Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q4 2020
Operator, Operator
Welcome to the Barclays Full Year 2020 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. We all know that 2020 was not a normal year. The pandemic has caused fear and dislocation in societies around the world, and it has caused huge economic harm and uncertainty, with hardship and stress for millions of people. It has brought tragedy to many families, including friends and colleagues. In common with others, it has tested our resilience as a business and our values as a corporate citizen. While we have faced significant challenges, I want to express how proud I am of the way our colleagues at Barclays have responded to an extraordinarily difficult year. Their efforts have been the driving force that has enabled us to step up and play our full part in the battle to contain the damage that this terrible disease is causing all around us. That commitment from my colleagues, and the core resilience of our business, meant that we stayed profitable in every quarter of 2020. This strength has allowed us to support our customers and clients, and the communities around the world where we live and work. During 2020, we provided almost 700,000 payment holidays to our customers. We waived around £100 million in overdraft interest and banking fees, and we have committed a further £100 million to charities supporting the most vulnerable through our Community Aid Package. We've helped our clients raise over £1.5 trillion in the global capital markets and extended approximately £27 billion to companies through the UK Government's lending schemes. We've been able to deliver all of that support while holding our top line steady. Overall, Group income was £21.8 billion, up 1% on 2019. But it is the composition of that income which shows most clearly how our diversified model has worked to absorb the shocks of 2020 and still deliver resilient overall performance. Our consumer operations felt the impact of the pandemic most acutely, with Barclays UK income down 14%, while our Consumer Cards and Payments business was down 22%. However, at the same time, in our wholesale business, Corporate and Investment Banking income was up 22% for the year, stabilizing Group income at a time of extreme stress. Before provisions, we generated profits of almost £8 billion for the full year, but these were heavily tempered by the approach we have taken concerning impairment charges driven by the pandemic. Full year impairment charges were £4.8 billion, bringing the Group's total impairment reserve to £9.4 billion, reflecting our cautious view of the impact of COVID. However, we were encouraged that the fourth quarter charge was down 19% relative to the previous quarter, at just under £500 million. We expect 2021 full year impairment charges to be materially below the 2020 level. Overall, Group profit before tax was therefore £3.1 billion, including a profit before tax of £646 million in the fourth quarter. The drivers of that performance were in the Investment Bank, where markets and banking both delivered their best-ever income performances, up 45% and 8% respectively. It's essential to note that this standout markets performance reflects not only significant growth in the Global Capital Markets but also material market share gains by Barclays. We have consistently grown share in markets over the past few years, moving from a market share of 3.6% in 2017 to 4.9% in 2020. Growth has occurred across Macro, Credit, and Equities. Markets and Banking income together grew 45% over the same period, relative to an industry wallet which has grown roughly 20%. Together, these data points illustrate the tangible momentum we have built in our Investment Bank, a business delivering improving returns year-over-year, producing a return on tangible equity of over 13% in 2020, despite a high impairment charge. While Corporate income was down 13%, including the impact of lower interest rates, the Corporate and Investment Banking department delivered income of £12.5 billion, up 22% year-on-year, and a profit before tax of £4 billion, up 35%. Our Consumer Cards and Payments business in Barclays International did, however, incur a loss of £388 million for the full year. This was caused by impairment charges, a fall in income from lower credit card balances, margin compression, and reduced payments activity due to the pandemic. The Consumer Cards and Payments division returned to profit in the last two quarters. Barclays UK profit before tax decreased by 47% during the year to £546 million, with performance in the year impacted by a significant reduction in income and COVID-related impairment charges. However, we did see growth in mortgages in 2020, and the business has performed better since the apparent nadir of the second quarter. In the fourth quarter, we saw a profit in Barclays UK of £282 million. Lest we forget, Barclays UK is a