Earnings Call Transcript - BCS Q2 2020

Operator, Operator

Welcome to the Barclays Half Year 2020 Results Analyst and Investor Conference Call. I will now hand you over to Jes Staley, Group Chief Executive, and Tushar Morzaria, Group Finance Director.

Jes Staley, Group Chief Executive

Good morning, everyone, and thank you for joining us today. First of all, let me say that I hope you and your loved ones have been keeping safe and well as we continue to navigate the COVID-19 pandemic. These remain extraordinary circumstances for all of us, and the impact of this crisis weighs heavily on our professional and personal lives. Truly the past quarter for Barclays has been a story of two things. The resilience of the bank, underpinned by diversification of our strategy and evident in our performance, and Barclays' continued support for our customers, clients, colleagues, and the communities where we live and work around the world. I do believe this is in large part driven by regulatory and Central Bank policies over the past ten years aimed at moving the economy from an over-dependence on bank balance sheets to a much greater reliance on capital markets to fund economic growth. The strategy has proven to be a very positive shift in terms of the ability of corporates and governments to remain well funded and liquid as this health crisis moves towards an economic one. A core priority for Barclays remains alleviating the social and economic impact of COVID-19. I've been especially proud of the way our colleagues across the bank have risen to the challenge. Five months into the crisis, we provided substantial reassurance and support to many of our customers facing financial challenges with understandable concerns about the future. In practical help, we've granted repayment holidays on 121,000 mortgages and 76,000 personal loans. We're providing an interest-free buffer on overdrafts for 5.4 million UK customers, and we've reduced bank insurance by half. We've waived late payment fees and cash advances for 8 million Barclays customers and granted around 157,000 payment holidays. Our business touches half the households in the UK, and we've exercised similar programs across our businesses in the U.S. and Europe. Approximately 870 branches are open across the UK providing critical frontline banking services, especially to our most vulnerable customers. We have also trained thousands of branch colleagues to help ease the burden on our call centers. These colleagues are helping handle around 200,000 customer calls a week. As the economic consequences of COVID-19 begin to bite, it is more important than ever to help businesses get through this period intact and to protect and preserve jobs. We have all seen the unprecedented efforts from the Treasury and the Bank of England to back businesses in the UK, and we've been playing our part to help get their support for companies that need it. As of the beginning of this week, Barclays has approved nearly 9,000 loans to mid-sized corporates in the UK at a total value of £2.5 billion. Perhaps more importantly, Barclays has delivered bounce-back loans to nearly 250,000 small businesses across the United Kingdom, valued at £7.75 billion, helping to preserve hundreds of thousands of jobs. To give you some sense of the scale, historically we would make that number of loans over about a three-year period, and we delivered the majority of this support in just 12 weeks. Behind those numbers are stories of businesses and jobs surviving this crisis. An example is Karas Plating in Greater Manchester, a 75-year-old company specialized in electroplating, surface coating, and metal finishing. A £250,000 civil loan has enabled them to adjust their manufacturing process to replace urgently needed parts for ventilators, provide electrical connectors to the Nightingale Hospital, and continue to supply critical components to the food and power sectors. Our support to the Giggling Squid, a leading Thai restaurant group, has helped safeguard 920 jobs at 235 restaurants across the Netherlands and the UK. We've also delivered significant help of our own through our banking activities, becoming a leader in assisting large businesses to access the Bank of England and Treasury's commercial paper program. To date, we have arranged £11.7 billion of funding for UK corporates representing 48% of total funding accessed at the CCFF scheme. Today, across all government-backed programs, Barclays has leveraged around £22 billion in COVID-19 related support to businesses. In terms of our backing for government schemes, we've waived everyday banking fees and overdraft interest for 650,000 of our small business customers and placed 12 months of capital repayment holidays for most SMEs with loans of over £25,000. We are continuing to extend credit to companies, and Barclays has maintained billions of pounds in credit facilities for clients worldwide. We are also steadfastly assisting clients globally in advisory, equity, and debt capital markets. In the second quarter, we advised on 580 capital market transactions that collectively raised over £750 billion in funding. In the UK, we helped listed companies raise almost £6 billion in the equity capital market, including household names such as William Hill, Aston Martin, and Compass Group. There is perhaps no way of stabilizing effects for a company during a time of stress than the injection of new equity, and Barclays is the number one underwriter of equities for British companies year-to-date. In the U.S., we serve as lead left book runner on our $1.5 billion term loan and $3.5 billion secured bond offerings for Delta Airlines. The term loan represented the first broadly syndicated institutional term loan to clear the market since the start of the COVID-19 crisis. On the advisory side, we were pleased to act as the lead financial advisor to Dominion Energy on the company's $9.7 billion divestiture of its midstream business to Berkshire Hathaway announced earlier this month. We continue to evolve our approach to offer clients, big and small, the help they need through this crisis. It is crucial we preserve as many businesses and jobs as we can to aid the recovery. Barclays has deep roots in the communities we serve, and I am proud of the efforts of our colleagues year-round to support their local areas. We are delivering our core solution programs, including life skills and reasonable impact to mitigate the impacts of COVID-19. So far, we have allocated £45 million of our £109 million community aid package to charities in the UK, U.S., and India to support those hardest hit by the crisis and to provide food to vulnerable families, including purchasing protective equipment for NHS staff. We understand that our fortunes are intertwined with the communities and economies we serve. I will now hand over to Tushar to discuss the numbers in detail.

