Welcome to the Barclays Q3 Results 2019 Analyst Investor Conference Call. I will now hand you over to Jes Staley, Group Chief Executive, and Tushar Morzaria, Group Finance Director.
Good morning, everyone. Barclays generated GBP 1.2 billion of attributable profit in the third quarter of 2019, excluding the litigation and conduct charges which largely related to our PPI provision. We dealt well with some headwinds in our U.K. consumer business, whilst we produced a good performance in our Corporate & Investment Bank, particularly compared to the same period in 2018. The bank generated earnings per share of GBP 0.197 for the first nine months of 2019. Profit before tax was GBP 1.8 billion in the quarter and GBP 4.9 billion 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 U.K. peers.
To reflect the positive impact of that change, we have consequently updated our CET1 target ratio to be around 13.5%. Our cost income ratio for the quarter was 59% and stands at 62% for the last nine months. Management focus on cost control remains a priority, 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%, 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 310 basis points, which was slightly up on Q2 despite this pressure.
We continue to invest in our digital capability. We're pleased that in the latest CMA service quality metrics, we were voted by U.K. consumers as the number one provider of active mobile banking services. In September, we also started the migration of 1.6 million customers from the Barclaycard legacy app to our award-winning Barclays app. 8.5 million Barclaycard and Barclays customers on one platform means sharing a richer experience with all of them and provide their customers with access to a larger set of products and services. The Corporate & 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 third quarter income performance for our banking business on record. Our Corporate Banking franchise had another decent quarter, with income up on Q3 2018. 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 transactions banking revenue. In our Consumer, Cards and Payments 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 Transact solution for e-commerce merchants. This delivers a smooth and secure customer authentication process compliant with PSD2, which optimizes the transaction experience and helps to prevent fraud for the merchants. 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. 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. Despite the impact to profitability of the GBP 1.4 billion PPI provision, it remains our intention, in normal circumstances, to pay a total dividend for 2019 of around three times the half year payment of GBP 0.03. Now I'll hand you over to Tushar, who'll walk you through the numbers in detail.
Thanks, Jes. I'll begin with the results for the first nine months, and then focus my comments on Q3 performance and the 30th of September balance sheet. We reported a profit before tax of GBP 4.9 billion for the first nine months, generating GBP 0.197 of earnings per share, excluding litigation and conduct. I'll continue to exclude litigation and conduct charges in my commentary as usual. The gap to strategy profitability was principally the additional Q3 PPI provision of GBP 1.4 billion, which was within the range we announced in early September, and resulted in a statutory EPS of GBP 0.104. Group ROAE for the first nine months was 9.7%, with double-digit returns for both BUK and BI. As Jes mentioned, we continue to target an ROAE for the full year of over 9% and over 10% for next year.
The nine-month return represents a good base for reaching the 9%, despite Q4 seasonality. The macro headwinds, including the low interest rate environment, are making our targets more challenging, particularly with respect to 2020. We grew income 2% year to date, with the increase in Barclays International more than offsetting the decline in Barclays UK. 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 GBP 13.6 billion. Impairment was GBP 1.4 billion, up on last year, which benefited from improved macroeconomic variables, but credit metrics remained broadly stable across both secured and unsecured portfolios. On capital, we've just concluded discussions with the regulators to remove the regulatory floor on operational risk RWA.
This resulted in a reduction in RWAs of GBP 14 billion, with an associated increase in the Pillar 2A requirement. The capital ratio was 13.4%, despite litigation and conduct taking 49 basis points of capital in Q3. Focusing now on the third quarter. Income increased 8% despite the challenging environment, particularly in the U.K., reflecting a strong performance in CIB, where income grew 17%. The cost print of GBP 3.3 billion was down 1% and reflects cost efficiency measures across the group, which resulted in positive jaws of 9%. Impairment was GBP 461 million, up GBP 207 million on the low level we reported last year, due principally to non-recurrence of the significant favorable U.S. macroeconomic updates last year. The Q3 impairment this year included a GBP 60 million net charge from macro updates covering both the U.S. and U.K.