business that, in the decade prior to 2020, regularly produced high returns, as did Consumer Cards & Payments. These remain good businesses with strong fundamentals, and I expect to see their performance improve as the economy returns to normal. That said, beyond the immediate impacts of the pandemic, UK retail banking faces some long-term strategic challenges, such as near-zero interest rates, lower charges for overdrafts and other services, and providing many core banking services for free. In response, we continue to invest in our technology platform, offering digitized finance to improve our relationships with our customers. We continue to focus on running the business efficiently, so that we can generate appropriate profitability while providing support to our customers, clients, and communities. Overall, Group operating expenses, excluding litigation and conduct, rose 1% to £13.7 billion, including roughly £370 million of charges for structural cost actions. This translates to a Group cost-to-income ratio of 63%, flat compared to 2019. We remain attentive to costs and continue to target a Group cost-to-income ratio below 60% over time. The 2020 Group RoTE was 3.2%, and earnings per share were 8.8 pence. We expect to deliver a meaningful improvement to Group RoTE in 2021, remaining committed to a target of above 10% over time. While navigating the effects of the pandemic on our business and supporting customers, clients, and our communities, we have continued to strengthen Barclays for the long term. In this respect, in 2020 we progressed on our approach to climate change, setting an ambition to be a net zero bank by 2050, alongside a commitment to align all our financing with the goals of the Paris Agreement. In late November, we announced a plan and methodology for achieving this. Our operations are already net zero, and our commitment extends to the financing we provide to clients, covering capital markets activity as well as lending. We will ultimately expand this approach to cover our entire financing portfolio, starting with Energy and Power, which account for up to three-quarters of emissions globally. Our clear goals to help accelerate the transition to a green economy include £100 billion of green financing by 2030 and directly investing £175 million in sustainability-focused start-ups over the next five years. Barclays' capital position strengthened significantly throughout 2020, with our CET1 capital ratio increasing by 130 basis points in the year, including 50 basis points in the fourth quarter, to stand at 15.1% at year-end. We anticipate some capital headwinds in 2021 from pro-cyclical effects on RWAs, the reversal of regulatory forbearance applied in 2020, and increased pension contributions. Nevertheless, we remain significantly above our CET1 ratio target of between 13% and 14% and well above our minimum regulatory requirement, with prudent provisioning for impairments. Given the strength of our business, we believe that the time is right to resume capital distributions. We have announced a total payout equivalent to 5 pence per share for 2020, comprising a full year dividend payment of 1 pence per share, and a share buyback of up to £700 million. We expect to comment further on capital distributions when appropriate. In summary, Barclays remains well-capitalized, well-provisioned for impairments, highly liquid, with a strong balance sheet and competitive market positions across the Group. I expect that our strong and diversified business model will deliver a meaningful improvement in returns in 2021. At the same time, we remain committed to supporting customers, clients, colleagues, and communities as we emerge from the COVID-19 crisis. I'll now hand over to Tushar to take you through the results in more detail.
Tushar Morzaria, Group Finance Director
Thanks, Jes. I'll comment first on the full year results, then summarize the fourth quarter performance. Our priority during the pandemic has been to support the economy, serve our customers, and look after the interests of colleagues and other stakeholders. It's been a very challenging year, but the pandemic has clearly shown the benefits of our diversified business model. Despite the effects of the pandemic, we reported a statutory RoTE of 3.2%, or 3.4% excluding litigation and conduct. Litigation and conduct was just £0.2 billion, but we had a large PPI charge in Q3 last year, so I'll reference numbers excluding litigation and conduct. The impairment charge of £4.8 billion, up almost £3 billion year-on-year, reduced PBT from £6.2 billion to £3.2 billion. However, as you see from this bridge, the increase in CIB income of 22% more than offset the 19% decline in consumer and other businesses. With income up 1% overall, we delivered neutral jaws and a cost income ratio of 63%, slightly in excess of the group's target of below 60% over time. TNAV increased from 262 pence to 269 pence over