Half Year 2022 Barclays PLC Fixed Income Earnings Call
Welcome to the Barclays half year 2022 results fixed income conference call, we will begin shortly.
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Yeah.
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Welcome to Barclays half year 2022 results fixed income conference call I will now hand, you over to Ana Cross Group Finance Director, Andy <unk> Group Treasurer.
Good afternoon, everyone and welcome to the fixed income investor call for our half year 2022 results.
I'm joined today by John <unk>, Our group Treasurer, So I will hand over to an environment. After my introductory remarks.
This morning, I'll focus on three key themes.
Continued revenue momentum our focus on cost.
Our readiness for any macroeconomic deterioration.
On this last point I want to reiterate that point.
Given the natural attention and panic and asset quality received from our fixed income investor base.
But let me begin on slide three with a very brief overview of our half year P&L highlights.
So half one broad based income growth, partially offset the increase in costs, which reflected the elevated level of litigation and conduct charges.
Impairment remaining line, reflecting the quality of our books and the level of provisioning.
As a result, we generated a statutory rate for the first half of <unk>.
10, 1%.
Let me now turn to impairment on slide four.
The net charge for the quarter was $200 million compared to a release last year.
A lots of factors that feed into this net charge. So I want to focus first on our risk experience and the quality of our portfolio.
Delinquency rates and the businesses remained stable.
<unk> with.
With 30 day arrears in U K card, 1%.
U S cards at one 4%.
We continue to track customer on client behavior very carefully given heightened concerns over an affordability crisis in order to identify early warning signs.
We have not yet seen worrying indicators.
Payment rates continued to be high as customers have reacted rationally to the economic environment.
As a result card balances in both the UK and U S are down on pre pandemic levels on a local currency basis.
Although the lessor has started to grow again this quarter and we believe that the quality of this book is higher than before the pandemic.
As a result, despite the macroeconomic uncertainty we are comfortable with our coverage levels with UK cards. For example, at 10, 9% and U S cards at eight 4%.
Our total impairment allowance was $6 billion at the end of the quarter of which $1 3 billion represents post model adjustment.
As I've shown on the next slide.
The macroeconomic variables are met we have used at Q2 for models impairment based on consensus forecast.
However, we are conscious of concerns that there could be further downside credit risk.
Therefore, we are retaining significant PMA totaling $1 3 billion.
As an illustration.
Also at point in time, when we model impairment using the Max for the downside one scenario.
Implied increase in modeled impairment.
$5 billion, which is significantly less than the PMA, we are still holding.
Taken together with our coverage ratios. This supports our expectation that we will continue to have quarterly impairment charges below the pre pandemic levels in the coming quarters.
And with that I'll hand over to Tom for the balance sheet highlights.
Thanks Anna.
Ended June with a robust position across all aspects of our balance sheet as evidenced on the slide our CET one ratio was 13, 6%.
UK leverage ratio ended at five 1% of Enbrel was 39% of <unk> liquidity continues to be strong with an LCR ratio of 166.
I will begin with some comments on capital.
Yeah.
We were pleased to end the quarter with a CET one ratio assessing 6% firmly within our target range. This reflects the impact of the issuance of securities underwrite U S shelf registration.
Explain it this morning.
Let me walk through the safety one ratio in Q2, but writing a major movements, excluding FX and the Irishman, Scott, which I'll return to.
Firstly, the new bright side. The main drivers of <unk> growth was at $1 4 billion pounds of attributable profit, which contributed 42 basis points of ratio accretion.
Fair value moves through decreased 61 by 600 million pounds equivalent to 17 basis points largely caused by the impacts of increased interest rates on the value of the bonds that liquidity pool.
Of course higher interest rates are expected to be a material tailwind for net interest income overtime.
Secondly, the denouement Ita <unk> grew by $6 4 billion pounds from investments in business growth.
27 basis points, including the <unk> acquisition and growth in CIB.
<unk> business had another standout quarter.
Let me now return to the other items the issuance had a combined 17 basis point effect on capital from a net loss of $341 million, including a reserve related to a potential SEC resolution and the increase of $1 7 billion pounds in order to view items associated with the hedging arrangements.
