Good afternoon, everyone. Welcome back, and it's my pleasure to welcome Anna Cross, CFO of Barclays, on stage with me today. Anna, thank you for coming.
Thank you.
Anna, why don't we start with the U.K. macro to set the scene? There continues to be some challenges in the U.K. macro backdrop, but households and businesses have been pretty resilient so far. Can you describe what you're seeing and what gives you confidence in the medium-term outlook? And with the budget coming up in a few weeks, to the extent you can you comment on the government's agenda and priorities and what they mean for you?
Yeah. Thanks, Perlie, and thank you for having us here. I'm going to be very consistent here and say that what we see is a very resilient backdrop for both U.K. consumers and U.K. corporates, and we shouldn't be surprised because nominal GDP is over 4%. It's the highest in the Eurozone, or certainly amongst the highest. We see real wages growing in the U.K., very low levels of unemployment, and that remains the case. So that performs a very consistent backdrop to what we're now seeing, which is quarter-on-quarter loan formation both in households and for corporates.
And I think it's really important to understand where the U.K. starts from. We shared a slide at our Q2 results, some of you won't remember it, but actually showing the relationship between debt- to- GDP for U.K. corporates, and that is at an all-time low, which shows you that the capacity to take on additional lending is really there, Perlie. The other thing I'd just call out is the necessity is also there because of this demand to increase productivity, the demand to respond to the technology that we all have in front of us. So we see good loan formation. What they're telling us is it's about technology spend. Then if I look more to the government, so far so consistent, very much a focus on growth and investment. We hope that continues. We, like everyone else, are waiting for the budget.
We've had a few interactions so far, and certainly the message seems consistent. But I'd just remind everybody that the surcharge is levied on U.K. profits, so to the extent that there is a change in the surcharge, which only generates GBP 1 billion of tax receipts for the U.K., so it's not a big number, but for us, each percent is worth about GBP 35 million. So it's not a significant impact to our returns at all in the U.K. or more broadly for the group. What's much more important, we think, is the signaling effect of the commitment to growth.
Very clear. Thank you, Anna. Applying that context to your business then, your U.K. loan growth has been very strong in the first half of the year at 5%, with particular strength in the corporate bank. Then in the past two and a half years, you've deployed GBP 25 billion of the target GBP 30 billion business growth RWAs in the U.K. What is driving this growth, and how sustainable do you think it is? How should we think about half two, because half one probably had a little bit of pull-forward effect from demand?
Okay. The first thing to say would be we don't observe any pull forward. So we continue to see very good loan formation. You can also see that in the Bank of England data that will have come out for July. So that confirms that the Q2 trends have continued. From our perspective, just as we look at the, so if I take it both sides of the balance sheet, if you like, both retail lending and wholesale lending, in some ways the thematics are the same, which is the story of self-help. So when we gave our target of greater than 5% CAGR, and in fact, when we gave our target of GBP 30 billion RWA, the rates in the U.K. were 5.25%, and the levels of GDP were certainly not high.
This is a story of self-help, and the way that happens in retail is if you think about where we were and where we are now, we've gone from a single-brand entity to a multi-brand entity in two and a half years. We're using multiple brands across our businesses. Specifically in mortgages, the Kensington capability allows us to operate across a much broader spectrum of the market. We previously had a flow of about 13% of high loan-to- value , now it's 21%. Higher margin, and a much broader customer proposition. That's also helped by the technology that we've put in place. That means that for the last 10 quarters, for nine of them, our flow share has been higher than our stock share. We're taking share in mortgages because of what we've done. Same in cards. We're deploying both Tesco and Avios and Amazon.
Corporate, I think, is the piece that perhaps is most misunderstood for us. If you just, and I appreciate this is difficult to see because of the way we report, but Barclays has the highest level of corporate deposits of any bank in the U.K.. Remember, our business is split between business banking in the U.K., BUK, corporate banking, and international corporate banking. We cover everything from the smallest organizations to the ones who need the most complex IB support. We are ideally placed to react to any increase in corporate loan demand, which is what you're now seeing. For us, what that means is that as we've changed our strategy here and sought to lean in, we've gone from a loan-to-deposit ratio in U.K. corporate from 31% to 35%.