The effective tax rate, excluding litigation and conduct, was 17%. Attributable profit was GBP 1.2 billion. This delivered an ROAE of 10.2%, excluding litigation and conduct. TNAV of GBP 2.74 was down GBP 0.01 in the quarter, as earnings per share of GBP 0.072 and reserve movements were more than offset by the PPI provision and payment of the half year dividend of GBP 0.03. Looking now at the businesses in more detail, starting with BUK. BUK reported an ROE 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 2.9 billion net in the quarter. Healthy application volumes, also continuing tight margins. Barclaycard balances were down from GBP 15.1 billion to GBP 14.9 billion in the quarter, reflecting both our risk appetite and customer behavior. 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 to our Barclays app and our digital offering more broadly. FICC 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 GBP 4 billion overall in the quarter to reach GBP 193 billion, and deposit balances continued to grow to reach GBP 203 billion.
Impairment for the quarter was just over GBP 100 million, well down on the run rate of around GBP 200 million we've referenced in the past. This was despite a charge of around GBP 30 million resulting from macroeconomic variable updates. U.K. card delinquencies were down slightly, and other credit metrics are benign. The lower charge 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 GBP 200 million 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 ROE 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 ROE of 9.2% for the quarter, up from 7% last year. Overall income was up 17%, or close to GBP 400 million, at GBP 2.6 billion. This included within markets, a loss of GBP 40 million from the mark-to-market on our residual stake in Tradeweb, and a net benefit of circa GBP 90 million 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 markets income of 13% or 6% in USD. Banking had a very strong quarter, up 33% ahead of U.S. peers, with good contributions across M&A, DCM and ECM.
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 GBP 200 million that we've referenced in the past. Costs were flat despite the stronger U.S. dollar, as we continue to implement cost efficiencies. This resulted in positive jaws of 17%. There was an impairment charge of GBP 31 million, which included single name provisions, compared to a net release of GBP 3 million last year. The most significant movement in CIB assets in the quarter, as in Q2, was the result of further flattening of interest rate curves, which led to increases in both derivative assets and liabilities. There are also further increases in prime balances as we continue to expand our financing businesses. RWA increased by GBP 9 billion in the quarter to GBP 185 billion, reflecting a stronger U.S. 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. ROE was 14%, down year-on-year, reflecting the unusually low impairment in Q3 last year. Income increased year-on-year by 7% or GBP 78 million, partly due to the non-recurrence of the GBP 41 million 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 bank, and payments. In payments, we continue to roll out our merchant acquiring proposition in a number of European countries. This is an interesting growth opportunity going forward.
As we flagged at Q2, impairment is significantly higher than the Q1 and Q2 levels at GBP 321 million, which includes GBP 30 million from macroeconomic updates, 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 and 90-day arrears. Turning now to head office. The improved result quarter-on-quarter was driven by the lower level of income expense following the redemption of the 14% RCIs at the end of Q2. Income was a net negative of GBP 55 million, reflecting GBP 30 million 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. RWAs decreased to GBP 13.4 billion, reflecting the removal of the operational risk floor.
I'm including a cost summary to emphasize our continuing focus on cost efficiencies to fund 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 GBP 13.6 billion. I would remind you that this was set based on a USD rate of 1.27. Although we had a Q3 cost headwind with an average run rate of 1.23, with the USD back above the 1.27 level, we still plan to come in slightly under the GBP 13.6 billion figure. NAV decreased in the quarter by GBP 0.01 to GBP 2.74. Earnings per share of GBP 0.072 were partially offset by the payment of the half year dividend of GBP 0.03. Net reserve movements were also positive, including the strengthening of the USD to 1.23 at 30th September.
Of course, this may reverse in Q4 based on current rates. The net accretion of GBP 0.08 from these elements was more than offset by the GBP 0.09 headwind from litigation and conduct. On capital, the CET1 ratio was flat across the quarter at 13.4%. This has reflected a 57 basis point increase from the removal of the operational risk floor, largely offset by the 49 basis points from litigation and conduct. Our businesses remain capital generative, 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. The 13 basis points from the FX impact of those redemptions will also not occur in Q4. This slide shows the buildup of our capital requirement.
The removal of the operational risk floor has had a positive effect of 57 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 updates. 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 more flexibility in how we meet it. 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 GBP 1 billion of AT1, and we called three outstanding AT1s totaling GBP 2.3 billion equivalent.
Our next potential AT1 calls aren't until December of next year. Looking at MREL overall, we have issued GBP 8.2 billion equivalent in the year to date, in line with our plan to issue around GBP 8 billion this year. As usual, we will keep an eye on market conditions for pre-funding opportunities. Our MREL is currently at 30.4%, 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 GBP 226 billion, with our loans deposit ratio was 82%, continuing to position us conservatively. To recap, we remain on track in the execution of our strategy. We reported an ROAE of 10.2%, excluding litigation and conduct for Q3, with positive jaws of 9%. We continue to target an ROAE of greater than 9% and 10% for 2019 and 2020 respectively.
