Very pleased to have, Anna Cross, Barclays CFO, here with us. Thank you for joining us this afternoon.
Thank you. Thank you for inviting us.
Well, perhaps we could just start at a fairly high level in terms of, you know, if you could very briefly set out for us what your priorities are for Barclays, how we're seeing that come through in terms of recent performance.
Yeah.
And then also the building blocks to deliver the sustainable ROTE above 10% that you have consistently targeted.
Yeah, sure. So the most important thing for us, and the thing that we, that we are extremely focused on is delivering consistent returns. You know, you'll see in the second quarter over 11%, 13.2% for the first half. And we're very confident in delivering greater than 10% for the full year, and as we do so, that will be the third consecutive year. And, you know, we've been very focused on this greater than 10%, but that's not the extent of our ambition, and obviously, we'll come back and talk about that ambition in due course. But what that's really made up of is strong, diversified revenue growth. So we saw income growth in the second quarter of 6%. That's against a really strong comp, and we saw it across the bank.
We're containing our costs well. We're really focused on delivering our cost guidance and on managing inflation. So with 2% cost growth, that gives us quite a strong operating jaws. And of course, asset quality remains pretty benign, and we're really focused on managing that. So we reiterated our asset quality guidance of between 50 and 60 basis points of loan loss rate. And what that allowed us to do at the half year was clearly the capital generation built a CET1 ratio that was strong at 13.8% by the end of the quarter and really facilitated that increased buyback and the increased dividend at the end of the second quarter. So, you know, really consistency of returns, underpinning capital return for investors is what we're focused on.
Thank you. So if we could, I guess, walk through parts of the P&L, starting with costs-
Mm.
which isn't necessarily the main focus of everyone here this week, but I guess particularly given the high inflation, that's been a hard, hard piece to manage. So how are you managing inflation versus the need to invest in growth and to drive efficiency across the group?
Yeah. So you're right. I mean, we've seen high inflation, particularly in the U.K. and also in the U.S. The way we think about it is we're driving efficiency programs to counteract that inflation, and really keep the base of our costs as stable as we can. To date, we've been successful in doing that. And then that allows us to think about investments across the group, and we think about the different parts of the group in different ways. In BUK, we're extremely focused on driving returns to the bottom line, improving the effectiveness and the efficiency of that business, so most of our investment in BUK has been towards transformation, towards digital, towards operational efficiency.
In our consumer cards and payments business, both in U.S. cards and also in our private bank, you know, we are focused on growth. So, you know, there, we're more focused on, yes, costs might go up overall, but it's really important that we're delivering, you know, strong jaws, operating leverage there. CIB is somewhere in the middle. You know, we've been through a few years now where we've invested relatively heavily in the CIB, in technology, in talent, in selective areas, and, you know, we've been thoughtful about those. The guidance that we gave at Q1 around CIB, in particular, was designed to indicate that we're actually coming to a point of stabilization in those investment plans, so we no longer expect that rapid increase. Actually, what we're seeing now is the revenue coming behind that.
Over time, we have an aspiration to get to positive jaws in the CIB also. But overall, you know, we've reiterated our guidance. We expect to be in the low 60s this year, and of course, our objective is to make the bank more efficient over time and get below that 60% level.
Thank you. And then a recurrent investor worry, I think probably for at least the last two years, it feels like longer in the UK-
Mm-hmm
... has been asset quality. And I guess the areas for Barclays that people mention to me most often are the cards businesses in the US and UK.
Yeah.
The tripling in mortgage interest rates as people-
Yeah
... as people refinance, and then worry around particular areas of sectoral exposures within the corporate book. So, across those three pieces, what are you seeing? Is there... are there any indications of stress, and how are you managing that if there are?