That tells you that our opportunity set here remains very, very significant because most of our peers are operating between 50% and 75%. How have we done that? Again, it's technology capability. Again, it's change in process and a real focus on this part of the business. I want to be really clear, this is not a change in risk profile in either retail or in corporate. The amount of risk that we're holding on the balance sheet remains broadly consistent with where it was.
Well, since you mentioned deposits, the U.K. deposit market has always been competitive, but it looks like it's maybe stepped up a little bit more in recent months, especially on the retail side. You yourself highlighted that the ISA market was 7% larger year-on-year with competitive pricing. So what do you think is driving this increase in competition? How does it compare to 2023, and how do you expect that to play out from here?
We did anticipate a competitive market in the U.K. in 2026. You might recall that we gave a range of GBP 8.1 billion-GBP 8.3 billion. Actually, we are bang in the middle of that range at around GBP 8.2 billion of NII for BUK. It was really the swing factor there was really how the deposit market emerged. It is broadly as we expected, but it is competitive. Why are we seeing that competition? It could be for one or two reasons or maybe both. The first is clearly fixed term deposits, which is where that intensity of pricing is, are used for funding. What we see is simultaneously high rates across the industry with also heightened levels of covered bond issuance across the industry.
That would tell us that there is a funding element to this, which again, is consistent with what I said about the lending demand more broadly in the market. For us, we are in a good position here because, well, firstly, you will note that our covered bond issuance has been around GBP 1 billion over the last few years. Secondly, from our perspective, the BUK loan-to-deposit ratio is less than 100%, it is 90%. We are really able to lean on the second factor, which is relationships. Our objective for BUK has been really to price and preserve with a relationship lens on it. Worth just thinking about, why is that retail relationship or that deposit relationship so important? Because that is the place from which you access everything for that customer.
If we look at our corporate deposits, sorry, our retail deposits, about 90% of them are held by people who also have a current account. That primacy of relationship is really worth investing in, which is what we are doing. If I look at how we have been pricing more recently, very focused on premier pricing. As we have lent into the market, and we broadly kept our share in that heightened ISA season, we have done so by leading with premier, and 85% of our growth was in premier banking, which tells me that we have done the right thing and we are building the franchise in the right way. I want to be clear that this is not 2023. It is very distinctly different. In 2023, what we saw was post-COVID excess deposits and a reduction in non-interest-bearing current accounts churning into fixed.
That is not what we see now. What we see now is a turnover of fixed term deposits.
Well, you've talked about mass affluent. That's actually my next question. It looks to be more competitive now, and a lot of your larger peers are also focusing in that segment. Can you just help us understand what you're doing differently to capture that market?
Our start point is different. This has been part of our strategy for many, many years. The way we measure the way our consumers value us is through something called Net Promoter Score. Our Net Promoter Score at 33 is higher than any of our U.K. High Street banking peers, and meaningfully higher. That comes from many, many years of investing in that capability that now continues, and it's an opportunity that still exists even within our four walls because as I look at the entirety of that retail book, there are 1.1 million mass affluent customers, only roughly half of which are in the premier brand. We've got more to do to get them to migrate into that capability. For us, what's the opportunity? Well, it's clearly around banking and banking services, so that's the most important.
The way we price them, the relaunch of the app. You'll notice that we are opening a few new branches, and as we do so, they have a particular skew to the way we support and service those premier customers. We bought GoHenry. You will hear more about that, but think of that as playing into a particular product gap that speaks more fully to premier customers. Then finally, just the wealth opportunity here. Nowhere in a U.K. bank do you have a proposition that takes you from a digital offering all the way through into wealth. It doesn't exist. That's been true since RDR in 2014. That's what we've built, and we launched it in Q2.
