Q3 2021 Barclays PLC Earnings Call
Welcome to the Barclays Q3, 2021 analyst and Investor Conference call I'll now hand over to Jeff Daily grief, Chief executives and she shouldn't zarya greif why not stomach huh.
Good morning, everyone. It's been another consistent quarter for Barclays.
Sure I will take you through the numbers in more detail in a moment, but at a headline let me say that I'm very pleased with our performance.
Our return on tangible equity for degree.
Was 14, 9% for the first time.
Nine months of this year.
We clearly expect now to deliver a <unk> above 10% for 2021.
Our profitability remains robust with year to date profit before tax of close to 7 billion pounds. This is our highest pre tax profit level on record.
Earnings.
Earnings per share was <unk> 38, paas the nine months.
And we remain in a strong capital position the CET, one ratio of 15, 4% well above our targeted range of 13% to 14%.
We are managing our costs appropriately a cost income ratio for the first nine months of the.
The year was 64% and.
And if you exclude structural cost actions our cost income ratio was in fact, 61%.
Looking at our performance by Division, we had another great quarter in the corporate and investment bank.
It was driven by the continuing strength of our debt capital markets franchise as.
Strong performance in advisory and equity capital markets.
In fact, the third quarter was the best quarter ever in investment banking fees.
We continue to evolve the investment bank towards more annuity like revenue streams, including our important securities financing businesses.
Corporate bank.
Well as we're making good progress on its strategic priorities, including income diversification.
Both in higher returning transaction banking and optimizing the use of loan capital.
Returns are now in double digits.
Our consumer businesses be U K, and CCP and performed well.
As we recover from.
From the impacts of the global pandemic, both businesses have benefited from positive trends in U K and U S consumer spending.
While interest, earning balances may take time to grow in the U K and U S cards U K mortgage growth remained strong with mortgages growing by some $2 3 billion pounds.
In the quarter.
We should not forget that in the past years, both Barclays UK and CCP have regularly produce double digit returns and they remain very good businesses.
Income from payments activity also continues to recover well up 17% year on year.
This is both the result of the pickup in the global economy as well as early benefits from our strategic initiatives around payments.
We're also expanding our unsecured lending in the U K U S and Europe.
We are deepening our engagement with customers through card acquisitions and corporate partnerships, including.
<unk> and collaborations we recently announced with GAAP AARP and of course Amazon.
We have built our business to be able to deliver double digit returns through the economic cycle diversified as we are by income type by customer and client and by geography.
Our one bank.
The excitements with recall the power one Barclays also allows us to realize synergies across our consumer and wholesale businesses.
This means we can target and unlock new growth prospects.
Specifically, we are focused on positioning Barclays to capture opportunities from three principal areas.
First.
Our present capital markets grow further to become the dominant financial driver of economic growth, we have built and will maintain our market position of one of the top six global investment banks.
Second as technology transforms consumer financial services Barclays is building and delivering next.
Next generation digital products and services.
And finally, we recognize that the transition to low carbon represents a defining opportunity for innovation and growth.
We wanted to be alongside clients as they transition using our advisory and financial expertise to help them navigate this period of extraordinary.
For change.
This week in fact, I joined a number of our clients that the UK global investment summit in London.
It did not have come at a better time, just a month before cop 26 conference and explored ways that the U K can play a leading role in dealing with the climate challenge.
Jordan area, because we had the last full service UK investment bank Barclays can and will play a meaningful role in that aspiration.
So Barclays is performing well, while our diversified model and strong balance sheet gives us growth potential for the future.
Turning to excess capital to shareholders still remains a key priority.
We have already returned over $1 5 billion pounds of excess capital so far this year.
And our CET, one ratio still stands well above 15%.
So we are in a very strong place as we head into the end of the year to sharp.
Thanks, Jess as usual I'll start with a summary of our year to date.
Performance and then go into more detail on the quarter.
The strength of the CIB continues to offset the effects of the pandemic on our consumer businesses. We are seeing initial signs of recovery in terms of spending metrics.
Overall income was broadly flat year on year, despite a 9% weakening in the average U S dollar exchange rate.
Coffee.
Cost increased by 0.6 to $10 7 billion, including structural cost actions of 0.4 billion principally in Q2.
This increase also reflected high performance cost accruals due to improved returns while base costs were flat and there is no change in the cost guidance, we gave for Q2.
After.
After the release of <unk> 8 billion in Q2, we had a modest impairment charge in Q3 generating a net release for the nine months of 0.6 compared to a charge of $4 3 billion for the same period last year.
This resulted in a PBT of $6 9 billion a significant increase on the same period last.
<unk> profit of $2 4 billion.
PFS with 38 cents generating an ROE of 14, 9%.
Our capital generation year to date puts us in a position to pay a half year dividend of two times and launch a share buyback of up to $500 million in August following on from the.
<unk> hundred million buybacks completed in April and still in Q3 at 15, 4% CET one ratio.
Above our target of 13% to 14%.
