Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q4 2021
C.S. Venkatakrishnan, CEO
Good morning, everybody. This is my first earnings call as Chief Executive of Barclays. It's a great honor to follow a three-century-long line of stewards of this company. While I'm new in this job, I have been at Barclays for a number of years. I was part of the management team that developed the strategy we set out in 2016 and I'm delighted now that we are seeing the benefits of that strategy in the results which we are about to discuss. So moving to slide three. It has been a strong full-year performance for the group. In 2016, we set out to build a bank capable of delivering double-digit returns through the cycle. Last year in 2021, we delivered a group return on tangible equity of 13.4%. This included double-digit returns in all three of our major lines of business: Barclays U.K., the consumer cards and payments business, and the Corporate and Investment Bank. The group also delivered a record profit before tax in 2021 of £8.4 billion. This profit included record levels of profitability in the CIB, strong cost discipline, and a net credit impairment release of around £650 million. We acknowledge that the economic outlook remains uncertain, but this is reflected in the robust coverage ratios which we retain. We also remain well-capitalized with a CET ratio of 15.1% at year-end, and this performance has enabled us to announce the return of over £2.5 billion of excess capital to shareholders in respect of 2021. This is the equivalent of a total payout of £0.15 per share. The group has demonstrated significant progress since 2015. We delivered a greater than 10% return on tangible equity in 2021, and the objective now is to sustain this performance, delivering double-digit returns on a consistent basis. Tushar will say more about this shortly on the factors that give us confidence in achieving this. We continue to focus on managing costs. Our cost-income ratio is 66%, down from over 80% in 2015. In part, this improvement was driven by lower litigation and conduct charges, and a substantial portion of our material financial crisis-related legacy matters are behind us. It's also a result of strong cost control, evidenced by base costs remaining flat year-on-year at £12 billion. We will continue to emphasize cost discipline, creating efficiency savings, which we will use to invest for growth and to drive higher returns. We have also managed our capital resources prudently, steadily improving our CET1 ratio since the end of 2015. Our strong organic capital generation, including over 200 basis points from earnings, has enabled us to increase capital distributions to shareholders in 2021. Barclays remains in a strong capital position and distributions to shareholders remain a key priority for management and the Board. To that end, we were pleased to be able to announce a further buyback of up to £1 billion with our results today. This is in addition to the £500 million buyback which we announced with our interim results and supplements the £0.06 total dividend for 2021. We recognize that the economic environment remains uncertain. However, Barclays is relatively well-positioned against this backdrop. We are materially geared to rising interest rates at both the short and long end of the yield curve. This means that we benefit from rises in the base rate, as well as the steepening of the yield curve via our structural interest rate hedge. We estimate that each 25 basis point upward parallel shift in the yield curve would add about £500 million to annual net interest income by year three. In addition, consumer spending levels in the U.K. and U.S. have been improving, and this is a good lead indicator of interest-earning unsecured balance growth to come. Our latest spend trend data in the U.K. showed that debit and credit card spend for January 2022 was up 7.4% versus January 2020 pre-pandemic. In the U.S., January 2022 purchases were broadly flat compared to January 2020, as the economy has continued to recover. Although inflation is a tailwind to normal GDP, it is a headwind to costs. We have a number of active cost efficiency programs to mitigate the impacts of inflation while continuing to invest for the medium term. At the same time, unemployment in the U.K. and U.S. remains at low levels. Unsecured lending balances are reducing and the macroeconomic outlook appears to be improving. We expect this to mean that the quarterly run rate for impairment is likely to be below pre-pandemic levels. These are positive signs, though we of course recognize that a recovery is not assured. Our universal banking model is key to our strategy. We are a large consumer bank, managing an excellent credit card franchise, as well as a leading corporate bank and one of the largest global investment banks. Each is a successful business in its own right, but together, they comprise a resilient and balanced group. For instance, in 2020 and 2021, we had strong profitability in the Corporate and Investment Bank, helping us withstand the downturn in our consumer businesses. Now, as the broader economy continues to recover, we expect to see an improved performance in our consumer businesses while sustaining the robust performance of the Corporate and Investment Bank. To grow the group and to sustain returns above our target, we emphasize three priorities. I will outline these in the next few slides. Our priorities should enable us to take advantage of some of the long-term changes taking place in financial services. Digitization is one of the most important of these trends. Digitization continues to liberate finance. It provides our customers and clients with cheaper and better products and services, a better user experience, and a more seamless and efficient way of interaction. This is typified by the upward trend in the number of customers who want to engage with us digitally. In the U.K., our mobile banking customers continue to grow year-on-year. We now have over 10 million people registered on our app, with around 11,000 more added each week. At the same time, branch visits continue to fall. The pandemic has accelerated this transition. Within Wholesale Banking, we continue to observe growth in both the public and private global capital markets. Combining the total market capitalization of issued securities around the world, the value of equities and bonds outstanding has grown by over 50% in the last three years. But as these public markets have grown, so too have the private ones. Since 2018, the total assets under management in the private market have grown more than 60% from $6 trillion to $9.8 trillion. The largest private equity and private credit funds dominate these markets, and they are among our biggest clients. Finally, as our third priority, we recognize the scale of opportunity in climate-related financing. It is difficult to be precise about the magnitude of this opportunity, much as it would have been difficult to predict the value of the Internet revolution in the mid-1990s. Estimates of the additional investment required to finance the transition are at least $3 trillion to $5 trillion every year for the next 30 years. This could be a new industrial revolution. So let me take each of our strategic priorities in turn.