Yeah, sure. I mean, what we've, what we've seen, I guess, are not only the impact of rates but also the impact of persistent inflation. Clearly, that, that poses some challenges for corporates and personal customers. And actually, I think the market expectation is that we would see that come through in higher impairment. Actually, we've discovered that our customers are rate sensitive, but just not in that way. They're actually more focused on managing their deposits, I'm sure we'll come to that. But really, in the U.K. and in the U.S., we're not seeing any concerning trends. In the U.S., the economy is quite different. You know, the, the book that we have is quite different. It's a partner book, you know, rewards-driven, and so we've seen growth in balances post-COVID.
We've obviously added Gap to that, but Gap is a relatively high-quality retail book. And over time, we've seen an improvement of FICO scores, in that business less than 10% is below 660, so it's performing very well. We see an increase in delinquency, but in line with our peers and what we would describe as a normalization, really. The UK is quite different. Again, we see much more conservative consumer behavior. We see that through our payments business, so customers are managing their outgoings very carefully. They are, you know, seem quite reluctant to build unsecured balances, so our cards growth remains very muted. Repayment rates are very, very high, and they remain high all the way through the credit spectrum.
I would say in mortgages, I mean, you call out the rapid increase in rates that many of our customers across the industry have faced. Actually, they're coping really well. I think at the heart of this is the fact that, you know, for a decade now in the U.K., we've had to stress mortgage affordability at fairly high rates. You know, anybody that we've extended a mortgage to since 2013 has been stressed at 6.6%, which is lower than the prevailing rate right now. They're doing other things as well. They're paying down their mortgages in advance, so we're seeing more than a quarter of our book overpay on their mortgage, and they're also remortgaging very quickly to secure a new rate. I'd say in corporate, again, you know, pretty, pretty benign.
We have been very thoughtful about the way we've built our corporate franchise. You know, we have very low exposure to commercial real estate, and we changed some of our exposures post-Brexit, and actually, we use synthetic credit protection very extensively through this book, and that gives us coverage of about 35%. So again, we're really thoughtful about where we put our risk. But sort of stepping back here, I mean, this is clearly impacting our NIM in some instances. So, you know, it means that we're not growing unsecured as quickly, but we are definitely seeing sustainable benefits coming through in the impairment line, and actually, this is good for the long-term health of the franchise.
Okay. Thank you. And then moving on to capital. There was another share buyback announced with the Q2 results. What is your ambition in terms of capital distribution? Can you help us frame what we should expect in terms of dividends and buybacks going forward, or at least how you think about it? To what degree may or may not that be impacted by regulation in the U.S., which is obviously at the forefront of people's minds? There is also a knock-on worry that maybe that might come to the U.K. or Europe more broadly. In terms of how fixed is the regulatory framework, do you think?
Yeah. So we've obviously had the Basel Endgame proposals in the U.S. more recently, and that now brings, for a bank like Barclays, the sort of the near final piece in the puzzle, if you like. I mean, for many years now, we have operated across multiple regulatory jurisdictions. So we've got a U.S. IHC, we've got a European bank, we've got a U.K. ring-fence bank, and then, of course, the whole group is sort of the binding constraint is the PRA rules. So, you know, we are exposed to the U.S. rules, the European ones, and the U.K. ones, but we're used to that complexity. You know, our primary objective as we go through planning is to anticipate regulatory change. So we've been anticipating this Basel Endgame for some time, and we've given some guidance around that.
That's built into our plans and the way we think about, you know, our distributions and indeed, our investments for the business, and that's really how we think about it in three big blocks: regulatory requirements and prudential soundness, our ability to distribute capital to shareholders, and really our ability to, to invest in the business. How we think about it, particularly given where our valuation is, that clearly share buybacks are extremely compelling. You know, doing a share buyback, given where we're valued, would yield a, an ROTE around 20% with very little execution risk. That creates a very high bar for what we do internally, and you'll note that, you know, over recent quarters, you'll see a cadence, and you'll see the commitment that we have to return capital to shareholders.
So, you know, we've reduced the share count by 13% since 2020. Over the last two and a half years, we've returned nearly GBP 6 billion, GBP 5.8 billion of buybacks and dividends to investors, and that is, you know, it's around 25% of our valuation, so we are extremely committed to it. So it's a very high bar for us to cross internally, but, you know, hopefully you'll have seen that commitment at the half year.
