Barclays PLC (BCS) 2016 Q4 法說會逐字稿

Welcome to Barclays full-year 2016 results fixed income Conference Call.

I'll now hand you over to Tushar Morzaria, Group Finance Director.

Good afternoon, everyone.

Welcome to our full-year 2016 results fixed income call.

I'm joined today by Dan Hodge, our Group Treasurer.

Let me start with slide 3 and make a few comments on our strategic progress and full-year results.

This morning, Jes Staley, our Group CEO, outlined the progress we made against our strategic objectives, and I'll briefly summarize the key points.

Firstly, our core businesses of Barclays UK and Barclays International performed well in 2016 showing great resilience in an eventful year.

Profit before tax, excluding notable items, increased 4% to GBP6.4 billion generating a return on tangible equity of 9.4% for the year on an average tangible equity base which was GBP4.1 billion higher.

Reduced the cost income ratio to 61%, and we continue to focus on achieving a cost-to-income ratio of less than 60% for the Group.

Secondly, we continued to have successful rundown of non-core, selling a suite of retail cards, insurance, and wealth operations and our index business while reducing legacy derivatives and closing offices in nine countries.

This reduced RWA by GBP22 billion in the year to GBP32 billion at year-end, achieved NOA which preserved value, and released equity to the rest of the Group.

The full-year, non-core loss before tax, excluding notable items, increased GBP1.7 billion to GBP2.8 billion as we accelerated the rundown.

Given this accelerated progress, we announced today our intention to close this unit six months early on 30th of June this year with residual RWAs around GBP25 billion at that time.

Overall, we expect the capital tied up in these low-yielding assets to be a single-digit percentage of the Group's capital, and we are guiding to a loss before tax in the region of GBP1 billion in 2017 weighted towards H1.

Thirdly, we made significant further progress in preparing for the regulatory deconsolidation of Barclays Africa.

Since the sale of the initial 12.2% stake in May, we have focused on agreeing the separation arrangements with local management.

We reached agreement of the terms in Q4 and now await approval from the relevant regulators of our separation plan so we can further reduce our holdings.

We expect to see Q1 ratios increase of over 75 basis points upon regulatory deconsolidation, including separation costs based on year-end share price and currency translation.

This represents a major milestone in the simplification of Barclays allowing us to focus even more on driving operational efficiencies and generating attractive returns for the Group.

Looking at the businesses now in more detail on slide 4. For Barclays UK, we reported an underlying ROTE of 19.3% on an underlying cost income ratio of 53% for the year.

Net Interest Income accounted for over 80% of the income of Barclays UK, and we maintained a strong pricing discipline in a low rate environment delivering a relatively stable full-year NIM of 362 basis points.

Assuming an unchanged Bank of England base rate, we expect full-year 2017 NIM to be in the range of 350 to 360 basis points.

At Barclays International, we reported an underlying ROTE of 8% with income up 21% in CCP and 6% in CIB.

Since the Brexit vote, we have been closely monitoring all leading indicators and have not seen significant signs of credit stress in the UK.

We maintained a conservative risk appetite and remain comfortable with our risk positioning and the underlying impairment trends we are seeing.

So to recap, we continue to make good progress in delivering the plan we announced last March.

The core is performing well, and the non-core rundown is ahead of plan.

Our risk position is conservative, and we are now fully focused on driving operational efficiency and enhancing Group return.

With that, I'll turn it over to Dan who will talk about progress we've made on our balance sheet and structural reform this year.

Thank you, Tushar.

In 2016, we further strengthened our balance sheet ending the year in the robust position with strong and stable capital funding and liquidity ratios.

We are well positioned for structure reform as we enter the final stages of our restructuring and begin a period of normalization for Barclays.

Our CET1 ratio grew by 100 basis points to 12.4% over the year, and we made further significant progress on our HoldCo transition.

We issued GBP12.1 billion equivalent in total driving a Moody's rating upgrade while repurchasing and redeeming 7.4 billion securities.

These included the redemption of preference shares totaling USD1.9 billion reducing expenses by close to USD140 million per annum.

We've also continued to deliver on structure reform.

Our IHC became operational.

We submitted our draft banking license application for our UK ring fence bank, and we made changes to the organizational design of the Group repositioning the entity which will become our Group service Company.

In terms of the regulatory change agenda, the November Bank of England policy statements on MREL, and the draft [CRB5] package provided insights into potential future requirements.

While traditional clarification is required on a number of points, we welcome the increased stabilization of the regulatory backdrop and longer implementation time frames.

