Barclays PLC (NYSE:BCS) Q4 2022 Earnings Call Transcript

Barclays PLC (NYSE:BCS) Q4 2022 Earnings Call Transcript February 15, 2023

Operator: Welcome to Barclays Full Year 2022 Results Analyst and Investor Conference Call. The call will start with a recorded message from C.S. Venkatakrishnan, Group Chief Executive, before I hand over to Anna Cross, Group Finance Director.

C.S. Venkatakrishnan: Good morning. I have recorded this message in anticipation of possibly not being able to join you on the day. I am pleased to report that Barclays has delivered our target return on tangible equity of greater than 10% for the year 2022. We continue to see broad-based income momentum across the group. We have invested in growth opportunities and realized returns from those investments across all 3 operating businesses. In the Corporate and Investment Bank, we grew income year-over-year and delivered a double-digit RoTE. I want to highlight our Global Markets business, which has managed risk very adroitly through a volatile year and continues to gain not only the market share with clients but mind share with them as well.

Our Consumer Cards and Payments business grew income across each of its components, which is payments or Private Bank and U.S. cards. In U.S. cards, our new partnership with Gap has helped to drive strong income and balance growth and scale to the business by doubling our total number of end customers. In Barclays UK, our RoTE has returned to prepandemic levels. As our sensitivity to interest rates has driven higher income, our investment in efficiency programs have enabled significant cost control and positive jaws. More broadly, we have managed our costs in a very disciplined way across the group, and we maintain a cautious approach to both the macroeconomic environment, how we position our balance sheet throughout the year and how we continue to do so.

Finally, our organic capital generation from profits has enabled continued distributions to our shareholders. I want to use this opportunity to review our progress against our 3 strategic priorities, which we laid out 1 year ago. Although much has changed in the world, in the U.K., in the U.S. since last year, our priorities remain appropriate and fitting to the environment in which we operate today. The first one is to deliver next-generation digital financial services. The second is to continue to deliver sustainable growth for our Corporate and Investment Bank. And the third is to continue to capture opportunities as we transition to a low-carbon economy globally. Against the first priority, which is the delivery of digital financial services, we took several important steps in 2022 to broaden our capabilities and our product offering.

In the U.K., investment in digitization is a core part of our Barclays UK transformation strategy, both helping simplify our products and driving improved efficiency. The Barclays banking app has over 10.5 million users now and with the number of log-ins growing by about 8% during 2022. This translates directly into product demand as 94% of our new 5% Rainy Day Saver accounts were opened online. The ability to offer help online also benefits our customers, with nearly 0.5 million using our banking app to manage their mortgages, for example. From April, when that functionality was added to the app, over 8,000 mortgage holders chose to switch their mortgage rates with us online within 4 days of a base rate change. We are diversifying our product offerings further.

We now expect to complete the acquisition of Kensington Mortgage Company, a specialist mortgage lender, in the first half of 2023. In the U.S., our partnership with Gap has broadened our product offering, opened up a meaningfully new addressable market for us in retail partnership cards and provided us with scale and further growth opportunities. Our second priority is to deliver sustainable growth for the Corporate and Investment Bank, the CIB. We have invested in the CIB consistently over many years in our technology, our people, our capabilities, our product offerings and our focus on our clients’ needs. As a result, we have built a globally competitive business that is now delivering attractive and sustainable returns. In 2022, we managed our risk well, not just in Q4 but throughout the year as we supported our clients during periods of high volatility, and the diversification, which we have built within the CIB has proved valuable as we grew our broad overall income.

Even though Investment Banking activity was subdued, we have continued to invest appropriately in talent, so we are prepared for the future. Our Global Markets business performed strongly relative to our peers, and it has consolidated increases in market share and positioned us well for the future. And I will talk more about how investment in the financing businesses, which are part of Global Markets, has helped to provide a more stable income stream along with intermediation even in periods of low volatility. Our third priority is to capture opportunities as we transition to the low-carbon economy. We are steadily building our capability and our reputation with clients in this area. Recent examples of our assistance to clients include, as I mentioned in our Q3 earnings call, acting as sole M&A adviser to Con Edison on the $6.8 billion sale of their clean energy business; more recently, acting as lead left bookrunner on Portland General Electric’s $500 million green financing equity offering for the construction of a wind energy facility and other renewable investments.