And then we could spend some time on the businesses, particularly CIB-
Mm.
the scale and profitability.
Yeah.
So the things that weigh on people's minds. So there's been a long-running discussion about the weight of the CIB-
Yeah
... particularly from a capital consumption perspective within the business. But there's also been, you know, an argument from your side about, you know, needing to be there consistently for clients in order to drive the long-term profitability of the business. So I guess the question is: how do you manage... So, does the weight of the CIB, is that something that concerns you? How do you balance that with longer-term profitability, market share, capital allocation, et cetera?
Yeah, sure. Yeah, it's a really good question with many nuances, so let me try and unpack it. Firstly, our CIB is an extremely broad church. So contained within that is our corporate business, you know, very UK-dominated, very stable, you know, a stable net interest margin-based business. It also contains our global markets business, which again, has a range within it. It's got the trading elements and also the finance, financing elements, which we've given increased disclosure over time, and then there's our investment banking business. And really, our objective has been to get to a position where our business can deliver consistently double-digit returns, and it has done for 10 quarters out of the last 14. So that was our objective.
We now feel like we have a CIB, which is broadly of the scale we would like it to be. During that time, it's been able to really make some momentum in market share, so not only growing its returns but generating better market share. For example, in credit, we were sort of number 5, now we are operating at number 3. In our fixed income financing business, we were at number 3, now we're at number 2. Our prime business, which we've been able to grow alongside that, recognizing that they're both RWA-light, much more stable businesses, was previously around number 8, now in the top 5. So we've really, we think, demonstrated a particular client focus. We're very focused on deepening the relationships with our top 100 clients, and that's resulting in market share gains across markets.
The IB is similar. You know, we've traditionally been very focused on debt capital markets, now we're really focused elsewhere within banking. And you'll note that, you know, we were one of the four global coordinators on the Arm flotation in the U.S. We've done the third sell down of London Stock Exchange, we're the only bank that's been on all three tranches. So we feel, again, that's a business. But it's of the size and scale now that we believe is about right, and it's a business that we can continue to grow within its current footprint and continue to grow share. So we wouldn't expect it to grow in relation to the rest of the bank.
And indeed, you know, our focus is on other parts of the bank, like, for example, private banking, and our retail and corporate businesses. So I would say, though, that, you know, as we go through investment in the CIB, or indeed any other part of the bank, we are really focused on, you know, the discipline of how do we benchmark these investments relative to the returns that we offer to our shareholders. But we do, we do feel now that we've got a CIB which has breadth, stability within it, and is returning really, really well for shareholders.
Thank you. So then moving on to Barclays UK, and the margin.
Yeah.
It's taken a while to get here. I suppose the thing that's front and center currently that's moved quite fast recently is deposit volumes and profitability.
Yeah.
So, that feels like the biggest uncertainty when we look forward from a margin perspective. So if you could talk a little bit about your expectations for deposit pricing, mix, and volumes, that-
Yeah
... that would be helpful, and then maybe we can come on to some of the other margin drivers within the business.
Yeah, sure. Thanks. Just to sort of level set, net interest income is about half of the group's revenue. So half from net interest income, half from other forms of revenue, including trading, and BUK is about half of our net interest income, so about 25% of the group, but I appreciate it, you know, it attracts a lot of attention. So what we observed through the second quarter was that customers were really using their deposits in a very proactive way to manage their financial outgoings and some of the uncertainties that we talked about. So, you know, paying down their debts, actually moving their deposits towards higher yielding, higher yielding accounts, and that's clearly had an impact on net interest margin. We actually think it's positive, it's good for the franchise.