Looking forward to the rest of this year, strategy execution remains our foremost priority.

Closing non-core and progressing the sell-down of Barclays Africa will remain key.

We will also continue to execute our structure reform agenda and plan for the various potential outcomes for the Brexit negotiations.

We feel confident in our ability to complete the delivery of strategic priorities that we have set up.

Turning now to capital and leverage on slide 6. Slide 6 shows that our full-year CET1 ratio improved by 100 basis points over the year to 12.4% driven by strong profit generation of GBP2.1 billion after notable items.

Q4 accretion was significant at 80 basis points driven by lower RWAs primarily from further non-core rundown as well as the reversal of the Q3 defined benefit pension scheme deficit move.

Our leverage ratio was up 10 basis points on the year to 4.6% as the GBP5.8 billion increase in Tier 1 capital more than offset an almost GBP100 billion increase in leverage exposure.

The increase in leverage exposure was mostly driven by FX.

The remainder arose from an increase in liquidity pool and lending growth partially offset by non-core reductions.

While progress may not always be linear we remain confident in the trajectory of our leverage ratio as we continue to create capital and remain disciplined in balance sheet usage.

Turning now to slide 7, and our future CET1 ratio expectation.

Our approach to capital planning remains unchanged.

We continue to manage our CET1 ratio as a function of expected future minimum requirements and CRD4 buffers, plus a prudent management buffer which also reflects stress tests.

As you would expect, we constantly monitor the regulatory backdrop and factor this into our capital planning.

We were pleased with the reduction in our GSIB buffer from 2% to 1.5%, and we now are positioned comfortably within that GSIB bucket.

We've also been informed by the PRA of both our Pillar 2a and our PRA buffer for 2017.

Our 2017 Pillar 2a requirement is 4%, an increase of 10 basis point from the prior year 3.9%, of which at least 2.3% is required to be met with CET1 capital.

Wealth to PRA buffer is confidential.

As a matter of policy, it is informed by the most recent bank stress test, albeit there is no mechanical link between stress test results and the setting of the PRA buffer.

Stress testing remains a key component of our capital management.

The 2016 Bank of England test was particularly severe stressing our key markets and geographies simultaneously and resulting in a drawdown of 4.5% from our 2015 year-end balance sheet.

Taking into account these results, we have increased our expected end-state management buffer from a range of 100 to 150 basis points to a range of 150 to 200 basis points effectively absorbing the GSIB buffer reduction.

The top end of this new range would result in a buffer of 4.5% over Bank of England's stress test hurdles in end state, reflecting the latest drawdown.

Thus, the fully phased-in regulatory CET1 requirements as we know them today at 10.8% plus our recalibrated management buffer with the upper end of the buffer range placed our end-state target capital ratio at 12.8% to 13%.

At 12.4% for full-year 2016, we currently are near this expected end state.

Notwithstanding our BAGL plans, we continue to be conservative in our capital planning as the regulatory landscape stabilizes, and we deal with headwinds such as remaining legacy [comita] litigation and evolving accounting and regulatory developments including IFRS 9. IFRS 9 is still scheduled to be implemented from January, 2018, and we expect to begin parallel reporting later this year.

The capital impact will depend in large part on the timing and extent of any regulatory overlays.

Meanwhile, we are a taking conservative approach in preparing our businesses for potential outcomes.

There are two other phases of regulatory reform which are expected to be implemented over a longer time horizon than previously proposed.

Firstly, CRR2, CRD5 legislation, including the fundamental review of the training book and binding leverage requirements, which we do not anticipate coming into effect until after 2020.

Secondly, [bar 4], expected to include credit risk and operational risk RWA proposals among others, which will be implemented some time after that.

In terms of RWA trajectory the regulatory deconsolidation of BAGL and further down on of non-core is achieved as planned with lower RWA to around GBP320 billion.

Any business growth and recalibration from future reg changes with an increased RWAs above this level.

However, the key measure for capital is the CET1 ratio itself which we will continue to manage as a primary measure above RWAs.

Let's now turn to MREL on slide 8. During 2016, we issued GBP12.1 billion equivalent of HoldCo senior debt and capital comprising GBP9.3 billion senior, GBP1.7 billion tier 2, and GBP1.1 billion AT1, further progressing our MREL build.

The strong progress on HoldCo issuance was also reflected in the December upgrade by Moody's of our senior HoldCo and OpCo ratings.

In column with a number of UK banks, negative outlooks from both Moody's and S&P remain however, driven primarily by agency views around Brexit.

We are also pleased to have issued around GBP4.7 billion equivalent in January this year including our first callable HoldCo transactions.