We continue to make good progress in 2 priority areas. The first is facilitating sustainable finance, and the second is investing in sustainable technology start-ups. As we finance the transition, we have announced a new target to facilitate $1 trillion of sustainable and transition financing between 2023 and the end of 2030, and we are on track to meet our target to deliver GBP 100 billion in green finance, well ahead of the 2030 target date. Our commitment of sustainable impact capital has generated substantial demand, and in December, we announced we would increase our investment to GBP 500 million by 2027. This investment will have an enhanced focus on decarbonization technologies, including carbon capture and hydrogen. When we set out to build a diversified bank at Barclays as a management team in 2016, none of us imagined the sheer rate and magnitude of change which we would go through in the next 7 years.

Our businesses, I’m happy to say, are performing well individually, and they fit well together. While our performance in 2022 was very gratifying overall, it was marred by the over issuance of securities in the U.S., which I have discussed previously. I am determined that an incident like this should not happen again. And we are committed in Barclays to operating at a very high level, reliably and consistently, day in and day out. Our focus will be on high-quality client service on shedding complexity and achieving operational excellence. In summary, we have achieved a great deal this year, reaching our financial targets for the group and supporting our customers and clients. None of this would have happened without the skill and dedication of our colleagues across the firm.

I’m grateful to every one of them for their hard work and commitment to our purpose. Thank you for listening, and I will now hand you over to Anna.

Anna Cross: Good morning, everyone. I’m going to talk first about full year then Q4. As Venkat mentioned, it was another year of delivery across businesses, with a statutory return on tangible equity of 10.4%. Income growth of 14% outweighed the 6% growth in operating costs, which exclude bank levy and litigation and conduct or L&C. Despite the increase of GBP 1.2 billion in L&C, profit before impairment was up 9%, with a statutory cost-income ratio of 67%. This allowed us to absorb a GBP 1.9 billion delta in impairment as the charge began to normalize following releases in the prior year. This earnings momentum and capital discipline is reflected in the year-end CET1 ratio of 13.9%. EPS was 30.8p, and our total distributions in respect of 2022 dividend plus buyback will be equivalent to 13.4p as we balance investing for growth with returning capital to shareholders.

All operating divisions delivered double-digit RoTE for the second year running. Our U.K. retail and business bank, Barclays UK or BUK again delivered strong double-digit RoTE at 18.7%. Our international consumer business, Consumer Cards and Payments, delivered 10% RoTE despite elevated legacy L&C charges, and we invested in growth. Our Corporate and Investment Bank delivered 10.2% despite the effects of the over issuance of securities. I now want to highlight the main drivers of income, costs and impairment. As I do so, I’m going to emphasize 3 key themes. First, strengthen income, not just because of diversification but because of performance. Our businesses have performed strongly and in the way we expected them to. I’m going to focus particularly on market, which has outperformed global competition in FY ’22 because we have invested and been committed.

Second, our cost strategy to grow the business and drive efficiency. And third, our risk management across retail, wholesale and interest rates, including the structural hedge and the liquidity pool. All 3 businesses contributed to our income growth of 14%. This growth comes not just from margin expansion but from client activity and selective growth in the balance sheet. BUK grew income by 11% largely as a result of higher net interest margin. Income in CCP increased 35%, including the effect of the stronger U.S. dollar. Within this, international cards was up 39% from balanced growth. U.S. card balances were up by around 31% or $7 billion year-on-year, both organically and with the $3.3 billion Gap back book. Payments income grew 25%, and the Private Bank grew 30%, again, benefiting from increased rates but also from an increase in client assets and liabilities by 10% to GBP 139 billion.