the year. Our capital position is also strong, with the CET1 ratio strengthening further in Q4 to reach 15.1%, up 130 basis points over the year. Under the temporary guardrails announced by the regulator in December, our statutory profitability allows us to distribute 5 pence in aggregate, by way of dividend and buyback. We plan to launch a share buyback of up to £700 million by the end of Q1, which is attractive for us from a financial point of view at current share prices and is equivalent to 4 pence per share. In addition, we're paying a dividend of 1 pence, reaffirming our intention going forward to pay dividends supplemented, as appropriate, by share buybacks. The level and form of distribution was determined by the current circumstances, and you shouldn't read too much into the level of the overall payout ratio or the mix chosen on this occasion. We'll update the market further on distributions at the appropriate time. A few words on income, costs, and impairment for the year before moving to Q4 performance. This slide shows the split in the 1% income growth, with the 22% increase in CIB offsetting declines of 14% and 22% in BUK and CCP respectively. In the CIB, our share gains in markets and the momentum across the businesses position us well for the future. However, conditions remain challenging for the consumer businesses, with reduced unsecured balances and a low-rate environment, as shown on the next slide. We've highlighted in the charts on the right the continuing headwinds from balance reductions in UK and US cards. We saw signs of recovery in consumer spending in both the UK and US in Q3, but further lockdowns hit spending over the Christmas period and are continuing in Q1. Consequently, credit card balances were down in Q4 in the UK and flat in the US in dollars, rather than seeing the usual seasonal increases. We've also included a reminder of the specific headwinds that the consumer businesses are experiencing. Although the customer support actions affecting BUK will fall away in 2021, the effect of low unsecured balances and interest rates continues. Moving now to costs. Full year costs were up 1% overall at £13.7 billion, due to an increase in structural cost actions to around £370 million, but underlying costs were flat year-on-year. The bank levy increased but is expected to be lower in 2021, with decreases in both the rate and scope of the levy. The COVID pandemic has led to additional costs for the Group, including building out the teams to help customers in financial difficulty, and these costs will remain elevated in 2021. However, the Group will continue to drive cost efficiencies while investing in the franchises where appropriate. As noted earlier, the impairment charge increased by £2.9 billion, driven by deterioration in the economic outlook due to the pandemic, resulting in significant increases in charges in each business. However, this buildup in provisions in Q1 and Q2 has not yet been followed by material increases in defaults. As shown, much lower charges for Q3 and Q4 reflect this. We've provided the charge for each quarter, split into Stage 1 plus Stage 2 impairment, mostly relating to balances which aren't past due, referred to as book ups, and the Stage 3 impairment on loans in default. Most of the elevated impairment in Q1 and Q2 was from book ups, while the Q3 and Q4 charges predominantly came from Stage 3 balances. The macroeconomic variables we've used in the expected loss calculation have been updated slightly in Q4. However, I would emphasize that with the reduction in unsecured balances and the ongoing level of government support, the models would have generated a significant provision write-back in Q4. We have therefore applied significant post-model adjustments totaling £1.4 billion. The increase in our total impairment allowance by £2.8 billion to £9.4 billion broadly maintains our increased level of coverage. Based on forecast unemployment levels, we anticipate an increased flow into delinquency in 2021, but given our level of provisioning, we expect a materially lower charge for 2021. Unsecured balances have decreased significantly from £60 billion to £47 billion over the year, and coverage has increased from 8.1% to 12.3%, with even higher coverage in the credit card books. Wholesale coverage has nearly doubled over the year to 1.5%, with a large proportion in sectors we consider more vulnerable to the downturn. We've included the usual detailed slides on unsecured coverage, selected wholesale sectors, and payment holidays in the appendix. Turning now to Q4 performance. Q4 income decreased 7% year-on-year, as continuing strong performance in CIB, in both Markets and Banking, was offset by income headwinds in BUK and CCP. Costs increased to £3.8 billion, including Q4 structural cost actions of £261 million and an increased bank levy charge of £299 million. Impairment decreased £31 million to £492 million