...For important disclosures, please see Morgan Stanley Research Disclosures website at morganstanley.com/researchdisclosures. The taking of photographs and the use of recording devices is also not allowed. If you have any questions, please, reach out to your Morgan Stanley sales representative. With that, we can kick off with questions. So with your full year results, you presented a new, three-year plan. It's the first three-year plan, since you've, you have presented as CEO. Maybe you can start there. What are the main targets of the strategic plan, and what are you trying to change within the bank?
Yeah. Well, Alvaro, thank you very much for having me here, and, you know, appreciate the opportunity to present at the U.S. conference. We often are there at the U.K. conference, but this offers us a new opportunity. The three-year plan was not just my first three-year plan as CEO, it was actually the first real investor day the bank had had in a decade, so since 2014. And I think it was very important in the long-term context of the history of the bank, for us to lay out our return ambitions for our growth ambitions, our return ambitions to shareholders, and what we thought of as the business mix and the future of the bank. So we centered on three measures.
The first measure was that we should have a-- we've been producing approximately 10% ROTE, and we set out a target of greater than 12% by, you know, 2026, or with by, you know, within 2026. The second one was we've been increasing our capital distribution, so buybacks plus dividends, to around GBP 3 billion in 2023. We set a target for, you know, greater than GBP 3 billion by 2023. We set out a target of a greater than GBP 10 billion in the three years, 2024-2026. And then the third thing is the business mix.
You know, we have our investment bank has been growing in both less spending, in capital share of the bank, to the point it's around 60% of the bank. It was 60% of the bank at the end of last year. We've laid out a target of making the IB about 50% of the bank in terms of capital or RWAs by 2026. The important part of this is that this is not coming from shrinking the investment bank. We believe we have an at-scale investment bank that is competitive. We've made choices about where we operate. We are not in emerging markets, generally speaking, other than India and Mexico. We are not in commodities. We have limited footprint in Asia, in trading and investment banking, but we don't do equities in Asia, for instance.
So we've made those choices, and within those choices, we believe we are at scale, particularly in the U.S. and the U.K. and, and Europe. So the three points were a return target of greater than 12% in ROTE by 2026, greater than GBP 10 billion in distributions, buybacks plus dividends, and then the rebalancing of the bank so that the IB is about 50% of the bank. And to get that, of the approximately GBP 50 billion of RWAs we expect to generate through profitability, we aim to put about GBP 30 billion to work in U.K.-related assets. Organic largely, but we did have one inorganic acquisition, which was Tesco Bank, which accounted for 8 of that GBP 30 billion earlier this year.
We're 5, 6 months into the plan, what can you tell us about the progress?
It's more or less going as we would've liked it to have gone or expected it to have gone. You know, in these things, you sort of lay out a plan, and there's a range of outcomes that happen, either because of macroeconomic conditions or because of the business environment. So the critical elements of the plan were, are proceeding both basically, the bank is performing, or we reported it in the first quarter, along what the lines were. So what were those lines? So in 2024, to have a to produce returns that were approximately that of 2023, which was 10%. We produced 12.3% in the first quarter, but you know, the first quarter is generally seasonally a little strong.
The second thing was to start the growth in our UK lending businesses, which has begun. It'll take some time for it to mature into interest-earning balances. And then to be in a position to sort of satisfy our capital distributions, which is what I said. And our target for 2024 is approximately that of what we did in 2023. Now, little bit of ups and downs. Interest rates have been higher, and I'm sure you'll get into some of these questions. Interest rates have been a little higher. NII has been a little higher. In the investment bank, some parts are doing slightly better, some parts need more time to catch up.
You know, we would expect this kind of small variation quarter to quarter, but the pluses and the minuses, when you take it together, have allowed us to produce what we would have expected to have produced.
... We start looking through the divisions in a bit more detail. In the - let's start with the UK. There, the UK, the competition in deposits in the UK in general has moderated. You've set yourself the target to grow mid-single digit throughout the plan, three years of the plan. But after all competition we saw last year, when do you expect NII to trough? Has it already troughed? And with all these changing rate environments, does - how does that affect your plan?