FX news had a neutral impact on the CET one ratio given our long standing hedging arrangements, but accounted for large gross movements with 9 billion pound volume growth offset by $1 3 billion pound increase and a currency translation reserve.
Hopefully you will also find helpful. The rebased viewed that we show on the right hand side of the slide the 500 million pound share buyback announced today. The second this year will be deducted from capital in Q3.
As expected to be broadly offset by the tailwind from the removal of the full complexity and patented ought to be right on the other issue with hedging arrangements.
As we've always stated holding an appropriate headroom above our MDA hurdle is essential to their capital plans.
As you can see on slide nine with a CET one ratio of 13, 6%. This gives us 270 basis points of headroom above the MDA hurdle or 9 billion pound in absolute terms.
30% to 40% target range accommodates the changes to the MDA hurdle that we foresee.
<unk> faced reintroduction of the UK counter cyclical buffer or Cc one base.
At the end of the year the.
The end of this year at 1%.
2% in Q3 2023, this translates into a 0.5% and 1% requirement respectively for the group.
We remain confident that our target provides an appropriate headroom.
Given our capital generative ability.
As we previously mentioned delivering a temperature RFC corresponds to 150 basis points of CET one ratio accretion.
We know from experience that the safety is a breakthrough.
Regulatory stress buffer and we would expect the requirements to be reduced or eliminated in the event to the macroeconomic stress as demonstrated in recent experience in 2016 and 2020.
It's also worth noting that the MDA hurdle is subject to an at least annual calibration flatulate requirement.
We indicated to the market earlier in the year that we expect to go into the triennial pension valuation.
September 2022 surface position, both from an <unk> and a funding point of view.
And the element of our pillar two requirements for pension risk might reduce.
Turning to the next slide which illustrates the structure of our capital stack.
Capital position of 19, 9% continues to provide a prudent headroom of 370 basis points above the regulatory requirements.
You can see on the slide that we held three 6% of all the <unk>.
Format, which is below the three 9% level, we held at the year end and continues to represent a prudent headroom to the two 3% regulatory prescribed level.
We have consistently communicated the rationale for <unk>, primarily as a buffer above tier one capital requirements as we manage any <unk> and FX fluctuations as we've said over the year already and with the added benefit that this capital.
Total capital and leverage given ACP when capital is able to support regulatory metrics across a number of fronts. You'll note on the slides that we show our current preference to run a surplus one level rather than for take two.
We also show on this slide co profile of <unk> and.
And we are mindful of potential calls ahead of time as we calibrate our issuance plans.
On legacy capital acquisition is unchanged, we continue to assess each security on a case by case basis noticing that the population of securities has been reducing.
Moving on to the wider MRO fundings back as you can see on slide 11, we have a prudent enbrel position and are in excess of regulatory minimums.
Despite the number of issuance Windows. We were pleased to have made good progress against that 9 billion pounds Enbrel 2022 funding plan with our senior one transactions and we have $5 5 billion pounds remaining.
We continue to look for issuance opportunities across <unk> and Daiichi one for the remaining planned this year.
I want to touch briefly on the bank of England's result ability assertion frameworks or Ross officially last months shown on slide 12, we have a robust framework in place. We've received the highest score possible with regards to our enbrel sales ability capabilities in Nebraska. This was helped companies slash strong record.
The proactive MRO issuance since 2013.
You can see on that slide but from a treasury perspective, we were also deemed to have no material issues in terms of that funding and resolution.
Yes.
And overall, we were pleased that the bank of England effects, there were no shortcomings deficiencies or substantive impediments identifies can have reservation capabilities.
Let me now turn to slide <unk> to talk about our liquidity position in more detail the liquidity pool of 343 billion pounds and Thats I don't know.
LCR ratio of 156% represent 119 billion surplus above the minimum regulatory requirements. We continue to proactively manage market risk in our liquidity pool and maintained our approach to reduce that rate of increase the already material holdings of inflation linked bonds Youll see.
