Barclays - Antony Jenkins and Chris Lucas’ remarks to analysts

Antony Jenkins Barclays

It's good to talk.

Antony Jenkins, Group Chief Executive, Barclays

Good morning and thank you for joining this call.

With me today are Chris Lucas, Barclays Finance Director and Charlie Rozes, our Head of Investor Relations.

You will by now have seen the announcements we issued this morning which cover our first half performance update, progress on Barclays Transform commitments, and the outcome of the discussions we have been having with the PRA on capital. I will focus my remarks this morning on the last of these matters.

Slide: Original Transform Commitments

As you know on the 12th of February, I shared the outcome of our comprehensive strategic review, our goal of becoming the "Go-To" bank and our plans to get there – the Transform programme. We have been executing this plan at pace, and – just five months on – are making good progress. I will say more on that shortly.

At the same time, we set out a number of financial commitments, including in relation to capital. These commitments were primarily predicated on delivering against a risk-weighted ratio target. But our plans also involved improving our leverage ratio such that we would achieve a ratio of 3%, ahead of the anticipated CRD IV deadline.

Slide: PRA Capital Adequacy Review

On June 20th, the PRA announced the results of its review of the capital adequacy of major UK banks and building societies. We confirmed at the time that we expected to meet their requirement for an adjusted 7% fully-loaded CET 1 ratio by December 2013 through planned balance sheet actions and retained earnings generation. This expectation has not changed.

As part of the review, the PRA also introduced a 3% leverage ratio target. Over the past few weeks, Barclays has discussed a number of options with the PRA to meet the target and was asked to submit a plan to achieve the target by June 30, 2014. This plan has now been agreed by the PRA as you can see from their statement.

Slide: Leverage ratio movements

We reported today a CRD IV leverage ratio as at June 30th of 2.5%. This is down from the estimate of 2.8% as at the end of December 2012. The increase in leverage exposure arises primarily from clarifications in the final CRD IV text, published on June 26th, rather than an underlying move in exposures.

The PRA has also applied CET1 adjustments of £4.1 billion pounds, which no longer include provisions for conduct, given the £2 billion pounds of provisions announced today. This equates to a gap of £12.8 billion pounds between our current PRA Leverage Ratio of 2.2% and the target of 3%.

Slide: Barclays’ Leverage Plan

After careful consideration of the options, my judgement is that Barclays should respond quickly and decisively to the new leverage requirement in order to reduce uncertainty in the outlook for Barclays.

I have therefore, with the full support of the Chairman and the Board, developed a balanced plan to meet the target – and we intend to execute that plan immediately.

With the increased financial strength which we believe our actions deliver for Barclays, we can continue to focus on delivering our Transform programme, and on building the "Go-To" bank for all our stakeholders.

The plan we have agreed has four elements:

The first element of our plan is to raise approximately £5.8 billion pounds of equity, net of expenses. That process begins today.

Slide: Rights issue detail

Existing shareholders will be given pre-emptive rights to buy the new shares in this exercise, at an offer price of £1.85.

I am pleased that the offering has been underwritten by Credit Suisse, Deutsche Bank, Bank of America Merrill Lynch and Citigroup.

We expect to publish a prospectus, subject to UK Listing Authority approval, in September, to formally launch the Rights Issue.

Slide: Barclays Leverage Plan

Second, we will take several actions to reduce the size of our leverage balance sheet by £65 to 80 billion pounds by June 2014 through already identified measures. This equates to approximately £2 to 2.5 billion pounds of capital. These actions are not expected to have a material impact on revenue, or on our ability to support the real economy through lending.

They include reductions in:

  • the liquidity pool by £15 to 20 billion pounds;
  • the CRD IV exposure measure for securities financing transactions of £20 to 25 billion pounds; and
  • the CRD IV Potential Future Exposure measure generated by the derivatives portfolio, leading to a £30 to 35 billion pound reduction.

Again, these actions will not have a material impact on revenue or on customer and client relationships. We believe that they have low execution risk and contribute £2 to 2.5 billion pounds capital equivalent toward meeting the 3% PRA Leverage Ratio target.

Now I know that there are some who will question whether we could reduce the balance sheet further. To be clear, we are not stopping here but we believe that a more aggressive reduction in the balance sheet would in the short term significantly damage our franchise and not be in the long term interests of shareholders.

We are continuing our analysis and scrutiny of the balance sheet, particularly in the Investment Bank, as part of the on-going review of returns across our businesses, taking into account evolving regulation. We will update you on this work and its outcomes in due course.