year-on-year, of which £444 million was for Stage 3 defaulted loans. Despite the headwinds, Q4 was still profitable, with a profit before tax of £0.7 billion and a RoTE of 2.2%. Turning to Barclays UK, the headwinds we've referred to in previous quarters continued to affect BUK, with income down 17% year-on-year. Unsecured balances further declined in Q4, with gross card balances down from £16.5 billion to £11.9 billion, a decline of 28% over the year. Mortgage balances, on the other hand, were up £5.1 billion year-on-year, with a net increase of £1.9 billion in Q4, and pricing continues to be attractive. There was a significant increase in BUK business banking lending over the year, as Bounce Back Loans and CBILS reached approximately £11 billion in aggregate. Loan balances grew by almost £12 billion in total to £205 billion. Deposit balances also continued to grow, resulting in a loan-to-deposit ratio of 89%. Q4 income included higher debt sales, contributing to the income increase compared to Q3. Q4 NIM was up on Q3 at 256 basis points, but we expect a clear reduction in 2021 as secured lending continues to grow. This is expected to take full year NIM to around 240 basis points, absent any changes in the base rate. The income outlook remains tough, with low demand for unsecured lending and headwinds from the structural hedge, despite expectations of continued mortgage growth. Costs increased 11% year-on-year, as COVID-related costs and increased structural cost actions more than offset efficiency savings. The cost increase includes around £30 million of quarterly costs in our partner finance business, which was transferred from Barclays International earlier in the year. Impairment for the quarter was £170 million, down slightly year-on-year and well below recent quarters. Arrears rates continue to be stable. Turning now to Barclays International. BI income was stable year-on-year at £3.5 billion, reflecting strong performance in CIB, offset by lower income in CCP, and RoTE was broadly flat at 5.9%. I'll provide more detail on the businesses on the next two slides. The Corporate & Investment Bank delivered an RoTE of 6.2% in Q4, traditionally the weakest quarter of the year, up from 3.9% last year, with strong performance across markets and banking. Income was up 14% year-on-year at £2.6 billion on a flat cost base, delivering strong positive jaws. Markets income increased 19% in sterling, the best Q4 level since 2014 when the investment bank took its current form, and up 22% in dollars. The full year markets income of £7.6 billion was also a high since 2014. FICC increased 12%, with a particularly strong performance in credit. Equities income was up 33%, with strong growth in derivatives and cash equities. Banking fees were up 30% year-on-year, with good performance across debt and equity capital markets and advisory after some weakness in advisory earlier in the year. Corporate lending this quarter wasn't distorted by the volatile mark-to-market moves we had in earlier quarters. Reported income of £186 million reflected limited demand for corporate lending, with further paydown of revolving credit facilities. Transaction banking income remained depressed at £344 million, with further increases in deposits more than offset by margin compression. CIB costs were flat, reflecting tight cost control, reducing the cost-to-income ratio from 80% to 69%. Impairment increased slightly year-on-year but was well down on the previous three quarters at £52 million. We've started the year with the investment banking franchise in good shape and are optimistic about the future. Turning now to Consumer Cards & Payments, income in CCP was down 25%, principally driven by US card balances, which were down 22% in dollar terms. In addition to affecting balances, lower spend volumes were also a headwind for interchange in US cards and for payments income. In the payments business, although volumes were down, e-commerce accounted for over 50% of volumes. Card balances in the US ended the year flat on September in dollar terms, rather than seeing an increase from Thanksgiving and Christmas spend, so the income growth we were hoping for in 2021 is going to be tough to achieve in the absence of significant improvement in economic conditions. Costs were down 4%, resulting in a 64% cost-to-income ratio. Impairment was £239 million, well down on levels of Q1 and Q2, reflecting lower balances, with arrears rates slightly up in the quarter, but still well below the level our provisioning assumes. Turning now to Head Office, the Head Office loss before tax was £416 million, reflecting one-offs in both the income and cost lines. The negative income includes a Q4 expense of £85 million related to the repurchase of half the outstanding Tier 2 Contingent Capital Notes. This will roughly halve the £100 million annual legacy funding cost in Head Office that we had guided for in 2021 and 2022. The