Yeah. So NII has three components to it. One is deposits, the second is lending income, and then for those who follow UK banks, you know, there's a third thing, which we call the structural hedge, which is basically a smoothing mechanism for changing interest rates. And it's a smoothing mechanism based on the quantum of our deposits, which I'll talk about. So on the first thing is deposits. Deposit behavior with slightly rising rates has stabilized in the sense that two things. We continue to see deposits growth and stability, and I think, in a very small amount of it, you can relate to what's happening to a shift between midsize and smaller banks to the larger banks. There is a small amount of flight to quality.
The second thing is within deposits, we are seeing that even though rates fell and rates have risen, there is a little more stability in … while people are still moving from shorter term to longer term, what we are seeing is that that rate of that move has decreased. So there is what people might call a burnout effect, which is those who would have moved, have moved, and those who are, are not moving, continue to stay. So what that has led is to some stability in deposits and deposit-related income. So that's the first part, and then, you know, other movements in and out seasonally with income taxes and retirement accounts, or ISAs as they call them in the UK, that's played out as you'd expect. So that's deposits. The second is lending.
On the lending side, we've made, first of all, and I should say overall NII, we are expecting for this year to be around GBP 6.1 billion. That excludes Tesco, which we expect to close in the fourth quarter. Tesco, when it comes in, will be an annualized approximately GBP 400 million a year. Right? So, and that 6.1, we are sort of on track for. The second part is lending. We've made investments to broaden the suite of our lending product and to increase the amount of lending which we do. So, as I said earlier, on credit cards and in loans, that started, it'll take a little time to show. In mortgages, our share, the mortgage market itself has stabilized, and our share has increased slightly. You know, that'll ebb and flow.
It's a broker market for the main part. What we are trying to do is for the part that is a little more customized, which is high loan to values, non-traditional income, so not your plain vanilla, I want a 50%-60% LTV mortgage of this size, which is largely brokered. But for more complex mortgages, we bought a company called Kensington Mortgages. That is growing, and so we expect to see, on the lending side, more support. The third part is the structural hedge, and the structural hedge is, the way to think about it, is that the UK banks use it as essentially a way to smooth your, your interest rate exposure. So that structural hedge income, we expect to be contributing around GBP 2 billion more in 2026 than it did in 2023.
That basically will help when rates fall, to dampen the effect of the fall in rates. We do it on a view of the stock of our deposits and therefore, how much to sort of smooth that income. I want to stress that we do not view this as an interest rate positioning activity. I've spent 30 years of my life as a fixed income person, and I know I'm incapable of calling rates. So what we do is to do a look at the stock, and as I said earlier, you're seeing a little bit of a burnout in the movement from short-term deposits to long term. So, you know, we think about that when we contemplate our structural hedge.
But that's an important balancing mechanism, if you like, and dampening mechanism for the effects of rates. So you take all three, deposits, slightly positive trends, lending, we're making all the attempts, we'll expect to see it come out, and the dampening mechanism, we expect to continue to be helpful to us, especially if rates fall.
I want to take you on one point there. You, you've talked about lending, growth, but if I think about the 30 billion RWAs you wanna grow in the UK across your three businesses, that even if we take out Tesco, that's 20% growth, in the plan versus your 2023 levels. Where are you gonna find all that growth?
... It's no doubt ambitious, even as an organic plan.
Mm-hmm.
And I also want to say that, I've not only been a fixed income person, I've been a risk manager for a lot of my life. And, the last thing we want to do is to deploy credit overly generously, so that won't happen. Where do we see the growth? First of all, you know, when we announced the plan and GBP 30 billion, especially in the UK, we got a lot of questions about the UK, and I'm sure you're going to come back at some point and ask me about the elections. But the important thing about the UK to remember first is that it's been a generally resilient economy. It's finding its feet post-Brexit. Now, is it the fastest growing economy in the world? No, but it's been very strong and resilient.
There's a fair amount of political unanimity in the way they view the economy. We can come back to that later. The second thing is, we've got a huge presence in the UK, right? From 300 years of history across the scope of in personal lending to business banks, to corporates, to obviously, the very large companies. So that puts us in a good position. Third, we are starting from a position, especially in business banking, credit cards, and corporate lending, where we are underrepresented. And in a way, it's an easier story than you might think, because if you take corporates and business banks, 25%-30% of them have deposit accounts with us, transact with us, but our lending is underrepresented to them.