Tushar Morzaria, CFO
Thanks, Venkat. While it may be the right time for me to be moving on, I can't think of a better team in both you and Anna to be stewarding and driving Barclays forward for many years to come. Moving on to the numbers. As usual, I'll start with a summary of our full-year performance and then go into more detail on Q4. Through the year, the strength of the CIB has continued to offset the effects of the pandemic on our consumer businesses, which we're now seeing initial signs of recovery. Overall, income was up 1% year-on-year, despite an 8% weakening in the average U.S. dollar exchange rate. Costs increased by £0.6 billion to £14.4 billion and I'll say more on the cost trajectory shortly. Following an impairment charge of £4.8 billion in 2020, we had a net release of £0.7 billion for the year. However, we maintained strong coverage ratios in line with or higher than pre-pandemic levels in key portfolios. This resulted in a profit before tax of £8.4 billion, a significant increase on the 2020 profit of £3.1 billion. The EPS was 37.5p and we generated a return on tangible equity of 13.4%. TNAV increased by 23p over the year to reach 292p. Our capital generation has put us in a position to pay a full-year dividend of 4p per share, making 6p in total for the year and launched a further share buyback of up to £1 billion following on from the £500 million buyback executed in the second half of 2021. We ended the year at a 15.1% CET1 ratio or 14.8% adjusted for the announced buyback, well above our target range of 13% to 14%. A few words on income, costs, and impairment trends before I look at Q4. We mentioned the benefit of diversification throughout the pandemic and we again delivered resilient income performance in 2021, up 1% on 2020 despite the U.S. dollar headwind, reporting a 3% increase in BUK income with growth in mortgages and non-recurrence of COVID-related customer support actions, partially offset by lower unsecured lending balances. CCP income was down 3% year-on-year, reflecting lower average U.S. card balances increased customer acquisition costs and the weaker U.S. dollar. But income from payments in the private bank increased year-on-year. CIB income was down just 1% on the very strong 2020 print despite the dollar headwind with the strength in the fee businesses and equities offsetting weaker fixed performance. We summarize here some of the trends that are driving income across the lending businesses, which underpin our confidence in income growth going forward. We have a continuing tailwind in secured lending volumes in the UK, adding almost £10 billion in mortgage balances year-on-year. While unsecured lending, we have been consistently cautious throughout 2020 and 2021, but we are now seeing the first signs of recovery and are optimistic about the prospects of a return to balanced growth. The rising rate environment is a significant positive for us, through the effect of higher longer rates on the role of the structural hedge, in addition to the effect on deposit margins of recent base rate rises and potential further increases.
Omar Keenan, Analyst
Good morning. Thanks very much for the presentation and taking the questions. I also want to say my thanks to Tushar for all the guidance and wish you the best of luck for the future. I've got two questions please. Firstly, on Barclays U.K. NIM. I guess some of the key sensitivities for the 260 to 270 basis points are around deposit beta assumptions and mortgage margins. And you said you're assuming a base rate of 1% and the market is expecting something higher than that. Could you help us think about what assumptions you have on deposit pass-through for these rate hikes and how it compares to the sensitivity figure that you've given us? And I appreciate your comments that mortgage pricing has firmed in the past couple of weeks. But could you also help us think about what sort of churn assumptions you're making in the 260 to 270. So just a bit of color around what the key assumptions are behind that. And then my second question is on the return on tangible equity target.