I'll say more on the capital flight path later on.
Turning now to Q3.
Income was up 5% year on year.
To $5 5 billion, despite the weaker U S dollar.
Within this we saw growth in CIB and the UK, partially offset by lower income in CCP.
Costs were broadly flat year on year delivering positive jaws.
We had an impairment charge of 0.1 billion compared to 0.6 billion.
For Q3 last year.
As a result profit before tax was <unk> 2 billion for Q3 up from $1 1 billion last year.
The attributable profit for the quarter was $1 4 billion generating an EPS of $8 five pence and minority of 11, 9%.
I would remind you again that these are all statutory.
The numbers and take into account a litigation and conduct charges of $32 million.
Police have increased from 281% to 287% in the quarter, principally reflecting the eight five points of EPS.
Our capital position strengthened further in the quarter with a CET one ratio increasing to 15, 4% driven by <unk>.
Profitability.
He was on income costs and impairment before moving on to the performance of the businesses.
We've mentioned the benefit of diversification throughout the pandemic and in Q3, we again delivered resilient group income performance.
CIB income was up 8% despite the U S dollar headwind any investment bank continue.
<unk> to perform strongly.
We saw a 6% increase in B U K income with strong performance in mortgages, while the quarter on quarter trend in unsecured lending balances stabilized.
CCP income was down year on year, reflecting lower average U S card balances and the weaker U S dollar.
Recent recovering spending.
Lending is encouraging but like many of our peers, we continue to see elevated payment rates.
Income from unified payments and the private bank increased year on year.
While unsecured lending remains subdued the income outlook for the consumer businesses, the U K and CCT reflects a continuing tailwind in secured.
In the U K plus portfolio acquisitions in U S cards and spending recovery in payments.
UK mortgage business had another strong quarter with $2 3 billion of organic net balance growth to reach 157 billion.
In unsecured we saw some balance recovery in U S cards in the quarter on quarter decline in UK.
I call it stabilized, but the balance trajectory continues to be impacted by higher payment rates.
I would remind you that in the U S. We have added zero point $6 billion of balances with the acquisition of the AARP book at the end of the quarter.
We are seeing clear signs of recovery in consumer spending in both the UK and the U S.
The build in interest, earning balances is expected to take time to materialize.
Barclays is well positioned for a rising rate environment through the effect of a steeper yield curve on the role of the structural hedge and the effect of potential base rates base rate increases on deposit margins.
The table on the right of the slide shows an illustrative example.
Ample for a 25 basis point parallel shift in the current yield curve.
We mentioned previously an expectation that the role of the structural hedge would be a further headwind in 2022. However, the expansion of the hedge we mentioned that Q2 and the current yield curve should eliminate this headwind and an increase in base rates would be a clear positive for income.
You will recall that most of the recent increase in the size of the hedge will benefit Barclays international rather than the UK.
Looking now at costs.
Starting with base cost as we label costs, excluding structural cost reductions and performance costs. These basic costs were broadly flat year to date in line with our expectation for the full.
Full year.
Overall cost increase was a result of the increase in performance cost, which is largely in Q1 on structural cost actions.
Just to remind you of the phasing of the structural cost actions through the year you can see on this slide we have charged <unk> $392 million year to date, including the Q2 real estate charge.
You'll recall that last.
Or is expected to result in annual cost savings of about $50 million from 2023.
We are evaluating planned structural cost actions for Q4, although the precise size is still to be determined. These are likely to include the continuing transformation of the B U K cost base as you mentioned the Q2.
There'll be some structural cost.
Actions into next year, but I wouldn't expect the charges largest this year.
As I indicated at Q2, we aim for full year base cost to be broadly in line with 2020 at around $12 billion.
Within this we continue to make investments and there is underlying cost inflation, but we aim to offset these increases through efficiency savings.
And are getting a tailwind from the weaker U S dollar.
Last years costs were $13 9 billion, allowing for increases in performance cost and the structural cost actions on broadly comfortable with the current cost consensus of between 14, 4% and $14 5 billion.
Looking forward as the recovery strengthens will continue.
To manage the balance between growth and investment spend and cost efficiencies with the aim of delivering positive jaws in order to achieve our target sub 60% cost income ratio in the medium term.
Moving onto impairment.
Reported a net charge for the group of $120 million for Q3 with charges in the UK.
K and CCP offset by natural lease in CIP.
On the right we show the split of the charge for the recent quarters into stage, one and two impairment and the stage three impairments on loans in default.
As you can see the charge in Q3's, principally on stage three balances after large book ups last year and a net release in.
Q2.
On the next slide we show the macroeconomic variables in place model adjustments.
<unk> is used for the Q3 modeled impairment are shown in the upper table and you can see the improvements in the baseline GDP and unemployment forecast.
However, the <unk> is used for the downside scenarios broadly offset these improvement.
<unk> in terms of the modeled outputs.
<unk>, we want to make sure that we don't lose sight of the risks of the wind down of support schemes phase III.