In part, post-Brexit, this was a risk management decision, which we made very deliberately. I raise my hands for that. And what we did was we shrunk lending to so what we thought was some of the frothier sections in the UK economy. Now, our loan-to-deposit ratio in some of these sectors is around 30%, so we have room to grow. So that's where we expect to grow, as well as in cards in the UK. The thing I want to point out is, we've been also very clear in our, our statement about capital. Right? The waterfall is simple. One, is we want to be a well-capitalized bank, and that ratio is 13%-14%, CET1. And we were 13.8, I think, at the end of the first quarter.
The second thing is, after that, the GBP 10 billion plus of distributions.
Yeah.
And then third, to invest in the high-returning sectors of our bank, which are primarily in the UK, including our wealth business, and the private bank, which will take a little capital, but not as much as the others. So we expect to do this in a very risk-controlled way. If for whatever reason, we are not able to deploy that GBP 30 billion or some of it, come back to item two, which is shareholder distribution. That's the waterfall.
By the way, if anyone wants to ask questions, feel free to raise your hand. But I'll maybe continue with the global business. Turning to the global businesses. In the investment bank, part of the plan is you've laid out how you wanna take market share. What areas are you most focused on in terms of revenue growth, particularly the... and how are you going to achieve that, in particular, given the RWA constraints-
Yeah
-that you've explained, that you've, the constraints you've put on the business to, to grow capital?
So, again, so there are three parts to this, of making the investment bank even more successful, and I think it's been quite successful. One is revenues. The second is what I would call the quality of revenues, which is a return per unit RWA or return on capital, which is especially important in banking and in markets, but more in banking. And then the third is cost management. So on the first one, in revenues, now, in each of these, I'll sort of take markets and banking in sequence. So on the trading side, and the banking side, overall, by the way, is that we are, after the US banks, the number one bank, investment bank, globally, and so number six globally.
But there are parts of the markets where we are stronger than that, because as I obviously told you, there are parts of the markets we don't participate in, so therefore, other parts we are stronger than number 6. In markets, one of the things we laid out a few years ago was with our top 100 clients, with over 70 of them, about 70 of them by 2026, we want to be in the top 5, so one position above our overall average. That number with whom we were top 5 in 2021 was something like 30. It's crossed 50 by the end of 2023. We reported in our Investor Day 49. In mid 2023, it's gone up a little, and we aim that to be 70.
What that is, is greater product penetration, doing more products with our individual clients, and it's a playbook we've used, and we're continuing to use it. It also means continuing to build strength in certain areas of the markets, and we laid out three. One was European rates, where we had a strong position, which attrited over the last few years. The second was equities, derivatives, and the third was securitized products. And in our Q1 results, we showed progress in the second two, equity derivatives and securitized products. Little more to do on European rates. And then RWA productivity in markets has been fairly good. We've given markets over GBP 30 billion of RWAs in the last few years, and their return per unit RWA has been around 6%, which is... and stayed constant.
So as they've absorbed RWAs, they've maintained efficiency. Coming to banking. In investment banking, again, strong, but it's a debt capital markets heavy business. Barclays, Barclays has always been known for strength and credit. And so it's a DCM-heavy business, which we are trying to move into more capital efficient and revenue-based approaches. So more equities and more M&A. Early signs are good, being involved in a few transactions, but obviously, this has to happen quarter by quarter. The RWA productivity has declined over the last few years from around 6% to 4.5%, and we are looking to make it come back. And we are trying to do that in part by being disciplined about capital, and in part, obviously, by building strength in some of the growth areas in the market: tech, healthcare, and the new energy economy.
We feel, if you look among banks, you would see that we have probably been, you forgive the dad joke, sustained in our commitment to sustainability. We've been committed and consistent. You know, partly this reflects the fact that we're a European bank or a UK bank, but partly it is a deliberate choice which we have made, that while we continue to believe in the transition and we continue to support oil and gas companies and fossil fuels, they are a part of the transition, but they're a diminishing part of the overall energy economy. We've put a huge emphasis on the other side of it, which is green energy and all the stuff that goes with it. That's another area of focus for us.
And you'll see that in transactions which we do. So in banking, that's the aim, more to be done and, you know, watch the quarter by quarter progression. So one was revenues, the second was return per unit RWA, and the third is cost. So we've invested a lot in our investment banking business over the last number of years, especially in technology. We believe, I mean, you have to continue to invest, but the rate of that investment will be more moderated, and the cost picture for the bank overall is progressing as we said it would. We had said for the bank that, we'd look to get about GBP 1 billion additional pounds of cost savings this year. We reported GBP 200 million in the first quarter, so we remain committed to that target.