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 ROAE for the first nine months of 9.7%, we are well-placed to deliver on these priorities. Thank you. We will now take your questions, and as usual, I would ask you to limit yourself to two per person so we get a chance to get around to everyone.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove the question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask a question. Your first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, please go ahead.
Yeah, Alvaro.
Hi. Good morning. Two questions from me. Obviously, you had a pretty 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 the last call, you had gained GBP 20 billion of assets from Deutsche. Some of your competitors have been calling out Europe as being quite tough. 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. 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, Alvaro. Jes, do you want to take the CIB one, and I'll maybe talk a little bit about 2020.
Just on the CIB, it was a good third quarter for us, particularly in the M&A advisory and debt underwriting side, where we think we landed the strongest third quarter in the history of the bank. 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. Fourth quarter 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 equities side and on the fixed income financing side. Let's see how we compare with the European peers as they report next week. All the dialogue we have with the buy side is quite good.
There's still certain markets where volatility is at very historic lows. Obviously, we'd love to see through the course of 2020, a more normalized level of movement in the financial markets. Maybe, [Tushar], that's too short.
Yeah. No. Thanks, Jes. Alvaro, just 2020. I think really the comment that we put in our release this morning is 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 third quarter of 2017, 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 U.K., growing our mortgages business more rapidly relative to unsecured credit. 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, but we didn't expect Brexit to still be ongoing. What does that do for our business?
It does create some uncertainty, particularly in our traditional banking businesses. 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 entity, consumer credit. 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 path of the macroeconomy is just a dose of realism. We think we have a good diversified business. In some ways, the 9% and 10% are important to us, but perhaps what's more important to us is sequential profit growth. That's something that both Jes and I are very focused on. Hopefully that gives you a little bit more context.
Yes. Thank you.
Thanks, Alvaro. Can 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. Can I have two questions? They're both on CIB, essentially. The first question is the comment around the GBP 90 million 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? The reason for the question is the fair value in OCI reserve fell by over GBP 200 million in the quarter, despite bond yields going down. 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. Second 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 billion.
Can you give us a sense as to how much of that was FX driven? 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.
Thanks, Jonathan. I think I'll take both of them. On your first one, the sort of, if you like, the gross components of the GBP 90 million benefit that we called out. Really what we've tried to do here is, we've disclosed Tradeweb as well. It just helps folks that find this useful, is just to try and isolate out for you what are the non-recurring items. I think there's three this quarter. Tradeweb, as you pointed out, treasury gains, given the very strong rally in rates, but of course has reversed already in Q4. Counterparty credit risk hedging, CVA hedging, as a lot of people noted. You are right that the gross gains are obviously reasonably well offsetting. We haven't disclosed what those gross gains are. They're meaningful. If they were that significant, I think I would've called them out in the release.
I won't throw out a number on the call. You're right that the treasury gains were larger than the losses on counterparty credit risk hedging. If they were that significant, I would've called them out.
I'm sorry. Just to follow up, do you think that will be a negative then in the fourth quarter in terms of the combination of those two? I guess it'll just be treasury losses in Q4.
Yeah. It depends on the rate environment and a whole bunch of factors there, Jonathan. At the moment, rates have backed up a lot. I guess, look at it in the 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 fortuitous for us because obviously the carry on the liquidity pool will show up in subsequent quarters. It's just way too early to be extrapolating to those things, I think, Jonathan. You had a question on what sort of the counterparty credit risk hedge. 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. 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. I'd 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. To try and be a little bit more helpful, I'd say half of the growth in CIB came from FX. You know FX has obviously moved quite a bit since Q3, so that will be what it will be probably the other way at certainly these rates.
The other half I would put in a combination of a little bit of book growth, and 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. Very modest, I guess, period end book growth. I'd 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'll 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 U.K., 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. It's not exactly like the Street is there, first of all, in terms of estimates, but good to have the caveat, I suppose. I guess in terms of considering offsets and 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 post any resolution on Brexit. How would you think about pacing things like investment spend and variable comp?
I noticed the quite robust cost performance in the investment bank in the quarter. How would you think about those two dynamics in terms of attempting to deliver on the ROE aspiration set up for next year?
