Earnings Call: Q3 2019

Oct 25, 2019

Welcome to the Barclays Q3 Results 2019 Analyst Investor Conference Call. I'll now hand you over to Jez Daley, Group Chief Executive and Tushar Mazaria, Group Finance Director. Good morning, everyone. Barclays generated £1,200,000,000 of attributable profit in the Q3 of 2019, excluding the litigation and conduct charges, which largely related to our PPI provision. We dealt well with some headwinds in our UK consumer business, whilst we produced a good performance in our corporate and investment bank, particularly compared to the same period in 2018. The bank generated earnings per share of 19.7p for the 1st 9 months of 2019. Up and before tax was £1,800,000,000 in the quarter and £4,900,000,000 year to date. Our group return on tangible equity of 10.2% for the quarter is a further positive step towards our 2019 target of 9%, which we still feel good about. Turning to capital, our CET1 ratio stands at 13.4% as we now account for our operational risk more consistently with our UK peers. To reflect the positive impact of that change, we have consequently updated our CET1 target ratio to be around 13.5%. Our cost to income ratio for the quarter was 59% and stands at 62% for the last 9 months. Management focus on cost control remains a priority and we continue to expect to see positive jaws across the group over the remainder of the year and for the full year. Barclays UK produced good performance in the quarter, resulting in an RoTE of 21.2 percent despite a challenging environment. We grew mortgage balances, though we still see margin compression in what is a competitive market. Therefore, we were pleased to land our net interest margin at 3 10 basis points, which was slightly up on Q2 despite this pressure. We continue to invest in our digital capability and we're pleased that in the latest CMA service quality metrics, we were voted by UK Consumers as the number one provider of active mobile banking services. In September, we also started the migration of 1,600,000 customers from the Barclaycard legacy app through our award winning Barclays app. 8,500,000 Barclaycard and Barclays customers on one platform means sharing a richer experience with all of them and provides our customers with access to a larger set of products and services. The Corporate and Investment Bank produced a 9.2% return on tangible equity in the quarter and 9.3% year to date. Markets income was up 13% compared to Q3 of 2018, which was in line with our U. S. Peers. Within that performance, equities income was up a touch on the comparable period last year, whilst in fixed income, currencies and credit, we saw a 19% improvement in income year on year. Banking fees were up 33% versus the same period in 2018, reflecting strong performances in advisory and debt capital markets. This actually represents the best 3rd quarter income performance for our banking business on record. Our corporate banking franchise had another decent quarter with income up on Q3 'eighteen. We are maintaining a strong focus on improving returns in the corporate bank with client by client plans to grow profitability, especially through increasing higher returning transaction banking revenue. In our consumer cards and payment business, we are targeting growth in U. S. Cards with a particular focus on capturing new partnership opportunities, a core strength of the Barclays franchise in the States. We are confident in our ability to expand the portfolio further, both from signing new partners over time and through organic growth of our existing partnerships. Indeed, we expect to announce a new major partnership shortly. In payments, we are also positioned for growth and are investing in our digital capabilities to drive that. For example, in September, we went live with our new TRANZACT solution for e commerce merchants. This delivers a smooth and secure customer authentication process complying with PSC2, which optimizes the transaction experience and helps to prevent fraud for the merchant. This is an excellent demonstration of where we've used our leading position as both an issuer and acquirer to create a hugely welcome solution and we've already signed a number of agreements with clients paying a monthly fee for this state of the art service. In summary, the numbers we've reported this morning represent another consistent and resilient performance from Barclays and they show the benefits of our diversified model, one which allows us to weather today's macro headwinds and grow our businesses and profitability over time. They also show that we remain on track to achieve our target of a group return of 9% this year. We continue to target an RoTE of 10% in 2020, though we acknowledge that the outlook for next year is unquestionably more challenging now than it appeared a year ago, and particularly given the uncertainty around the U. K. Economy and the interest rate environment. We'll see what transpires, but we are fortunate to have a strong franchise to deal with the challenges when they come. Finally, as I said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. And so despite the impact to profitability of the 1,400,000,000 PPI provision, it remains our intention in normal circumstances to pay a total dividend for 2019 of around 3x to half year payment of 3p. Now I'll hand you over to Tushar to walk you through the numbers in detail. Thanks, Jeff. I'll begin with the results for the 1st 9 months and then focus my comments on Q3 performance and the 30th September balance sheet. Reported a profit before tax of £4,900,000,000 for the 1st 9 months, generating $0.19.7 of earnings per share, excluding litigation and conduct. I'll continue to exclude litigation and conduct charges in my commentary as usual. The gas to strategy profitability was principally the additional Q3 PPI provision of €1,400,000,000 was within the range we announced in early September and resulted in a statutory EPS of 10.4p Group RoTE for the 1st 9 months was 9.7 percent with double digit returns for both BUK and BI. As Jeff mentioned, we continue to target an ROTE for the full year of over 9% and over 10% for next year. The 9 month return represents a good base for reaching the 9% despite Q4 seasonality. But the macro headwinds, including the low interest rate environment, are making our targets more challenging, particularly with respect to 2020. Nevertheless, we grew income 2% year to date with the increase in Barclays International more than offsetting the decline in Barclays U. K. Costs were broadly flat year on year, but with positive jaws in Q3 and expected for Q4 and for the year as a whole. With the income environment, cost control remains a major focus and we've reiterated our cost guidance of below €13,600,000,000 Impairment was £1,400,000,000 up on last year, which benefited from improved macroeconomic variables, but credit metrics remain broadly stable across both secured and unsecured portfolio. On capital, we've just concluded discussions with the regulators to remove the regulatory floor on operational risk RWAs. This resulted in a reduction in RWAs of €14,000,000,000 with an associated increase in the Pillar 2A requirement. As a result, the capital ratio was 13.4 percent despite litigation and conduct taking 49 basis points of capital in Q3. Focusing now on the Q3. Income increased 8% despite the challenging environment, particularly in the UK, reflecting a strong performance in CIB, where income grew 17%. The cost print of €3,300,000,000 was down 1% and reflects cost efficiency measures across the group, which resulted in positive jaws of 9%. Impairment was £461,000,000 up £207,000,000 on the low level we reported last year, due principally to non recurrence of the significant favorable U. S. Macroeconomic updates last year. In contrast, the Q3 impairment this year included a €60,000,000 net charge from macro update covering