And I expect to say more on the development of that business in the future. CIB income was 8% on top of a strong 2021. Within this, corporate was up 2%, with growth in transaction banking, offsetting the corporate lending income expense, which included marks on leverage lending and higher costs of our increased credit protection. Investment Banking fees were down 46% in U.S. dollars, in line with the industry, reflecting the challenging environment for primary issuance of M&A. Markets, by contrast, was up 24% in U.S. dollars with a standout performance in FICC, up 48%. Clearly, volatility provided a tailwind as we helped clients manage their risk and the business managed its own risk well. Equities income was down 4% in dollars. Whilst derivatives were weaker, our equity financing income continued to grow.

I now want to focus on how we have invested in a more sustainable income base for markets by growing financing to complement our trading businesses and how investing in capability more broadly across markets have increased share relative to our peers and with our top clients. In markets, we buy and sell securities and derivatives for clients and earn a bid offer spread or commission income for this intermediation role. We also finance client portfolios, lending against trading positions, appropriately margined and at conservative LTVs. A key part of our strategy has been to grow this financing business. As a result, whilst we have long been top-ranked in fixed income financing, we are now also top 5 in prime services. With investment in robust technology and risk management, this is good business for 3 reasons.

First, intermediation income goes up and down with volatility. Whilst financing will also fluctuate to some extent with the leverage needs of our clients, it has a more stable base than intermediation. Second, having a strong financing capability complements client intermediation flows, whilst they trade with you also tend to finance with you. Finally, financing, if prudently margined and carefully structured, is relatively RWA-efficient and, therefore, generates an attractive return on capital. We have been investing in systems and talent in financing over a multiyear period and are now seeing the results. We manage the business with an integrated approach across fixed income and equity financing, allowing our multi-strategy clients to realize cost savings.

Consequently, an increasing amount of our markets income now comes from financing across FICC and equities, and this has grown at a 16% CAGR over the last 3 years. Financing is only part of our multiyear investments in technology and talent across markets, expanding our product offering in line with our clients’ needs and growing market share. Our top 100 clients represent around 40% of the market wallet. We have grown share by serving them in an integrated and effective way and have increased the proportion of these clients where we have a top 5 wallet share by 37% in the first half of 2022 alone. As a result, we have outperformed all but 1 of our top 10 global peers since 2019, with 114 basis points growth in revenue share. Market conditions have varied over this period, so this multiyear share gain illustrates strength across our asset classes.

We believe that with continued investment in human and technological capability, good risk management and strong offerings across trading and financing, we can continue to gain sustainable share in the market business. Moving on from market, I want to remind you of our interest rate sensitivity, which underpins the income momentum from our consumer and corporate businesses. As I’ve highlighted before, a lot of this comes from the role of the structural hedge, as you can see on the left-hand chart. Although the long end of the curve has moderated from the Q4 average, reinvestment rates on the hedge roll are still well above the average yield and the yield on maturing hedges. Although the size of the hedge was marginally reduced in Q4, we have over GBP 50 billion maturing in 2023 and expect to reinvest a large proportion of that.

And remember, the portion we lock in has a multiyear effect. Looking now at our cost performance and strategy. As guided, costs were GBP 16.7 billion. This includes L&C of GBP 1.6 billion, an increase of GBP 1.2 billion year-on-year. Costs, excluding L&C, were GBP 15.1 billion, an increase of GBP 0.9 billion. With around 30% of our costs in U.S. dollars, this increase is due to the stronger dollar year-on-year and inflation. Investment to drive the 3 strategic priorities was largely funded as cost efficiency savings. Our statutory cost-income ratio was 67%, flat on 2021, significantly affected by the elevated level of L&C. Excluding L&C, net cost-income ratio was 61%. Looking forward, movements in the U.S. dollar will affect our sterling cost print, and 2023 costs will reflect further investment in growth and the continuing effect of inflation.