Tushar Morzaria, Group Finance Director

Thanks, Jes. As usual, I'll summarize the first half results and then focus on the second quarter performance. As noted in Q1, we are facing a period of uncertainty making it particularly difficult to give forward-looking guidance. We can now feel the initial effects of the COVID-19 pandemic, and where possible, I will try to give pointers for the coming quarters. As Jes mentioned, the results of the first half showed the benefit of our diversified business model. Despite the impairment charge of £3.7 billion, we reported a statutory profit before tax of £1.3 billion, generating 4p of earnings per share. The Q1 profit for the half was down on last year due to a £2.8 billion increase in the impairment charge. However, income growth of 8% and a 4% reduction in costs resulted in a profitable half and an RoTE of 2.9%. Given the uncertainty around the economic downturn and low-interest rate environment, we expect the environment in H2 to remain challenging. While we continue to believe that about a 10% RoTE is the right target for Barclays over time, we need to see how the downturn plays out before giving any medium-term guidance. Net income growth reflected a 31% increase in CIB, more than offsetting income headwinds in the consumer businesses. The cost reduction delivered positive jaws of 12% with an increased cost income ratio of 57%. Pre-provision profits were up 27% to £5 billion. Our capital position remains strong, with a CET1 ratio ending the half at 14.2%, up on the year-end level of 13.8%. The strength of the balance sheet was reflected in the rising TNAV from 262p to 284p. Moving on to Q2 performance, income decreased by 4%. Continued strong performance by CIB, particularly in markets, was offset by income headwinds in the UK and CCP. Costs decreased by 6%, delivering positive jaws of 2% with a cost income ratio of 62%. Pre-provision profits were broadly stable year-on-year at £2 billion. However, we provided a further £1.6 billion for impairment, up £1.1 billion added to the £2.1 billion provided in Q1. This charge included a further £1 billion net increase for modeling revised COVID-19 scenarios with macroeconomic inputs based on a slower recovery than that modeled in Q1. We continued to see limited effects of the pandemic on delinquencies, probably a result of support programs, with net write-offs in the quarter of just £0.5 billion and £0.9 billion for the half. Assuming no further deterioration in the macroeconomic variables we are using, we would expect to report a lower impairment charge in the remaining quarters of the year. The quarter showed the benefit of the diversification of our income sources across consumer and wholesale businesses. CIB income increased by 19% to £3.3 billion, driven by a 49% increase in markets and a reduced 8% decline in Q2. However, consumer businesses continue to face challenges. We anticipate some recovery in consumer spending as lockdown measures ease, but there is uncertainty about how quickly interest-earning balances will normalize. This is particularly true for U.S. cards. Overall, we remain cautiously optimistic about expense recovery into the coming quarters. To summarize, we believe we are well-positioned to navigate the challenges presented by COVID-19 and emerging economic pressures, while continuing to support our customers and communities.

Operator, Operator

Our first question on the line comes from Joseph Dickerson of Jefferies. Joseph, you may now proceed with your question.

Joseph Dickerson, Analyst

Hi, thank you for taking my question. Do you expect any benefit on capital in the second half from the recent changes around the treatment of software intangibles? Secondly, from a top-down perspective, your comments suggest that you have reached an inflection point on margins. It seems like volumes at the system level are picking up; can you comment on the potential for earnings momentum in the second half?