other main income elements, residual negative treasury items and negative income from hedge accounting, will continue in 2021 and are expected to be at similar levels to the past. That would suggest around £300 million negative income in total, in the absence of a resumption of the Absa dividend. Q4 costs of £222 million were above the usual run rate of £50 million to £60 million due to around £150 million of cost actions and the inclusion of a further £22 million from the community aid programme we announced at the start of the pandemic. Moving onto capital, we finished the year with a very strong capital position. The CET1 ratio was 15.1%, up materially from 13.8% at the end of 2019, and an increase of 50 basis points in Q4. This reflected capital generation from profits across the year, regulatory support, and cancellation of the full year '19 dividend at the start of the pandemic. The strengthening of the ratio was achieved despite an increase of £11 billion in RWAs. You can see the elements broken down in the bridge on the top half of this slide. IFRS9 transitional relief didn't move significantly this quarter, as the majority of the impairment charge didn't qualify for relief. In Q4, the main contributors to the increase were profits and 30 basis points from the new regulatory benefit for software assets. We're expecting this software benefit to be reversed at some point this year, and I'll provide more about the flight path for capital on the next slide. We're content with the headline capital ratio of 15.1%, but I want to remind you of some factors that will reduce the ratio in 2021, particularly in Q1, and why we are comfortable to run at a level materially below 15.1%. We've shown at the start of this bridge a couple of easily quantifiable factors that will affect the ratio early in the year. The proposed buyback of £700 million is not reflected in the ratio and would reduce the year-end ratio by 23 basis points. Additionally, the temporary PVA relief brought in last year was reversed on January 1, and the IFRS9 transitional relief reduces. So you could consider a rebased ratio at the start of 2021 of 14.7%. This is still well above our target range of 13% to 14%. I would remind you that our MDA hurdle is currently 11.2%, and we've included the usual slide in the appendix showing how that is calculated. Our target range is designed to allow for fluctuations in the MDA, for example, if a UK counter-cyclical buffer is reintroduced. Going forward, we remain confident in generating capital from profits, although I'm not going to forecast a precise level of capital generation. We've shown here several additional headwinds to the ratio that we are aware of, in addition to the expected reversal of the software benefit. The two most difficult to forecast are the migration of impairment into Stage 3 defaulted balances, which will not qualify for transitional relief, and potential pro-cyclicality that could inflate RWAs. This didn't materialize during 2020 as expected, but we are likely to see some effect from credit migration during 2021. Nevertheless, we are confident that the balance of these elements will leave us with sufficient capital generation to continue distributions to shareholders and remain comfortable in our CET1 target range. Both spot and average leverage ratios were at or above 5%. Finally, regarding our liquidity and funding, we remain highly liquid and well-funded, with a liquidity coverage ratio of 162% and our loan-to-deposit ratio of 71%. This positions us well to withstand the stresses caused by the pandemic and support our customers. To recap, we were profitable in each quarter of 2020, generating a 3.2% statutory RoTE for the year, despite the COVID pandemic, which led to significant reductions in income in the consumer businesses and an increase of close to £3 billion in the impairment charge. I've summarized the various comments on the outlook we've made. While the income outlook for the consumer businesses is challenging given the economic environment, the CIB is well positioned for 2021 and beyond. We continue to see the benefits of our diversified business model coming through, allowing us to take a measured approach to costs and continue investing in the future of the group despite the difficult economic environment. We have taken significant impairment charges in 2020, but with £9.4 billion in balance sheet provisions, we expect a materially lower charge in 2021. We're distributing the equivalent of 5 pence per share via dividend and share buyback. Although we expect a reduction in our CET1 ratio in 2021, our starting point of 15.1% should put us in a good position to provide attractive capital distributions to shareholders moving forward. Thank you. 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 reach everyone.
Operator, Operator
The first question today comes from Joseph Dickson of Jeffries. Please proceed, Joseph.