But the LCR position has been stable throughout this year, maintaining a prudent balance between holding a healthy excess and deploying the liquidity to our businesses.
NSS acquisition continued to be above requirements too and we've now commenced quarterly disclosures to the right.
Turning briefly to our deposit profile on the next slide.
Deposits continued to grow over the quarter by 22 billion pounds and remained elevated when compared to levels. Prior to the pandemic. We continue to monitor closely for any signs of changing depositor behavior that could indicate future deposit outflows through our key lenses, including sector demographic and account.
Sides, with particularly truck and a wonderful customer base by leveraging our historic data consumed with Ibs, but to date, we continue to observe stable dynamics.
Clearly a large driver for the record deposit volumes was the growth in money supply driven by central bank's quantitative easing initiatives and so naturally we watch closely the vacuum against comments quantitative timeframe.
Gross market expectations last months appears to be a moderate volume of <unk> sales, we continue to run a prudent liquidity levels to cover alternative scenarios.
Scenarios.
With the sustained increase in deposit balances you can see on slide 15.
To us identifying further hedgeable balances we grew the structural hedge program 18 billion pounds in Q2, and <unk> 85 billion pound since the beginning of the pandemic, albeit we maintain prudent levels of unhedged balances as we remain alert to potential signs of reversal of retro deposit volumes.
As the balances continues to rollover into higher swap price you can see the gross hedge income has grown materially in the last quarter.
Versus Q1.
On credit ratings with.
We show our current position on slide 16, improving our credit ratings continues to be a key strategic priority and we maintain an active dialogue with all the agencies.
<unk> continues to demonstrate the execution of that strategy and providing a sustained improvement in our profitability, which we believe is key and converting the positive outlooks with S&P and Moody's.
Let me finish with an update on our sustainable finance initiatives within Treasury on Slide 17, as you know from previous calls we've been active for a number of years and supporting the Ceos key strategic pillars abating the transition to a low carbon economy were longstanding investors in green bonds within our liquidity pool.
And we were one of the early issuance of Green bonds.
I spoke before about our sustainable impact capital program, which has a mandate to invest up to 175 million pounds of equity capital and sustainably focused startups for 2025.
This program is housing treasury within the principal investments business, which is where the subs growth stage equity investing and portfolio management capabilities fits.
With 181 million pounds invested to date up from 54 million pounds at our last update we are well on track to deliver or exceed the 175 million pound topics. We've.
We've invested in 14 companies across a variety of sectors, but all supporting the transition to a more sustainable environment for.
For example, energy transition is a key pillar and we have a number of portfolio companies in this space such as protein, which is the primary green hydrogen development company and energy, which is an innovative company aimed at solving the long duration energy storage.
We know that the transition to net zero is an important part of the investment decision, making process for all stakeholders and we look forward to continuing this dialogue is the ESG landscape evolves.
And so to summarize we were pleased to deliver strong and stable metrics across our balance sheet and we continue to support the group's execution of that strategy as we navigate the challenging macroeconomic backdrop.
And with that I'll hand back to Anna.
Thank you Tom we would now like to open the call up to questions.
This call helpful. Operator, Please go ahead.
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Our first question today comes from Lee Street of Citigroup. Please go ahead Lee Your line is open.
Hello, Thank you Nicole and thank you for taking it.
My questions I have a couple please.
Lastly, as it relates to the U S self registration issue.
Can you perhaps have you placed any sort of impediment frictions in terms of what you want.
As the market, making more and I think you bought was the primary issuance market.
See any product.
One.
And then question two please.
Risk weighted assets.
Sure.
The proportion of group <unk>.
So two questions one is that.
A couple of thousand.
Okay.
Sure.
Risk weighted assets.
And secondly, remind me do you.
The proportion of <unk> relate to markets or can you give us any indication as to what they might be.
Taking my questions. Thank you.
Hey, <unk>, it's Dan.
Thanks for your thanks for your question so on the.
First one in relation to the.
The issuance program. So we have the full set of programs.
Available to us with the exception of the U S structured notes program, which we're not currently issuing from.