The dynamics of this will vary by business, with growth opportunities at attractive returns more concentrated in selected areas of the CIB and in Consumer Cards and Payments. In the U.K., the focus is more on transformation, with efficiency savings to fund continued investment in digitization, and we are aiming for a significant further reduction in the cost-income ratio in 2023. We manage total costs, including litigation and conduct charges with the aim of generating positive jaws on a statutory basis and are targeting a cost-income ratio in the low 60s this year as we progress towards our longer-term target of below 60%. Moving on to risk management. The forecast baseline macroeconomic variables or MEVs we have used at the full year for model impairments are worse than at Q3 and the start of the year.

This increased model impairment by circa GBP 0.3 billion in the quarter, but we utilized part of the post-model adjustment for economic uncertainty as planned to offset this, leaving GBP 0.3 billion of the uncertainty PMA. The charge for the quarter was GBP 0.5 million and GBP 1.2 billion for the full year, a loan loss rate of 30 basis points. Our total impairment allowance at the year-end was GBP 6.2 billion, a slight decrease in the quarter from GBP 6.4 billion but with strong coverage ratios across the portfolio. Given the current economics, we would expect the loan loss ratio for full year ’23 to be in the 50- to 60-basis-point range, closer to historical levels. This will be affected by product mix, including planned growth in U.S. cards and by changes in the macroeconomic outlook.

We’ve updated here the metrics we shared at Q3 to illustrate consumer credit quality. In the U.K., our growth has been in mortgages, whilst U.K. cards has reduced by around 40% since 2019. We continue to see high levels of repayment in the U.K. cards, and arrears rates remained stable and low. Consumer behavior and the risk performance confirms that the quality of the cards book overall has improved, and this is reflected in some reduction in coverage, but the ratio is still 7.6% in U.K. cards with a 19.2% coverage of Stage 2 balances. We’ve grown U.S. card but have maintained strong coverage levels, with 8.1% overall and a 33.6% Stage 2 coverage. A few comments now on our wholesale risk management. As we have grown share in CIB, we have managed risk carefully.

Whilst RWAs and the CIB have grown, the increase year-on-year has been as a result of the stronger dollar and regulatory changes. There was actually a slight decrease from other business-related factors. We also kept tight control on leverage, with leverage exposure for the group down year-on-year despite FX and the growth in financing. Looking at the wholesale lending risk, CIB loans to customers and banks at amortized costs grew by GBP 18 billion last year or GBP 15 billion, excluding FX. Most of this increase is in lower risk areas of corporate lending, and we’ve increased the first loss credit protection. Commercial real estate lending as a sector is facing some headwinds in respect of valuation and liquidity. Total CRE loans across the group are GBP 16.6 billion, down year-on-year and just 4% of our total loan book.

This is an area where we have taken a cautious approach, with U.K. exposures broadly static for a number of years and well collateralized. Another topical area is leverage lending commitments. We have actively managed down the pipeline over the last couple of quarters, having our syndicate commitments and have taken some marks on remaining positions in the corporate lending income line. In summary, we feel confident in our risk management across our lending portfolio and trading businesses. Some comments now on our Q4 results. Profit before impairment of GBP 1.8 billion was up 29%, with income growth of 12% outweighing cost growth of 6%. Both income and cost growth numbers are, of course, affected by the stronger U.S. dollar year-on-year. The impairment charge of GBP 0.5 billion represented a 49-basis-point loan loss rate, close to our expectation for 2023.

There was a small net tax credit in the quarter, and RoTE was 8.9%. Looking now at each business, beginning with the U.K. Income grew 16%, with costs down by 8%, reducing the cost-income ratio by 15 percentage points to 58%. The NIM for the quarter was 310 basis points, up 9 basis points on Q3 as we saw further benefits from rates. This was moderated by product margin pressure, notably in mortgages and effects from treasury activities, which are included in the other category on the NIM bridge. We would expect to see similar pressures in Q1. However, for 2023 as a whole, we’re guiding to a reported BUK NIM of over 320 basis points as tailwinds from the building structural hedge benefit through the year outweigh these other dynamics. The U.K. RoTE was 18.7% for the quarter.