You know, it's good for those customers to actually protect themselves in an uncertain environment, so we see it not unconnected with the impairment performance of the bank. Actually, as we go into Q3, we see those trends persist. You know, customers are using their current accounts proactively. They are continuing to migrate their savings, as we would expect them to do in this environment. Now, going the other way, there are two positives: the first is clearly 2023 has been quite an intense period of mortgage margin compression. That's difficult to say. We would expect that to somewhat abate towards the back end of the year and into 2024.
The reason I say that is we know who is maturing, at what rate, and actually what we see is an alignment of front book and back book rates over the next six months or so. That's really important. That drag on NIM will dissipate. The other thing is, obviously, we've got the structural hedge, so we've had a very mechanistic approach to our structural hedge over time. We've got about GBP 50 billion maturing next year. That will, you know, the pieces that are coming to maturity are maturing around 1%, so that gives us a real tailwind. We're clearly going through this period of deposit volatility at the moment. That means that the exact, you know, tiny changes in assumptions can materially, you know, change the outcome.
There are these real positives that are coming through in terms of, you know, the mortgage pressure abating and the structural hedge. I think what's really important here is to stand back and say, you know, not just Barclays, but across retail banking, these are businesses with high returns. We're seeing a period of NIM volatility right now, but we would expect that to stabilize at a point in time. I think it's also really important to point out that in this environment, you know, high inflation, high-rate environment, we see typically a movement of deposits from retail accounts into corporate accounts, and of course, given the nature of our book, we're a beneficiary of that. We see real stability in the corporate side of the house.
You know, we've got GBP 170 billion of corporate deposits, very stable, again, franchise-led and delivering a really strong NIM there.
Then customer treatment or the treatment of customers and pricing has been a real media focus in particular...
Yeah
... but also has got a lot of political focus and some regulatory focus. What are the implications for Barclays? Is it changing the way that you run the business at all?
Not really. I mean, most of the charter matters are things we were already doing, of course, for our customers. And, you know, the Consumer Duty that became very front and center for the media in July is something that we've been working on for years and actually has been a really big part of our transformation program. I would say the things that are, or the regulatory focus that's perhaps a little bit different, is not about pricing itself, but making sure that it's very clear for customers, the rates that are available. So bringing those front and center to the customer, that's really important for us to do.
And then I think the real change from Consumer Duty in particular is the requirement to not only ensure good outcomes for customers, of course, that's what we would always want to have, but make sure that there is a body of evidence that demonstrates that. So I think that's the bigger, that's the bigger change, and one of the reasons why we are so focused on our digital transformation, because actually a digital footprint means that customer journey is very, very clear to all. So you know, I think it's, I think it's a reflection of what we and others actually were doing for some time.
Okay. It's a purification, if you like.
Yeah, I think so.
Right.
Yeah.
Okay. Thank you. And then you mentioned digitalization in the context of BUK before-
Yeah
... as a way to drive efficiency. Is that how you think about digitalization across the group? Is it an efficiency driver, or is it a revenue driver, or some combination of the two?
Yeah.
Where, where are you deploying it most?
Yeah. Well, it's... We're focusing it significantly in the UK, and one of the things that we're trying to do is ensure that a customer can go through an entire journey digitally. That's really important, because it's only when you achieve that, that you can really start to retire some of the physical infrastructure that surrounds it. So, you know, we're seeing very, very good digital engagement. You know, more than 90% of our transactions are done digitally. You know, of our high rate savings accounts, more than 95% of those are being opened digitally. So you know, that is really important. So I think it is a revenue driver, but it's also an efficiency driver.
So it allows the customer to complete the product journey, stay with you, deepen their relationship, but it's also facilitating, over time, a reduction in the physical infrastructure around us. I think it's similar in US cards. You know, it's, it's probably an earlier journey for us there because it's more of a monoline, but it would be an area of focus there. And of course, electronification in markets has been, you know, all of our focus for quite a few years now, and particularly in, you know, the technology that we've invested around prime and fixed income. I'd call those out as well.
Thank you. And then, so following on then, U.S. cards, so you acquired the Gap book last year.
Yeah.