Given that we've announced the decision on stuff, but we will be out of the programs up and available to us and there is no further specific restrictions.
On our activities.
In relation to the capital markets.
Hi, Lee.
Questions on <unk>.
Right.
So we.
We don't have.
Specific targets about how we deploy at Orion.
Great.
What you're seeing is us essentially reacting to.
<unk> market opportunities and we think Thats, a really important part of thing.
Our diversified great.
Somewhat undermined diversification, if we had sort of strict absolutely limit.
Having said that some of the growth that you're seeing.
And across the half April does it relates to some of the regulatory changes.
Had on the first of January at that pace.
Business deployment.
And if you're looking for.
Helpful.
Disclosure around our Wi <unk>.
Don't split type markets, specifically, but if you look at sort of pages.
<unk>.
61.
All right.
And you can see the split that.
Kent policy credit risk can you can see that in Barclays International and there is one off the table, but I'm just looking for yes also on page 61.
Youll see CRM market risks, but split so that might be helpful to you.
Alright. Thanks.
Thank you place your own system.
Thank you should we take the next question please.
The next question comes from Robert Smalley of UBS. Please go ahead.
Okay.
Hi, Thanks, very much a couple of topics.
Sure.
In.
On page or slide 28 in the back of the deck.
Quite healthily breakout.
U S.
Credit experience and and coverage.
There are some differences between U K cards in U S cards in terms of.
Impairment allowance.
Development and.
Where they stand stage one stage two stage three so my first question is could you talk a little bit about that and what the differences are that you are seeing market to market.
In terms of consumer behavior.
That's the first question second on on this slide.
Could you also.
Talk about.
Germany exposure.
What youre seeing there and.
This is gil.
Wow.
The forecast with German economy Pan out the way they are particularly around energy issues.
Whether youre going to have to do.
Make a much bigger allowance here.
Okay. Thank you, but what I would say that those questions.
There are quite.
Quite big differences between the U S cards in the U S.
K card businesses.
The U S cards business as a partner cards business.
Much younger and it's there.
Automation if you like.
We're very focused on.
Pursuing those partner programs.
We have strong relationships with the institutional clients, whether that be GAAP jetblue et cetera.
And typically what we see within that book is very high FICO scores are very high quality credit book and.
Dominated really by sort of airline relationships.
And we would see it as toward.
The premium end.
And clearly we've on boarded.
In the current quarter GAAP for the retail portfolio they tend to be different in nature smaller ticket items.
On a slightly different risk profile.
The book is.
Very high.
Risk quality and if you look at what's happened to the filing of <unk>.
Hi.
Integration Youll see that its not really made which tells you have high quality.
<unk>.
<unk>.
So that's the U S card market I guess, what we're saying that it's good practice growth.
Hi repayment.
And some balance growth, but in the U S I guess because.
The rewards programs are very generous we do see customers using that cause probably more side than we do in the U K.
In the UK card balances have dropped sharply during <unk> and <unk>.
That's left us with a smaller but a bulk purchase better in terms of its risk profile.
The UK card given our market share in the U K is much more represent much more of a record sanitation Allstate.
Customer demographic as a whole.
<unk>.
The reason that we've seen that fall away of that simply in the UK.
The reward.
Programs.
Well, there's simply no as generous.
People tend to use more as a borrowing mechanism.
Rather than just the spending mechanism.
And therefore spend.
Spending behaviors change through Covid, so we've seen those balances.
You'll see on <unk>.
Facebooks and fairly high.
Level of coverage.
And the one.
<unk> looked at is.
Stage two coverage so that is a rough the math.
<unk>.
We may have.
Seen a degree of change in that behavior. It may not be.
For example, our concern around not behavior. If for example, you start spending more on your card yield probability of default will go up just because you're spending more.
So we're very focused on that cohort and you can see that the coverage levels on those two in particular very high 26% in the UK.
33% in the U S.
And so hopefully that gives you a bit of background in terms of Germany, it's a very mature portfolio and we feel.
We have.
Provided for it adequately there are no concerning signs in the customer behavior at this point in time.