both the U. S. And U. K. Effective tax rate excluding litigation and conduct was 17% and attributable profit was €1,200,000,000 This delivered an RoTE of 10.2%, excluding litigation and conduct. CNAV of 2.74p was down 1p in the quarter as earnings per share of 7.2p and reserve movements were more than offset by the PPI provision and payment of the half year dividend of 3p. Looking out the businesses in more detail, starting with BUK. BUK reported an RoTE of 21.2% for Q3 despite the challenging income environment with income down 3%. In Personal Banking, we saw further strong volume growth in mortgage balances, up GBP 2,900,000,000 net in the quarter and healthy application volumes, but also continuing tight margins. Barclaycard balances were down from €15,100,000,000 to €14,900,000,000 in the quarter, reflecting both our risk appetite and customer behavior, and I would expect this trend to continue. Despite margin pressure and the continuing growth in secured lending, the NIM of 310 basis points was a slight increase on Q2. We expect NIM for the full year to be close to this level as the Q4 NIM will be lower, reflecting both the continuing mix effect of growing secured lending and lower interest earning lending in cards. Costs decreased 4% year on year as efficiency savings more than offset continuing investment. This includes ongoing upgrades for our Barclays app and our digital offering more broadly. Q3 income was up on Q1 and Q2, and I would note that this was achieved without any debt sales, which are part of our normal business activity in most quarters. We still expect positive jaws for Q4. Loans were up €4,000,000,000 overall in the quarter to reach 193,000,000,000 and deposit balances continue to grow to reach £203,000,000,000 Impairment for the quarter was just over £100,000,000 well down on the run rate of around £200,000,000 we've referenced in the past. This was despite a charge of around €30,000,000 resulting from macroeconomic variable updates. U. K. Card delinquencies were down slightly and other credit metrics are benign. The lower chart reflects some recalibration of our models to reflect experience of customer behavior over the last few quarters as well as lower Stage 2 balances. As a result, although I would expect a higher charge in subsequent quarters, the €200,000,000 run rate we've referenced previously is looking like the high end of the expected range, absent significant deterioration in economic conditions. Turning now to Barclays International. In BI, income and impairment were both up, while costs were flat, delivering an RoTE of 10% for the quarter, up from 9.2% for Q3 last year. You can see the key financial metrics on this slide. And now I'll go into more detail on the BI businesses, starting with CIB. CIB reported an RoTE of 9.2% for the quarter, up from 7 last year. Overall, income was up 17% or close to €400,000,000 at €2,600,000,000 This included within markets a loss of £40,000,000 from the mark to market on our residual stake in trade web and a net benefit of circa £90,000,000 from treasury activities, including positives from treasury sales and negatives from CVA hedging. FICC had a good quarter, up 19%, reflecting strong performance particularly in Rates and Securitized Products. Equities increased 5% despite a lower contribution from derivatives, resulting in overall market income of 13 percent or 6% in dollars. Banking had a very strong quarter, up 33% ahead of U. S. Peers with good contributions across M and A, DCM and DCM. The corporate income line was up 1%, reflecting growth in Transaction Banking, while the corporate lending line remained close to the underlying run rate of €200,000,000 that we referenced in the past. Costs were flat despite the stronger dollar we continue to implement cost efficiencies. This resulted in positive jaws of 17%. There was an impairment charge of £31,000,000 which included single name provisions compared to a net release of £3,000,000 last year. The most significant movement in CIB assets in the quarter and in Q2 was the result of further flattening of interest rate curve, which led to increases in both derivative assets and liabilities. There were also further increases in prime balances as we continued to expand our financing businesses. RWAs increased by £9,000,000,000 in the quarter to £185,000,000,000 reflecting a stronger dollar and levels of trading activity. Turning now to Consumer Cards and Payments. We continue to generate attractive returns in CCP, while growing the business. RoTE was 14%, down year on year, reflecting the unusually low impairment in Q3 last year. Income increased year on year by 7% or £78,000,000 partly due to the non recurrence of the £41,000,000 loss on Visa preference shares. We grew the U. S. Cards receivables by 4% in dollar terms, notably in the Partnership portfolio. Costs increased 1% as we continue to invest in the growth of the international cards, the private banks and payments. In payments, we continue to roll out our merchant acquiring proposition in a number of European countries, and this is an interesting growth opportunity going forward. As we flagged at Q2, impairment is significantly higher than the Q1 and Q2 levels at £321,000,000 which included £30,000,000 from macroeconomic update. And we expect Q4 to reflect further seasonal balance growth through Thanksgiving and Christmas. However, credit metrics remain well controlled with not much movement in the 30 90 day arrears. Turning now to Head Office. The improved results quarter on quarter was driven by the lower level of income expense following the redemption of the 14% RTI at the end of Q2. Income was a net negative of €55,000,000 reflecting €30,000,000 of residual legacy funding costs, hedge accounting expenses and the residual negative treasury items. These negatives were partly offset by the Absa dividend, which is received in Q1 and Q3 each year. RWA decreased to £13,400,000,000 reflecting the removal of the operational risk floor. I'm including a cost summary to emphasize our continuing focus on cost efficiencies to fund the investment spend and to deliver absolute cost reductions when the income environment requires it. As I've mentioned, we remain on track to meet our cost guidance of below €13,600,000,000 I would remind you that this was set based on a dollar rate of €1,270,000,000 Although we had a Q3 cost headwind with an average run rate of €1,230,000,000 with the dollar back above the 1.27 level, we still plan to come in slightly under the 13,600,000,000 figure. TNAV decreased in the quarter by 1p to 2.74p. Earnings per share of 7.2p were partially offset by the payment of the half year dividend of 0 point 0 3p. Net reserve movements were also positive, including the strengthening of the dollar to 1.23p at 30th September. Of course, this may reverse in Q4 based on current rates. The net accretion of 0 point 0 8p from these elements was more than offset by the 0 point 9p headwind from litigation and conduct. On capital, the CET1 ratio was flat across the quarter at 13.4%. This reflected a 57 basis point increase from the removal of the operational rig floor, largely offset by the 49 basis points from litigation and conduct. Our businesses remain capital generated with 50 basis points from profits, out of which we accrued 21 basis points for dividends and AT1 coupons. The 21 basis points reflects the final coupon on AT1s we called in Q3, you would therefore expect a lower capital effect in Q4, and a 13 basis points from the FX impact of those redemptions has also not occurred in Q4. This slide shows the buildup of our capital requirement. The removal of the operational risk floor has had a positive effect of 50 7 basis points on our CET1 ratio. Our CET1 requirement has also increased with Pillar 2A up by 35 basis points, reflecting this and the annual update. The result is our regulatory minimum capital