wealth transfer drove a 9% increase in CC and P income, partially offset by FX. We grew US cards balances by 11% year on year to $30 billion. In the private bank. Total invested assets were 105,000,000,000, up 27%, excluding UK wealth, as clients moved deposits to money market funds and other investments. With US payments income was modestly down year and year as customers adjusted their spending to lower value essential items which have lower margins, offsetting the 9% increase in payments.

Processed roti was 9.6%, reflecting both higher income and operating costs year on year as we grow these businesses moving on to the CIB. CIB income fell 6% year on year in sterling terms, in part reflecting the stronger sterling US dollar rate. The more stable elements of our CIB income performed as we expected in markets. The relative stability from our combined fixed income and equity financing businesses was visible again compared to the downward move in intermediation and corporate delivered strong year on year income growth reflecting higher rates in transaction banking and the nonrepeat of leveraged finance marks this time last year in corporate lending. As you heard from ######, markets was down 13% in dollars versus a record third quarter in 2022.

FIC fell 19% in dollars as we benefited less from US rates volatility compared to guilt volatility in the UK. This time last year, fixed income financing income reduced due to a normalization of inflation linked benefits, as we have mentioned previously, and we are smaller and securitized products, which was an area of strength for some of our peers. Equities was up 3% in dollars as derivatives and cash performance was partially offset by equity financing as client balances continued to grow, albeit as spreads tightened. Banking fees were down 24% year on year, with a better performance in ECM not sufficient to offset weaker DCM. And advisory, given the relative scale of those businesses for us, combined with stable costs and a small impairment release, roti was 9.2%, which, even in a mixed quarter like this one, does not reflect the potential of our franchise.

CIB RWAs were relatively stable with the increase to 219,000,000,000 on Q Two, largely driven by FX. Turning now to capital funding and liquidity. Starting on slide 19, we continue to maintain a well capitalized and liquid balance sheet with diverse sources of funding and a significant excess of deposits over loans. Looking at these metrics in more detail, starting with capital and slide 20, our CET One ratio increased around 20 basis points to 14% attributable profit generated 37 basis points, totaling 128 basis points over the last three quarters. As we indicated previously, our MDA hurdle increased to 11.8% from the increase in the UK countercyclical buffer, and we continue to operate with ample headroom whilst Basel 3.1 remains at proposal stage.

We continue to guide to the day one RWA impact to be at the lower end of the five to 10% range. This reflects what we see from all the proposals across the jurisdictions we operate in, including the US. As a reminder, the PRA’s rules remain the most relevant. On a group consolidated basis, our total deposit position remains stable as we have a diverse deposit franchise across consumer UK and international corporate customers. Within that, the decline in the UK deposits that we discussed earlier was more than offset this quarter by inflows from global corporates, and this places us in a strong position to manage seasonal fluctuations that we often see around yearend from balances held for financial sector clients. Our LCR of 159% represents a surplus of 116,000,000,000 above our minimum regulatory requirements.

We continue to be comfortable with our liquidity position, and we have demonstrated its robustness throughout the market disruption earlier this year. So, concluding with our outlook, we are evaluating actions to reduce structural costs to help drive future returns, which may result in material additional charges in Q four impacting this year’s statutory performance. Excluding any such structural cost actions, we continue to target roti above 10% in 2023 and a cost income ratio in the low 60s. Our loan loss rate guidance remains 50 to 60 basis points. This is higher than the year to date experience, allowing for some potential seasonality in US cards in Q Four. As of now, we are not seeing anything that concerns us and we would view the guidance as a through the cycle range.

Our CET One ratio was at the top end of our target range, and strong capital generation in the year to date supports our commitment to return capital to shareholders. We will provide more details at an investor update at our full year results in February, including our capital allocation priorities and revised financial targets. Thank you for listening. We will now take your questions and as usual, please limit yourself to two per person so we get around to everybody.

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Q&A Session

Operator: [Operator Insertions] Our first question today comes from [indiscernible ]from Morgan Stanley. Please go ahead. Your line is now open.

Q – Unidentified Analyst: Hi, good morning. A couple of questions please. On first one on UK NIM, your guidance I think I understood the top end of the guidance, the 310, assumes a similar sort of deposit trend as in Q Three, I guess. Your guidance implicitly says that things could get worse in Q Four in terms of mix and volumes. Can you maybe sort of explain what happened during Q Three? And why have you given yourself some room for deteriorating trends? I think most of the guidance from your peers and maybe even yourselves was that once the rate sort of hikes were over, you would see much more stable deposits. So interested to see why you’ve left yourself some room for deterioration. And second question is on the restructuring charge in Q Four.