The result is that we are maintaining a significant economic uncertainty PMA at around $2 billion in the quarter that's shown in the table.
This continues to leave us with materially higher unsecured.
<unk> coverage ratios than pre pandemic as you can see on the coverage slides we've included in the appendix.
With these levels of coverage, the lower unsecured balances and improved macroeconomic outlook.
The quarterly impairment charges to remain below historical pre pandemic levels in the coming quarters.
Turning to Barclays UK.
The UK income increased 6% year on year with the continuing strong performance in mortgages and non recurrence of last year's customer support actions.
Cost decreased 6% generating positive jaws of 12% this quarter.
As we showed on the earlier side credit card balances were flat at Q2 at nine 6 billion.
<unk> down about 20% year on year.
The level of Q3 card balances reflects the highest payment rates and we expect the spend recovery to take time to feed into interest, earning balances that drive net interest income growth.
Mortgage balances again group with a net increase of $2 3 billion in Q3.
Margins for the mortgages booked in the quarter were attractive, but the pricing on new mortgages is very competitive and we do expect the churn margin to turn negative next year.
NIM for the quarter was 249 basis points down on the 255 reported for Q2.
Our outlook for full year NIM is now around two.
250 at the top end of the 240 to 250 range. We previously indicated.
It implies a Q4 margin in the low to mid <unk> as a result of the mix effects from the depressed level of interest, earning account balances from the continued growth in mortgages combined with the moderation in mortgage margins.
Piece of cost of 6% reflected efficiency savings and lower operational costs, which more than offset investment spend.
There was an impairment charge for the quarter of $137 million.
Almost half last year's charge, reflecting the low levels of delinquency and reduced unsecured exposures.
Customer deposits.
The decrease further by a further $1 billion on the <unk>.
For the quarter was 12, 7%.
Turning now to Barclays International.
<unk> income increased 4% year on year to $3 9 billion. Despite the U S. Dollar headwind while costs were slightly up impairment was a net release of $18 million.
Increased testing and enormity of 15, 9%.
I'll go into more detail on the businesses on the next two slides.
The momentum in the CIB continue with income up 8% on Q3 last year to $3 1 billion.
Cost increased by 2% delivering positive jaws, there was $128 million net impairment.
As the release compared to a charge of $197 million last year.
This generated an RFP for the quarter of 16, 6%.
Global markets income decreased 8% overall in sterling or 3% in dollars, but equities reported its best Q3 up 10% at 757.
Impairment Liam with strong performances in derivatives and equity financing, including further growth in prime balances to reach a record level during the quarter fixed decreased 20% against a strong comparator last year. However, our franchisee is proving robust despite the lower levels of market volatility.
Investment banking fees on the hand on.
<unk> reached a record level at $971 million up 59% year on year.
We were pleased with our increased diversification as advisory equity capital markets and debt capital markets. All contributed strongly to the record performance.
Despite the healthy deal flow pipeline remained at the high level, we reference to Q2.
On the other sponsor activity continued to be high and our overall fee share a 4% continued the momentum we have achieved over recent quarters.
Corporate lending.
Income was $168 million, reflecting lower average balances and higher cost of credit protection.
Transaction banking income was up 16% year on year to 413.
So again no software in Q2 with an improvement in deposit margins and increased client activity.
As I mentioned before the increase in variable compensation accrual, reflecting improved returns will skew towards Q1 this year.
Overall costs were up 2% and $1 7 billion, resulting in a cost to income ratio of 56.
6%.
Turning now to consumer cards and payments.
Incoming CCP decreased 8% to 0.8 billion, reflecting lower income from U S cards, partially offset by growth in unified payments and the private bank.
The decrease in U S cards income reflected the weaker dollar the 4%.
<unk>, Michigan average card balances year on year and higher customer acquisition costs.
As I mentioned earlier like our peers, we have experienced higher payment rates.
Quarter end balances or up on Q2 at around $21 1 billion.
This growth includes <unk> 6 billion from the AARP each acquisition.
Retail and organics organic balance growth of zero point $4 billion.
Another positive trend is that new accounts have increased over the first nine months and this has contributed to the increased balances, but also means increased customer acquisition costs.
Unified payments income was up 24% year on year no swap on Q.
And as we saw the initial effects of the spending recovery.
Private banking income increased 10% year on year and client balances grew.
Investment and higher marketing spend was reflected in an increase of 5% in CCP costs.
Dependent charge was $110 million and the ROE was 10 five.
Q2.
The recent developments in our partnership portfolio is the prospects for the U S cards business are encouraging.
To remind you that the translation of recovery in card balances into income and profit will be affected by the so called J curve as we invest in partner and customer acquisition and been card utilization.
We're pleased with the recovery of the unified payments income as we pursue our growth ambitions across payments.
Turning now to head office.
The negative income of $110 million is a bit above the $75 million run rate I mentioned at Q1 reflected some hedge accounting losses, driven by interest rate volatility.
Cost of 104.
The study included some costs related to discontinued software assets, while the other net income line was a positive with another fair value gain on business growth fund.