We are pursuing a prudent maturity profile for our HoldCo issuance.

Senior HoldCo issuance in 2016 had a weighted average maturity issuance of 7.8 years.

In 2016, we repurchased and redeemed OpCo capital and senior debt across a range of securities totaling GBP7.4 billion equivalent.

You will also be aware of the notes of redemption we issued on 9 February regarding our Series 3 US dollar-preferred shares with redemption scheduled for 15 March.

These activities reflect the proactive approach we are taking to the HoldCo transaction and MREL build as we maintain our focus on efficiently managing our funding costs.

Indeed, at today's spreads, we expect the cost of HoldCo funding for the Group to be broadly similar to today.

There is, however, more to do, and on this slide, we show the HoldCo-MREL position compared to expected future requirements.

We continue to expect the MREL requirements as at 1 January 2022 to be our finding constraint given that OpCo legacy capital is not expected to qualify from that time.

At year-end, our HoldCo-MREL ratio was around 19.8% compared to 24.2% on a transitional basis.

Based on the November Bank of England policy statements on MREL which envisages a phased approach to implementation and prior to any management buffer, we currently expect the requirement to hold MREL equivalent to around 20% of RWAs by 1 January 2019 being twice Pillar 1 plus the combined buffer requirement, or CBR.

For 2020, we expect a requirement of around 24% as Pillar 2a added.

Based only on HoldCo securities as at year-end 2016, and assumptions are shown on this slide, this would result in around GBP20 billion equivalent incremental HoldCo issuance over the transition period.

For end state, we expect a requirement of around 28% of RWAs, assuming a doubling of pillar 2a.

Again, based only on HoldCo securities, this should result in around GBP40 billion incremental HoldCo issuance to be met over the forthcoming five-year transition period.

For Barclays, issuance remains largely a matter of refinancing legacy OpCo debt, given GBP28 billion of OpCo capital and debt outstanding, the matures, or is callable by 1 January 2022.

Importantly, the Bank of England has indicated that 2022 requirements are expected to be subject to general review prior to setting end-state requirements.

The review will incorporate changes in the regulatory framework and UK Banks experience in issuing MREL.

On an individual basis, the Bank of England may also make adjustments to the Pillar 2a recapitalization amount prior to 2022 should feasible and credible changes to a bank's capital requirements following resolution be expected.

This year, we expect approximately GBP10 billion equivalent of new HoldCo issuance in total.

As mentioned, we've issued almost 50% of this already.

We expect the balance of our 2017 issuance to be shared between senior, tier 2, and AT1.

While we now have more clarity on potential end-state MREL requirements, finalization at international and EU level is still required.

So, we expect to maintain optionality reflects both timing and composition of our build.

Issuance volumes may not therefore be constant year on year.

Overall, we are comfortable with our progress to date and our ability to satisfy our MREL requirements within the required time frames.

Notwithstanding the importance of our MREL build in our approach to wholesale funding, we expect secured funding to remain a modest but important component of our mix.

For Barclays UK, our future ring-fenced bank, we will prepare to access short-term secured funding markets following establishment and will engage investors on this in due course.

Turning now to our CRD4 capital structure on slide 9. At full year, our consolidated total capital ratio was 19.6% on a transitional basis and 18.5% on a fully loaded basis, both representing an increase of 80 basis points in the last quarter.

These increases were driven mainly by CET1 ratio accretion.

In terms of the composition of our total capital stack, we remain incentivized to hold at least 2.3% of RWAs in AT1, reflecting the Pillar 1 and Pillar 2a requirements permittable in this form.

We will likely target a surplus to 2.3% to enable us to make efficient use of CET1 to maintain optionality to manage our core profile and to accommodate variability in RWAs over time.

We therefore expect to remain a regular AT1 issuer.

We note that the current draft CRD5 regulations proposed to introduce a preference for AT1 payments over dividends and variable remunerations were MDA restrictions to be triggered.

For Barclays, this proposal is implemented.

We'd simply codify our existing intention to respect the creditor hierarchy.

We expect to hold at least 3% of RWAs in Tier 2 format reflecting Pillar 1 and Pillar 2a requirements.

As usual, we will determine the appropriate balance between senior and Tier 2 based on relative pricing and investor appetite.

We note market commentary around instruments governed by non-EU law and without contractual [bearing] acknowledgment clauses, given that the current draft of the CRR2 proposal to just such instruments may not be eligible as Tier 2 or MREL.

If implemented as proposed, this could impact two of our legacy instruments.