In the third part of our leverage plan, the PRA has approved the use of CRD IV compliant AT1 contingent capital with a fully-loaded CET1 trigger of 7% towards the PRA Leverage Ratio target.

You may recall that we announced previously our intention to build a layer of contingent capital equivalent to 2% of RWAs, which we started to do last year. This aspect of our leverage plan continues these actions and includes the issuance of up to £2 billion pounds of these instruments by June 2014, in tranches and at times to be determined based on market conditions.

Lastly, as a result of the conduct provisions announced today, we believe that we have strengthened our ability to retain earnings and generate capital going forward.

I believe the combination of these four elements:

  • the equity raising,
  • a prudent reduction of our leverage balance sheet,
  • issuance of contingent capital, and
  • retention of earnings,

....represents the right mix and balance to meet the leverage target we have been requested to achieve by June 2014.

I also believe that Barclays should respond quickly and decisively to meet this target. Delaying action will only prolong uncertainty and distract from delivery on the rest of the Transform programme.

As a result of these actions, we expect Barclays PRA Leverage Ratio to be above 3% by June 2014.

We are aware of the implications of a rights issue on our shareholders. However, looking further out, we believe there are tangible benefits from taking decisive action now.

First, as I said earlier, we believe the plan will reduce uncertainty for shareholders.

Capital concerns have been a significant variable that have impacted the valuation of Barclays and so too have conduct risks.

Second, by mixing balance sheet reduction with raising capital, the plan allows us to remain a committed lender to the real economy.

Slide: Revised Transform financial commitments

Third, as a result of today's equity raising, we will see an acceleration in meeting two out of the six financial commitments we made as part of the Transform programme, namely those relating to capital ratios and dividends.

Our fully-loaded CET 1 ratio, adjusted for the rights issue, was estimated at 9.3% at June 2013. It is expected to increase during the second half of 2013, with achievement of our targeted 10.5% fully- loaded CET1 ratio early in 2015, ahead of our original plan.

The Transform programme also envisaged a dividend payout ratio of 30% over time.

We now target a payout ratio between 40% and 50% in respect of 2014 and beyond, whilst maintaining our capital buffers and continuing to invest for growth.

For 2013, we anticipate maintaining a dividend payout at the same level per share as that of 2012. As you would expect, these will be subject to meeting applicable minimum regulatory requirements.

We remain on track to meet three more of the six financial commitments made as part of the Transform programme:

Reducing our cost base by net £1.7 billion pounds between now and 2015 to £16.8 billion pounds, excluding costs to achieve,

Taking our cost to income ratio for the group to the mid-50s; and

Reducing Basel III RWAs by £75 billion pounds gross by 2015 to £440 billion pounds

The final commitment we set out in February is to generate a sustainable return on equity above the cost of equity in the course of 2015. We are now targeting this to be achieved in the course of 2016, as a consequence of the limited ability we have to deploy the capital raised in high return areas in the short term.

This change is disappointing of course, but I want to be realistic in my assessments, and the revised timeframe is achievable based on current plans. I can assure you that we will relentlessly pursue further actions to enhance shareholder returns to improve on this target wherever possible.

When I presented the Transform programme to investors in February, I said that our path would not be an easy one and that I saw four risks to achieving our plans:

  • a major macroeconomic downturn,
  • legacy issues,
  • failure to execute the plan properly, and significant unexpected change in regulation.

The current circumstance falls in the last of these brackets, but we are managing it such that we are able to maintain five of the six financial commitments made in February, with a modest delay on the RoE target.

Barclays will be stronger for having taken this decisive action today, and our goal of becoming the "Go- To" bank for all our stakeholders will be even more attainable.

I want to turn now briefly to our performance in the first half and to progress on delivering our Transform targets, as they are an important indication of the underlying strength of the business.

Slide: H113 financial progress

The first half results demonstrate continued momentum and progress in the execution of Transform with an adjusted profit before tax of £3.6 billion pounds. This excludes an additional £1.35 billion pounds in respect of PPI redress and an additional £650 million pounds for Interest Rate Hedging Products. This takes the total provision Barclays has made for both issues to £5.45 billion pounds, of which nearly £3 billion pounds is unspent, reducing uncertainty for shareholders around these conduct risks.

Costs remain a critical component of the commitments and we expect to incur £1.2 billion pounds of costs to achieve Transform in 2013, having recognised £640 million pounds in the first half of the year, focussing on restructuring in the Investment Bank and Europe Retail and Business Banking. This increase of £200 million pounds from earlier guidance is only an acceleration of future CTA; the total planned CTA remains £2.7 billion pounds.