Tushar Morzaria, CFO
Thanks, Omar, I appreciate your comments. I look forward to seeing some of you next week. Let me address both questions, and Venkat may want to add some comments as I go along. Regarding the U.K. net interest margin, your questions were about how we view deposit data and mortgage churn. For us, you’ve seen how we’ve adjusted our deposit rates with the initial two rate hikes. The repricing has been relatively mild, reflecting a significant pass-through assumption. We’ve shared sensitivity for an additional two rate hikes, or a further 50 basis points increase. Our view is that deposit beta will likely remain low at higher rates, meaning we will capture a substantial amount of the rate increase. While I won’t provide specific figures, I believe that as rates rise, we may proportionately capture less of any subsequent increases. It’s challenging to be precise because we lack historical data on this situation, given the low starting point and the rapid increase in rates. Additionally, the U.K. banking sector has a considerable amount of cash on deposit. For the immediate future, during the next two rate increases or 50 basis points, we should capture a reasonable portion of the pass-through, but we will see how it plays out. On mortgage churn, my perspective is that it focuses on the flow. Specifically, it refers to each product that comes up for refinancing from our existing portfolio, such as a two-year fixed-rate product. At current pricing levels, I think we might see negative churn for now. However, it is quite difficult to predict further out, especially given how often large lenders adjust their mortgage rates and the fluctuations in swap curves. While we may experience near-term pressures and negative churn affecting our front-end production, it’s harder to determine what lies beyond that. Overall, I want to convey optimism regarding our current assumptions about rate increases and their potential impact on our income trends, which you could see reflected in our net interest margin guidance.
C.S. Venkatakrishnan, CEO
Could we go to the next question, please, operator?
Ed Firth, Analyst
Yes. Thanks very much. Good morning, everybody. I have two. Good morning. Yes, the first one was around CIB revenue outlook. And I seem to remember there was a lot of speculation in the press, the January time that you've taken a big one-off hit on a particular transaction. I'm not particularly worried about the details of the transaction, but I just wondered, can you give us some sort of idea of the quantum of that in terms of the Q4 numbers? And I guess, more importantly, looking forward, other than that, is there anything particular about your business this year that would mean that going forward, you would perform any differently than what we're seeing from the market as a whole? I mean, all the U.S. banks are giving us sort of reasonable guidance in terms of how the market is operating into Q1. So, I guess, that would be my first question. Did you have the second question at the same time, or do you want to answer…
Tushar Morzaria, CFO
Yes, do you want to give a split of them and we'll try to move together.
Ed Firth, Analyst
Yes, of course. The second question was regarding credit quality. I understand your perspective on credit, but I've noticed that your Stage 3 balances in Q4 compared to Q3 have increased significantly in both BUK and internationally, which caught me off guard if I'm interpreting that correctly. My question is, as a bank analyst, each time we hear about an additional 25 basis points increase in interest rates, we tend to add another 200 million or 300 million in revenue projections. However, these rate increases are intended to slow down the economy. I’m curious about the internal analysis you've conducted regarding the point at which rising rates might become a headwind and start causing credit issues in your portfolio. If that's alright. Thank you.
Tushar Morzaria, CFO
Yeah. Thanks, Ed. What I'll ask maybe, Venkat to talk a bit about the CIB revenue and the item that you referred to? And maybe, I'll come back to credit quality. And Venkat, may want to add some comments there as well.
C.S. Venkatakrishnan, CEO
Sure. Thanks, Ed. I think our CIB both in our markets and banking businesses has been making strong and steady progress over the last few years. We have a sixth-ranked markets business. We've got a fifth-ranked banking business. Markets business has gone from eight to six approximately in three years, and the markets business that the markets business for banking has also improved over the last year. And this is with steadily accreting market share. Now in that context, you will see some strong quarters and some quarters which are slightly weaker. What I would say is on that specific item that part of the strength of our business is now the greater coordination in large transactions, which we do between banking and markets. The vast majority of these transactions are very profitable to us, and very helpful to the clients in managing their risks and getting the profile that they want the return profile that they want. Occasionally, one of these things does not work out quite as planned. We don't like it when that happens and we learn from it, and we move on, but I wouldn't read anything particular into this. And I have great confidence in the continuing trend of strong performance in the CIB both in banking and markets and in the accretion of market share.
Tushar Morzaria, CFO
Thanks, Venkat. On your second question in terms of at what point do we start getting concerned about credit quality as rates rise. I'll make a few points there. At the outset, before we optimize any lending decision, at least particularly on the consumer side, obviously, we do this in much more detail on the corporate side on a name-by-name basis. But sitting on the consumer side, we do stress for affordability at the very outset. To give you a sense for mortgages, we would stress customers to 6% mortgage rates, where we feel it's prudent to be extending the mortgage. That gives you a sense of sort of how we think about where that should go. The other thing I'd say is, just in the consumer book, obviously, it is dominated at the moment by our mortgage business, which is predominantly fixed. It's just the nature of the UK market. So there is obviously rate sensitivity to customers from there, but it's the point of refinancing rather than sort of instantaneous transmission. The final two things I'd say is, we are seeing relatively low levels of indebtedness generally. So we aren't seeing customers at this stage exhibiting real stress in any sort of meaningful way. The one thing I would say though, in terms of your own work when you're looking at – at what point could this be more of an issue it will be – I think always unemployment is probably the best lead indicator. So as unemployment starts trending up particularly above perhaps, where most people would expect to be a sort of regular level of sort of residual unemployment at that point, you'll see credit quality change and that's the best lead indicator. At the moment, we feel some way away from that, unemployment is at extremely low levels both in the U.S. and in the U.K. So we're not concerned at the moment, that's probably the one that we watch closely.