The other big lever to sort of improve profitability of the group is normalization of provisions, in particular in the US cards. Your provision charge in Q1 was just over 600 basis points, and you're looking to bring that down to 400 basis points. Maybe you can share your latest thoughts on what you're seeing, what gives you confidence that you will see that reduction?
Yeah.
How quickly you think it can happen? Yeah.
So our U.S. cards business is a partnership card business. I gather another large partnership provider just presented a minute ago.
Yes, Synchrony.
Synchrony did. So what we do therefore, in the US, in the UK, we of course issue cards for partners, but that's a minority of our business. It's mostly in our own brand, in our own name. In the UK, it's... In the US, it's a partnership business, working with about 20 large and wonderful US corporate companies, corporates, and with about $30 billion in assets. So we increased our loan loss reserves coming in to the year, partly based on macroeconomic modeling and high expectation of higher unemployment.
So now you can see consensus estimates are coming down, and what we have said is that we expect by the end of the year to reach our long-term target of around 400 basis points from the 600 that you mentioned. I should say that we are fairly well reserved, at around 11.3% in IFRS 9 terms and 8.5% in CECL terms. We have a fairly high FICO scores, what, 750 on average for the book, and about 10% or 12% of it is around 660 and below. It's a travel-heavy portfolio, which has advantages and disadvantages, in terms of sector concentration, but one advantage is that it tends to be higher credit quality.
We've seen behavior that continues to give us a level of optimism about the stability of the actual charge-offs when they come. We reserve in advance of the actual charge-offs.
If we look beyond the sort of cyclical recovery, when you think about your growth opportunities in that business, we've seen sort of press reports talk about GM portfolio, sort of Walmart. We've seen press reports, not sure if that's a slightly different category maybe, but how do you see your organic growth evolving? And what are you willing to consider in that business in terms of when it comes to acquisition of portfolios?
Yeah. So the business, as I said, is around $30 billion in balances. We aim for it in this plan to be around $40 billion. Some of that is organic growth in the accounts which we have. Some of that is making a provision for adding. People we've got to be alive to the risk of some account leaving you, although we've had a fairly high retention rate. What I like to see when I think about that business is we think about the risk and the opportunity in four ways. First of all, is who's the corporate you work with? And how important are you to their business endeavor?
Because at the end of the day, in a partnership card, that corporate has to view it as a valuable part of what their revenue plans are, and see the relationship which we can do in enhancing that customer experience. And we don't compete for the end customer, because we are a pure partnership business. The second is to have the right bite sizes. And, you know, 5%-7% of our portfolio is a good bite size. The third is to stagger the portfolio so that you don't have a concentration of maturities in a particular year. The client concentration, maturity concentration, a good two-way relationship. And then last, of course, is the underlying credit in the portfolio itself, which you have to manage.
So, you know, I won't comment obviously on the press reports yet, but I believe that there is scope for us to continue to find accounts that fit that profile. And I think that we offer something very valuable for those companies, and that would be what's right for us.
Related to that, when you think about sort of acquisitions, you've obviously made the commitment to distribute GBP 10 billion of capital to shareholders. How do you think about sort of that GBP 10 billion commitment versus the room that you have to invest, when you think about your overall portfolio? Is there upside to that GBP 10 billion, or should we think about sort of the disposals you have leaving... Sort of using disposals to invest, and how does the capital allocation interact when you think about it?
So the first and most important thing is that waterfall, which I mentioned. We want to be a well-capitalized bank. That number is 13%-14% CET1. Right? That's the range in which we expect to operate. That's first. The second is the commitment to GBP 10 billion or more of capital distributions in the next three years. The third is to invest in our higher returning businesses. So just some factoids. When we announced the GBP 10 billion plus, that represented about 50% of our market cap in February. Now, about 4-5 months on, that's about a third of our market cap, or 30%. So obviously, a smaller amount.
Equally, at that point, if you looked at it or at the trade, the way the stock was trading price to book, the implied cost of equity for the bank was somewhere in the mid-ish, high-ish teens. Obviously, that's declined just a bit, but the U.K. businesses in which we look to invest have all produced high-teen returns, and we've given you that in our reorganization of our businesses. So whether that's our U.K. consumer bank, whether that's the U.K. corporate bank, whether that's private banking and wealth, high teens to the 20s, and one even 30. So the investment will be there in businesses which are above our hurdle rate for cost of capital, whatever you think that number is. So if that's the logic, first, keep the bank well capitalized. Second, return GBP 10 billion or more. Then third, invest.