Adjusted return on equity, excluding costs to achieve, was 9.5%, driven by continued momentum across the businesses, in particular, the Corporate and Investment Bank, Barclaycard and UK Retail and Business Banking.

We continue to make good progress in running down legacy assets in a manner which is positive for shareholders. In the first half we reduced our Quadrant 4 "Exit" assets by the equivalent of just over £25 billion pounds of CRD IV risk-weighted assets, out of the nearly £94 billion pounds originally identified.

Chris will say more about the results in a minute.

Slide: Other Transform progress in H113

Our businesses have made progress against their other strategic review commitments. For example Barclaycard has recruited 900,000 net new customers in the half. In Europe Retail, restructuring is well underway, with union negotiations completed in Spain, Portugal and Italy. And in the UK, mortgage market share has improved to 9.9% at the end of the half.

Our commitment to lend has not faltered and we provided approximately £42 billion pounds of FLS- eligible gross new lending to UK households and businesses in the half.

We are also making good progress in implementing our non-financial commitments.

We have focused on embedding our purpose and values across the organisation since they were launched in January, and I am pleased to announce that 95% of our employees – 133,000 people globally – have now participated in a half-day workshop on Values. The remainder will do so in the next few weeks.

I want to take the opportunity to thank all of my colleagues for their enthusiastic engagement with the purpose and values, and for their unfailing commitment to Barclays success.

We have also launched our Balanced Scorecard, applying it first across the Senior Leadership Group, before rolling it out to the rest of Barclays during 2014. This sees us measure performance in a more holistic way, also taking account of how we live our purpose and values. This new approach to how we measure performance is critical to our future success and to affecting the cultural shift we are pursuing.

The performance reported today demonstrates the underlying strength of Barclays. It is early days, and there is a long way to go, but we are making good progress towards our goal of becoming the "Go-To" bank for all our stakeholders.

Before handing over to Chris, I want to reiterate that it is in Barclays and our shareholders' interests that I should be decisive and swift in addressing this regulatory requirement. And that is what I have done.

Chris – over to you.

Slide: 2013 Interim Results

Chris Lucas, Group Finance Director

Thanks Antony and good morning.

We're reporting solid results today, demonstrating the ability of the business to generate earnings.

Despite a challenging macroeconomic environment, income in our larger businesses remains resilient and we continue to maintain or strengthen our competitive positions.

Impairment has continued to improve. This reflects both our conservative risk appetite and the quality of our risk management.

Costs remain well controlled. Excluding Transform charges, we've reduced operating expenses, and our cost income ratio is moving well in the direction of our 2015 target.

As you heard from Antony, enhancing our financial strength remains a central focus,and we continue to make steady progress adapting to the new regulatory environment. The plans we've announced this morning will further strengthen our capital and leverage position.

Our financial performance should be viewed in light of the progress we've made with our Transform programme. We've incurred significant restructuring costs, especially in Europe RBB and the Investment Bank, and we'll be investing in the second half in order to build long term competitive advantage. Both restructuring and investment are essential to achieving our 2015 targets, but this will impact our numbers in the intervening period.

As usual, I'm using adjusted numbers today because they give a better understanding of business performance. We have not adjusted for the Transform charges, but we will highlight the effect of these costs on key performance metrics. The main adjustments are own credit, and additional provisions for PPI and interest rate swaps announced today.

In general, my comments compare the first half of this year with the same period last year. Turning now to the headlines.

Slide: Adjusted Financial highlights

We're reporting adjusted profit of £3.6 billion, which is a reduction of £748 million. This mainly reflects Transform charges of £640 million.

Total income was down 3% at £15.1 billion.

Impairment improved 5% to £1.6 billion, and we continued to reduce costs, which were 4% lower at £9.1 billion, excluding Transform charges.

Slide: Adjustments to profit before tax

This slide shows the adjustments to statutory numbers.

Own credit is a small gain in contrast to a charge of £2.9 billion last year.

As Antony mentioned earlier, we've made further provisions of £1.35 billion for PPI. We feel we're now well provisioned and expect any further costs to be handled as part of our normal operations. £2.3 billion of the total PPI provision had been used at the end of June, leaving a residual provision of £1.65 billion.

We've also made an additional provision of £650 million for interest rate hedging products, following a review of a larger sample of customer claims.

Slide: Adjusted performance measures

Return on equity decreased from 10.6% in the first half last year, to 7.8% in the first half this year. The reduction is largely the result of Transform which will help us achieve our 2015 financial targets. Without the Transform charges, Return on Equity would have been 9.5%.