What we're trying to do now is create a really clear digital pathway that takes those 1.1 million mass affluent customers, at least 400,000 of which we believe have a need, through into this wealth proposition. What that looks like is, firstly, a human interaction. First of all, no fees. That makes it very, very different. Thereafter, digital execution, digital management, so that the customer can follow along the way. At the same time, we've repriced our digital investing proposition to take out custody fees. There are now zero custody fees. This is an area, Perlie, where because it doesn't exist in our portfolio, we can go with a much more aggressive approach, a much more disruptive approach. Expect to see more in this area, but it's a key focus for Premier.
Great. Bringing it together for your NII guidance then, you have mentioned that you're expecting to land in the middle of the GBP 8.1 billion-GBP 8.3 billion range, which does include improvement in product margin in half two. How should we think about the key drivers for that improvement as we move through H2?
Well, firstly, let me just level set everybody. We talked a lot about NII as being BUK. BUK is 25% of the group income. NII exists outside of the U.K., so we've guided to GBP 8.2 billion for BUK, but we've guided to greater than GBP 13.7 billion for the group, and that's the fifth consecutive year of NII growth, and it will not be the last, given our lending trajectory and given what's going on in the structural hedge, which I'll come back to. But for BUK in particular, you're right, we expect to be in the middle of the zone. in Q1 we had Q1 and Q2, you've seen negative product margin impacts. We guided in Q2 it would be similar to Q1. I think they were GBP 10 million apart, so not that significant.
In the second half, much of what we talked about is somewhat behind us.
All of those mortgage maturities from 2021. Remember, the ISA season is very Q1 and Q2 focused. That's when the majority of the maturities are. As you go into Q3 and Q4, what you have is some seasonality in cards. You have some day count headwinds, sorry, tailwinds, and you also have this benefit of just the continued lending momentum. So we do expect to see some positive momentum in the second half of the year, so we've guided to neutral to positive. We talk a lot also about the structural hedge, and I'd just remind everybody, our planning assumption for the structural hedge is 3.5% reinvestment rate. We think that's reasonable. It's through the cycle. We don't want to react to what's happening with the yield curve. But I'd also just remind everybody that the structural hedge doesn't just benefit BUK.
It benefits every division that has non-interest sensitive balances, deposit balances. So you see it in corporate. You see a little bit in international corporate banking. You also see a bit in private banking and wealth. But the other thing is, we also structurally hedge our equity balances. Because the equity in the bank is growing, and because the majority of the equity in the bank relates to the investment bank, the structural hedge is also an important tailwind to those businesses, too.
That's great. I think that's all I have on the U.K. businesses. Moving to the IB then, the investment bank delivered a good Q2 with a half one ROTE of 15.5%. How sustainable do you think that is, and how do you see your competitive position relative to U.S. peers?
So whilst we're U.K. domiciled, the mix of our investment banking business is not that different in domicile to our U.S. peers. Particularly around IB fees, we are 60%-70% U.S.-based. So the opportunity that exists in the U.S. capital market also is an opportunity for Barclays. That's how we think about the opportunity. We are very clear in the way that we are taking this business forward is really a story of discipline. I know we've spoken about this a lot, but in part, it's about how we manage the capital. You'll note that the capital has been broadly stable for many years, four years now. We're managing our costs extremely tightly. We've had 10 consecutive quarters of positive jaws, so income growing faster than costs. We're also managing our risk extremely tightly in this business.
You can see that in our VaR and our loss days. But the most important thing is how we are changing the nature of the income within the investment bank, and that's what really brings this together structurally. We had a slide in our Q2 deck, which if you haven't seen, I'd guide you towards it, slide 41. What that showed was how is the split of income changing, and particularly what we call the stable base, which is international corporate banking and financing. You can see that growing in absolute terms over the quarters. The way I think about it, because this is a more volatile business, you have to say, what would happen if the market were to step back from what we see more generally now?
How much leverage do you really have? Now we're in a situation where those stable income streams have grown from, I think, 30%- 40% of our cost base to now covering 80% of it. So we are much more, we have more ballast, if you like, in the operating leverage of the bank. But then the other thing that we've been doing is really filling out, particularly our equities franchise. Barclays has always been a very strong fixed income house. But what we've been doing is particularly working on our focused business, of equity derivatives.