level is now 12%. We have therefore updated our target CET1 ratio to around 13.5%. The operational risk charge doesn't affect our overall capital requirement, but does give us a little flex a little more flexibility in how we meet this. In summary, we are still around our target ratio, and our confidence in our ability to continue to generate further capital is reflected in our capital returns policy, combining a progressive dividend and buybacks as and when appropriate. Our funding and liquidity position remains strong. In Q3, we issued a further €1,000,000,000 of AT1, and we called 3 outstanding AT1s totaling €2,300,000,000 equivalent. Our next potential AT1 calls aren't until December of next year. Looking at MREL overall, we have issued GBP 8,200,000,000 equivalent in the year to date, in line with our plan to issue around £8,000,000,000 this year. As usual, we will keep an eye on market conditions for prefunding opportunities. Our MREL is currently at 30.4 percent, close to our expected end requirement of 31.2%, which reflects the Pillar 2A update. Liquidity coverage ratio was 151% at the end of the quarter with a liquidity pool of €226,000,000,000 but our loan to deposit ratio was 82%, continuing to position us conservatively. So to recap, we remain on track in the execution of our strategy, reported an RoTE of 10.2%, excluding litigation and conduct for Q3 with positive jaws of 9%. We continue to target an RoTE of greater than 9% 10% for 2019 2020, respectively. But the macro headwinds, including the low rate environment, are making it more challenging to achieve these targets, particularly with respect to 2020. Continuing to improve our returns year on year remains a key priority for the group, while also delivering attractive capital returns to shareholders and investing in key business growth opportunities. We are at our updated CET1 target of around 13.5% despite the Q3 PPI provision And with an RoTE for the 1st 9 months of 9.7%, we are well placed to deliver on these priorities. Thank you. And we will now take your questions. And as usual, I would ask you to limit yourself to 2 per person, so we get a chance to get around to everyone. Your first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, please go ahead. Hi, Alvaro. Hi, good morning. Two questions for me. So obviously, you had a very strong quarter in CIB in particular. I was just interested if you can give us a bit more color about the competitive environment during the quarter. Obviously, you mentioned in the last call, you had gained EUR 20,000,000,000 of assets from Deutsche. But some of your competitors have been calling out Europe as being quite tough. So maybe you can give us a bit of sense how things are evolving and a sense for the pipeline. Because given that revenue beat and things being quite solid, you've cautioned around 2020 despite that good performance. So maybe can you reflect on that as well? And what divisions are you particularly worried about where visibility is lower now than you anticipated before? Thank you. Thanks, Savara. Why don't Jeff, do you want to take the CIB one and I'll maybe talk a little bit about 2020? Yes. Just on the CIB, it was a good Q3 for us, particularly in the M and A advisory and debt underwriting side, where we think we landed the strongest Q3 in the history of the bank. We always there's always a degree of volatility in the markets business. We did reasonably well in FICC. We'd still like to be doing stronger in equities than we are right now. Q4 last year, as everyone recalls, had a very tough end of December, and you can't count that out again. We feel good in terms of the market share gains. We continue to see gains in prime brokerage, both on the equity side and on the fixed income financing side. So let's see how we compare with the European peers as they report next week. But all the dialogue we have with the buy side is quite good. There's still certain markets where volatility is at very historic lows. And obviously, we'd love to see, through the course of 2020, a more normalized level of movement in the financial markets. But maybe pass it to Tushar. Yes, sure. Thanks, Jeff. And now, Varro, just 2020, I think really the comment that we've put in our release this morning is, it's just being realistic about the operating environment that we think we'll be entering into as we get into 2020. You'll recall when we set our targets in the Q3 of 20 17, obviously, a lot has changed since then. Things I'd call out is the rate environment is obviously significantly lower than we would have thought. We've also been taking a relatively defensive posture on unsecured credit in the UK, growing our mortgages business more actually relative to unsecured credit. So I would expect that to be reflected in our net interest margin, coupled with a low rate environment. I think it's just where we are. Obviously, famous last words where we didn't expect Brexit to still be ongoing. Now what does that do for our business? It does create some uncertainty, particularly in our traditional banking businesses. So you'll see that liability balances actually have been growing quite nicely, but there's less demand for credit than we would have anticipated. You can see that, for example, Business Banking, Corporate Banking, Consumer Credit. So I think a combination of just sort of lower asset growth as we get into 2020, a more difficult rate environment and perhaps a bit more uncertainty as to the sort of the path of the macro economy, just a dose of realism. We think we still we have a good diversified business. In some ways, the 9% 10% are important to us, but perhaps what's more important to us is sequential profit growth. And that's something that both Jess and I are very focused on. So hopefully that gives you a little bit more context. Yes. Thank you. Thanks, Bharat. We have the next question please, operator. The next questioner on the line is from Jonathan Pierce from Numis. Jonathan, please go ahead. Hello there. Kind of 2 questions. They're both on CIB essentially. The first question is the comment around the GBP 90,000,000 of net benefit from treasury sales and counterparty credit risk hedging. Can you give us a flavor as to what the gross components of that were? Because the reason for the question is the fair value in OCI reserve fell by over EUR 200,000,000 in the quarter despite bond yields going down. So I'm just wondering whether actually the treasury gains were really quite large and then there's a big negative in the other direction on counterparty credit risk hedging. If that's the case, what exactly is this hedging CCR issue? That's the first question. 2nd question is just to get a bit more color around the movement in CIB risk weighted assets in the quarter, they were up about GBP 9,000,000,000 Can you give us a sense as to how much of that was FX driven? And there also looks like there was some model and methodology changes in the quarter that were quite big as well. I'm really trying to get to the bottom of the extent to which the book itself, the book size has driven up CIB as opposed to other issues like FX and model changes. Thanks. Yes. Thanks, Jonathan. I think I'll take both of them. So on your first one, the sort of, if you like the growth components of the €90,000,000 benefit that we called out, really what we tried to do here is, we've disclosed trade work as well. It just help folks that, find this useful is just to try and isolate out for you what are the non recurring items. And I think there's 3 this quarter. Tradeweb, as you pointed out, treasury gains, given the very strong rally in rates, but of course, has reversed already in Q4. And counterparty credit risk hedging, CVA hedging, as a lot of people noted. You are right that the growth gains are obviously reasonably well offsetting. We haven't disclosed what those gross gains are, but they're meaningful. If