Moving on to CCP. Income increased 46%, reflecting growth across international cards, payments and the Private Bank. Total costs were up 22%, delivering strong positive jaws despite our continued investment in growth. The impairment charge was GBP 287 million compared to GBP 96 million last year. This reflected the growth in U.S. cards balances back to prepandemic levels, including the effect of the Gap portfolio. As balances grow, we did expect some stage migration, but risk metrics remain below prepandemic levels. The Q4 RoTE was 13%. Turning now to CIB. Income was down 2% overall, with another standout performance in FICC, up 56% in dollars, offset by lower Investment Banking fees. I want to focus here on the Q4 corporate income, which was up 8% overall.

Within this, transaction banking was up 78%, reflecting strong NII growth and growth in fees. And in Q3, the corporate lending income expense reflected both fair value losses on leverage finance lending of circa GBP 85 million net of mark-to-market gains on related hedges and the continuing high cost of hedging and credit protection. The underlying corporate lending income remained stable. Total costs increased by 13%, reflecting continued investment to support income growth initiatives plus the impact of inflation. The impairment charge of GBP 41 million and the RoTE for the quarter was 5.4%. There’s a slide in the appendix on the head office results. Turning now to capital. We ended the quarter with a CET1 ratio at 13.9% towards the top end of our target range.

I’m going to focus here on the movements in Q4, but there’s a full year bridge in the appendix. Our capital generation from profits was strong, contributing 31 basis points. As expected, there was a headwind of close to 30 basis points from the acceleration of the capital effect of pension deficit contributions, but we have now completed the triennial valuation with a funding surplus and don’t have deficit reduction payments in 2023. We are very focused on managing the capital risk in the liquidity pool, and the effect of movements in the fair value reserve on capital were immaterial in the quarter. We’ve announced a further buyback of GBP 500 million to supplement the earlier buyback and dividend totaling 7.25p, making the return of capital in respect to 2022 equivalent to 13.4p per share.

I do expect moderation in the ratio this quarter. For example, the 15 basis points impact of the buyback and the investment in Kensington. We also plan to lean into the seasonal opportunities in markets in Q1, as we usually do. Looking further ahead, a quick update on Basel 3.1. We previously estimated 5% to 10% RWA inflation. But following the recent publication of the consultation paper, our current estimate would be towards the bottom end of that range for the January 2025 impact, and that’s premitigation. Our MDA is now 11.3%, and our target range remains 13% to 14%. In conclusion, we remain confident in our organic capital generation to support further business growth in line with our 3 strategic priorities and capital distributions. A quick comment on the move in equity.

TNAV increased 9p in the quarter to 295p per share, reflecting 6.5p of earnings and net positive movements in reserves. Finally, we remain highly liquid and well funded, with a liquidity coverage ratio of 165% and a loan-to-deposit ratio of 73%. So to recap and summarize the outlook. We reported statutory earnings of 30.8p per share in 2022 and generated a 10.4% RoTE, delivering against our target of over 10%. We are aiming to generate a double-digit RoTE again this year as we pursue our 3 strategic priorities. We have a diversified mix of businesses, budgeted investment in the businesses and the way we manage risk that allows them to perform and get us confident in continued progress. Income momentum comes from investment we have made to underpin the sustainability of CIB and grow the balance sheet of CCP.

And in BUK, we are guiding to an increased NIM in excess of 320 basis points this year. We will balance this investment with cost efficiency given the inflationary pressures, and we wouldn’t expect the elevated level of litigation and conduct experienced in 2022 to recur. So we are aiming to deliver a statutory cost-income ratio in the low 60s this year as we progress towards our target of below 60%. We are very focused on risk management and readiness for potential deterioration in the macroeconomic environment. As a credit risk matter, we expect an increase in the impairment charge this year as we grow U.S. cards in particular and are guiding to a range of 50 to 60 basis points, absent further macroeconomic deterioration. We also expect some normalization of the group’s effective tax rate.