C.S. Venkatakrishnan, CEO
Yeah. And I'll add to that, that I think we are at a stage in the economic cycle and the credit cycle, particularly where buildup of balance is more beneficial to us from an income point of view and hurtful to us from a credit point of view. So I don't see – I see that that marginal trade-off of balance that being beneficial to us.
Ed Firth, Analyst
Okay. And sorry, just in terms of the Stage 3 balances, is that just something to do with how you add them up at the year-end or something or why would that be?
Tushar Morzaria, CFO
Yeah. I mean, we should probably maybe have – maybe after this call rather than sort of go to just looking at the quarter-on-quarter Stage 3, and they're slightly down but you may be referencing a different table. So perhaps we can give you a quick call after this one just to make sure we synced up.
Ed Firth, Analyst
Okay. Thanks.
Tushar Morzaria, CFO
Could we have the next question please, operator?
Jason Napier, Analyst
Good morning. Thank you for taking my questions and congratulations to you Tushar, as well as to Venkat and Anna. And just to echo what Omar was saying, thank you for the hard work and help over the years and trying to make sense of all things financial. Two questions. The first please, I guess, perhaps Venkat and for Tushar, the 10% RoTE target is around 160 basis points of CET1. And so when we're thinking about how the 10% RoTE and 150 basis points of capital accretion fit together, I wonder whether you might talk a little bit about what sort of normal RWA growth or consumption the group might demand? And Venkat particularly, whether you saw any changes to the composition of the group in the coming years. So that will be the first question. And then secondly, I hear what you're saying about the customer acquisition costs in CC&P. That's something we're hearing from U.S. players quite clearly. Some of the offers in the market are pretty attractive. But there is something you've warned on before. And so I just wondered whether you're signaling that consensus is not listening. At this stage, we're at £3.7 billion for 2022, so up 13%. I would have thought with balances growing 5% last quarter in the GAAP portfolio coming on stream, that would have been a number that you could achieve, but perhaps you could be more clear about what it is you're saying about CC&P and those headwinds as we go through this year.
Tushar Morzaria, CFO
Thank you, Jason, for your opening comments. I'll address both your questions briefly, and I believe Venkat would like to add a few thoughts as well. Regarding the RoTE, we've rounded it to a 150 basis points capital generation. We weren't aiming for absolute precision. In response to your question about how much of that will be absorbed by our balance sheet growth or reinvesting capital into our businesses, my expectation is that as our consumer businesses recover, we aim to grow consumer assets, especially in non-secured mortgages in U.S. cards and in the U.K. However, these assets aren't especially capital-intensive, so I don't anticipate significant RWA inflation from expanding our consumer balance sheet. As for the investment bank, Emerson Bank will be more agile. We've noticed a slight increase in RWAs this year, and the conditions have been favorable with active capital markets and strong sales and trading activity. However, I don't expect any substantial changes, even on the CIB side, but Venkat might elaborate on how we view this business mix in the medium term. Quickly on customer acquisition costs in CCP, I appreciate you highlighting this as a positive indicator. There are three key stages for us. First, we need people to want our card, which means new account openings. In the U.S., account openings are robust, often exceeding pre-pandemic levels in certain portfolios, which is promising. Secondly, we look at card usage. Our spend data and gross purchase volume align well with industry averages among U.S. peers, which is encouraging given our focus on partnerships versus open market brands. Finally, we monitor balance growth and revolving balances. We’re seeing balance growth now, and I’m optimistic about it leading to increased revolving balances as we head into next year. Overall, we're optimistic about growth in the U.S. cards business. The rise in customer acquisition costs affects all three areas of our P&L, appearing in contra revenue as we offer rewards to new card users, in our marketing expenses, and in impairment builds for allocated balances and new lines. This impact is spread throughout our P&L but serves as a positive lead indicator, and everything seems to be trending well. Venkat, would you like to add anything?
C.S. Venkatakrishnan, CEO
I completely agree with what Tushar mentioned. Overall, we are aiming for a more balanced growth with a modest capital consumption, particularly from the consumer side in cards. Specifically regarding cards, we are pleased with how we are onboarding accounts with GAAP and AARP, as this diversification has shifted our travel-heavy portfolio to include more retail spending. On the investment banking front, we are experiencing what we describe as sustainable organic growth. The market, with its nimble capital flow, largely depends on trading volumes, which we are optimistic about as this quarter progresses. We anticipate continued growth in equities and securitized products, and we have witnessed significant volatility in the macro space. Over the past couple of years, the prime business has notably expanded, significantly increasing balances with minimal capital outflow due to their well-structured nature. In summary, we believe we can accommodate the anticipated growth in our trading and banking sectors overall.