The loss before tax for the quarter was $147 million.
Moving onto capital.
The CET one ratio increased in the quarter to 15, 4% well above our.
Teammate range of 13% to 14%.
Profits generated approximately 54 basis points of accretion.
Offsetting this further buyback of up to $500 million launched in August reduced the ratio by approximately 16 basis points.
Q3 pension contribution had an effect of 11 basis points before tax.
Tom dividend accrual in the quarter amounted to eight basis points.
<unk> were up slightly in the quarter, reflecting some headwinds from FX moves.
We showed some elements of the future capital progression on the next slide.
As we indicated at Q2, we expect to end the year, well above our target range of 13% to 14%.
As shown on this slide the three specific headwinds, which will reduce the ratio of the start of 2022.
This would reduce the current ratio by around 75 basis points.
Going forward, we are confident that the balance between profitability investment and growth and remaining capital headwinds will leave us with net capital generation to support.
And we'd give distributions to shareholders over time and.
And be comfortably within our target range.
And average leverage ratios were around 5%.
Finally, a slide about our liquidity and funding remained highly liquid and well funded with the liquidity coverage ratio of 161%.
Attract posit ratio of 69%, reflecting the continued growth in deposits.
So to recap.
We have generated an 11, 9% statutory authority for the quarter and 14, 9% for the year to date.
Although Q4 is generally the weakest quarter of the year for <unk>, we expect to be clearly above.
Our loan to target of 10% for the full year and we are focused on delivering this on a sustainable basis.
We're seeing some recovery in lead indicators for consumer income and the CIB performance remained strong.
Although costs in 2021 are expected to be higher than 2020 cost control remains a critical focus let me.
<unk> costs, excluding structural cost actions and performance cost to be around 12 billion. This year.
Reported a modest impairment charge for the quarter, but of a net release of <unk> 6 billion for the year to date, when we expect the run rate for impairment to be below pre pandemic levels over the coming quarters.
Despite the two buybacks announced earlier.
Expect the year totaling up to $1 2 billion and a half year dividend of two pence per share a capital ratio of 15, 4% at the end of the quarter remained comfortably above our target range of 13% to 14%.
Although there are some capital headwinds to come at the start of 2022 and remain confident of being in a position to make attractive capital returns.
Earlier in the holders, but also investing for future growth.
Thank you and we'll now take your questions and as usual I would ask that you 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 the keypad. If you change your mind and wished for me of your question. Please press star.
Just trying to see what the parents asked your question. Please I'm sure you'll find this lightly.
Your first telephone question is from Sean <unk> of Bank of America.
Hi, good morning.
Good morning, I had a couple of plays.
One is almost where you just finished that she's just.
From a clarify.
You're saying on slide 23, particularly the right hand side on capital protecting the right hand side of the slide.
Beyond the solid 2022.
It looks like organic capital generation is offset by other headwinds, but I think too shallow you commented that you expect it to.
Net capital generative.
So I was just wondering if you could clarify what it is you're saying there and if any.
Any numbers around those.
Headwinds.
That was the first question and then the same with.
Just on the CIB.
Secondly cost income there. It's obviously a good revenue performance say are keeping up with.
And the cost income mid fifties for the last few quarters is also pretty much in line with with your major pace is that a level of efficiency that you think you can maintain even if we get some fade in the revenue environment for the CIB. Thank you.
Thanks, Alright.
Why don't I.
So the question is Jeff may want to add a word or two.
First one in terms of the future capital path, I guess sort of beyond this year and into next.
I think the gist of your question is that we expected to generate more capital than.
Various technical headwinds.
Business growth and what have you that we may have.
Our objective I would caution you before you get your route is out and try and sort of.
Figure out from the slides, whether there is any sort of supplemental message that there isn't.
It's what it has been I guess over a number of years, we do expect to be net capital generative.
Yes.
There will be headwinds from time to time.
And we've got a sustainable level.
Starting ability and that should more than compensate for that in terms of it.
The efficiency to.
To be honest as well efficiency metrics are important for US returns are more important the way we think about it is we want to keep the CIB above double digit.
Profitably through a cycle, it's felt most points in the cycle the way we think about it.
It is.
It's almost.
<unk>.
Just just just the fact that to be above 10% youre going to be operating in the kind of efficiency levels that we broadly have today I mean, it will go up and down obviously, depending on their variable pay goes and where income revenues.
But.
To get to a 10% return on the sort of capital level do you have a reasonably efficient.
That's sort of how I think about it.
This is Ed.
If you take away the structural costs, particularly.
The main building.
At Canary Wharf.
Got it that we took the charge on our second quarter cost income ratio of 61% target 60 I think.
How we get below 60 will be more a function of efficiencies in the UK than in than in the CIB.
Sure.
Thank you.
Alright.
Revenues. The next question please operator.
The next question.
<unk> is from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hey.
Good morning, a couple of questions from me on CIB revenues.
Obviously, a very strong performance and beat.