The 5.14% 2020 Tier 2 and the 7.625% 2022 Tier 2 CoCo.

Of course, the future eligibility of these instruments will depend on the final wording and UK implementation of CRR2, and we will monitor developments closely.

Moving now to our strong liquidity and funding position on slide 10.

We continue to maintain a very robust and well balanced liquidity and funding profile.

At full year, our liquidity pool was GBP165 billion, an increase of GBP20 billion year on year.

The Pillar 1 LCR was 131%, a surplus of GBP39 billion to 100%.

The year-on-year increase in the liquidity pool reflects the depreciation of Sterling against other major currencies as well as net increase in retail and commercial deposits from wholesale funding to support business growth.

Our NSFR continues to exceed 100% from time lines.

Turning now to slide 11 and structure reform.

We continue to execute against our structure reform objectives on 2016 and remain on track to deliver against our regulatory objectives well ahead of the January 2019 deadline.

To successfully complete the program, we now have two key operational deliverables.

Taking these in chronological order -- firstly, to build out Barclays Services Limited to become the Group's Service Company, or ServCo, to meet operational continuity requirements.

And, secondly, to transfer the BUK businesses into the new ring-fenced bank entity.

A key milestone of our first deliverable was met in November with the transfer of our existing primary service entity to become a direct subsidiary of Barclays PLC in preparation for its buildout as a Group-wide ServCo.

The ServCo will become a hub of our shared operational architecture and a provider of critical services to both BUK and BI post the separation.

Locating our shared operational architectural in ServCo supports two key purposes.

Firstly, it enhances financial stability for all our customers and clients by ensuring that critical services can continue to be provided irrespective of unforeseen stress events in either banking entity.

Secondly, it provides an opportunity to drive significant efficiencies in client and Customer Service.

In the model we envision, core functions for the entire Group will be standardized across the Company, streamlining costs, driving high quality analytics, and improving customer experience.

The pivotal role that ServCo will play within the Group was also reflected in its recent rating of A minus by S&P.

In terms of the transfer of BUK businesses into the new ring-fenced banking entity, the second key deliverable, we submitted the draft banking license application for this entity in September.

And, we believe that we are well on track to receive conditional license in the first half of this year subject to the ongoing review of our regulators.

Over the course of this year, we will continue to prepare our internal infrastructure to allow for a smooth execution of the legal separation and transfer of our BUK businesses into the entity that will become the ring-fenced bank.

The last important step in becoming fully operational is to complete the legal entity separation through the court-approved ring-fenced transfer scheme, RFTS.

As part of the RFTS process, we need to review the impact of our ring-fencing plans on all our stakeholders and assess whether there's any material impact to them beyond what is necessary for the purpose of ring fencing.

Our assessment is subject to review and challenge for the independent court appointed skilled person which helps ensure that stakeholder outcomes are the primary consideration in all of our execution plans.

We expect to initiate a court process for this in Q4 of this year with final execution planned for H1 2018.

Successful execution of these actions, while minimizing disruption to all our customers and clients, should support the continued delivery of fundamentally strong banking propositions that reflect the Group strategy of being a trans-Atlantic consumer, corporate, and investment Bank.

Our communications outreach program to customers, clients, and suppliers is well underway and the positive responses to date has confirmed the strength of our design.

We remain confident in our ability to deliver against our objectives and continue to make good progress with our regulators and the [skilled person] in order to meet our timelines.

We firmly believe the structure reform strongly supports Group strategy.

Successful execution will deliver greater transparency, accountability, and efficiency at an entity level, while maintaining the diversification benefits of BPLC that investors currently in joy.

Lastly, while you can form a good understanding of the financial profile of the respective entities based on the existing divisional business disclosures, we expect to provide more detail on the legal entity financials in due course.

So, to summarize on slide 12, in 2016, we continued to deliver on the Group's strategy, simplifying our business and delivering strong core returns.

The momentum in our core businesses facilitates further progress on our balance sheet, including the significant accretion of our CET1 ratio taking us closer to our expected end state.

We [officiated] our MREL build with efficient issuance and liability management, and we entered 2017 with a strong and stable balance sheet, well positioned for structure reform.

With that, I'd like to hand it back to you, Tushar.

Thank you, I hope you have found this call helpful.

Dan and I would like to open the call to your questions.

(Operator Instructions)

Our first question of the day is Paul Fenner-Leitao of Societe Generale.

Hi, good afternoon, everyone.

Thanks for doing the call.

I've got a couple of questions that are very quick ones.

First, in terms of the phasing in of the GSIB, I notice there's something funny about how you're phasing in.