Tushar Morzaria, CFO
Can we have the next question please, operator?
Jonathan Pierce, Analyst
Hello, good morning both. A couple of questions. The first one is a numbers question around equity Tier 1 in the first quarter. And I was in particular looking for some guidance on whether there's going to be an impact of the big move in the swap rates that we've seen so far this year. Your report accounts shows there's about GBP 500 million pretax hit on the fair value OCI for every 25 basis point move. And I guess that scales up to about GBP 1 billion pretax based on what we've seen so far this year. But you don't split it between pensions which obviously don't hit capital and other things which do. So give us a bit of help please on any Q1 headwind that's coming from that. That would be really helpful? The second question is much broader and it's on the distribution profile dividends versus buybacks. Is it your intention to just move the ordinary dividend up over the next few years to 40% 50% of EPS, or are you going to be a bit more dynamic than that? And if the shares continue to trade at spot 6 5x book. I note your LTIP pays out in full and if the RoTE hits 12% next year so you clearly think the shares are pretty cheap. There will be a big bias towards buybacks versus ordinary dividends in the nearer term? Thanks very much.
Tushar Morzaria, CFO
Thank you, Jonathan. I'll address both of your questions. Regarding CET1 headwinds from AFS, there are indeed some challenges. Many factors influence the CET1 ratio, including business activity. Typically, we are net users of capital in the first quarter, which tends to be very busy for us due to significant activity in our investment bank related to deals and trading opportunities. After that, we generally accumulate capital steadily over the next three quarters. I won't go into the specifics of the individual components of the ratio, but generally, we use a small amount of capital in Q1 and then generate capital thereafter, which is consistent with our usual annual pattern. As for the distribution profile, we have committed to a progressive dividend policy, and under normal circumstances, you can expect that dividend to increase at a healthy rate from its current level. You accurately mentioned that given our current share price, buybacks appear very appealing. We firmly believe we are capable of achieving a double-digit earnings growth rate annually, which we think is not yet reflected in our share price. While buybacks are attractive at these levels, our dividend policy remains progressive, and I'm not sure the Board would consider adjusting the dividend level until the share prices reach a different point. I hope that clarifies your question, Jonathan. The next question please, operator.
Joseph Dickerson, Analyst
Thank you for allowing me to ask my questions. I have a couple of long-term inquiries, mainly directed at Venkat. When considering the U.S. CC&P business, how significant is the expansion into adjacent markets and the potential revenue increase from that? Specifically, how important do you think this opportunity is for the group, especially regarding leveraging the GAAP portfolio and any future scorecard agreements? Additionally, looking at the near-term, CCT costs rose by 13% year-over-year. How much of this is due to the competitive landscape, and how much is specific to Barclays? Furthermore, Venkat, do you believe the group has taken sufficient risks in certain areas of unsecured finance?
Tushar Morzaria, CFO
I’d like to invite Venkat to share some insights on the long-term prospects, especially regarding the mix in our U.S. business and the associated risks. To start, moving into or diversifying from hospitality and travel is a significant step for us. The GAAP portfolio serves two crucial purposes. First, it positions us in a completely different area concerning the partnership product. Broadly speaking, the overall market for partnership programs is divided, with about half in travel, hospitality, and leisure, and the other half in retail, where we currently have no presence. Therefore, GAAP is very important for us. In the U.S., GAAP is expected to reach around 11 million customers, similar to our customer base in the United Kingdom, making us a major player. Attracting one million customers in one sector is highly impactful. Additionally, it allows us to enter a new product area of store cards, which currently represents about 40% of the U.S. market, a segment we are not engaged in at this moment. This is a significant opportunity for us, and we are extremely excited about it. We anticipate this will coincide with a shift in the credit cycle, as we move from the pandemic phase into a recovery phase that could lead to a strong consumer rebound—a favorable time for us to increase our investments in this area. Regarding the risk profile, I think it would be best for our Chief Risk Officer and our CEO to address that. Venkat, over to you.
C.S. Venkatakrishnan, CEO
Yes. So thanks, Joseph. I think, I echo what Tushar has said. And I think the question you had about adjacencies so there are clearly some technological adjacencies that happened with the card portfolio. I think the more meaningful adjacencies that we have capitalized on so far are actually the investment banking adjacencies. So our cards business is a corporate-oriented business. So while we have millions and millions of customers actually we are dealing with a few dozen corporates. And the core relationship is the way we have to cement a much broader investment banking relationship, which has been particularly lucrative for us and helpful to our clients. So that's a very important adjacency. I think more broadly do we take enough risk? I would say do we take the right type of risk. And I think the one type of risk we do not take particularly is our own branded cards, and that's important because we don't have a broad U.S. retail presence and we don't know the customers as well. When we take the portfolio risk in our corporate card program we are working with a lot of data and low familiarity. And as Tushar has said diversifying away from travel into both private or white label cards as well as the retail segment is actually we think risk improving for us.