Obviously your 10% Rot guidance is now x this restructuring charge. Question is, how much is that going to interfere with the payout and with buybacks that you may announce at the end of the year? Because I would have thought, given the provisions are going much better than expected, you would have had plenty of room to cover potential restructuring without going into your Rot guidance. But that doesn’t seem to be the case. So maybe how should we think about year end distribution? Obviously capital going better, but more restructuring costs. Maybe sizing that restructuring costs will be helpful. Thank you.

Anna Cross: Thank you. Good morning and thanks for starting off the questioning. I’ll take the first one and then I’ll pass to Venkatakrishnan for the second half of that. So let me just talk through UK NIM in the third quarter and just to level set and reiterate what I said on the call. A basis point of NIM is 20 million annualized, less than 0.1% of groups income. What we said at Q Two was that we expected NIM to step down in the third quarter and somewhat stabilized into the fourth. There were a few moving parts within that and much of it has played out as we expected. So we’ve seen a lessening of the impact of mortgage churn, we’ve seen a continued tailwind from the structural hedges. Actually, deposit pricing played out roughly as we expected.

And you can see that that’s negative in the quarter for the first time, as we indicated it might be. What’s really different is the movement in deposits. And what I said on the call earlier was that actually the movement in average deposits is a bit more significant than the quarter end might indicate. And whilst we saw very similar trends to the overall bank of England movement in current accounts through the quarter, we captured less of that into fixed term deposits than we might have expected to. And that related purely to the intensity of competition that we saw during the quarter and very intense at particular points. And it’s really that that’s made the difference. So I would say it’s depositor behavior that has somewhat intensified in response to pricing.

So previously we said that we expected that to be more stable in Q Four and that’s simply because in Q Four you typically see a deposit stabilization pre Christmas. We now no longer anticipate that just because of these competitive dynamics and that’s really what’s causing us to change that outlook. We’re not saying that it will be better or worse in the fourth quarter. I think what we are saying is that this customer deposit behavior has been relatively difficult to predict and that’s why we’re giving you a range indicating to you that if we saw something similar, that would be towards the top of that range. So that’s the reason for the changing guidance. ######.

C.S. Venkatakrishnan: Yeah. Thanks I’m sure you sort of caught this through the presentation, but just to add on the NIM point, for 1 minute overall group deposits, as #### said, buk NIM is part of our overall NIM. Our overall deposits grew about 7 billion quarter on quarter and our Nii is up about 6% year on year at 3.2 billion and NIM itself at 3.98%. At the group level, again 13 bips higher. So think about in the larger context and also coming back to the restructuring charge, two things I would say. One is you should think of this structural cost action as in part of the investor update which we will provide in February. So what this is, is we have to announce it now because as we work through it, we will likely take a charge in Q Four.

That’s why we announce it now. But you should think of it as not something related to a quarter or the last two quarters, but part of the larger structural improvement of efficiency and productivity for the bank. As for your specific question, what I would say is a few things. Number one is that we very deliberately start this quarter at a strong capital position of 14% and we’ve got a capital generation of about 130 basis points of CET One ratio year to date. This underpins our ability to return capital to shareholders. As far as our desire, you know, we completed a 750,000,000 buyback in the first half. And so total distributions so far this year are 1.2 billion, which is about 30% higher versus the first half of last year. And this really reflects our commitment to return capital to shareholders.

We spoke about the efficiencies we are driving across the group equally. You should know that we are comfortable to operate in the full range of 13% to 14% and we have been there in the past. Obviously, any capital action ultimately is approved by the board and approved by regulators. But from our point of view and we’ll come back with the details in February from our point of view, good initial starting position, good capital generation across the bank. Understand the importance and the priority to our shareholders of returning capital, willingness to operate through the range.

Q – Unidentified Analyst: Thank you very much.

C.S. Venkatakrishnan: Next question, please.

Operator: The next question comes from Jason Napier from UBS. Please. Go ahead. Your line is now open.

Jason Napier: Good morning. Thank you for taking my questions. Two for me. The first is coming back to the issue of the flagged restructuring charges. as you mentioned, capital really strong and in fact, the Q Three beat alone is a billion pounds relative to consensus. And so I guess anything that you could say to provide a rough sense of how much you’re looking at spending here. I appreciate this is not the venue at which you wanted to give it, but today conversations with the investors are that there seem to be risks on the payout front, with no sense of how much cost savings we might be talking about or where in the group you might be looking to be more efficient. Clearly, we think it’s the right thing to be doing, but the billion beat on CT One is 7% of annual group costs.