they were that significant, I think I would have sort of called them out in the release. So I won't sort of throw out a number on the call. But you're right that the treasury gains were larger than the losses on counterparty credit risk hedging. But if not, it's going to be hard to call them I'm sorry, just a follow-up. Do you think that will be a negative then in the Q4 in terms of the combination of those 2? I guess it will just be treasury losses in Q4. Yes. I mean, it depends on the rate environment and a whole bunch of factors, Jonathan. So at the moment, rates have backed up a lot. I guess, look at it in the sort of glass half full way. If we were able to take some gains in Q3 as rates rallied and able to add back into our liquidity pool as rates sold off, that turns out to be quite what you assess for us because obviously the carry on the liquidity pool will show up in subsequent quarters. So it's just way too early to be sort of extrapolating those things, I think, Jonathan. You had a question on what sort of the counterparty credit risk. I mean, it's nothing cleverer than we have a whole bunch of counterparty credit risk out there from both collateralized and non collateralized counterparties. And we need to manage the risk effects of that. That does get harder as you get into particularly when forward rates in things like euros go negative, that becomes quite hard to hedge. So it's just some of the effects you have in a low rate environment. You also had a question, I think, on risk weighted assets in the CIB. Yes, I put it in the half just coming straight out of FX. The table that we have in the disclosures is there, but it doesn't really do a great job of stripping out the FX component. You'll probably see that in our footnotes there. But to try and be a little bit more helpful, I'd say half of the growth CIB came from FX. FX has obviously moved quite a bit since Q3. So that will be what it will be probably the other way at the certainly at these rates. The other half, I would put in a combination of a little bit of book growth and sort of effects that you have as we close the quarter at the end of September. Perhaps a more helpful measure for folks is what was the average RWA through the quarter and that's a bit lower than the spot print that you have there. So very modest, I guess, period end book growth, but I put that into the regular way sort of characterization. I don't think there's anything sort of, a, significant and b, sort of perpetual there. It will ebb and flow just as trading activity changes. Okay. That's helpful. Thanks very much. Thanks, Jonathan. Could we have the next question please, operator? The next questioner on the line is from Joseph Dickerson of Jefferies. Joseph, please go ahead. Hi, good morning. Thanks for taking my question. Just two quick areas. On the net interest margin in the UK, was the benefit quarter on quarter primarily from funding costs coming down and therefore that's what is guiding the commentary around the Q4 movement, firstly. Secondly, just coming back to the caveats around the ability to deliver on the ROE target. I mean, it's not exactly like the street is there, 1st of all, in terms of estimates, but good to have the caveat, I suppose. I guess in terms of considering offsets, how would you think about in a lower for longer environment? And I suppose certainly part of your business may be impacted by whatever the Bank of England does or doesn't do, opposed to any resolution on Brexit. How would you think about pacing things like investment spend and variable comp? Because I noticed the quite robust cost performance quarter. So how would you think about those two dynamics in terms of attempting to deliver on the ROE aspirations up for next year? Yes. Thanks, Joe. Why don't I take the question on NIM and I'll hand over to Jeff to talk a little bit more about our investment spending on lower for a longer rate environment. The net interest margin, I wouldn't say it was funding cost as much. You may recall in Q2, we made an adjustment to reflect that all the customer behavior that we've been seeing, particularly in the mortgages businesses. We've seen the refinance at much quicker levels and refinancing into longer fixed products. So we reflected that and that sort of catch up, if you like, to actual customer behavior resulted in probably a slightly lower NIM in Q2 than you would have on an underlying basis. I would say that's probably the bigger delta from Q3 to Q2. Some people may have not picked that up. In Q4 though, and I think this one is important, if we were to hold NIM, I think it close to these kind of levels, there will probably be a touchdown, but I would expect Q4 NIM to be lower than the Q3 headline number. Now what's driving that? There's really 2 aspects that I'd call out there that we can see at the moment. 1 is, we continue to grow our secured book relative to our unsecured book. So just the math of a lower margin product growing at a quicker pace than a higher margin product. And the second thing is we have seen a very deliberate decrease in our interest earning balances in the card business, and I expect that to continue to roll into Q4, as we continue to position ourselves in the right way for that business. So I think combination of those two factors will have a lower Q4 NIM. But over the full year, it will be probably a touch lower than we've had for Q3. And with that, Jess, do you want to cover the Yes. For sure lower for longer, I think makes it challenging for the financial industry, whether it's a bank or an insurance company, particularly if the yield curve is flattening. One of the realities with a European bank, U. K. Bank or a U. S. Bank, we all have to manage very sizable liquidity pools now. And those liquidity pools basically gets trapped in those low interest rates. And obviously, that's going to have an impact on your performance. In Europe, you've got negative interest rates, and that still is particularly acute for the European banks. The 10 year here is well below 100 basis points, and so that has an impact. And we wish we had the 10 year that they have in the U. S. On the other side of that, however, low interest rates on one level should help the outlook for your credit environment. And so as we look at impairments, particularly in the small business and corporate side, those lower interest rates can translate into improvement in your provision line. And the open question, I think, for all of us is if we are facing economic headwinds in Europe and U. S. And possibly or in Europe and possibly in the U. S, is there going to be a fiscal response in Europe the way you've seen the fiscal response in the U. S? And so I think that's some one of the things that we're looking at in addition to obviously hoping to get the Brexit uncertainty behind us. But a lot of the headwind that we talk about for the 10% target for next year is much more focused on the U. K, the Brexit uncertainty and the interest rate environment here, particularly versus the environment when we set this target in the fall of 2017. But on the other side, we hope that the diversification of our business model, the sizable position we have in the U. S, both in the U. S. Consumer business, but particularly in the IB, currency plays in our favor there. So there are pros and cons, but we didn't want to leave a degree of caution for next year. Can I just ask on the point that you made on liquidity? It's just another it's a macro level point on the need to hold liquidity. It seems that is part of what is exacerbating the repo market in the U. S. Propping the Fed to have to open the windows. Is there any way that that is impacting your business? You have an incredibly liquid balance sheet, particularly relative to some of the other primary dealers. Is that providing any opportunities for you in terms of market making in the U. S? We