Rich.
Consensus, but looking at your U S peers that the mix is different it seems like.
Equities.
Strong and you've made up for it.
Yes.
Can you maybe talk us through what you think explains that and particularly in equities and as we look forward does that have any.
Implications.
The outlook.
How we should think about the outlook and the pipeline from here.
And my second question is on costs.
I've seen you've given the rate sensitivity, which is obviously very relevant at the moment, but on the cost and in particular the structural.
So of course that $12 billion.
In the last call you were sort of to show you alluded to that you would expect roughly the same number.
Seem to remember in 2022, all the inflation picture is picking up.
And the offset to the rates as could be cost.
If you can sort of make.
Infections are you going to be able to offset input cost inflation with with cost efficiencies in 2022 as well as I think you alluded to in the previous quarter thinking.
Thanks, Oliver I'll take the first question.
Sure I'll take that.
The second one on cost on the CIB revenues.
Any one person to the market size.
Or are the marketing side, we were.
So a little bit lighter than the U S peers.
I'd say, it's sort of a function of two things one.
Asia.
Asia cash equities for the U S firms was quiet.
<unk> robust and as you know our strategy for the last six years, it's been focusing more on the U S and in Europe. So that 71 issue the second one.
You, obviously had a very robust.
IPO calendar I think when you look at Goldman to non Brazil.
They're they're they're they're positioned.
It is being lead left clearly helps us numbers, but we're very happy with our markets business overall and.
On a year to date basis.
The numbers are really strong and then if you look at <unk> as sort of a primer for your overall.
Investment banking results.
They are we out there in the U S peers.
Those profitable.
The highest revenue number in advisory DCM and ECM fees the bank has ever had so.
I think.
Good story actually for the.
For the quarter and for the year to date.
Yes.
Maybe.
I don't feel vulnerable thing and we will set a record in equities.
For those of you been following Barclays for some time, you know the equities revenues approaching a fixed income revenue. So the diversification in our markets business is something we're very pleased with.
Just moving on to costs.
I think youre right to point out.
Inflation.
For us it's principally about.
Labor costs, the real sort of bit of inflation for us rather than sort of other complicated supply chain mechanics.
Something we used to we obviously have a lot of our operations actually in India, and we've had that for some years.
High inflation countries. So we are.
Our used to having to deal with.
On a percentage basis sort of meaningful increases in labor cost year on year, we do that by absorbing that through our own efficiency programs of course, if that sort of spread around to all other countries that puts a bit more pressure.
I think for now for planning purposes, now the $12 billion into next year feels about right.
But.
But we will see how we do in terms of ensuring that we have a sufficient efficiency programs to more than offset that while continuing to invest in the business I feel it's a very good time to be investing in the business, but for now 12 billion feels about right and we will certainly keep you posted as we go into the rest of the year.
Thank you very much.
Thanks for your questions.
The next question please operator.
Our next question for today comes from Jonathan Pierce of Numis Securities. Please go ahead.
Hey, John Hello.
Hello.
Two questions first on the hedge.
Ph belden hedged in the third quarter.
There is more than the capacities.
You said you had at the end of the second quarter site.
I'm wondering is there more to go on the hedge and maybe you could talk to how this hedge was put on in the third quarter or is it fairly closely.
Six.
Roll off February.
Every month from now.
For the next five years. So first question is on the hedge up the second question. Thanks fuel updated rate sensitivity I Wonder if you could just talk.
The subset of the 275, it specifically relates to an increase in <unk> base right, we can kind of triangulate to hold.
The structural hedge pull out the non UK Pos at Barclays International, but maybe you could just tell us how much of the $2 75.
Would arise as a result of a 25 basis point move up in the short and in the U K.
Thanks very much.
Yes, thanks, Jonathan.
Take both of them.
In Tampa.
The hitch capacity.
Yes, I think if you like we're fully.
Expressed in terms of the amount of nominal hedged that we want to be running youre right that we guided to increasing that hedge nominal at Q2, which is broadly what we've done obviously.
Deposits continued to track up anyway. So.
Scott and influence whenever we sort of if you like where we would like to be in.
In terms of the road profile, yes. It is.
There's nothing unusual that same sort of strip of swaps that we have been used for a number of years.
So into next year, if you want to look at on.
On a sort of 12 month basis, it's in the sort of somewhere between 30 and 40 billion pounds of role.
But you should expect and they will refinance into refinancing to whatever rates that will be providing as we go into next year and as you know we sort of expressed as a stripper.
Six to seven year maturity swaps.
Which.
Which I guess hopefully is helpful in terms of.
I think that the point of your question was can you just tell us how much of the year one.
Net interest income sensitivity comes from just face rate rises and posture assumptions versus just natural.
I'd say.
In the majority.
In year one.
You would say, it's probably more driven by base rate rises in the grinding effect of the hedges sort of come through in two years.
<unk>, obviously all of this will be somewhat dependent on the shape of the curve that we use as a reference point of how steep it is or what have you, but think of it as being.