Thanks, Joe. Why don't I take the question on NIM, and I'll hand over to Jes to talk a little bit more about our investment spending, a lower for 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 a little customer behavior that we've been seeing, particularly in the mortgages businesses. We've seen the refinance at much quicker levels than refinancing into longer fixed products. 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 just not picked that up. In Q4, though, I think this one is important.
If we're to hold NIM, I think it close to these kind of levels, it'll probably be a touchdown. I would expect Q4 NIM to be lower than the Q3 headline number. What's driving that? There's really two aspects that I'd call out there that we can see at the moment. One is we continue to grow our secured book relative to our unsecured book. Just the mass of a lower margin product growing at a quicker pace than a higher margin product. The second thing is we have seen a sort of 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. I think combination of those two factors will have a lower Q4 NIM.
Over the full year, it'll be probably a touch lower than we've had for Q3. With that, Jes, do you want to cover the?
Yeah. 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, whether a European bank, U.K. bank, or a U.S. bank, we all have to manage very sizable liquidity pools now. Those liquidity pools basically gets trapped in those low interest rates, obviously, that's going to have an impact on your performance. In Europe, you've got negative interest rates, That is particularly acute for the European banks. The 10-year here is well below 100 basis points, That has an impact. 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.
As we look at impairment, particularly in the small business and corporate side, those lower interest rates can translate into improvement in your provision line. The open question, I think for all of us is if we are facing economic headwinds in Europe and possibly in the U.S., is there gonna be a fiscal response in Europe the way you've seen the fiscal response in the U.S.? I think that's one of the things that we're looking at in addition to obviously hoping to get the Brexit uncertainty behind us. A lot of the headwind that we talked 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.
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 CIB, currency plays in our favor there. 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 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. and prompting 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. All I'd say is, obviously, no one likes to see a market like that break out the way it did for those two businesses. They were actually quite active for us, and we stayed in the repo market quite strongly. 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 G-SIB pressure that maybe some of the money center banks in the U.S. have called out in recent times. 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 Firth from KBW. Ed, please go ahead.
Morning, everybody. Can I just ask about international consumer and in particular the similar credit metrics? I'm just trying to square your comments about optimism in that market and in that sector. When I look at your credit, the actual underlying dynamics look to have deteriorated. Certainly Q3 versus Q2. If I look at your coverage, you've let your coverage come down Q3 versus Q2 certainly on your stage 3 assets. We've got a challenging environment. It's an overseas market, which intuitively one imagines one's not as close to, but I know that's probably a little bit unfair. Also it's an area you're growing at the same time as credit seems to be deteriorating. I'm just trying to square all those facts, if you could help me there.
Yeah, sure, Ed, I'll take that one. The impairment charge sequentially is something I sort of called out earlier on in the year. I think most people picked up on that. That the shape of impairment for that business is going to follow really the sort of seasonal spending patterns. There is a build-up in balances in the latter part of the year and a sort of flat to pay down imbalances in the early part of the year. Q3 impairment was certainly expected to be higher than in Q2. 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 the dynamics of how the accounting charge works, though, we are not really seeing 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, be they delinquencies, be they affordability, be they spending patterns, spend behavior even. I think it looks okay at the moment. 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. That may or may not be a good year. For the first years of following presidential cycles do tend to have an adjustment period usually. 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.
As a consequence of that, we are much more focused in growing our affinity business, our partnership products, particularly in the airline space, which tends to have relatively high FICO scores and relatively low sort of risks or lower margin, lower risk product, and have not been growing the high-risk parts of our portfolio much, particularly our own branded books at the Barclaycard branded business in the U.S., if anything, shrunk slightly. 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, if that's helpful.
No, I wasn't thinking so much the accounting. I was thinking if you look at the arrears, they've gone from 2.4 to 2.6, which I know in itself is not a big number, but that's sort of odd when, as you say, you're growing the lower risk part of the business rather than the higher risk part. 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.
Well, that's the-
Is it like one thing or is it?
No. Look, if I think it's small differences on small numbers, so I don't read too much into them. 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 cards sort of season out as the actual revolving begins. 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.
Yeah
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, three, six months later could feel different. We are very vigilant around that space.
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, Ed.