have a very sizable repo book in the U. S. I think we're one of the largest banks in that market. And all I'd say is, obviously, no one likes to see a market like that break out the way it did for those 2 business days. But they were actually quite active for us, and we stayed in the repo market quite strongly. And we're there to provide the ultimate financing for our clients that needed it. Joe, the only other comment I'd make on that is we probably don't have the GSIB pressure that maybe some of the money center banks in the U. S. Have called out in recent times. So probably makes it a little bit easier for us to navigate through that. Thanks for your questions, Joe. Could we have the next question please, operator? The next question on the line is from Ed Flerth from KBW. Ed, please go ahead. Good morning, everybody. Could I just talk about International Consumer and in particular, of the credit metrics? Because and I'm just trying to square your comments about optimism on that in that market and in that sector. But when I look at your credit, the actual underlying dynamics look to have been to have deteriorated, certainly Q3 versus Q2. And if I look at your coverage, you've let your coverage come down Q3 versus Q2 on your certainly on your Stage 3 assets. So I'm just trying to we've got a challenging environment. It's an overseas market, which intuitively one imagines one is not as close to, but I know that's probably a little bit unfair. But also, it's an area you're growing at the same time as credit teams to be deteriorating. I'm just trying to square all those factors, if you could help me there. Yes. Sure, Ed. I'll take that one. The impairment charge sequentially is something I sort of called out earlier on in the year, and I think sort of most people picked up on that. The shape of impairment for that business is going to follow really the sort of seasonal spending patterns. So there is a build up in balances in the latter part of the year and a sort of flat to pay down in balances in the early part of the year. So Q3 impairment was certainly expected to be higher than Q2. And I think Q4, you would expect it to be a touch higher again as we get into the Thanksgiving and Christmas period, which tends to be the most active period. When you step away from sort of the dynamics of how the accounting charge works though, we're not really seeing really any flashing lights or anything that sort of gives us too much concern in U. S. Consumer credit from, if you like, more leading indicators, whether be they delinquencies, be they affordability, be they spending patterns, spend behavior even. So I think it looks okay at the moment, but we are cognizant that we are growing that business in what appears to be a record length expansion. And in the last year of a presidential cycle and that may or may not be a good year, but for the 1st years of following presidential cycles do tend to have an adjustment period usually. And so when you're looking in the consumer credit business, we're almost as much interested in what 2021 looks like than 2020 in of itself. And as a consequence of that, we are much more focused in growing our Affinity business, our partnership products, particularly in the airline space, which tend to have relatively high FICO scores and relatively low sort of risks or lower margin, lower risk product and have not been growing sort of the high risk parts of our portfolio much, particularly our own branded book, the Barclaycard branded business in the U. S, if anything shrunk slightly. So I know the accounting can be a little bit odd, but looking through it, I think that's how we're thinking about the businesses there, if that's helpful. Yes. No, I wasn't thinking so much the accounting. I was thinking if you look at the arrears, they've gone from CHF 2.4 billion to CHF 2.6 billion, which just I know in itself is not a big number, but sort of odd when, as you say, you're growing the lower risk part of the business rather than the higher risk part. And it's at a time when the balances have grown quite strongly anyway, so the percentage of arrears you would have thought would be coming down. Is it like one thing or is it a No. Look, I think small differences on small numbers. So I wouldn't I don't read too much into them. And as you say, we've been growing the portfolio reasonably steadily at sort of mid single digit percentage. You're going to have a seasoning effect as those cars sort of season out, the actual revolving begins. So I think it's one of those things, Ed, that we're all looking for that canary in the coal mine. Trust me, we're looking as hard as anyone. I'm not sure we're seeing it yet, but I would absolutely caution everybody that these are short term indicators and what feels relatively well controlled and where we'd expect it to be now 3, 6 months later to feel different. So we are very vigilant around that space. And as Tushar said, I think over the medium and long term, our focus increasingly on the co brand space and less so on the branded space should improve the credit profile. Okay. Thanks very much. Can we have the next question please, operator? The next question on the line is from Robin Down from HSBC. Robin, please go ahead. Good morning. A couple of questions from me. Just looking ahead slightly to 2020, obviously, you're keeping with the 10% plus target. Consensus is at 8.4% for 2020, so quite a big gap there. And I guess a couple of things that I would just highlight and want to get your views on. You seem to be suggesting kind of slightly lower run rate now for U. K. Card losses going forwards. But if you look at the overall group impairment charge in consensus next year, it's kind of 20% up on this year. Just whether you kind of feel that that's a realistic outcome barring any sort of major U. K. Economic disaster. And then second question, I guess what you're really flagging up in terms of the challenging environment is what we're kind of all expecting, which is that the revenue environment is going to be that much weaker kind of going forward. Can I ask you about the corollary of that? Do you see any cost flexibility in 2020? And how much flex do you have there if revenues do turn out to be weaker than expected? Thanks. Yes. Thanks, Robin. Why don't I talk a little bit about the impairment and your question around consensus, and Jess can cover sort of cost flexibility. Look, I wouldn't comment on next year's consensus. It's quite an uncertain environment we're going into. But to try and be helpful, we've always said that the UK business, for that in my scripted comments, that we've guided to around €200,000,000 a quarter. I think that will be probably slightly at the upper end of performance from here, somewhat because our interest earning balances in cards, we have reduced somewhat. I see that trend continuing a little bit. So I don't think it will be much lower, but they will be a bit lower than the €200,000,000 We've always talked in the past in CIB, which is much more of a name specific type impairment story there. Again, hard to predict because when it's in single names, it's always a little bit hard to tell. But somewhere around 50 a quarter is a good sort of benchmark to have out there. And then for U. S. Cards, slightly more differentiated, probably not as even over the year, it starts off lower and ends up higher. But if you take sort of the average of where we've been running, once you see Q4, it's probably a reasonably good jumping off point into next year. Of course, added to that, we do expect the book, unlike in the UK cards business, we do expect the U. S. Cards business book to grow. So you should layer on some growth as well when you're doing your forecast. And all of that a subject to all things being equal. Any sort of changes in unemployment, revisions down in GDP, etcetera, The IFRS nine is sensitive to that. So it will