Recently announced a partnership with Microsoft, which really those two things seem to diversify the customer base-
Yeah.
of that, that business quite a lot. So how should we think about that from a growth perspective, but also a capital consumption perspective?
Yeah. So, we like our US business very much. You know, it's a great business in terms of the diversification it gives us, in terms of our consumer business away from the UK. But also within the US, it provides, you know, a broader benefit in the way that we manage the IHC. We've grown it successfully. You're right, we've put down capability for Gap and now Xbox. That does mean that we've essentially doubled the addressable market for that business. The way we think about it is that, you know, we were previously very dominated by travel, and that's only about half of the partnership cards market in the UK. The rest of it is more in the retail space. So now we've built that capability, it opens the option for more partners to us.
How do we find those partners? Well, our institutional relationships are really important, so it sits very well alongside our U.S. bank, our U.S. investment bank in particular. Because essentially what we're doing is we're providing retail customer capability to those institutional clients. So, you know, it's a business that we are keen to continue developing, noting that it is relatively capital-heavy, you know, like most cards businesses. So we do it carefully, we do it carefully in the current environment. And, you know, we're really focused on driving returns through other matters, like, you know, what I said on digital efficiency, but, overall, a good business.
Okay. And then continuing with that division, so CC&P, you talked more recently than any time that I can remember in the past about private banking.
Yeah.
And then there's been media discussions around plans for the payments business.
Yeah.
So could you talk about what your plans are for those two parts of CC&P?
Yeah. So our private bank within CC&P has been growing very nicely over the last few years. So, you know, sort of quarter-over-quarter, we've seen good growth in client assets and liabilities and indeed investments. And it's a business that made more than GBP 1 billion of revenue last year, so really growing very nicely. What we've now done, and we did through Q2, was we picked up our UK wealth business, so an execution-only, retail-focused business, and we've now brought that across to be with the private bank. And we've done that for efficiency, to allow us to deploy our technology more effectively and also just singularity of leadership and focus. So we feel like we've already got a good basis there to grow from, and you're right, we'll talk about that more in future.
But it's already a successful business, just one that, you know, we have some ambition around. On the payments business, I mean, that's quite unique in Barclays in that it, it actually touches every single part of the bank. It goes from, you know, personal banking all the way through to SMEs, corporates, and our biggest institutions. So it's a great way for us to really leverage the best of Barclays, all of those clients, and, and, and bring them that payments offering. I think what we've done very successfully thus far is serve our corporate business extremely well, so large corporates.
You know, that's high volume, relatively narrow margin, but what we've done now is built out capability around that, so an e-commerce gateway, you know, support in fraud and fraud analytics, you know, two-factor authentication, all of those things that hold you up now when you try and buy something online. You know, we're trying to support our clients with that. What we've served less well is actually our SME book. More complex, more fragmented, but much higher margin, so we're, you know, we're really focused on, on leveraging that too. So, you know, it's a good business, capital light. You know, quite high technology cost, but once that technology is built, the marginal cost of the additional client is, you know, extremely small. So it's a business that we want to continue scaling.
Thanks. That might be a good point to see if there are questions from the audience. The lights are bright, and I'm short-sighted, so do please wave if you've got a question.
At the front.
Well, thank you. Yeah, just here at the front.
Thank you for breaking the silence.
Thank you. Thank you for the presentation. I just have a quick question. I mean, the U.S. regulator has now scrutinized or strengthened a bit the capital requirements, so the U.K. banks might be busy with building up capital at some point, which the European banks have been done, done for the past decades. Do you think, like, there is additional growth perspective for the CIB business or some other areas you can additionally grow in, instead of like, what you have done already? Thanks.
Yeah. So, because we operate some of our CIB in the U.S., we will be subject to the same regulation as we operate there. That will certainly impact our banking business and to a fairly large extent, our markets business. So, you know, there may be some differences between the regulation and how it plays out across the jurisdictions, but to be honest, we see ourselves as having to comply with Europe, U.K., and the U.S. I think what I would say is that we, like most banks, are very used to operating in that environment of regulatory complexity. I would expect the shape of the businesses, the pricing, et cetera, to sort of moderate over time as the banks transition through those changes.