There's quite a big jump in the GSIB buffer from last year to this year and then a flattening next year.

I would have imagined that would have been smooth.

Can you just explain how that works from last year to this year?

Second question, just to clarify in terms of legacy Tier 1 core, so you're planning to call the Series 3 this year.

Is that also the bond that Jes was alluding to this morning?

And, how do you go about selecting which series it is that you've decided to call?

On AT1 calls -- just get ready as we move towards 2018-2019, this is going to be a common question.

Can you just tell us what your approach is going to be around AT1 calls?

And, exactly what you define as the economics of the call?

In terms of funding you've got another GBP5 billion-odd to do, you said that you would split that between senior HoldCo, Tier 2, and AT1.

Is that an even split?

Is it basically one transaction in each of AT1, Tier 2?

A little bit of color there.

And, finally, and I apologize -- on the ring-fenced bank, this is a fairly odd situation for creditors given that we're exposed to an entity that is going to look quite different possibly by the end of this year.

How close are you working with the rating agencies to ensure that we don't have some sort of drop in ratings, or that could be a surprise?

I guess the disclosure you provide is very helpful, and I think probably allays fears.

But, just to give us a little bit of flavor on how that process is working.

Thank you very much.

Thanks, Paul.

I'll get Dan to answer most of them.

But, once Dan just covers the GSIB phasing-in buffer, I think it's relevant to that.

I'll just make another comment on capital, and then Dan can talk about the legacy instruments and any other questions you have related to that.

Sure, so let me start with the GSIB.

What you're seeing now is -- recently, we were seeing the transitioning in at 25% per annum of the GSIB of 200 basis points.

But, of course, given we are now falling bucket because our score fell to 308 which puts us in the 1.5% Tier instead, you'll see that have effect from 1 January 2018.

There is lag effect to dropping a bucket, and it will come in from the start of next year.

So, what you've seen therefore is there is a stabilization even though we are still transitioning it in, we are now switching to a lower buffer.

So, that's why you see that stabilization.

And, you come back to Tushar on the capital point.

Yes, so just before I go back to Dan on the other stuff.

On the GSIB buffer, the reason why I just wanted to make an additional comment is, obviously, in the end state, we've dropped down a bucket.

But, we are keeping our management buffer above MDA levels at about 150 to 200 so it's sort of, if you like, recycled the benefits of the reduction of the GSIB buffer into a slightly larger management buffer.

So, it's still targeting the capital range that we had, and we expect to get there in very good time.

Of course, there's a number of things that we need to work through as we work toward that end state.

So, the question this morning around pension contributions -- and I thought it might be helpful for this call to touch on that.

Obviously, their pension contributions are driven by triennial negotiations we have with the pension fund trustees and their actuaries.

The last negotiations were completed in 2014 so these are something we've been aware of for some time.

And, it's completely factored into our capital projections.

Of course, we're having another triennial discussion so we've been very prudent in any assumptions that we're making around the outcome of those discussions as well and still anticipate getting to our end-state capital in good time.

The reason why I thought that was helpful is because, of course, it's part of the capital and overall total capital stacked [fir] for the Company so just to drive some clarity on that.

Dan, do you want to cover the other questions?

Yes, certainly.

To clarify on this point, we did give notice of redemption of the Series 3 preferred shares, and that's going to have effects middle of March this year.

So, you'll see that one coming through, and we haven't made any decisions with respect to the remaining series 5 preferred shares.

Obviously, it's [small module or anything] This remains a complete option for us as to call or not to call, and it's an option that's available for us every quarter at par plus the crude coupon.

In terms of more broadly how we see AT1s.

We don't make assumptions or give any comments on calls ahead of time.

You can expect us to continue to be a regular issuer of AT1.

We would expect to issue enough AT1 to have flexibility to manage our redemption profile.

That's obviously without predicating whether calls may or may not be made in the future.

Any decision taken would be subject to the consent of our regulator, and we would really have to look at the economics at the point in time so that would include upfront and ongoing PBT and CET1 impact.

Just turning to the point around funding this year, and what we would the composition of the remaining GBP5 billion.

Again, absolutely nothing are hard-wired around that significantly so one-third in each of senior to AT1.

We're going to be really guided by investor appetite and market conditions in doing that so I can't give more specifics than that at this stage.

In terms of what we describe as unusual situation of investing in BB PLC, at the moment, it's becoming quite different.

Obviously, as you'd expect, we have been doing a lot of work with the rating agencies on this, and we've done an awful lot of work in terms of designing BB PLC in a way that it will continue to be very investable, very credit-worthy very strong, stable, robust -- post-the establishment of the ring-fenced bank.