The way you see that come to life in that diagram is the peak to trough, if you like, the seasonal up to down in equities or in trading is now much less than it was. It is those things as you put them together, the cost, the capital, the risk, and the income stabilization and diversification that gives us the confidence that this business has gone from 7% ROTE in 2023 to circa 12% this year, and we think has got more to go after that.
Your planning assumptions are based on a broadly flat wallet across both banking and markets, which implies low- single-digit income CAGR growth. Given where we are in the cycle and the market environment, et cetera, do you think those assumptions are maybe a little bit conservative? Where do you think you have the greatest opportunity to lean into some of those opportunities? Would you consider allocating more than the current GBP 200 billion of RWAs?
We take target setting very, very seriously. Our objective with any target that we have is to give you very clear assumptions that sit behind it, but also to plan on a set of assumptions that gets us to the right structural position. So, markets or wallets may rise and fall. Same with the yield curve. We are trying to give you a set of assumptions which we think are somewhat agnostic to those opportunities. Now, if they come, you should expect us to lean into them, and you did see that both in Q1 and Q2. As we did so, parallelly, we did put some more capital behind it. Only a little bit, because we are still very conscious of this is a return story. But you should expect us to do that and then pull it back, if that were a different environment.
From our perspective, there is still more to go at here. If you think about, if you like, this very AI-driven opportunity in the U.S., we are probably less exposed to that than many of our peers. Remember, about 70% of our business is markets, not fees. So we are building out ECM and M&A, and remember, they are capital light, and we were in nine out of 10 of the big IPOs in the second quarter. So we are making progress, but those two together are 7% of our IB total income. So our focus on those businesses, we are not sitting here with a significant market share. We still have more to go, and our talent is definitely behind that. The other area I would just call out that we talked a lot about at the full- year was the international corporate bank.
If you line up our investment bank in comparison to those of our U.S. peers in particular, the thing that is most market is the scale or the relative scale of the international corporate bank. That business matters because firstly, it's relatively capital light. It's the heart of the deposit relationship, which we talked about before. It gives us a great opportunity to get a corporate flow into our intermediation business. For all of those reasons, we believe it's a business worth investing in. Much of the additional investment that Venkat talked about in February is actually behind that opportunity. We see that as very significant. You will note that our deposits have grown very significantly in that business, both in the U.S. and in the U.K., dollar deposits in particular, and we continue to make really good progress.
Our markets business is an institutional one.
The opportunity to take our corporate network through that is very significant.
That's great. Last but not least, in terms of the main business divisions at USCB, there were a couple of moving parts in that business last quarter with American Airlines dropping out and several new relationships and capabilities being added, including Best Egg and Samsung. Can you talk us through how the business is evolving and what are you building towards over the medium- term? Are higher U.S. rates a headwind for the business?
Yes, I appreciate Q2 was a bit difficult to model and understand from the outside because we off-boarded American Airlines and brought on board Best Egg. I think if you want to know where this business is going, how we think about it is it's actually got more retail customers than the U.K..
It has a smaller market share. It's entirely digital. That means that we have an opportunity to scale this business in a way that's in a little bit of a contrast to a really well-performing business in the U.K., which is greater than 20% ROTE, but where we expect to grow at about 5% CAGR in terms of lending growth. Really important here, the operational plan. We've improved the NIM by 2.5%. We've increased our deposits by more than 15%. We've repriced the book. We've expanded so that we're nearly 25% retail. We've lowered the cost, so the cost income ratio is the lowest in the group. It's about mid-40s. We expect it to be low 40s. It's because it's the most digital business that we have.
When we launched Samsung, the agentic approach that we took to code deployment meant that we deployed it in 50% of the time that it would have done previously. We can do that because this business is more nimble and it's digital. That's really important. It's got a very, very strong operational backdrop to it. Then you say, well, what businesses do I have within there? Which products? We've got a cards business which is growing at 8% organically, is 20 years old, and is essentially us operating consumer finance for 20 of our investment banking clients. Then we've added to that a retail direct-to-consumer, completely digital, no bricks- and- mortar deposit capability that has grown significantly, including now with one of our partners. Then you add to that loans. Best Egg is a top five digital disruptive, unsecured platform in the U.K..