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. Two questions from me. Just looking ahead slightly to 2020, obviously you're keeping with the 10%+ target. Consensus is at 8.4% for 2020, quite a big gap there. I guess two things that I would just highlight, and want to get your views on. You seem to be suggesting kind of a slightly lower run rate now for U.K. card losses going forwards. If you look at the overall group impairment charge in consensus for next year, it's kind of 20% up on this year. Just whether you kind of feel that's a realistic outcome barring any sort of major U.K. economic disaster.
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 going forwards. Can I ask you about the corollary of that? Do you see any cost flexibility in 2020? How much flex do you have there if revenues do turn out to be weaker than expected? Thanks.
Yeah. Thanks, Robin. Why don't I talk a little bit about the impairment and your question around consensus, and Jes 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. To try and be helpful, we've always said that the U.K. business, without having my scripted comments, that we've guided to around GBP 200 million a quarter. I think that'll be probably slightly at the upper end of a performance from here somewhat because our interest earning balances in cards, we have reduced somewhat. I see that trend continuing a little bit. I don't think it'll be much lower, but they will be a bit lower than the GBP 200.
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 GBP 50 a quarter is a good sort of benchmark to have out there. For U.S. Cards, a slightly more differentiated, probably not as even over the year. It starts off lower and ends up higher. 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 U.K. Cards business, we do expect the U.S. Card business book to grow. You should layer on some growth as well when you're doing your forecast.
All of that is a subject to all things being equal. Any sort of changes in unemployment, revisions down in GDP, et cetera, the IFRS 9 is sensitive to that, so it will capture those effects pretty quickly. Jes, you want to add?
Yeah. 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 three, four 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. As we think about headwinds as a team, 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. I do think there are a lot of investment opportunities for the bank that we are making and that we need to make.
We've 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 we've 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. 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 cost too hard.
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.
Thank you.
Next 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. I was just wondering, in terms of the new threshold, if you intention essentially to return capital as and when your quarter one ratio is above that new 13.5% threshold, and do you think the supervisor would grant you the permission for that? Related to that, what is your view at the present time, when you're considering dividends versus buyback? I know you obviously increased the dividend and the dividend outlook for this year. How do you gauge between the two, given where the stock is trading? 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.
There was reports out there that another major competitor is considering to reassess its equity franchise. 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? Thank you.
Sure. First on returning excess capital to shareholders. Obviously, the negative note for the third quarter is rather than returning excess capital to shareholders, we had to return excess capital to PPI claimants to the tune of about GBP 1.4 billion. Yeah, 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 know, we have tripled the dividend in the last two years to roughly GBP 0.09. This year, let's see. Our payout ratio is around 40%, and we'd probably like to keep that. For sure, with the stock paying out where it is, buybacks are something that you would like to see. 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 bulge bracket investment bank in the two 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 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. 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 for the full year you've reiterated is looking quite tough. I appreciate currency was a headwind in Q3 and currently ought to be a tailwind in Q4, as you say. Even adjusting for this appears to require a step down in the run rate of costs beyond what we've seen so far this year. I'm trying to understand where that could come from. Because it seems like you're guiding up on head office versus expectations, presumably not enough for delta in Barclays UK. Is it really the CIB we should be expecting this to come from? With that in mind, if Q4 was quite strong in the CIB and you found it hard to justify cost take out there, would you be content missing the 13.6 target?
That's the first question. 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 2020 at the earliest, or is there something else going on that I'm perhaps missing? Thanks.
Yeah, thanks, Guy. On cost, 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 fourth quarter of last year. The bank levy actually may be up year-on-year, but that really is just a function of some catch-up components that were just one-timers in Q4 of last year. When you're doing your modeling, you might find that a bit helpful. Bank levy probably in the GBP 300-ish million, maybe a bit higher. The rest would be an implied step down in run rate operational expenses.
All things being equal, obviously, there's an FX component there that none of us know what it'll be for the rest of the year. I think you would expect that to be through most of the divisions. I certainly see UK being a touch lower as well as the CIB being a touch lower. I won't comment so much on CCP because obviously that's a growing business for us. It's a high cost 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 go back to what I said at the beginning. While the 9% type targets are important to us, they're more way markers for us rather than you absolutely need to hit specific levels. What's more important to us is continued sequential profit improvement. 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 Jes probably answered that in the earlier question. We'll keep you updated as we go along, I don't think there's anything we're intending on guiding or commenting at the moment. It's something we'll keep you posted on as the year progresses.