In terms of where we are specifically with the rating agencies, let me start with S&P because they've actually come out publicly and said they've taken into account the advent to ring fencing in the current rating of BB PLC.

And, what they said is, that it's obviously a bit of negative downward pressure, the ratings profile from that.

But, it's offset at the moment by positive uplift from our issuance out of the Holding Company which generates an increase in what they call the ALAC add-on to the standalone rating.

So, offsetting impacts there which are quite helpful that they are taking that forward view, and it vindicates a lot of the work around robust of BB PLC on a forward basis.

We obviously do talk to Moody's as well.

They haven't come out and said anything specifically about Barclays and how we are impacted by ring fencing.

They've made general comments to say that a non-ring-fenced bank's rating is likely to be the same or lower.

And then, the pre-ring fencing -- where the ring-fenced bank itself would be the same as the existing rating of BB PLC or higher.

They have said that they won't make an adjustment to their rating until the separation time itself so we think it's in our interest and the interest of our investors to get more notice of any changes they would do.

So, just finish with our general comments around ratings is that ultimately the agencies will do what they do.

The key thing for us is to deliver on what's within our control and that's to execute on our strategy which we know should absolutely be credit-ratings-positive.

That means delivering our core returns and completing the wind-down of non-core to make it more profitable.

It's about successfully building our issuance out of the Holding Company and also delivering on our structure reform plans through retaining a very diversified business model for BB PLC.

Thanks, Paul.

Our next question today is Lee Street of Citigroup.

Hello.

Good afternoon and thank you for hosting the call.

Just a few quick ones from me.

Firstly, just any comments you can give on how you intend to fund the non-ring-fenced bank?

And, specifically, what was your issue on the senior unsecured financing?

And, secondly, talk on the [preference] calls -- when you call AT1 -- or, if you call AT1, I should say.

Will there actually be a negative CET1 impact, or is it just because the [all] pressures are actually preference shares and that's why they have that impact?

And, appreciate the increase in the management buffer that's now happened.

In the slides, you didn't actually stress-test the outcome.

If you had a much better stress test outcome, is there are a chance that Management buffer could slip down lower?

And, just finally if it's not too cheeky, risk-weighted assets?

I think you guided that you gave out GBP320 billion adjusting for [paid] in the non-core, on your best guess for fundamental year the trading book and operational risk, you should put those back in -- do you think you'd be above or below the current level of RWAs you're currently at?

That would be my questions.

Thank you.

Thanks, Lee.

Why don't I cover the second two about how we think about the management buffer and risk-weighted asset levels, and I'll ask Dan to talk about funding in the non-ring-fenced bank and the technicalities of when we call AT1.

In terms of the buffer, we've always tried to calibrate that to ensuring that we have enough distance between our capital levels and any MDA levels to avoid any triggering of that.

And, we've always felt somewhere around 150 basis points or above feels about right.

We've been also -- stress testing is always really important in terms of ensuring that absolute capital level is consistent with any expected drawdowns with regards to stress testing.

And, that's why when we looked at the 2000-- or the most recent banking stress testing, we had a 450-basis-point drawdown.

When I look at the upper end of our 12.3 to 12.8, it hovers close to those eventualities.

I think if -- the bank [bigelun] did say that was that a particularly severe stress test, and they certainly didn't indicate that they would expect subsequent stress tests to become increasingly severe.

We'll see what it is, but I don't think it's something we would look to revisit very frequently, but if our drawdowns [continue to be lower than these levels in subsequent stress tests, I think that does give us some capacity to perhaps recalibrate that buffer.

In terms of risk-weighted assets and the GBP320 billion, I think things like fundamental review of the trading book et cetera.

There will be a wall before they get introduced as part of the CRR2 text, and it remains to be seen how] they get finalized if you like that implementation, but it does feel a few years further out.

I still think it's reasonable to assume that on an underlying basis think about our having divested of Barclays Africa after having continued to wind-down non-core, and if you like, that's the jumping-off point for risk-weighted assets.

And then, we would like to where we see opportunities perhaps grow that, but I think it would be a very, very modest pace.

You can see given our market share in the UK, it will grow at very, very modest pace.

And, we haven't had a huge amount of growth over the last couple years which is what I think you'll see prospectively as well.

So, I don't think the immediate rule changes in CRR2 will flow into RWA until some point in the future.

I think it's probably a few years out.

Dan, do you want to cover the other two?

Yes, sure.