capture those effects pretty quickly. Yes. Robin, on the cost side, I guess the first thing I'd say is I think we've done a pretty good job over the last 3, 4 years of managing our costs down. We've pretty much delivered every year where we've guided to in terms of bringing our costs down. That being said, like in this quarter, where we outperformed the consensus by quite a bit, almost driven entirely by the revenue line. And so as we think about headwinds as an agitam, what we'd obviously like to do is to deal with those headwinds by delivering higher revenues than by necessarily focusing on the cost side. And I do think there are a lot of investment opportunities for the bank that we are making and that we need to make. We spent a lot of money in the last year bringing in new algorithms for all of our electronic trading, whether it's cash equities or interest rate swaps. We do have the highest valued banking mobile app in the U. K. And put a lot of investment in that. Part of the improvement in our corporate bank is through our transactional volumes coming out of Europe, which is all based on a new operating technology for our corporate bank in Europe. So what we'd like to do is to continue to invest, particularly around technology, in order to grow our revenues and not try to achieve these profitability targets by hitting on costs too hard. So like we've done in the last couple of quarters, we want to grow our revenues in the face of the interest rate environment that we're dealing with and take cost efficiencies and use them to invest in the business. Thanks for taking the question, Robin. Could we have the next question please, operator? The next question on the line is from Martin Leitgeb of Goldman Sachs. Martin, please go ahead. Yes, good morning. Firstly, I would like to ask you on what your view is on capital return. And I was just wondering in terms of the new threshold, if your intention essentially to return capital as and when your core Tier one ratio is above that new 13.5 percent threshold? And do you think the supervisor would grant you the permission for that? And related to that, what is your view at the present time when you're considering dividends versus buyback? I know that you obviously increased the dividend and the dividend outlook for this year. How do you gouge between the 2 given where the stock is trading? And the second question more broadly on the equities business in Europe and about the industry as a whole. Just looking at recent news flow, we had one competitor pulling out of equities last quarter and there was reports out there that another major competitor is considering to reassess its equity franchise. And I was just wondering how you see the equities industry evolving from here and what do you think the right positioning here is for Barclays going forward? Sure. First, on returning excess capital to shareholders. Obviously, the negative note for the Q3 is rather returning excess capital to shareholders, we had to return excess capital to PPI claimants to the tune of about £1,400,000,000 Yes, we think our CET1 ratio at around 13.5% is appropriate and over that level. As we generate capital, we think that we can increase the return of capital to our shareholders. As you note, we have tripled the dividend in the last 2 years to roughly 9p this year. Let's see. Our payout ratio is around 40 are something that you would like to see. But for sure, with the stock paying at where it is, buybacks are something that you would like to see. But we're not going to talk about them until they start to happen. In terms of the equity franchise for the IB, I think to be a bold bracket investment bank in the 2 deepest capital markets being Europe and the U. S, I think you have to be across all asset classes, which includes equities. As I said, we've been investing in our in the electronic trading on that platform. We like the franchise that we've got. We think we've got a very good research product. We believe that we can compete with the major U. S. Players as we are. So we're going to stay fully invested in that business. Thanks, Martin. Could we have the next question please, operator? The next questioner on the line is Guy Stebbings from BNP Paribas. Guy, please go ahead. Good morning. Two questions coming back to costs and capital. Firstly, on costs, the sub 13.6 percent for the full year you've reiterated, looking quite tough. I appreciate currency was a headwind in Q3 and currently also a tailwind in Q4, as you say. But even adjusting for this appears to be require a step down in the run rate of cost beyond what we've seen so far this year. So I'm trying to understand where that could come from. It seems like you're guiding up on head office versus expectations, presumably not enough for Delta in Barclays U. K. So is it really the CIB we should be expecting this to come from? And with that in mind, if Q4 was quite strong in the CIB and you found it hard to justify cost takeout there, would you be content missing the 13.6 target? So that's the first question. And then on capital, to come back to other forms of potential capital return, looking at the movements in Q3, you're now 10 basis points below the new target and Q4 doesn't tend to be a strong quarter for capital generation. RWAs have been growing, although that's partly FX related and you're accruing a larger ordinary now than was the case previously. Should we therefore assume any discussions on excess capital repatriation beyond the ordinary is really a topic for first half twenty twenty at the earliest? Or is there something else going on that's perhaps missing? Yes. Thanks, Guy. On costs, yes, it's all things being equal, you've done the math and you're absolutely right. You'd expect a step down. Having said that, the only thing I'd just maybe to help with the modeling, bank levy, we were probably a little bit lower than a run rate would imply last year. We had some benefits that were from prior sort of tax periods that we were able to recognize in the Q4 of last year. So the bank levy actually may be up year on year, but that's really just a function of some catch up components that were just one time as in Q4 of last year. So when you're doing your modeling, you might find that a bit helpful. So bank levy probably in the $300 ish million, maybe a bit higher. So the rest would be an implied sort of step down in run rate operational expenses. Things being equal, obviously, there's an FX component there that none of us know what it will be for the rest of the year. I think you would expect that to be through most of the divisions. I'd certainly see U. K. Being a touch lower as well as the CIB being a touch lower. I won't quite comment so much on CCT because obviously that's a growing business for us. It's a high class problem, the one that you sort of threw out there, which is if we have a very strong performance in CIB, how would we think about incentive compensation in that business? We are a pay for performance culture. We look at everything in the round. We look at the overall group's profitability. We look at the division's profitability. We look at where we are competitively. We just do the right thing. I sort of go back to what I said at the beginning. While sort of the 9% sort of type targets are important to us, they're more sort of way markets for us rather than you absolutely need to sort of hit specific levels. What's more important to us is continued sequential profit improvement. And so we'll do the right thing in terms of managing the company for the medium term rather than just doing short term decisions for the sake of it. On your second question around capital and should we be entertaining any other forms of distribution in the first half, I think Jeff probably answered that in the earlier question. Let's we'll keep you updated as we go along. But I don't think there's anything we're