Then coming back to your earlier question, hopefully, we find the ways to do that organically. If we don't, we come back to the second. That's the way I think about it broadly. In that context, you ask, "Can it be more, and, and, and where are we on disposals?" So the disposals were factored into this. We announced the sale of our Italian credit card portfolio. We are fairly well advanced in the sale of our German credit card portfolio. Everything in Europe takes a day longer and a little more complicated than you thought it would be, but we're fairly well advanced. And then, if everything happens on the revenue side, the way we think and growth happens, then I would focus on the greater than, right? Whether it's greater than 12% ROTE or greater than GBP 10 billion. Right?
But there's obviously some expectation that not everything will click, but we're very confident of the 10, and the greater than sign is if things go better than we thought.
Great. I've got more questions, but just to... Do you want to just-
Yeah.
Just there?
Yeah, thanks for taking my question. Just going back to your comments on competition in card, or at least the alignment with your partnerships there. There's been some movement out there of large retailer card portfolios, and obviously American Airlines is taking another look at their book as well. Just wondering if you had any comments on how you're thinking about those businesses? And is there any sort of, in addition to the alignment with the corporate side, and you know, you don't own those customers, obviously, is there any sort of financial hurdle rates or implications you think about as you look at those portfolios?
Yeah. So I think, look, there's it's always important for corporates. They look at their contracts, they've got to ask themselves, what do their co-brand partners bring to the table, both in helping them with their financial objectives and helping them get that connection with their customers. The business has become more competitive and become competitive in two ways. One is just, you know, the pricing that you've got to offer, and second, of course, there are movements. You didn't ask me the question, but in the actual financing of the business, which is whether it's late fees or anything like that. So we've got to manage to that. An important part of that management is our cost discipline. An important part, even equally, and I should have mentioned it earlier, is our capital discipline.
You know, we did a trade of GBP 1 billion pounds, dollars of receivables with Blackstone off of our portfolio. It's one of the first trades of the kind, if not the first trade of its kind from a major bank. And that shows a willingness on our part to do capital management. So we will use all the levers for it to be that kind of a win-win relationship, financially and otherwise. And I think equally, you see in the corporate or in the consumer world, when you don't strike that right balance, it's never a great relationship. These are long-term relationships, and it has to be mutually beneficial on all sides.
Okay. Maybe I have to, before this session ends, ask about U.K. elections. On the fourth of July, how do you see that, so the potential outcomes and policies affecting Barclays? And in particular, there's been some sort of latest press reports we were talking earlier around changes in reserve remuneration at the Bank of England, potential proposals there. Yeah.
First of all, given what happened in the Indian elections last week and in the European elections over this weekend, it's a mug's game to predict election outcomes.
[crosstalk] Mexico, UK, and Mexico is there.
And Mexico, and Mexico. So I'm not going to get drawn into the prediction. What I would say about the UK is that the two major political parties are fairly well aligned in terms of the way they view the economy and the way they view the banking system. I do think that they view the financial system as an important part of UK competitiveness. I do think with Basel endgame, however it plays out, is a sign of stability in the capital regime. And then the consumer regime is also approaching that at its own speed.
I think that, you know, whatever the outcome between the two major parties, I think the relative, there's relatively low political risk in the U.K. compared to what we are seeing elsewhere in the world, and compared to what we have seen in the U.K. in the past. So this is not the election of, you know, Thatcher versus Callaghan or Corbyn. So it's not that. So I'm fairly confident about that. On reserve remuneration, the Bank of England has been pretty clear about what it thinks about the pitch about it, which is not to have a change. Obviously, we, as banks, would support that.
We think it's important for the financial system to have stability in policy, clarity in policy, and also to have a method of managing the way the monetary system works, which is on par with the leading counterparts in the world. And so the Bank of England, in my opinion, has always shown itself to be very wise and very, far-thinking and stable in its approach, and I expect that to continue.
Very clear. We're approaching the end of the session, so just remain to say thank you very much, [audio distortion] .
Alvaro, thank you.
Thank you very much.
Thanks for having me.
Thank you.