I think you're talking about the normal ring-fenced bank in terms of whether or not it would be issuing any unsecured.

I'll give you a bit of guidance on ring-fenced bank as well while it's around it.

But, it will continue to have some senior unsecured funding needs.

That's going to be a mixture of three things.

Firstly, downstream, the TLAC from the parent.

Secondly, some money-market funding for operational purposes.

And, thirdly, continue to have access to structured notes which has historically been quite material on funding source for Barclays albeit not the same volumes as we've seen in the past.

So, it will absolutely have a need for that, but it's also quite important to realize that the non-ring-fenced bank is going to be very diversified in terms of its overall funding profile.

It's going to have a very material quantum of deposits from corporate, from wealth customers as well, and perhaps retail sources as well.

For instance, in Delaware.

It's also going to have some secured funding sources.

Also, from Delaware through our credit card securitization.

Quite a nice mix of things by product and by currency as we'll see by tenor as well.

Just on the ring-fenced bank.

That's not going to have the same quantum of unsecured wholesale funding as the non-ring-fenced bank.

The majority of its funding will be from deposits, and most of those are insured.

But, there will absolutely be some secured funding, too.

Mainly of our mortgage portfolio.

There is going to be some money markets there as well for operational cash purposes as well as utilization of downstream TLAC.

In terms of the other point around Tier 1 calls.

Obviously, with the press, and there is an upfront impact, if you like, from redeeming these to capital which is the retranslation of a dollar liability at the point of redemption.

And, clearly, given that the dollar has [risen] since these were issued, that is a negative for us.

That was the case for the two series that got redeemed really last year, and the one that is going to get redeemed in March.

Clearly, these are very economic things to do though on an ongoing basis, and you do get a very nice IRR from these redemption decisions so that you make that capital back in a small number of years.

In terms of do we see a similar effect for the AT1 out of the Holding Company?

Yes to the extent which it is non-Sterling denominated because that equity accounted because of the [XE] features from an accounting perspective.

We are not re-translating that liability to Sterling over time so you would see that come through the P&L at the point of call were we to call them.

Thank you very much for your answers.

The next question comes from Jackie Ineke of Morgan Stanley.

Hi, good afternoon.

I have two questions.

The first one was actually related to a bond you mentioned earlier on the 5.14%, the Tier 2. I think you were suggesting that might lose its regulatory value if the proposals go through from last November without change.

And, I was wondering why it would?

It looks like it was issued in 2010 so it would have got grandfathered and so it would be exempt from the proposals.

Second question was more broad.

Obviously, you said you are going to call this series, and it's obviously from the OpCo.

Are you seeing regulatory encouragement to clean up the OpCo layer as [campesil] in the Group?

Obviously, you've done a lot of LME, and you continue to do LME.

But, is that kind of pure economics, or is there a regulatory angle there as well?

Thank you.

Thanks, Jackie.

Why don't I -- Dan, why don't you cover both of them.

The Tier 2 and regulators' views on cleaning up non-performing legacy.

Yes, absolutely.

First thing to note here is that CRR2, it's only a first draft so we don't know what the final version of legislation is going to be.

And so, I was just merely pointing out that the CRR2 talks about losing value as capital by virtue of these securities not having a contractual [bed] and language that they would cease to qualify as capital and as MREL.

On that draft language, but I think there's going to be plenty of iterations yet before we wind up with a final version of the law.

In terms of grandfathering, it wasn't actually our expectation that it would be grandfathered by virtue of being issued before 2010.

That wasn't our understanding.

Obviously, we can go and take a look at that -- the technicals around that.

So, we aren't necessarily relying on it being grandfathered.

That's because we aren't really going to have -- we are actually very, very confident in our issuance profile and ability out of the Holding Company going forward.

It's not something that we necessarily need to place a lot of value by.

In terms of the second piece around -- related -- .

Just on that, sorry.

If it's not grandfathered -- or if it is really grandfathered, then you wouldn't be able to [reg] par call it would you?

Because you wouldn't have that open to you?

Well, I'm not saying that it's necessarily reg par call something we would rely on or not rely on at this stage.

I think it's too early to speculate about that.

I think we have to wait and see what the regulations finally say.

And then, once those regulations are complete, we'll obviously need to understand those and how they apply at the time and take legal advice, et cetera.

But, it's a bit premature to speculate for it.

Okay, thanks.

I think in terms of not necessarily receiving any kind of regulatory gentle pushing in terms of our [lava] Management exercises or our calls.