Tushar Morzaria, CFO
Thanks for your questions, Joe.
C.S. Venkatakrishnan, CEO
Could we have the next question please, operator?
Alvaro Serrano, Analyst
Hi. Good morning. I have a couple of follow-up questions really. First of all, on your NIM guidance in the U.K. you point out that the business mix is still a headwind. I was wondering what on the volume growth there what kind of recovery if you can be a bit more specific maybe on you're assuming on credit cards? You obviously said, you expect some growth but it sounds like it's not going to be a big rebound and how do you think that's still compared to obviously mortgage balances. And then I had another follow-up on CIB. Obviously, the pipeline in ECM, M&A had dried up quite a lot and you alluded to that, particularly in technology. You've called out the volatility and obviously, your prime brokerage balances. But I wonder you think – is that going to be enough to offset what looks like a pretty weak start to banking fees? I'm just thinking of consensus is – are legal revenues down just a bit for this year and that might prove a bit optimistic? I don't know if you can maybe share some thoughts on that. Thank you.
Tushar Morzaria, CFO
Yes. Thanks, Alvaro. Why don't I cover them both? And Venkat may want to add a couple of comments as well. On net interest margin and business mix, we are constructive on credit card growth. We have been cautious up till now. And I guess in this case unfortunately, perhaps we were right that balances didn't grow as quickly as perhaps a bit more optimism out there from elsewhere. But we unfortunately, we're probably more right on this one. But we are quite optimistic into 2022. And the reason for that is, we think that 2022 ought to be a year that is free from lockdowns and sort of restraints on the economy. The big difference that we'll make for this year is that the kind of spend that we would expect to see will be more geared towards credit card spend activity. So unfortunately, last year for example, at least in the United Kingdom, there's much less holiday travel for example than we would typically spend, certainly overseas holiday travel. That's usually completely a credit card sort of category that's very important for us. And when we – that was – it was muted last year. We would like to think that this year those kind of more discretionary spend items would be unabated and therefore, we should see good utilization of our credit cards. And the next question is how much of that then appears as revolving balances. So a little bit harder one to gauge but we are optimistic that we should see some improvement there. I wouldn't overstate it but it's a high-margin product. So you don't need to see too much for it to be very accretive to NIM and indeed net interest income. The other thing is on the mortgage side. If anything this year might suit our business mix a bit more than last year. Last year was characterized very much by sort of a first-time buyers market that was fueling the mortgage market. For us as you probably are familiar the remortgage business is an even bigger part of our business than first-time buyers. And with rates rising you tend to see much more active remortgage activity. People were just basically financing themselves before the anticipated rate rises. And that actually suits our business well. So constructive on both mortgage growth just as the nature of the market perhaps suiting us and on credit cards, the nature of the spend activity, we expect to see in the U.K. being quite attractive to us. In terms of CIB, the only thing I would say there Alvaro it's very, very hard to give sort of precise guidance on income so I'll refrain from that. But we feel really good about the diversification in the CIB. So you're right, it's been somewhat slower ECM, M&A activity, certainly in January. And that's in some ways not surprising. That's actually quite typical because we usually get a flurry of deal activity before the calendar year-end and then you go into company reporting season and blackout periods and stuff like that. So you don't typically see a lot of deal activity in the earlier part of the year and that may change obviously, you'll have to look at asset markets and geopolitical risk and whatever. But away from that if for example, there is price volatility and asset price moves and sort of geopolitical news flow, it typically suits sales and trading business real well. And certainly a rising rate environment, all suits the financing business very well and we're very pleased with the progress we've made in the prime business. And one business we don't talk a lot about but is fixed income financing as well, which is a large business for us. So I refrain from giving sort of precise income guidance but we feel pretty good about the diversification that we should do well, regardless of sort of what's hot and what's left in any one particular quarter but we should be able to sort of see that through.
Alvaro Serrano, Analyst
Sorry, Tushar, on the retail side, I mean you're optimistic on credit cards and mortgages. But do you think the mix is still a drag? So, i.e., credit cards maybe not growing as much as mortgage as yet? If I read your guidance correctly?
Tushar Morzaria, CFO
On a nominal basis, mortgage will significantly outpace cards. While cards have higher margins, I wouldn't dismiss any possibilities. It really depends on the pace and strength of the recovery. We feel confident about it now, but we will keep an eye on it each quarter. Thanks. Can we have the next question please, operator?