intending on sort of guiding or commenting at the moment. Something we'll keep you posted on as the year progresses. Okay. Can I come back to your comments there on cost and the 9% return? I mean, I guess, could you foresee a scenario where CIB revenues were strong in Q4 and you therefore felt you had to pay for that. So you didn't want to take the cost base down too much in CIB in the Q4, but you still missed the 9% return. I mean is that a scenario that you could envisage playing out still? Look, I think that's too specific. I mean, you can look at the CIB cost numbers in the Q3, where we had a pretty good performance, but at the same time, the RoTE for the group was 10.2%. So we're not going to seriously be held to 9%. But obviously, we all recognize that we need to deliver a good return to our shareholders, and that compensation is a variable that you can manage to deliver that return. The next questioner on the line is Farhad Kamal of Redburn. Farhad, please go ahead. Hi, good morning, Jes Tushar. Thanks for taking the questions. I have 2 actually. Just one, just back on the balance sheet deployment to the investment bank. So you said half the RWAs and the CIB were kind of activity in trading and half were FX. I mean, also, if you look at the leverage, is it a leverage increase of around CHF 21,000,000,000 at group level, which I assume is the prime balances that you talk about? If I look at the share of the CIB, the percentage of group capital has gone from 55% to 59% in the quarter. Where does that cap at, at the moment? I mean, do you think to carry on taking market share, should we think that you need to carry on deploying costs and capital to that business? Or do you think realistically, in the current environment, without a kind of cycle pickup, you can take share while not deploying capital and cost to that business? And that's the first question. And the second question, just on the structural hedge. Can you give us a sense of how much of a drag that is year on year? We're assessing our U. K. NII targets. You must know kind of the answer to where the starting point is. How much of this kind of flat yield curve does that drag on? And also, if the yield curve inverts, do you just stop at reinvesting the hedge? Or do you carry on reinvesting it? Does it go negative? Thanks. Thanks, Fahad. So why don't I take both of them? Yes, the percentage of risk weighted assets in the group sort of going up from 55%, 59%. You've got to remember that's nearly all driven by the fact that the operational risk weighted assets in Pillar 1 have reduced by $14,000,000,000 and have been sort of included in Pillar 2. So I think that's just a feature of the change in treatment of risk weighted assets, which makes it more comparable to other banks. So we're comfortable with that. The book growth that we saw in the CIB this quarter, I mean, it's just regular way stuff. And as I say, average RWAs are actually lower than the spot number. So I don't I wouldn't characterize this as some sort of net increase in capital to the CIB and nor are we intending to do that. I think we've been over the last, I think, probably 2 years, I don't have all this sort of time history in front of me, but we've been operating at this level of risk weighted assets plus or minus several quarters now. And you've seen we've been picking up market share both in investment banking fees where we had our best Q3 ever. We were sort of 5th in the U. S, ahead of one of the larger American peers, which we're very pleased with. And if you look at coalition data, I think you'll see that we're picking up markets revenue share as well. So for us, it's the same again, continuing to do what we can then. In terms of hedge drag, to try and help you out, if we take the yield curve as was at the beginning of the year and I look at where it is now, and of course, it's a bit lower now than it was earlier in the year. Earlier in the year, I threw out number of about negative 50 in hedge contribution. That's probably nearer 100 now at these rates. But rates will go up and down. We have no idea which direction they're going in. And they sort of doubled since late September in terms of yields. So as you know, as well they'll go from here. And I think that sort of answers your sort of final part of the question, if curve inverts or whatever. We don't we're not running sort of a rate view here as management. All we're doing is rolling our structural hedge to provide some stability to our income profile. So we'll continue to roll that rather than trying to get too clever and find the market as part of our structural hedging activity. Thanks, Peter. Sorry, just one quick follow-up. On the CIB as a percentage of group risk weighted assets going to kind close to 60%. So do you have a cap in mind as to how much the CIB should consume with group capital? Well, we don't sort of sell these sort of artificial caps because things will ebb and flow. All I would say is I don't think you'll see a net capital addition to the CIB on a trend basis at all. We've got enough and we'll do what we need to do with what we have. I would expect as a trend basis over time, our consumer businesses to grow, obviously, they're relatively slower moving, but you see we're growing our U. S. Car business, for example, we're growing our mortgage business. So I would expect to see our U. S. Consumer sort of sorry, our consumer integrated business is growing quicker than you'd earn and CIB holding roughly where it is. Perfect. Thank you very much. Thank you. Can we have the next question please, operator? The next question is from Chris Kams of Autonomous. 2 on head office, please. Just looking at the quarterly print, you've got the minus €55,000,000 revenue print for the quarter, and that includes the benefit of the bagel dividend and obviously reflects the absence now of the RCIs. If I take that 3Q level as a steer, allowing for a bit of improvement on the drag from legacy derivatives and the annual effect of the Bagel dividend, it looks to me like that would point to something like €250,000,000 of revenue drag in 2020. Is that reasonable, please? And then on costs in head office again, you seem to be settling into a circa €50,000,000 euros a quarter run rate there, ex levy. Should we be assuming GBP 200,000,000 per annum going forward as head office costs, please? Thank you. Yes. Thanks, Chris. On the income side, your characterization is right. If you back out the bagel dividend and try and get to sort of ex that sort of one off, obviously, it's nearer nearer to €100,000,000 I would thought. Now within there, you've got the sort of go back in time here, you've got the hedge accounting effects going on in the head office. And these are sort of unwinding of the hedge accounting effects that we had from the sale way back when of our non core divestitures. So these are sort of technical accounting effects. It ought to come down a little bit over time. This is just sort of ebb away, I guess. I think what I'll do is rather than now, but perhaps that the full year results, I think probably give folks I know it's very hard to model from the outside, give some guidance on what head office income profile looks like. But generally speaking, you should see a slight sort of everway for those underlying hedge accounting relationships as they just expire. And on the cost side, the one variable item there, we've got the Italian mortgages in our portfolio and there are servicing costs and various other things that sort of flow through the cost line as a consequence of that. To the extent we're able to divest of them, you would see a commensurate sort of reduction in costs. So absent that, I think it's sort of where it is. To the extent you see us exit any of the Italian mortgages, that should allow you to see the cost sort of drop out there. So that's the FX I'd call out. If I could just clarify too, Sean, I appreciate you said you'd give some clearer remarks at full year results. But were you indicating that it was a GBP 45,000,000 benefit from the Bagel dividend in the quarter? So the current run rate for revenues is minus GBP 100,000,000 a quarter prevagal dividends. Is that what you said there? It's a bit lower than that. I think it's more like GBP 30,000,000, I think, from memory, GBP 30,000,000 GBP 35,000,000 GBP 35,000,000 GBP 35,000,000 GBP And we can even get it across to you if you like IR can send it to you. But I think it's in the €30,000,000 to €35,000,000 zone. Okay. Thank you. All right. We have the next question please, operator. The next question on the line is from Andrew Coombs from Citi. Andrew, please go ahead. Good morning. 