From and what.
The first year, mostly a base rate story and beyond that becomes more of a grinding effect of the structural hedge is somewhat a number but at least gives you a sense of how we think about it.
Okay. That's helpful, but just to clarify I mean, it looks like probably $50 million of the 275 is the hedge so let's call. It low two hundreds in terms of deposit revenue specifically.
Near the oldest mass U K U K base rate, yes, that's right, it's mostly predominantly Sterling don't forget that that is split across our <unk>.
K bank as well as our international banking over the large corporate business U K corporate business and that it is a sterling one were still almost entirely of studying exposure.
Sort of.
<unk> thousand 60 across the UK and international.
Thanks for that.
Thanks, Jonathan could we have the next question. Please.
Our next question comes from Joseph Dickerson of Jefferies. Please go ahead.
Hi, Good morning, guys. Thanks for taking my question I guess, one thing to me is.
Why are you being so conservative from external observers point of view with the $2 billion of management overlays.
But <unk> got sitting in Europe.
Sitting in your provisions when I look at a call it a 15%.
Loan loss reserve on the UK unsecured book.
And nearly 12% on U S cards, which would kind of be levels I would have thought about if you had an eight or 9% unemployment rate.
Base case.
In each jurisdiction. So is why why the conservatism I mean, I hear you on things like furlough schemes et cetera, but it still seems like a.
Fairly high number, particularly.
When if you go back the.
Management adjustments at the full year 'twenty were about 15% of your overall <unk>.
L allowance, so I guess, just what what's driving that there and then.
Our share buybacks still still something you'd like to do with your CET one ratio at 15, 4%.
Yes lots of moving parts, but hopefully still capital generation and in the fourth quarter or are there.
Other inorganic opportunities you might look at as well.
Yeah. Thanks, Joe why don't I take the first one and I'll ask Jeff to talk about capital returns.
The 2 billion pounds of size that if management overlay.
And really there because.
As you are aware when we wrote these models.
No concept of a pandemic scenario, we could've model is most of that historical calibration that we could have used and we don't think these models really.
Can pick up the the effect of government support and more importantly, the removal.
Move out of government support schemes.
So in some ways, you're right we're getting towards the.
Towards the backend of that and I haven't said that the furlough scheme in the U K is just being unwound now we do have.
Which most people probably don't appreciate as much but the support schemes in the U S are actually still in place and we will go on a bit longer you've.
It's a cataract and social security payments and extended unemployment benefits and what have you.
But you know as these schemes begin to unwind, we will see that we see.
The full effects of that Anita if you.
Intermodal is have underestimated the amount of.
Distressed debt Mei Mei.
Got it it's helpful in which case, we'll digest the provision hopefully and we won't need any more.
Or alternatively.
It turns out it's a much more smooth adjustment then.
We may afford it could've been in which case that will be positive for us.
The word on credit before I hand over to Jess is though I would just stress how benign.
<unk> presented the credit environment and kind of is when we look at a few things like delinquency data.
<unk>.
They're as low as we've seen I think you already sort of multi decade lows in the U S and if you look at our watch list, which is sort of you know.
Names that we would be closely monitoring as a credit risk in our corporate.
In investment banking names I mean, that's about.
And I've seen as well so.
The credit environment is that we can be.
Good evening.
Yes, it's a good environment, if you'd like to be going into the removal of the support schemes. So we'll see how that plays out just on the buyback.
So thats still remains.
Sure.
And instrument.
Like for us to use as we return excess capital to shareholders, which was clearly our our our goal.
I think returning capital, whether it's through dividends or buybacks and needs to be a certain cadence to it.
We've done $1 2 billion.
This year that the second buyback of 500 million that's still in progress now so.
We are buying back stock and.
And that will be something that we we will continue to do.
In the future in terms of inorganic.
<unk>.
We clearly if we see an opportunity we will make investments of our capital I think probably the best example would be the GAAP transition, which.
Transaction, where we increased our number of consumers in the U S that have a Barclays credit card fraud.
11 million to 22 million.
And that in that single transaction so.
We will make investments like that that we think will be very.
Very viable.
In the long run.
But we also recognize the economics of the buyback are pretty hard to be given where our stock is trading. So we closed the quarter at a very strong capital.
<unk> 15, 4% and we continue as an objective to return excess capital to shareholders.
Thanks for your questions Josh.
Could we have the next question please operator.
Certainly our next question comes from Mark Keenan of Credit Suisse. Your line is open.
Thank you good morning.
The follow up question on rate sensitivity.
One on the capital plan. Please so just on the.
Rate sensitivity.
I was wondering perhaps if you could.
Just kind of use your view of the competitive.
Landscape perhaps.
Tell us.
<unk> also gives us the curse of perhaps how long.
The new upgraded rate sensitivity.
$275 million.
My comments can be maintained.
At the bank of England.
Hikes rates.
What sort of level of base rates it might be before we get to something that looks like.
Closer to $150 million again.
And then just on the point on the rate sensitivity.