The Group's cost income ratio increased from 61 to 65%, entirely due to Transform.

Adjusted earnings per share decreased to 16.2 pence, and we've announced a cash dividend for the second quarter of one pence. We anticipate a dividend payout for the remainder of 2013 at the same level per share as 2012, and expect to increase the dividend payout ratio to between 40 and 50% from 2014, as Antony said earlier.

Looking at capital, our Core Tier 1 ratio increased to 11.1% on a Basel 2.5 basis, reflecting both retained earnings and the exercise of warrants.

Slide: Adjusted PBT by Cluster

We've given you detailed information about the performance of the individual businesses in the results announcement this morning, so I'd like to focus on key trends on this call.

Before I do that, I'll talk about adjusted profits by business to set the context.

In UK Retail and Business Banking, profits improved 7% to £632 million, as cost savings outweighed some increases in impairment.

In Europe RBB, the loss increased by £561 million to £709 million. This included costs to achieve Transform of £356 million as well as an increase in other net expenses relating to contractual obligations to trading partners impacted by our restructuring plans.

Profits in Africa RBB increased 16% to £212 million, despite currency depreciation. This was mainly due to lower credit impairment provisions in the South African home loans recovery book.

Barclaycard grew 3% to £775 million, driven by the US and UK card portfolios.

Profits in the Investment Bank increased 7% to £2.4 billion, and in the Corporate Bank they improved 29% to £402 million driven by lower impairment.

Wealth and Investment Management profits decreased by £52 million, largely as a result of Transform charges and higher credit impairment.

The loss in Head Office was £157 million due to higher than expected deposit inflows.

Slide: Investment Bank

Given the scale of contribution from the Investment Bank, I'd like to take you through their performance in detail.

Total income was stable at £6.5 billion - this is a good performance given the strong start to last year.

Impairment increased to £181 million, mainly due to a provision made in relation to Canadian litigation.

We reduced costs by 3% to £3.9 billion. This included a Transform restructuring charge of £168 million as we reduced the size of our equities and investment banking operations in Asia and Europe. As we told you in April, we expect headcount to come down by 1,600 in Investment Banking.

The cost income ratio improved from 63 to 61%, and the compensation to income ratio was 39%. We continue to target a compensation to income ratio in the mid 30's by 2015.

The Return on Equity was 15.4%, up from 13.4% in the first half last year.

Slide: Investment Bank Quarterly Income progression – overall

Looking at the quarterly income progression, total income of £3 billion was 13% down on a strong first quarter and stable compared to the second quarter last year.

This income was achieved despite an 11% reduction in RWA's year on year to £169 billion.

Slide: Investment Bank Quarterly Income progression – by sub-segment

Breaking quarterly income down in more detail.

Fixed Income, Currencies and Commodities decreased 37% to £1.4 billion; This performance was due to: small losses on assets we plan to exit versus gains in the first quarter, markets in Europe being generally weaker than the US, and our business model which tends to outperform in weak markets and underperform in strong markets.

Equities and Prime services grew 17% to £825 million, reflecting both improved volumes and share gains.

Investment Banking advisory income was down 5% at £528 million. We also had a £259 million positive fair value adjustment in connection with Lehman assets in the second quarter.

This was reported in the category of Principal Investments.

Slide: Income by cluster

I'd like to talk now about the key trends in our financial performance, starting with income.

Income for the Group was down 3% to £15.1 billion. There was positive momentum in UK RBB, Wealth and Barclaycard which were up 1, 4 and 11% respectively.

There was also a good performance in UK Corporate Banking. Africa RBB was down 9% in sterling but was stable on a constant currency basis, and Europe RBB remained weak, with income down 7%.

Income in the Investment Bank was stable.

Head Office income declined as a result of increased deposit inflows across the Group in the first half. Rebalancing our funding mix towards retail deposits is in line with our strategy, but we were more successful than expected and this has left some of the income expense in Head Office.

Slide: Net Interest Margin

Moving on to look at margins.

Overall net interest margin declined 9 basis points to 177 basis points. Customer generated margin in our Retail, Corporate Banking and Wealth businesses fell 6 basis points to 160. The structural hedge declined 3 basis points to 17.

Increased business volumes more than offset the customer margin contraction, especially on the liability side, so that net interest income generated from customers was up 4% at £5.1 billion.

Total net interest income grew 2% to £5.6 billion.