2, please. The first on the UK consumer loan losses, only €49,000,000 I think it's the lowest quarter on record. If I look at your IFRS 9 disclosure, I think it's Stage 2 not past due that's come down quite materially Q on Q. So it looks like you've refined some of your models around the UK card book. Can you elaborate a bit more on exactly what's happening there, please? And then the second question is on the transaction bank. Just interested in the outlook there and the sensitivity to U. S. Rates. Thank you. Yes. So why don't I take them, Andrew. On UK Cards, you may have picked it up from my scripted comments. It is a lower impairment charge than you would normally have on a sort of a regular basis. The reason for that is that we periodically recalibrate our models from time to time. And IFRS nine was introduced in the earlier part of 2018, a year and a half sort of experience in, we recalibrate those models to actual experience. And as a result of that, there's some sort of catch up, if anything, our actual customer behavior has been better than was forecast. So there's that sort of one time catch up. And that just feeds into, if you want to get into the gut feed models, estimates around exposures of default and probably the defaults get recalibrated down in line with actual experience. That's the non recurring component. I did guide a little bit earlier on. So if you look at the U. K. In total, I've always said sort of GBP 200,000,000 is a reasonable sort of quarterly run rate. I think that's probably at the higher end of what I would expect. Now it won't be euros On the transaction bank, I just got very little correlation, I think, with interest rates. I'd say what you're seeing in Transaction Banking for us is the impact of 2 initiatives. 1, importantly, is the new platform we have for transaction banking for corporate relations in Continental Europe, which we rolled out a little bit a year ago, and we've already seen quite an uptick in balances and deposits being left with us and foreign exchange trade coming out of that, our clearing business there. So extending our corporate platform from the U. K. To Europe has started to pay dividends. And then secondly and equally important, we as we talked about last year, we've gone client by client, particularly with our largest clients, where we have a return on risk weighted assets because of the extension of credit, principally non drawn revolvers. And where we have a low return on risk weighted assets, we've gone to those customers and said either we have to increase our transactional volume through treasury or we may step away from the facilities. We are about halfway through a 2 year process to do that. We've had a significant uptick in our return on risk weighted assets for each of those clients, and that has been translated through the transaction volume line. So we don't see that. And one of the nice things about that business is very capital light and very interest rate insensitive. Yes. And I think just to add to Jess' point on that, we're able to offer transaction banking services on the continent in Europe now, I think, in 5 or 6 countries, and we've got a few more coming online this year. We've added about 200 new clients over the course of this year that are leading cash management business with us as a result of those rollouts. So it's sort of early steps, but client acquisition rates being very good. And the other thing that's actually quite exciting for us in that business is joining that up with some of our payments capabilities. So another thing that we have rolling out is merchant acquiring capability over, I think, about 5 or 6 countries in Europe with several more coming online, countries like Poland, Austria, etcetera, coming online. And the referrals between the corporate bank and the merchant acquiring business, we've had 19% increase in referral rates across that business. So I wouldn't say this is going to make any sort of huge difference to next year's numbers or perhaps even after. But when I look at the medium term, the ability for us to attract these clients with no physical sort of footprint in Europe and the cross referral going on is a really nice trend. Extraordinary capital light, not heavily regulated and very additive to us. So more of a medium term thing, but hopefully that gives you some other color. That's very clear. Thank you, Ben. Thanks. Could we ask one more question please, operator? And then I think we'll wind up the call. The last question today comes from Anke Vanke from RBC Capital Markets. Anke, please go ahead. Yes. Thank you very much for taking my two questions. Firstly, a follow-up on the NIM and into 2020. From your comments you made about the structural drivers, is it fair to assume that you would assume we could assume a further decline into 2020 from the Q4 levels? And then on PPI, I'm sorry if I missed it, but just to get a bit more of a sense on how comfortable you are with the SEK 1,400,000,000, how far have you gone through the claims? Yes. Thank you, NK. On your first question, yes, look, I think Q4 NIM will be lower than Q3 NIM. And it's a little bit hard to tell when you're sort of projecting out too far out. But the sort of 2 fourths is in play for us or perhaps even 3 fourths is in play. 1 is growing our mortgage business quicker than our cards business. So that's dilutive to NIM just as a mathematical construct. Secondly, I do think our interest earning lending balances in cards are reducing and will continue to reduce a bit more. Obviously, it lowers our NIM. And the third thing is the rate environment. Obviously, we have a lower sort of rate environment that we appear to be entering 2020 and then we enter 2019. So those are factors that probably downward pressure on NIM for into next year, but I wouldn't extrapolate too far into the future obviously, where mortgage margins and various other things go, it's very difficult to forecast. PPI, we feel, which do have a look at. It gives you a sense of the assumptions that we're making and we're which do have a look at. It gives you a sense of the assumptions that we're making and whether those assumptions in real life to be different to our forecast, you get a sense of what this sort of this range of outcomes are. But as we sit here today, everything that we've seen, would suggest that we're doing okay. In terms of progress through PPI, we had a, just like every other bank, an enormous inflow of claims. So probably about twothree of the way through that big deluge, but a lot more to do. And that's Dan, I think you correctly, you said 2 thirds. About that, yes. Okay. So this is 2 thirds. If you look at the sort of claims that came in the July August period, and I wouldn't say claims, sort of literally every piece of information that came in, And we're about 2 thirds through on it as an initial processing matter to sort of sift through those are real and those are not real, but that's kind of where we are. Thank you very much. Okay. And I think we'll wind up the call there. Thank you very much for joining us and see you next time. Thank you. That concludes today's conference call.