Okay, thanks. Can I come back to your comments there on cost and the 9% return? 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 fourth quarter, but you still missed the 9% return? Is that a scenario that you could envisage playing out still?
Look, I think that's too specific. You can look at the CIB cost numbers in the third quarter where we had a pretty good performance. At the same time, the ROTE for the group was 10.2%. We're not going to slavishly 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.
Okay, understood. Thanks.
Thanks, Guy. Can we have the next question please, operator?
The next questioner on the line is Fahed Kunwar of Redburn. Fahed, please go ahead.
Hi, morning Jes, Tushar. Thanks for taking the question. I have two actually. Just one, just back on the balance sheet deployment to the investment bank. You said half the RWAs in the CIB were kind of activity in trading and half were FX. Then also if you look at the leverage, there's a leverage increase of around GBP 21 billion 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 the moment? 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?
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? That's the first question. The second question, just on the structural hedge. Can you give us a sense of how much of a drag that is year-over-year? As we're setting 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? Also, if the yield converts, do you just stop at reinvesting the hedge, or do you carry on reinvesting it as it go negative? Thanks.
Thanks, Fahed. Why don't I take both of them? Yeah. The percentage of risk-weighted assets in the group sort of going up from 55 to 59, you got to remember that's nearly all driven by the fact that the operational risk-weighted assets in pillar 1 have reduced by GBP 14 billion and are being included in pillar 2. I think that's just a feature of the change in treatment of risk-weighted assets, which makes it more comparable to other banks. We're comfortable with that. The book growth that we saw in the CIB this quarter, I mean, it's just regular weight stuff. As I say, average RWAs are actually lower than the spot number. 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 the 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. You've seen we've been picking up market share, both in investment banking fees, where we had our best third quarter ever. We were sort of fifth in the U.S., ahead of one of the larger American peers, which we're very pleased with. If you look at Coalition data, I think you'll see that we're picking up markets revenue share as well. For us, it's the same again, continuing to do what we can there.
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, 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 a number of about negative 50 in hedge contribution. That's probably nearer 100 now at these rates. But rates will go up and down. I have no idea which direction they're going in. They sort of doubled since late September in terms of yields. So who knows where they'll go from here. I think that sort of answers your sort of final part of the question, if curve inverts or whatever. We're not running a 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. We'll continue to roll that rather than try and get too clever and time the market as part of our structural hedging activity.
Thanks, Tushar. Sorry, just one quick follow-up. On the CIB as a percentage of group risk-weighted assets going to kind of close to 60%. Do you have a cap in mind as to how much the CIB should consume of group capital?
Well, we don't sort of set 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. You see we're growing our U.S. card business, for example. We're growing our mortgage business. I would expect to see Sorry, our consumer-orientated businesses growing quicker than you'd. 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 Cant of Autonomous. Chris, please go ahead.
Good morning. Thank you for the call and taking my question. Two on head office, please. Just looking at the quarterly print, you've got the minus GBP 55 million revenue print for the quarter, and that includes the benefit of the Absa 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 Absa dividend, it looks to me like that would point to something like GBP 250 million of revenue drag in 2020. Is that reasonable, please? On costs in head office again, you seem to be settling into a circa GBP 50 million a quarter run rate there, ex levy. Should we be assuming GBP 200 million per annum going forwards as head office cost, please? Thank you.
Thanks, Chris. On the income side, your characterization is right. If you back out the Absa dividend and try and get to sort of ex that sort of one-off, hopefully I don't have the numbers in front of me, but nearer to GBP 100 million, I would have thought. Within there, you've got the hedge accounting effects going on in the head office. These are a sort of unwinding of the hedge accounting effects that we had from the sale way back when of our non-core divestitures. These are sort of technical accounting effects. It ought to come down a little bit over time. These are just sort of ebb away, I guess.
I think what I'll do is, rather than now, but perhaps at the full year results, I think probably give folks, because I know it's very hard to model from the outside, give some guidance on what head office income profile looks like. Generally speaking, you should see a slight sort of ebb away for those sort of underlying hedge accounting relationships as they just expire. 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 cost. Absent that, I think it's sort of where it is.
To the extent you see us exiting the Italian mortgages, that should allow you to see the cost sort of drop out there. Those are the two effects I'd call out.
If I could just clarify too, Tushar. I appreciate you said you'd give some clearer remarks at full year results, but.