Slide: Impairment

I'll talk now about impairment, which improved 5% to £1.6 billion, with significantly lower charges in the Corporate Bank and Africa RBB. UK RBB increased to £178 million. This was mainly due to the non- recurrence of 2012 releases in unsecured lending and mortgages.

In Europe, charges were up 14% to £142 million due to movements in exchange rates and a deterioration in recoveries. Mortgage impairment trends are stable in both Spain and Italy, and have improved slightly in Portugal.

Increases in Barclaycard were due to portfolio growth, including acquisitions, as well as the non recurrence of releases in 2012. Loan loss rates in the UK and US were broadly stable In South Africa they increased, partly due to a portfolio acquisition.

The performance of our major credit portfolios continues to be resilient, despite the macro-economic environment.

We expect overall impairment trends to continue in the second half, and the Group loan loss rate to be reasonably steady.

Slide: Cost analysis

Turning to costs.

Overall costs increased 3% to £9.8 billion, but if you exclude Transform charges of £640 million, they were down 4%.

Excluding the Transform charges, we reduced performance costs by 10% to £1.3 billion and non- performance costs by 3% to £7.9 billion.

Looking at the Transform charge in more detail, £356 million is in Europe Retail and Business Banking, and £169 million is in the Investment Bank, with the rest spread across other businesses.

The charge in the first half breaks down into restructuring costs of £593 million, and an initial investment of £47 million, intended both to reduce our cost base and improve customer propositions.

We plan for further Transform charges in the region of four to five hundred million in the second half, mostly focussed on investment, and we expect overall payback in about two and half years.

Moving on now to capital, liquidity and funding.

Slide: Capital, Liquidity and Funding

Our Core Tier 1 ratio increased to 11.1% on a Basel 2.5 basis, reflecting retained earnings and the exercise of warrants. RWAs were broadly flat, despite currency movements.

Our liquidity position remains strong, with a pool of £138 billion. We had a liquidity coverage ratio of 111% at the end of June, based on Basel 3 standards. Our Net Stable Funding Ratio increased 1% to 105%.

We aim to fund our retail banking, corporate banking and wealth businesses predominantly with customer deposits. The loan to deposit ratio for these businesses improved significantly from 110 to 102%. This has reduced our term wholesale funding requirements.

We've issued $1 billion of Tier 2 contingent convertible debt year to date. This level of issuance reflects our strong deposit inflows, the pre-funding we did in 2012, partly through the funding for lending scheme, and the deleveraging of our balance sheet.

Slide: Core capital ratios

As you'd expect, we've updated our Basel 3 ratios based on current expectations.

Our latest estimates show a Transitional Common Equity Tier 1 ratio of 10% for the end of June. This is based on the transitional methodology in place since the first quarter. Our fully loaded ratio was 8.1%, compared to 8.2% at the beginning of the year. This is the result of capital being impacted by an increase in both our PVA adjustment and in deferred tax assets. Adjusted for the rights issue, our fully loaded ratio increases to 9.2%. We expect to get to 10.5% on a fully loaded basis early in 2015. Detailed calculations are in the appendix to the slide pack.

In terms of risk weighted ratios, we believe we're well capitalised, and our announcement this morning sets out a clear path to meet the PRA's leverage requirements.

As far as outlook is concerned, we continue to remain cautious about the environment in which we operate and we remain focused on costs, capital, leverage and returns, in order to drive sustainable performance.

Slide: 2013 Interim Results and Leverage Plan

So in summary, we're reporting solid results this morning. We've made a strong start to our Transform programme which will help us deliver our 2015 targets, though it also impacts our financial performance in the intervening period. Despite a challenging operating environment, the underlying performance of the business continues to build momentum.

Thanks very much – I'll hand back to Antony now.

Antony Jenkins, Group Chief Executive

I'm afraid we must draw our call to a close at this point.

In conclusion I would sum up what we have announced this morning in three parts:

First, a really solid performance in the half, with our underlying business in good health.

Second, encouraging early progress in our Transform programme, with delivery already apparent in areas such as RWA reduction and on costs. We are on track to deliver the plan we announced in February.

Third, bold and decisive action in response to a change in circumstances:

  • Action which will ultimately leave Barclays a much stronger institution;
  • Action which significantly reduces uncertainty around our business;
  • and action which will make our goal of becoming the "Go-To" Bank even more attainable.

Our Investor Relations team stand ready to assist with any more questions you have, and I look forward to meeting with our investors in the coming days to explain the benefits of our plans further.

With that, I'll close this call. Thank you.

 

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