Rohith Chandra-Rajan, Analyst
Hi, good morning. I had a couple please. The first one on the CIB. So the commitment to maintain that market position, it seems like a very clear statement of intent. As Tushar alluded to earlier, consensus expectations are for a smaller revenue pool this year but also competition looks like it's intensifying. So I wondered, if you could talk about how you balance near-term revenue prospects with the cost and capital resources that might be required to maintain that top six global IB ranking? So that's the first one. And then the second one, hopefully relatively quick. Just on the structural costs for 2022. Should we think about that as similar to 2021 excluding the real estate charge that we had in 2021? And to what degree should we think about the structural costs being ongoing?
Tushar Morzaria, CFO
Thank you. I'll address the second question and then ask Venkat to discuss the CIB. I think it's reasonable to consider the 2021 charges while excluding the large real estate charge from the second quarter as a good planning assumption. Moving forward, we have considerable options in this regard. At this stage, I don't anticipate this being a significant factor in our projections for 2023 and beyond. However, we aim to keep you updated as we progress through the quarters. I want to emphasize that where we see opportunities to accelerate our progress and make a meaningful impact, given our earnings and capital capacity, we believe it is in the best interest of shareholders. We intend to pursue these opportunities but will keep you informed. For 2022, I believe your planning assumption is a sound one. Venkat, would you like to discuss CIB?
C.S. Venkatakrishnan, CEO
Yeah. So Rohith thanks for the question. I look at the CIB as a place where we've obviously been gaining market share and increasing our rankings. It comes from three things. It comes from investment in people and capabilities. It comes from investment in technology and it comes from a steady commitment to the business which basically helps clients decide that they want to do with you, do more with you and stay doing it with you. All three have been in place to an increasing level over the last number of years. So I think we have the momentum behind us to continue to do that. And we don't control the overall wallet. But to be meaningful to our clients, I think it requires as I said those types of investments and I'm fairly confident that with the investments we've made, we can continue to make and we will continue to make that we will continue to get both mind share and market share.
Tushar Morzaria, CFO
Thanks for your questions, Rohith.
C.S. Venkatakrishnan, CEO
Could we have the next question please, operator?
Guy Stebbings, Analyst
Hi, good morning. Thanks Venkat and Tushar and thanks for the comment and best of luck Tushar. The first question was on NIM trajectory and primarily the UK, and given the range of 260 and 270, it strikes simple math that we should be exiting at the top of that range, and as the curve holds, is there any reason why we shouldn’t be thinking about NIM in the north of 270 as we enter 2023 and potentially has caught a bit more if we have the benefit of every high implied from the market. I mean, within that tier, if I look at your hedge, it looks like it should be about 200 million in 2022 from the current run rate, and then another even largest step-up in 2023. So, is there anything that would just need you to stop expectations versus those sorts of comments? And then a second question on costs. Thanks for the guidance and comments about sort of happy with consensus cost of 14.3 to 14.4, if you just unpick that a little bit more. So firstly, modest growth in the base cost I would assume modest is about 2%. That's fair. And taking your comments on structural cost actions down to 250 million in the year. If I then had flat CIB costs, you'd be looking at about 14.4. So that's the sort of top end of that range. Is there anything I'm missing around that? If I can just quickly add another one on costs? Another year of CIB costs income ratio below 60%? Assuming revenues don't drop meaningfully in the CIB, is that something you think is achievable going forward from here?
Tushar Morzaria, CFO
Sure, I'll address your question about net interest margin in the U.K. It's reasonable to expect a range of 260 to 270, with an aim to finish 2022 at the higher end. This includes the effects of structural hedges and potential rate increases moving forward. You're correct in considering the various factors at play, such as the number of rate hikes and product mix, which is why we provide a range rather than a precise figure. As for costs, your building blocks seem quite reasonable, whether you use 2% or 3% in your models. Regarding the Corporate and Investment Banking (CIB) and its cost-to-income ratio, we're pleased with the operational leverage we've seen. A strong top line means much of that impact can be realized in profits. We're competitive in banker compensation, which has allowed us to attract quality talent, leading to good retention rates. We believe we've struck the right balance. In a favorable revenue environment, our goal is to show strong operational leverage in the CIB as we have in the past. While I won't provide exact guidance on cost-to-income ratios, maintaining operational leverage remains a priority for our business. Thanks, Guy. Can we have the next question please?