Is the $2 75 is that kind of a exit benefit from year one.
One rather than a change to NII over the first year.
And then my second question on capital with just a follow up to his point.
If I think about the 14, 7%.
From the first of 10 22.
I guess.
Kind of wanted to super fully load that on a couple of banks are talking about 5%.
<unk> to risk weighted assets.
From the completion of Basel that would take that number to about 14.
That would sort of imply that trip.
Pretty much all of the earnings going forward.
And I should be freely available for shareholders.
At least for for a number of years is that broadly right tool are we ignoring something like output flows.
And just related to that and the the point on the <unk> portfolio.
When you look at the.
The M&A opportunities out the or are there still interesting things available.
Keith.
Thanks, Tom.
Got it.
Got it.
Opportunities.
Think about that.
On the on the rate sensitivity.
Thank you.
As you know, we're not trying to be too clever here, it's taking the yield curve as you see it.
Immediately shifted enough by 'twenty five.
At this point in parallel.
Rubbing that each calendar year.
So.
Assuming that breaks one off instantaneously today, and then what would.
It happened in the first year based on our own.
Sense of where you.
Posit rates would reprice study in other words, our own cost of assumptions in the grinding effect that we would see on a strip of swaps and.
Grinding into high extra seats.
So in terms of your question about will that sensitivity decrease.
I think what perhaps what you're really sort of maybe.
Looking into his deep half rate pass through assumptions will they change.
As base rates continue to increase.
I think it's quite a hypothetical I think.
It's been a long time since we've had a sustained.
The rate rise from such a low level, so I'm sort of low to speculate but generally speaking.
You might find that.
We've got a lot of liquidity and that's the really the backdrop of it you might find you sort of parse through a little bit more.
As the rate environment gets higher and higher.
The other thing I would stress though is.
Is.
We have.
Lots of different sort of liabilities, we have of the corporate liabilities, we have everyday savings account, we have current accounts.
We also have fixed term deposits, we have savings bonds. So it's not a one size fits all which doesn't make it quite tricky to sort of see from.
From the outside so the sensitivity is giving you is really just all of that blended in.
And how we see it.
In terms of capital.
The fly close just before just talks about inorganic.
Basel floor.
I think with you a consultation paper by the PRA over the winter months.
That will give us some.
<unk> as to what we May see there I think many banks that are sort of try to have a stab at this already go somewhere between five and some cases, 10% of other inflation.
I guess, when we get the consultation paper out we'll be able to give a price about a guidance of what it may mean for us timing.
Timing of this will be important I know that.
And now I'd like to fully load and I sort of understand that it makes sense, but.
This thing is going to be implemented in two three whatever years out then.
We've got a good track record of adapting to that.
Output floors again, I wouldn't speculate on how that feels.
Slightly further out on the horizon.
I don't want to speculate on where that May go until we get clarity from the regulators, but by and large I think the gist of your question or your sort of almost inferred answer is about right, which is we are net capital generative and it's important that we aim to.
<unk>.
Get the bulk of that capital back into shareholders' hands.
We'd be able to just talk about inorganic.
Yeah. Thanks Omar.
<unk>.
I think the context that six years ago.
Set the strategy of the bank to be the Universal banking model that we.
Got it.
And what we've really been driving for US is to provide Barclays a level of stability that I think for many years. It did not have.
Now it leads to the most profitable nine months in the history of.
At the bank.
And I. Thank you.
You are we are we are reaping the rewards now of the stability of our of our strategy in that and that is paramount to.
To the bank.
Will.
Engage in transactions that that have real structural gains for us.
The partnership we have with Amazon in Germany, and Amazon in the UK, where every time someone goes on Amazon to make a purchase and they go to the checkout and if it's over 100 euros in the case.
Germany, Youre getting a number of options to finance that purchase and that's all Barclays behind that and so.
That's an extremely important relationship we have.
With Amazon and then there are a number of <unk>.
Less visible ventures that where we're partnering with with Fintech companies to advance the digitization of our offerings, particularly our consumer banking business. So.
We will partner with people and we will.
Have alignments with things like the gap like Amazon.
But I think when we are delivering the level of returns that we're delivering now.
We're pretty confident that we can maintain through the cycle.
10%.
We're better return on tangible equity.
Its a strategy thats working and we want to endorse that strategy.
Thanks for your questions Omar Thank you.
Next question please operator.
Our next question comes from guys Stebbins of Exane BNP Paribas Your line.
Is now open.
Hey, guys.
Hi, good morning.
Two questions.
The first one was on consumer asset quality.
Just because there was some interesting movements in terms of the ECL.
In the period.
It was unfortunate that can stage two exposure to international retail bankruptcies.
With 185 billion increase in sales in this segment, which I presume.
<unk> and <unk>.
<unk> charging periods, but it doesn't look like there was much flowing stage three you havent seen a pick up in the rate is in your other countries. It sounds quite reassuring. So perhaps you could just give a bit more color as to what drove the increase in stage two retail in the U S, which didn't seem to be the case in the.