Joseph Dickson, Analyst
Hi. Good morning, guys. Thanks for taking my question. I guess just a couple of things. So on the capital distribution, the PRA was pretty clear in their December document that you could move away from these. I think they used the term temporary guardrails and return to more normal levels of Board decision-making in respect of the half-year. When I look at where the pro forma CET1 is, in addition to the fact you generated 81 basis points of capital in 2020, with a £4.8 billion impairment charge, it suggests on a fairly conservative basis, you've got somewhere between £1.5 billion plus of excess capital. Is that something you could seek to use for buybacks in respect of the half-year? How should we think about the timing of further buybacks, given that your shares are meaningfully below book, that's quite accretive? And then secondly, just on the Card outlook, both in the US and the UK, you gave a great deal of precision around the outlook for the UK NIM, but a lot of that is linked to card spend and lending. What’s the outlook there? Because you said, I think Tushar you noted in your comments, significant improvement in economic conditions will be needed. However, the US retail sales data for January is showing quite a strong 5% growth versus a slower 1%, and the stimulus checks being distributed. Therefore, it seems like the conditions may be primed for a recovery in spend, but you are sounding a bit more cautious. Can you elaborate on that?
Jes Staley, Group Chief Executive
Yeah. Thanks, Joe. Good to hear from you on that one. Let me take both of those questions. In terms of capital distribution, I hope you've seen this morning that it is essential for the Board here that we return as much capital to shareholders as we can consistently. The actions we've announced today demonstrate that. I would agree that we feel very comfortable with our starting capital position, even amid some natural headwinds. You can see that as you pro forma some of the numbers that we can quantify; we are still in a strong capital position. We expect to be more profitable this year than last, and that will help. Concerning announcements for further buybacks or dividends, I think that's something to be discussed at the right time. Today, we're not in a position to make any announcements. Of course, the guardrails are in place, and the PRA will conduct their reverse stress testing and come to their conclusions. I do agree that getting capital back into the hands of shareholders is a priority for us, and our actions today reflect that. Regarding card balances in the UK and US, I think you're right that as spending recovers, that will support us in the US, allowing us to benefit from the interchange fees available there. Moreover, even in the CCT segment, we include our acquiring business, which should respond quickly to increased spend levels. However, the growth in card balances may lag that somewhat as people have been cautious and saving, acting rationally. So, it’s a difficult judgment. We've aimed to be cautious, and I think that's the right stance. But if vaccine rollouts have the desired effects sooner than expected, and spending levels recover, it should help.
Joseph Dickson, Analyst
That's fair. Would you agree that the recovery in spend and its connection to lending is probably driven more by improvements in mobility and reopening non-essential spending where there's likely to be a greater propensity to revolve a balance?
Jes Staley, Group Chief Executive
Yes, definitely. Typically, essential spending is driven more by debit card transactions, while non-essential spend tends to be where credit cards are used. So I agree that increased mobility and spending patterns could drive improvements in card balances and serve as a leading indicator.
Joseph Dickson, Analyst
Thank you. Just one more thing, to confirm, the PRA mentioned that you can return to more normal capital decision-making regarding the half-year unless there are significant risks to the economy. Would you concur?
Jes Staley, Group Chief Executive
Yes, I believe so. We will discuss this more at the appropriate time. For now, let’s get through this season, and the PRA's reverse stress test. However, returning capital to shareholders is a clear objective for our board, and our actions today reflect that.
Operator, Operator
Sure. The next question comes from Jonathan Pierce of Numis. Your line is now open.
Jonathan Pierce, Analyst
Good morning, all. Two for me as well, please. Hi, Jes. Firstly, the NIM and the UK bank. Could you give us a sense of the trajectory of the NIM this year? Will it continue to trend lower such that we might exit below 2.4%? Secondly, could you elaborate on what you’re thinking regarding mortgage margins as the year proceeds? I noticed you seem to be leading the charge downward regarding some headline rates.