Our capital ratio is strong. And we are confident of being able to balance our investments for future growth with delivering attractive capital returns to shareholders. Thank you, and we will now take your questions. And as usual, I would ask that you limit yourself to 2 per participants, so we get a chance to get around to everyone.

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Q&A Session

Operator: . Our first question today comes from Joseph Dickerson from Jefferies.

Joseph Dickerson: Could you just discuss the balance between shareholder return and investment given the GBP 500 million buyback announcement? Looks like you’re kind of distributing down on a pro forma basis to about the midpoint of your capital range. Could you discuss what type of investments you see? Are there U.S. card portfolios or anything like that later in the year? Because the GBP 500 million was a, I mean, 15 bps of capital and you guide to — well, your ROE guide equates to about 150 basis points of capital generation per year. So I was just confused a little bit on the quantum of the buyback and maybe what lays out there in terms of investments and so forth, particularly in the U.S. cards.

Anna Cross: Thanks for your question, Joe. So we ended the year at 13.9%. That was a deliberate positioning of our capital. And the reason that it’s deliberate is because there are 3 things that we know are going to happen almost immediately in Q1. The first is the buyback that you’ve called out. We’ve also got the acquisition of Kensington, which has — which we said today will complete in Q1. And then we’ve got the continued reduction in transitional relief. Those 3 things together are 40 basis points and take us from 39 right into the middle of our range. So we’ve done that thoughtfully for 2 reasons, really. The first is Q1, we would always expect to be the low point of our capital, simply because of the seasonal nature of our business.

You’d expect us to lean into the market opportunity as I said in the script, and we’ll do so, and we would expect to accrete capital thereafter. The other thing I would say, Joe, is the economic environment is certainly not benign, so that should help you understand why we’ve taken the position that we have. As relates to specific investments and how we balance that with shareholder returns, you can see that we are committed to shareholder returns. We’ve got a 43% AP payout this year. And actually, if you look sort of on a free capital flow basis, you can see that there were some headwinds from pensions and FVOCI that we might expect to dissipate over time. So we are very committed to it. But we do balance that with 2 other things. The first is the opportunity to invest in the business and retaining that flexibility given the returns that we think we can generate.

And the second is obviously any regulatory changes. So very committed to it. It was a deliberate positioning of our capital to end at 39 so that we can essentially operate in the middle of the range and take opportunities as they come.

Joseph Dickerson: And can I just follow up on that? Do you anticipate in terms of buybacks to look at this on a more frequent basis, i.e., perhaps quarterly?

Anna Cross: That is a matter for the Board. So I wouldn’t change the guidance here. You can see that we have established a certain cadence, though, Joe. So I’d focus more on that.

Operator: Our next question comes from Omar Keenan from Credit Suisse.

Omar Keenan: My first question, please, is on the Barclays UK NIM progression. And I just wanted to ask about the negative 33-basis-point move in other. I would just note that, that minus 33 basis points to about 11% of Barclays UK NII, and, hence, was a substantial sequential headwind, doing my own numbers, while the mortgage margin pressure is there, it doesn’t look to be more than 1% of NII per quarter. So can you please elaborate on exactly what has driven this kind of looks like 10% headwind ex mortgage margins. I know you talked about treasury effects, but what exactly is this? Is it, I don’t know, MREL issuance or other positioning? And it was also mentioned in the scripted comments that this was expected to be an ongoing headwind.

Could you clarify whether that meant a further 33-basis-point headwind or a lack of unwind of this, i.e., this will be a persistent impact rather than a one-off? And just related to that, could you also talk about, when you think about your guidance for 2023, what assumptions you’re making, say, around movement of deposits into time deposits? And my next question is on Basel 3.1. So you talked about the lower end of the 5% to 10% premitigation. Could you potentially talk about what the impact of the mitigation could be? And whether you have a view on the 2030 fully loaded impact of output flows, if any, at Barclays would be?