The question is now how do you bring all of that together? Samsung is the first partner where that will happen. For Samsung, those of you who sit in the States, look at another provider of a wallet in the States and think what that is. It's actually more than cards in a wallet. It's a cash proposition. It's a payments proposition. It's a complete ecosystem. That is what this is, and we will be providing our three products to Samsung. You can only see cards now, but think of this. We called it the consumer bank for a reason. It's not CB cards business, it's CB Consumer Bank. Actually what's good for us here is with a population that's bigger than the U.K. population, we can have a truly disruptive retail proposition from which we can learn and take that back to the U.K..
That is how we think of it. It is not a cards business.
Okay. U.S. rates?
U.S. rates, two sides. Firstly, credit environment is fine. An increase in rates we do not see as being an immediate problem, particularly for our FICOs. It is causing some pressure on the securitized sale prices for Best Egg, but we have some optionality here if we choose to, which is we can choose to keep some of it on the balance sheet, if we want to do that. We are still working through that. The fundamentals of the business in terms of flow, we are not seeing any rates impact coming in through the door. Higher rates do give us a bit more opportunity to widen deposit margins. There is a bit of twos and threes.
Okay. Well, you have commented on impairments, so I might as well take the opportunity to ask you to add a little bit more to it. Given the change in the business mix, how sensitive is the USCB portfolio to any deterioration in the credit environment today?
Not really is the answer. Remember, as we've moved more into the retail side of the portfolio, actually the FICO hasn't really moved. Our average FICO is 756. Best Egg largely an originate to securitized model. To the extent that we hold anything on the balance sheet, it would be much higher FICO. We expect to manage that. We don't see anything, but we don't see anything in the U.K. either.
None of the lending that we have done has materially changed our risk profile. Remember, Tesco is a transactor book, largely. All of the lending that we've done in corporate has largely been at the same default grades. There's no real change in the risk profile. We don't see anything, but there's nothing that we've done in our growth phase over the last two to three years that concerns us.
That's great. That's everything I have on revenues. On cost then, you've accelerated some investments in half two this year, partly because the income performance has been better. Can you remind us what these investments are and how they are going to support future efficiencies, and how should we think about the balance between returns, distributions, and investment back into the business?
Yeah, sure. We accelerated investments for two reasons. The first was to do that because we had the capacity to do it. Really, really important here, this plan is one of balance. We would not do anything that would compromise either our pathway to higher returns nor our distributions. Despite those additional costs, we have not changed our cost income ratio guidance nor our ROTE guidance. Everybody should understand that as we make distribution decisions, we're also considering the same factors. At the half year, we're at GBP 9 billion with two quarters of buybacks to go and GBP 1.2 billion of dividend. That's reason number one, we could. Number two, we felt like we should.
The reason for that is because of the pace of change that we are able to push through the organization, those opportunities are coming at us faster than we anticipated. We would always have done these things. It would have just taken longer. We are doing two things. The first is a response to a regulatory opportunity in the U.K.. Those of you based in the U.K. and Europe will recall that the level of bonuses was capped in the U.K. and Europe. Therefore, we were in a situation where we were paying higher fixed comp to what we would call our material r isk takers, our higher comp people in the bank. This opportunity as a regulatory matter following the Financial Conduct Authority consultation allows us to go to more of a U.S. model. We are reducing the level of fixed, increasing the level of variable.
That gives us more flexibility from 2027 and beyond. Much more of a U.S. model. By the way, those MRTs, material risk takers, got to choose, and they chose, which gives you an idea of the confidence within the organization to continue to improve the returns. The second and more important thing was what we are doing to structurally reduce the cost base of the firm. Normally we spend between GBP 200 million and GBP 300 million. We said we would spend an additional GBP 300 million this year. That means there is GBP 500 million to go. You should expect GBP 250 million in each quarter. In Q3, half of that is going to be for BUK. This relates largely, almost exclusively, to personnel. Essentially what we are doing here is you are really seeing the benefit of organizational simplification, streamlining, et cetera, coming through.