There is not really any different too.
The UK or the U S in terms of customer behavior.
So there is nothing specific that I would call out.
Do recognize this is.
Deepak.
Economic.
Potential stressed there is in Germany, and therefore, we are very watchful.
That's great. Thanks for taking my questions.
Okay. Thank you.
Can we go to the next question please.
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The next question on the line comes from Daniel David of Autonomous. Please go ahead.
Hi, good afternoon, Thanks for taking my questions I've got three.
III.
The first one is a bit more broad.
Just looking at your CIB loan book, you've seen particularly strong strong growth I'm. Just wondering if you can give us the background on the specific drivers.
Physical geographies.
Just what Mike.
Might be making just on that question some of your peers.
And then the other two are just more focused on capital.
With regard to your capital target.
13% to 14%.
Looking longer term should we add the 1% to <unk> might be to that the reason why I ask I guess can you split the lower end of the.
Skinny against the minimum requirement compared to peers.
And then secondly, just fixing of 91 in a bit more detail.
Looking ahead to your calls next year I think you can go into the Sterling call coming up is it right to assume that you would look to refi.
She is going to be fine.
And Sterling with respect to the currencies of which that reshoot and then I hear your comments on the Q1 expense I guess I'm interested could you could you reduce that tier one headroom to facilitate could call. This primary markets remained challenging in the short term.
Yes.
Okay. Thanks.
Thanks Danielle.
I'll take the first part of that question and then Dan will pick up from that.
So there's really two parts to the answer that.
<unk>.
The first is.
26 billion overall in wholesale lending actually $14 billion of that 26 at a loss.
Six months.
<unk> to debt securities and the liquidity pool.
So it's just the way we present these things.
It's probably.
Probably a little difficult to disentangle up but we can we can do that I'm sure in the disclosures.
So of the 26, it's 14, essentially alright, and liquidity pool actions. The remaining balance is corporate is that.
True.
Lending I would say.
And that's concentrated on IP client.
Investment grade clients, drawing down on the existing facilities.
So.
It's not a massively significant number given the scale of our balance sheet overall, but we took that as a positive sign thats layoffs.
Positive economic activity and given the quality of those clients, who didn't have any concerns about it.
John .
Yes, so in terms of the comment around the.
On the capital ratio.
30% to 40% range.
Was developed in contemplation of a normalization of the cc, what the buffer so and we want to be changing that range in respect to the cc what the announcements.
Obviously, the NDA will be likely will go up to 11, 9%.
As you'll see in the slides.
Give us headroom of 110 to 210 basis points.
Which we're comfortable with.
Probably reiterate two points that we made in the script. Firstly, we think that there is an element of stress buffers in the in that stack.
In the event that was.
As a general market downturn, we would expect that my commitment and the PMI to take action on the Cc, one and secondly, I just.
To highlight the capital generative nature of the franchise.
Mr Rea oversee the capital generation from this.
This quarter in terms of IP and also the fact.
A 10% R&D is 150 basis points of capital generation.
Yes, we are comfortable with the stated capital target range.
In terms of your comments on <unk> one.
You should link directly.
Issuance two combs.
<unk>.
And in particular, Theres, no particular need for us to refinance with Sterling. It is nice to have a component of Sterling.
And particularly that's helpful for you.
But we definitely look at it on a on a portfolio basis, rather than specific instrument to instrument matching.
And yes Youre right.
Would you see.
One percentage.
We needed to and obviously that is one of the reasons why we run a buffer.
And obviously, we saw that play out this quarter given the FX loop.
It did bring down that ratio as a result of the strength, so we wouldn't be necessary.
To it but it's it's.
It would be what we target.
Sure.
Thank you very much.
Okay.
Thank you.
Operator are there any more questions in the queue.
We currently have no further questions.
Okay.
Well if that's the case then I'm sure we look forward to seeing many of you on the road over the coming weeks.
And we'd be happy to take any questions at that point or before.
But thank you very much for attending the call and we'll see.
Thank you.
That concludes today's conference call. Thank you all for joining you may now disconnect.
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