Were you indicating that it was a GBP 45 million benefit from the Absa dividend in the quarter, so the current run rate for revenues is minus GBP 100 million a quarter pre-Absa dividends? Is that what you said there?
It's a bit lower than that. I think it's more like GBP 30 million, I think, from memory, GBP 30 million, GBP 35 million, the Absa dividend. We can even get it across to you if you like. I can send it to you. I think it's in the GBP 30 million-GBP 35 million zone.
Okay. Thank you.
All right. Can 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. Two, please. The first on the U.K. consumer loan losses, only GBP 49 million. 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 QOQ. It looks like you've refined some of your models around the U.K. card book. Elaborate a bit more on exactly what's happening there, please. The second question is on the transaction bank. Just interested in the outlook there and the sensitivity to U.S. rates. Thank you.
Yeah. Why don't I take them, Andrew. On U.K. cards, you may have picked it up from my scripted comments. It is a lower impairment charge than you would normally have on a regular basis. The reason for that is that we periodically recalibrate our models from time to time. IFRS 9 was introduced in the earlier part of 2018. A year and a half of experiencing, we recalibrate those models to actual experience. As a result of that, there's some sort of catch-up, if anything. Our actual customer behavior has been better than was forecast. There's that one-time catch-up. That just feeds into, if you want to get into the guts of these models, estimates around exposures that 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.
If you look at the U.K. in total, as Alvaro said, GBP 200 million 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 much lower, but probably a touch lower than the GBP 200 million.
On the transaction bank, it's 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 two initiatives. One, importantly, is the new platform we have for transaction banking for corporate relations in continental Europe, which we rolled out a little over 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. Extending our corporate platform from the U.K. to Europe has started to pay dividends. Secondly, and equally important, 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 the extension of credit, principally non-drawn revolvers.
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. That has been translated through the transaction volume line. One of the nice things about that business is very capital light and very interest rate insensitive.
Yeah. I think just to add to Jes's point on that. We're able to offer transaction banking services on the continent in Europe now, I think in five or six 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 leaving cash management business with us as a result of those rollouts. It's early steps, but the client acquisition rate's been very good. The other thing that's actually quite exciting for us in that business is joining that up with some of our payments capabilities. Another thing that we have rolling out is merchant acquiring capability over, I think, about five or six countries in Europe, with several more coming online. Countries like Poland, Austria, et cetera, coming online. The referrals between the corporate bank and the merchant acquiring business.
We've had 19% increase in referral rates across that business. I wouldn't say this is going to make any huge difference to next year's numbers or perhaps even after. When I look at the medium term, the ability for us to attract these clients with no physical footprint in Europe, and the cross-referral activity going on is a really nice trend. Extraordinary capital light, not heavily regulated, and very additive to us. More of a medium-term thing, but hopefully that gives you some other color.
That's very clear. Thank you both.
Thanks. Could we have one more question please, operator? Then I think we'll wind up the call.
The last question today comes from Anke Reingen from RBC Capital Markets. Anke, please go ahead.
Yeah. Thank you very much for taking my two questions. Firstly, follow up on the NIM into 2020. From your comments you made about the structural drivers, is it fair to assume that we could assume a further decline into 2020 from the Q4 levels? 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 GBP 1.4 billion. How far have you gone through the claims? Thank you very much.
Yeah. Thank you, Anke. On your first question, yeah, look, I think Q4 NIM will be lower than Q3 NIM. It's a little bit hard to tell when you're sort of projecting out too far out, but there's sort of two forces in play for us, or perhaps even three forces in play. One 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 earnings lending balances in cards are reducing and will continue to reduce a bit more. Obviously, lowers our NIM. The third thing is the rate environment. Obviously, we have a lower sort of rate environment that we appear to be entering 2020, than we entered 2019. Those are factors that are probably downward pressure on NIM into next year.
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 good with our provision of GBP 1.4 billion. We've given some sensitivities in our release, which do have a look at. It gives you a sense of the assumptions that we're making, and were those assumptions in real life to be different to our forecast, you get a sense of what the sort of the range of outcomes are. 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, just like every other bank, an enormous inflow of claims. We're probably about two-thirds of the way through that big deluge, but a lot more to do.
Did I understand you correctly, you said two-thirds?
About that, yeah.
Okay.
This is two-thirds. If you look at the sort of claims that came in the July and August period, and I wouldn't say claims, sort of literally every piece of information that came in, and we're about two-thirds through 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. 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.