We will measure ourselves by a lower cost-income ratio, faster deployments, higher efficiency levels. Venkat and I have been talking a lot about cost to serve. Cost to serve coming down for every single product in the firm is what we are after here. I want to reiterate, even with that additional GBP 450 million this year, we have not changed our cost-income ratio guidance. We expect it to be high 50s, that is an all-in number. Low 50s in 2028, and somewhere between in 2027. We talked about modest cost growth. That is still what I expect, because remember, we are guiding to a sort of low income CAGR here. We are telling you that you are going to get positive jaws in every single year of the plan. The absolute level of costs growth here is going to be modest.
Okay. We have got a few minutes left, so I will take the opportunity to open the floor up. While we wait for questions, why do not I ask you about wealth and retail investments. You have introduced planning and advice a few months ago, in your private bank and wealth management business. What is the experience so far?
Bit early to say. I touched on it before. We're really excited about this just because of the opportunity and the connectivity there. So you'll hear a bit more apparently, but we're not even a quarter in. I'm not sure I'll give a headline here, but we do think it's important.
Okay. Watch this space then.
Yeah.
Then maybe one on capital. So you are now expecting USCB IRB migration in the second half of 2027.
Yeah.
There should be further reduction in Pillar 2A following that implementation. At that point, would you still expect to remain in the top- end of your 13%-14% range?
We said that we would operate at the top- end of that range until we got regulatory clarity. I actually expect that to come in a number of stages. Clearly we are going to get Pillar 2 clarity associated with Pillar 1 Basel. I would expect that in the second half of this year. Then we are going to get the clarity that we get from implementing Basel itself. That will happen in January. I would expect us to talk a bit more fully at the full- year. Then finally, we are going to get this Pillar 2 clarity when we implement A-IRB, hopefully in the second half of 2027. The reason that we are operating at the top- end is because we lack that regulatory clarity. When we get it, obviously, we will consider where we are going to operate.
But just to reiterate, all of our plans are based on a 14% CET1 ratio.
Of course. Well, anybody with a question, please do raise your hand. Well, maybe going to AI then. You have talked about some of the incremental investments actually being in personnel. Just wondering how you are thinking about AI investments. If the income environment continues to be better than expected, how should we think about incremental investments? Because obviously with AI, you will probably see more higher ROI investment opportunities coming through. Would love to know how you are thinking about it.
Yes. We are definitely getting AI benefits along the way, but we talked about sort of staged approach to technology in February. The first was our move to cloud compute, very much complete, probably ahead of much of the street. Then the second is this journey that we are currently on, which is to harmonize and modernize our technology stacks. To give you an idea, about 80% of our data is on an enterprise data platform now. We expect that to be 100% by the end of 2028. It is when you have done that work, and think about the pathway to 2028, that you can really deploy AI at scale. Now that is not to say that we do not have opportunities along the way, and we are getting them. We have got 6,000 fewer hours in our contact centers now.
As we deploy AI, what that allows us to do is create real connectivity across the businesses. The AI solutions in BUK are the same as the ones in USCB. We build it once for a contact center, and it gets deployed with an American accent in one side of the Atlantic and a British accent on the other. We are seeing that. We are seeing probably a reduction of about 20% on fraud inbound calls just because of the tooling that we are able to use. The opportunities are there. It clearly brings opportunities to spend, but also opportunities to deploy technology faster. It is really important that we are very disciplined in the way we deploy AI, and that we do it in the right places for the right depth, if you like.
It would be really easy to deploy agentic in large parts of the bank, when actually a more standard, cheaper machine learning solution would give you a better answer, both in terms of costs and the deterministic output that you want. We are just being really disciplined about that. I think we are all learning. I think the other area where AI is really important, super important, is cyber. Both in terms of understanding what the vulnerabilities are across the industry as a whole, because we all share much of the same technology, but the speed at which we can respond to those, I think is quite staggering.
Great. Unless there are any last minute questions, I do not think so. We are almost out of time anyway. Thank you very much.
Thank you.
for coming today.
Thank you, Perlie.
Thank you.