Jes Staley, Group Chief Executive
Thanks, Jonathan. The NIM trajectory is difficult to forecast due to a few moving parts, including the yield curve itself, which has been steepening recently. That steepening could help us, although we can’t predict it will continue to steepen or flatten. Mortgage margins will also need to reflect the supply and demand dynamics in the mortgage market. They’ve held steady reasonably well, although we do expect moderation in the mortgage margin as we move through the year, particularly post the stamp duty holiday. Volumes have been robust; hopefully, that will continue to support our mortgage margins.
Jonathan Pierce, Analyst
So starting today, based on what you see right now, you think you could do a bit better than 3.4% RoTE?
Jes Staley, Group Chief Executive
It’s possible, yes. However, it's challenging to forecast the next several weeks accurately. Still, the dynamics appear marginally helpful.
Operator, Operator
The next question comes from Jon Peace of Credit Suisse. Your line is now open.
Jon Peace, Analyst
Thank you. Could you help us size the material improvement in impairments for 2021? A few European banks have suggested that impairment levels could return close to a through-the-cycle rate. Given your low run rates in H2 2020, can we sustain those levels moving forward? Additionally, how have you started the year in 2021 in terms of the investment bank? Several competitors have reported revenues up year-on-year. Is that the case for you as well?
Tushar Morzaria, Group Finance Director
Thanks, Jon. In regards to impairments, we have been running at relatively low levels in both Q3 and Q4. The wildcard is when we might see defaults that our models forecast. Currently, government support is mitigating potential spikes in unemployment, which may mean we are over-provided. We've implemented post-model adjustments to account for this uncertain economic situation. On the investment banking side, I can't comment during the quarter, but last year was robust for capital markets and we expect strong performance continues.
Operator, Operator
The next question comes from Alvaro Serrano of Morgan Stanley. Please proceed with your question.
Alvaro Serrano, Analyst
Good morning, thanks for taking my questions. Just a follow-up on the NIM guidance in the UK. The 240 guidance translates to a 16 basis point reduction versus the Q4 level. Can you quantify the assumptions driving your outlook? Additionally, regarding costs, you previously provided detailed guidance that appears to have changed. Can you provide insight on the BBK outlook versus the overall volume?
Tushar Morzaria, Group Finance Director
Thanks, Alvaro. The UK NIM and structural hedge impact depend on interest rate shifts. We've included a sensitivity slide in our appendices. This illustrates that a flatter curve may provide different stress results. On the costs side, we do expect slight increases due to structural cost actions, but will focus on controls and sustainability. I can't comment extensively on specific divisions right now given uncertainty in the market.
Operator, Operator
The next question comes from Benjamin Toms of RBC. Please go ahead, Benjamin.
Benjamin Toms, Analyst
Good morning. Thank you for taking my questions. First, with the CIB performing well and market share growing, do you see yourself continuing to gain market share or is it becoming more competitive? Secondly, regarding real estate optimization, I didn't find much detail in your slides. Should we expect further branch reductions moving forward?
Tushar Morzaria, Group Finance Director
Regarding the market share, we've seen strong momentum in the IB, and we hope to continue gaining market share while also remaining prudent in managing costs. Consumer interactions are increasingly moving to digital channels, and as that transition continues, we may see further branch closures. We have over 700 branches in the UK, but you may gradually see that number reduce.
Operator, Operator
The next question comes from Rohith Chandra-Rajan from Bank of America. Please go ahead.
Rohith Chandra-Rajan, Analyst
Hi, thank you. Good morning. I have two questions. On the UK NIM, your sensitivity slide suggested a potential £100 million upside from the recent shifts in rates. Is that roughly the right ballpark? Secondly, regarding CCP, the mixes within that business might lag broader trends in US card balances. Can you confirm this? How so?
Tushar Morzaria, Group Finance Director
Regarding the structural hedge, I hesitate to provide an exact figure. However, the shift in the yield curve would generally be positive. The NIM guidance assumes UK card balances may decline slightly. For the US cards, the volatility in travel and leisure spend dynamics influence demand. Our US business is more tied to discretionary spending, but as those sectors recover, it should give us a boost in the second half.