Tushar Morzaria, Group Finance Director

Yes, thanks, Joe. Let me take both of those questions. In terms of tailwinds to our capital regarding potential rule changes around software intangibles, if they go through, we expect this to be in the order of 20 basis points for us. In terms of the operating environment into the second half, you are right that we should see some mechanical benefits coming through in our consumer businesses. For instance, net interest income in both the UK bank and in the CCP will experience mechanical effects of lower deposit rates through Q3 and Q4, as our deposits are now repricing. Moreover, spending levels are recovering since lockdown restrictions have eased, indicating increased consumer activity. If this trend continues, it should lead to improved credit profiles and net interest income growth. However, uncertainty about consumer behavior persists, especially as government support measures begin to wind down. We anticipate a cautious, lower impairment charge moving forward, taking into account improving economic outlooks.

Joseph Dickerson, Analyst

That’s helpful. I think you had guided on an approximate £5 billion impairment charge for the year. Is your outlook still aligned with that guidance now, given recent trends?

Tushar Morzaria, Group Finance Director

Yes, Joe, the underlying baseline run rate for impairments is certainly lower at present. If macroeconomic forecasts do not show significant deterioration, we would see lower charges than previously anticipated. However, the length and impact of support measures will remain key variables in shaping our future forecasts.

Jonathan Pierce, Analyst

Good morning, Jes. I've got two questions please, the first on impairment, the second on risk-weighted assets. I’m curious how your models will react in terms of provisions as economic conditions worsen. Should we expect to start releasing reserves quickly as stage 3 touches? Or will there be a disconnect where reserves remain high despite increasing stage 3?

Jes Staley, Group Chief Executive

That's a good question. In theory, provisions taken for expected losses should be good enough for any stage 3 credits. However, the timing of defaults will be critical, and it is possible to see a period of double counting as reserves remain intact while stage 3 charges are incurred. The government's support may also influence default timing, delaying some defaults even as other credits become more stable.

Jonathan Pierce, Analyst

On risk-weighted assets, can you provide insights on potential movements into H2, given we saw a 3% decline in Q2? Should we expect further adjustments, or will movements stabilize?

Jes Staley, Group Chief Executive

It's challenging to forecast. If markets don’t experience significant volatility, we anticipate less dramatic RWA movements. However, if volatility returns, we may need to prepare for procyclical adjustments. We are focused on managing these variables effectively.

Tushar Morzaria, Group Finance Director

As for visibility on management actions, we don't anticipate drastic shifts but will continue to monitor RWA risks as economic conditions evolve. Historical patterns suggest some level of stabilization is likely.

Andrew Coombs, Analyst

Good morning. If I could ask a couple of follow-ups relating to consumer spending trends in the UK versus the U.S., are you seeing any real divergence? Additionally, what indicates engagement levels for clients via your digital versus branch channels?

Tushar Morzaria, Group Finance Director

In the UK, spending is generally rebounding as lockdowns ease. However, we also observe a decline in physical branch visits due to increased reliance on digital banking, which may prompt consideration of our branch footprint moving forward.

Jes Staley, Group Chief Executive

To emphasize, our ongoing transformation to digital engagement accounts for increased customer satisfaction and efficiency. While branches remain a critical access point for certain demographics, evaluating our service delivery will be crucial in future operational strategies.

Christopher Cant, Analyst

Good morning. There are questions around your cost income ratio and how you see it aligning over time given the dynamics prevalent in your businesses. Can you elaborate on this?

Tushar Morzaria, Group Finance Director

Yes, Chris. Maintaining a lower cost income ratio has been a priority. We observed some initial challenges in the second quarter, but we remain focused on reducing costs while strategically investing in our operational capabilities for future growth.

Operator, Operator

The last question we have time for today comes from Edward Firth of KBW. Please go ahead.

Edward Firth, Analyst

Thank you. I’d like to inquire about the current disconnect between reported costs and anticipated revenues. Given the fluctuations in the market, what adjustments do you foresee?

Tushar Morzaria, Group Finance Director

We have a strong track record of cost management, but the pandemic has created short-term anomalies. We're prioritizing financial integrity during this period of uncertainty, while also preparing for future opportunities to streamline and strengthen our operations.