Chris Cant, Analyst
Good morning, Tushar and Venkat. Tushar, if I could just echo what others have said all the best for your future role and thanks for helping us all of the questions over the years. Two for me please on the CIB. So if I look at your performance costs I think if I think back to 2019, our total increase in group performance costs 2021 on 2019 is up £290 million. And if I think about CIB revenue over that time, they're up by £2.3 billion or there or thereabouts. So how should we be thinking about this into 2022? I appreciate you don't want to guide on revenues, you don't comment on current trading. But in recent quarters you've indicated that if revenues do come down in 2022, you would pull down CIB costs to offset it. If I think about where we have been historically, it hasn't moved up that much relative to the scale of the revenue improvement. What kind of cost income ratio and a decline in rates in revenue should we be thinking about there? Because it doesn't feel like there's a huge amount of wiggle room relative to kind of historical levels of performance costs if revenues do decline in the CIB? That would be the first question please. And secondly, instead of passing a number on CIB, could you talk about payments? So you gave this guidance at the first half stage that there was a £900 million revenue upside opportunity from the recovery of growth in the various payments businesses relative to 2020 levels. Could you just give us a sense of how much of that opportunity is already captured in your kind of 4Q run rate? So you were flagging in particular in CC&P quite a lot of growth year-over-year in payments there. But if we think about 4Q, how much of that £900 million is already in the run rate? How much of it is still to come as upside into 2022 and 2023?
Tushar Morzaria, CFO
Thank you, Chris, for your introductory comments. I appreciate it. Regarding performance costs, your main question seems to be how much we can reduce those costs in a declining revenue environment. It's a challenging question to address. One key point is that we need to be responsive to the market we're in, as simply applying a mechanical approach to performance costs is overly simplistic given the numerous factors involved. We must consider the competitive landscape, whether our underperformance was unique to us or reflected broader industry trends, how that affects overall pay levels, and the different payout ratios across our various businesses. Therefore, it's difficult to provide a precise answer. However, I hope you've observed that we've maintained discipline during an upward market while ensuring the franchise remains healthy with the right talent to capitalize on that growth. Our guiding principle is to ensure each division earns at least a 10% return on equity, which we strive to uphold. Nonetheless, we must be responsible; if we need to invest to protect our franchise, we will do so, but we have been disciplined in avoiding unnecessary payments. Regarding payments, the £900 million run rate should be clear from our disclosures, which indicate a 17% year-on-year increase. You should be able to derive some insights from it, and I can have someone follow up with you after the call to help clarify how much of that £900 million is already accounted for.
C.S. Venkatakrishnan, CEO
Can we have the next question please, operator?
Martin Leitgeb, Analyst
Good morning. Let me echo earlier comments and congratulate Venkat and Anna on the new roles and thank you Tushar for your help over the years. Just one question, please. And just looking at the progression of deposits in the U.K. system as a whole, compared to loans and the market increase and excess liquidity now trapped in retail ringfences in the U.K. I was just wondering if you could highlight your thinking on this excess liquidity do you think this is likely to stay, or could you see a scenario of this gradually decrease? The question here being could this in your view lead to a phase where deposit betas are markedly lower compared to where they were in history, or is there any other incentive for a bank like Barclays to potentially engage in kind of higher deposit beta maybe for current account market share purposes. Thank you.
Tushar Morzaria, CFO
Yes. To respond to your question, Martin, we have never been inclined to pay a premium for balances. If you consider our savings rates, you would likely be seeking the best available rates rather than using our accounts as a primary deposit option. This has never been central to our business model. Instead, we focus on what we refer to as franchise balances, which have increased significantly. However, at some stage, these balances will become sensitive to interest rates. As of now, we haven't observed this sensitivity. The last time base rates peaked at 75 basis points, we did not experience any rate sensitivity then. Therefore, it is reasonable to expect that for an increase of 25 to 50 basis points, we may not see much rate sensitivity beyond that. It's challenging since we lack historical data to establish a clear pattern. Nevertheless, we find some reassurance in the fact that we have never offered high rates for these balances initially, so it’s not that people are holding money with us expecting to shift it elsewhere for better rates. I hope this clarifies your inquiry. Thank you for your question, Martin. So why don't we wrap up the call. Before I close thank you for many of your comments as part of your questions. I'd just like to say, it's been an absolute privilege and a pleasure being a CFO here since 2013. And although it would be the last call I do at this time, I hope to get to see many of you at sell-side breakfast next week and the buy-side meetings that we'll have over the next coming days. And I'll still be at Barclays for some time, so we may bump into each other in a different capacity. But a big thank you to everyone for all of your debate, challenge, counsel and the other word of encouragement that I've had over the years there. Whatever you said it's been much appreciated and I mean tested all of you. I'd also like to say how thrilled I am that Anna has agreed to step into the role. Anna and I have known each other for several years and worked very closely. And hopefully many of you have met her in the recent quarters as she's been a fantastic help to me. She will be a fantastic CFO for Barclays. And with both her and Venkat at the helm someone will be owning shares in Barclays for the foreseeable future I can't think of two better people to be taking care of my shareholding in the right way.
Anna Cross, New CFO
Thanks, Tushar. And at the risk of repeating everyone, I think a huge thank you to you from all of us. It's certainly a tough act to follow, big shoes to fill, but I'm really looking forward to the opportunity. I'm also looking forward to the opportunity to meeting many of you over the next few weeks at the breakfast and beyond with Tushar and with Venkat. So with that, thanks everyone and we'll close the call there.