I think one thing that it will do is it's clearly making, you know, the barrier to entry to operate in some of these businesses really quite high because they're complex, with complex capital requirements and extensive capital requirements. You know, so to the extent that we feel like we're operating at scale in this business, actually, it's relatively positive once we get beyond that transition. Thank you.
Any more in the room?
Hi. We heard earlier from HSBC as well, talking about tech investment increasing in the sector. You've obviously talked about the same. The question is whether this is just everyone staying apace with each other, or do you feel actually, you know, with what you're doing, there are things that maybe puts you ahead of the pack or not? I mean, does a consumer or the client at the end expect you to do this, or is there a differentiation at the end? Thanks.
Yeah, it's a really good question. I think you're right. There is an element of technology investment that is just required every year. You know, and I'd call out not just keeping up with the competition, but ensuring that those platforms are run really efficiently and securely. You know, the investment, I'm sure, across the industry on cyber, for example, and resilience more generally, is an underlying level of investment that we will all need to make. The question is then: how do you deploy technology to create, uh, competitive advantage? Let me just... For example, within our U.K. business, we think it's really important. The app, the Barclays App, has more than 10 million customers on it. It has hundreds of millions of interactions every single day.
It is a platform where we've seen customer interaction actually increase very, very significantly over time. I think the number of interactions we have with customers is up about 12% year-on-year. They see it, particularly in an environment of economic uncertainty, the reassuring nature of being able to see your financial position, your incomings and outgoings, I think is really important. It's important for the relationship, but also once that person's within the app, your ability to lead them down different journeys and keep those balances within your franchise is really, really important. So, you know, our Rainy Day Saver, 95% of it opened in the app. If we went back, the last time we were in a rising rate environment, that would not have been the case.
So it's a real way to capture your customer. I think on the other side of the bank, probably the best example I could give you is fixed income and, and prime. So, as I said, we are a very, very strong fixed income house. What we have chosen to do over a number of years, it's many, many years of, of investment, is actually run a single platform across fixed income and prime. So those of you who are clients of ours, when your trading desks come to us, they're coming to us through a single leadership team and onto a single platform. We think that's really important for you as clients.
It gives you a better experience, but from our perspective, and we get great feedback on that interaction, but from our perspective, it also allows us to see the risk across a single client in everything that they do. So it's much better for us in terms of risk management, which ultimately is better for capital, which ultimately means you can, you know, recycle that into attracting new clients. So actually, in every part of the bank, it's important. Yeah, it's a way of life.
Perhaps I could come back with one before we finish. There's been a lot written about a strategic review at Barclays.
Yeah.
I think you've commented previously that, you know, management goes through an annual planning process.
Yeah.
So, just could you help clarify in terms of, you know, over the next three to six or six months or so, by full year, should we expect much of an update?
It should come as no surprise that we're frustrated and disappointed by the valuation. We don't believe that reflects, you know, the returns capability of the business, or indeed, you know, the commitment that we're making to shareholder returns. Every single year, we go through a process of planning the business. You know, every single business we consider, how do we create the best value, ultimately for the bank and for the shareholder in that business? The type of questions we ask are, you know, our right to win, you know, our ability to deploy capital effectively and get a return on that capital, and really, you know, where should we be deploying our technology investment, for example. This year is no different to that. What we have is, I would say, a bit of external involvement.
We haven't focused them on one part of the business over another. They're helping across the board. And I think that independent challenge is really important, you know. It's something that we deploy in the business fairly regularly, and this time we're using it through the planning process. But, you know, we're extremely focused on delivering value, delivering the best possible returns for every business that we run. And as I said, you know, we'll come back in time and talk about our ambitions.
Thank you. I think that's a good point at which to end. Thank you very much, Anna.
Thank you so much.