Obviously, we do need regulatory approval to the extent to which we are redeeming or calling debt capital in our OpCo whether it be via an exchange or via just straight repurchase, and obviously, therefore they will support it -- the actions that we have taken and continue to take.

But, I'd probably take it as a good sign that they are happy with the speed of travel on our overall capital trajectories -- on our MREL trajectory that we are under no particular pressure to accelerate.

Okay.

Because the subordinated debt at the OpCo beyond 2022 would still count as regulatory capital depending obviously on its features.

That's right.

So, it would still have some value though it seems like you obviously getting through all of the OpCo sub-debt as we go along.

That's why I was asking if there's any encouragement from, I think, particularly the resolution authority who probably just wants to deal with the HoldCo if there is any problem in the future.

No, we haven't.

You're absolutely right that it will continue to qualify as capital post the 1 January 22.

Obviously, it wouldn't qualify as MREL.

But, no, we have not been receiving any pushes in that direction.

We don't have a particularly large tail I think it's fair to say of that capital within BB PLC.

I think numbers have showed under GBP8 billion actually left post 1 January 2022.

I think I'm right in saying that about 50% of that matures in 2022, so possibly a lack of pressure because it just isn't a particularly large quantum at that stage.

Okay, thanks for that.

Thank you.

Thanks Jackie.

(Operator Instructions)

Our next question today comes from James [Hide] of PGIM.

Hello, yes.

Thank you for doing this.

I have a question about the runoff the non-core.

It's pretty impressive to have got from GBP512 billion nominal assets to GBP290 billion, but is that really job done?

And, I'm asking this because of the leverage ratio.

Because given all of the uncertainties of risk weightings and so forth, we are having to be more vigilant on the leverage ratio as the debt investors.

Is there going to be a stop to these assets running off now that you will fold it into the operational parts of the Group?

And, are you going to even dip your toes into the same asset classes?

Is it that you're happy with those asset classes now and you want to go back into it?

Or, will there be a continued rundown of that quantum?

Yes, I think let me take that, and I'll ask Dan to give his thoughts on leverage more broadly.

I think with regards to the non-core assets, you would expect us to continue to run them down.

The reason why they were called non-core is they are either not strategic in nature, or they aren't really generating the returns we would like.

So, our real objective function is to recycle that capital to better productive uses.

Either back to our investors or put to more productive use within the Company.

So, to directly answer your question, I think you'd continue to expect us try and drive down that portfolio.

One of the lessons learned from non-cores that we found very positive is that just having a singular focus on working out these assets has been a good experience for us, and we don't want to lose that.

So, even when we fold these assets back into Barclays International and Barclays UK in the future, I think that intense focus within those two trading Companies in working out these assets will continue.

We may not report them separately, but you should be rest assured that the focus on driving them down will be just as much there.

Dan, any thoughts on leverage more broadly?

Yes, I mean we are very confident in where our leverage is now on spot basis and in the future flight path.

We aren't creating specific targets, if you like, or establishing formal management buffers because we are happy with the existence we have from our reg minimum anyway.

We are just going to let our CET1 and AT1 accretion sort of increase the ratio over time.

We absolutely do need to be disciplined.

Not saying that we are going to cease to be disciplined and fully aware of touching on the news from the PRA around the recalibration, I suppose.

It's a binding leverage ratio in the UK, which is now called the UK leverage ratio which is to recalibrate to the exclusion of central bank cash which is funded in the same currency.

We aren't taking that and going out and suddenly spending an amount of leverage elsewhere in the bank equivalent to the amounts of cash that we have.

We've listened to the PRA statement that these recalibrations are intended to lower [vaxal] capital requirements, and they are looking to recalibrate the ratio framework later this year so I think we are confident that we continue to plan on taking a -- in a prudential fashion.

Actually, just quickly on that, I'm assuming that, for instance, your US Fed -- deposits at the Fed cannot be [counted up] because you don't have enough matching consumer or other deposits to benefit from that?

Yes, sorry, James.

They can be because this isn't necessarily just consumer deposits.

This could be just any kind of deposits, including wholesale as long as they are in the same currency so we do have a lot of dollar-denominated CTs and CDs.

That's not just sterling.

Okay.

They count CDs at [system] count.

Great.

Yes.

Thank you very much.

Thanks.

Thank you, James.

Are there any other questions, Operator?

We have no further questions on the telephone lines.

Okay.

Thank you, everybody, for joining us.

I hope you found this call helpful.

We welcome any feedback you have for us.

Otherwise, we'll speak to you next time.

Thank you, ladies and gentlemen.

That concludes today's Conference Call, and you can now disconnect your lines.