Okay.
Do you think with US our model assumptions, perhaps and then the second question was just touching on Barclays UK NIM I.
I guess, we're now in the back end of October start to seem you've got strike good visibility on the mortgage pipeline completion spreads et cetera. So can we think about <unk> 50.
<unk> has been pretty much 250 spot.
Just given where we.
103 basis points, bringing the full year number is quite a big delta on the implied exit rate so any thoughts there would be useful.
Yes, Thanks Scott.
Asset quality.
In the U S. One of the things that may not be obvious to folks is when.
We took on the.
Our back book for AARP actually you have to bring on the day one.
Impairment provision through the P&L.
That if you like has a slightly sort of nonrecurring effect in this quarter's charging CCP. So of that 110 million pounds. I think it was in CCP between 20 or 30 of.
If it was coming from AARP on day one.
Nonrecurring, you'll actually see the same thing happen again for GAAP, when we bring that on probably in the second quarter. So I'll leave it to you whether you want to look through that or how you think about that.
So that hopefully that's helpful away from that of course as I mentioned credit.
Quality is.
It's looking very benign, but we're not really seeing any signs of stress at the moment.
Mortgage margins or sort of UK blended net interest margin I won't give a precise number I mean things things, even though like you say, there's any sort of two and half months of business.
To go before the <unk>.
Things can still move around a little bit.
Depending obviously on base rate changes, which may or may not come before we sort of year end.
And a guy that won't speculate on that but.
We think it will be somewhere around the $2 50 for the full year NIM.
We'll stick to that guidance, rather than give anything too precise.
For the moment.
Okay. So just to clarify I assume that typically doesn't assume any benefit from a base rate hike decided media.
No no no we don't try and see if you've got a crystal ball on that.
Okay. Thank you thanks.
Thanks Scott.
Next question please operator.
Certainly our next question comes from Chris <unk> with Autonomous Your line is now open. Please proceed with your question.
Good morning, Thank you for taking my questions.
If I could just clarify your rate sensitivity comments. Please on the currency split if I look at your annual report.
That shows that.
Okay.
60% coming from Sterling.
The balance sheet.
On the balance sheet has changed over the nine months.
The maturity of six years.
Now.
Okay.
And at the start of the point of view.
Turning to the ceiling.
Please my understanding was the.
Previous.
Disclosing anything to clients.
So.
Kris.
Bye.
Since what you were.
Two two points.
Okay.
And then if I look at the CIP.
Obviously, you've had another very strong periods in the nine months.
If I look at the nine months as a whole and I compare against the equivalent period in 2009.
Pete.
Covid during 2012.
Provision charges in that division.
Revenues were up 23% on the nine months buying team and costs around 1%.
And this is nine months, we're looking through the lending I.
You referenced the variable remuneration come up.
Okay.
But looking at those numbers in the round, it's not obvious.
You have much if any.
Reaction to the dramatic decline in revenue.
Revenue for the going forward should we actually expect cost.
Or does the revenue decline because hopefully to the bottom line because it looks like the revenue step up has largely holding.
The bottom line.
In this period. Thank you.
Thanks, Chris.
Ill answer both of them and just may want to add some more comments on investment.
Banking for the compensation.
In terms of the rate sensitivity I think youre trying to compare and annual report disclosure to what we had on a flight, but there is a.
The difference in sort of practice you liked basis a prep.
The previous sensitivities, we just took a sort of a hypothetical 50% sort of path through.
Everywhere.
At this time round is I guess, the likelihood of changes in interest rates becomes more real we'll see if that ever happens.
At least that's what conventional thinking is.
We've tried to give more of an indicative for what may really happen rather than just a hypothetical 50%.
I think if you want to go through the base the prep.
It sounds like you may want to do.
So just I'll get somebody and I ought to give you a call. After after this and I can take you through it just say you've got the various moving parts.
In terms of the CIC and.
Compensation relative to.
Income improvements.
Yeah.
I guess the.
Again, we will get there.
Little bit complicate because the accounting.
The accounting.
<unk> sort of compensation component.
Compared to the actual size of the bonus pool and you probably see this in previous disclosures. Unfortunately.
Unfortunately, the same thing just given the way deferrals and everything works through.
I would say, though if you look at a year.
Like 2021.
We are accrued a meaningful increase in the bonus pool as you would expect us to do well.
Where returns performance is it's not just really an income story for us we do try and look at returns Holistically.
We would obviously flex that down.
Of.
Of course, if performance is not as strong as it is this year as it was next year that will fade through but again underwrite for us till you do get the slight timing mismatches between.
I feel like economic awards in the way they are accounted for and again.
Probably pretty pretty good of that already and I imagine, Chris, but maybe work somebody and I asked.
Just to maybe take you through some of the sort of big moving parts just in case.
We do want to obviously.
Pay competitive with the market and we are constantly tracking what.
How the industry is accruing.
And what information we can glean about.
About the about the direction of compensation is too short.