Operator, Operator
Sure. The next question comes from Ed Firth of KBW. Your line is now open.
Ed Firth, Analyst
Morning, everybody. Just a quick question regarding capital headwinds. I was wondering if you could clarify the magnitude of pro-cyclicality expected in 2021. Additionally, what figures are we discussing regarding regulatory forbearance returning? Thanks.
Jes Staley, Group Chief Executive
On regulatory forbearance, PVA is an example that reverses on January 1st. When it comes to pro-cyclicality, £10 billion was noted last year. Future estimates are challenging, but we will monitor conditions closely. Even so, we remain comfortable being well above our targets.
Operator, Operator
The next question comes from Jason Napier of UBS. Please go ahead.
Jason Napier, Analyst
Good morning. Thank you for taking my questions. The first one is related to costs. Given the higher headcount and strategic COVID-related costs, what guidance can you provide for cost direction this year? The second question pertains to the size of your risk overlays and how confident you are adjusting Stage 2 to Stage 3 impairment levels? Could this affect future provisioning?
Tushar Morzaria, Group Finance Director
In terms of risk overlays, maintaining visibility into our customers helps in adjusting staging appropriately, though unsecured credit relationships are inherently less visible. Regarding costs, we maintain our focus on efficiency for the medium-term cost-income ratio. We will continue to invest where warranted while managing costs prudently during this uncertain time.
Operator, Operator
The next question is from Guy Stebbings of Exane BNP Paribas. Please go ahead.
Guy Stebbings, Analyst
Good morning. Thanks for taking my question. I wanted to revisit costs, particularly in the CIB. While costs appear stable, awareness of previous cost volatility makes future guidance difficult. Considering consensus for 2021, should we anticipate costs dropping significantly if revenues decline? Additionally, given the UK consumer assets have been declining over 30% since 2020, how many years might recovery take?
Tushar Morzaria, Group Finance Director
We expect recovery in consumer balances to happen more swiftly than the historical average, as the pandemic effects are unique. The structured approach we've taken should facilitate maintaining an efficient balance sheet to achieve our financial targets and adjust the cost-income ratio appropriately.
Operator, Operator
The next question comes from Robin Down of HSBC. Please proceed with your question.
Robin Down, Analyst
Thank you for taking my question. There are some inconsistencies in your impairment strategies, especially considering you’ve increased macro assumptions towards the upside. Can you clarify what triggers you’ll monitor going forward? Moreover, would you provide more insights on structural costs for 2021?
Jes Staley, Group Chief Executive
The adjustments we made were based on historical data informed by models. While optimistic economic signals exist, we opted to take a conservative approach to impairments. As for costs, we will call out anything significant should it arise during the year.
Operator, Operator
The next question comes from Chris Cant of Autonomous. Your line is now open.
Chris Cant, Analyst
Hi, thank you. I wanted to ask about your 60% cost income ratio target. Can you provide a timeframe for this target? Moreover, regarding FX, what are your assumptions on currency effects this year, like how revenues and costs are distributed by currency?
Tushar Morzaria, Group Finance Director
We remain committed to our 60% target, but cannot offer precise timing amid economic uncertainty. For FX, we retain substantial profits in dollars, and while we benefit from favorable movements in exchange rates, we don’t offer specifics on revenue and cost distributions across currencies.
Operator, Operator
The final question comes from Rob Noble of Deutsche Bank. Please go ahead.
Rob Noble, Analyst
Good morning. I have a quick question regarding your performance outlook for the CCP. Will you aim to grow non-interest income in the UK this year? What does the recent lockdown mean for interest income compared to last year?
Tushar Morzaria, Group Finance Director
We would like to aim for growth in our non-interest income. However, that hinges on economic activity, and we are prioritizing potential opportunities in areas like fees and payments.
Operator, Operator
This presentation has now ended.