Barclays PLC (BCS) 2017 Q4 法說會逐字稿

Welcome to the Barclays Full Year 2017 Results Fixed Income Conference Call.

I will now hand you over to Tushar Morzaria, Group Finance Director; and Kathryn McLeland, Group Treasurer.

Good afternoon, everyone, and welcome to our full year 2017 results fixed income call.

I'm joined today by Kathryn McLeland, who was recently appointed as Group Treasurer; as well as Miray Muminoglu, our Head of Capital Markets Execution.

Let me start with Slide 3 and make a few comments before handing over to Kathryn.

2017 was a year of significant progress for Barclays.

We sold down Barclays Africa to a 14.9% holding and closed our Non-Core unit 6 months early, ending the year with a 13.3% CET1 ratio.

Excluding the impact of the Barclays Africa sell-down, litigation and conduct and the DTA impact of U.S. tax reforms, group RoTE was 5.6% for the year.

Whilst the initial impact of U.S. tax reforms was negative, future impacts are expected to be significantly positive for us, and we are guiding to a reduced group effective tax rate in the mid-20%s for 2018 and future periods.

Impairments were broadly stable year-on-year and the loan loss rate increased marginally to 57 basis points.

Asset quality remained robust, with arrears in UK cards showing a small improvement over the year and US card arrears remaining flat, and both at historically low levels.

Our businesses performed resiliently.

We grew our mortgages and deposits in the U.K., whilst maintaining our pricing and underwriting discipline.

We achieved a full year NIM in Barclays U.K. of 349 basis points after the reintegration of the ESHLA portfolio, and in line with our guidance of greater than 340 basis points.

The performance of Barclays International was impacted by the challenging environment in markets, although we achieved a very strong result in banking fees, earning GBP 2.6 billion, and our highest global fee share in 3 years of 4.3%.

And whilst Q4 was another tough quarter for markets with low volatility impacting the FICC and equity businesses, we were pleased with our performance relative to peers.

We also made significant progress in our international cards and payments businesses, with strong returns and underlying growth in US Cards to $28 billion and a successful launch of our new merchant acquiring platform.

Turning now to Slide 4. In summary, 2017 was a transformational year in which we completed the restructuring of Barclays.

Whilst we still have some legacy litigation and conduct issues to resolve, we remain comfortable that our capital (inaudible) from here will enable us to satisfy our regulatory requirements and generate capacity for shareholder returns.

While it's too early to comment on the 2018 outlook, we note that the recent depreciation of the dollar is a headwind in terms of our sterling results, whilst lower U.S. corporate taxes are a tailwind.

In terms of trading, income in the markets business is up year-to-date compared to the same period last year in both dollars and sterling terms, but it is still early days.

Looking forward, we remain focused on delivering our group RoTE targets of greater than 9% in 2019 and greater than 10% in 2020, and shifting the composition of our cost base towards profitable spend so that we can grow our earnings whilst reducing the group cost-to-income ratio to below 60% are the key elements in achieving these targets.

We are encouraged by the resilience of our businesses and optimistic about the future.

We are pleased today to announce our intention to increase the 2018 dividend to 6.5p, subject to the usual regulatory approval and stress test outcomes, an important milestone for the group.

With that, I'll turn over to Kathryn, who will cover the progress we have made on our capital funding and liquidity this year.

Thank you, Tushar, and to everyone for joining the call today.

In 2017, we continued to strengthen our balance sheet, further improving our capital funding and liquidity positions.

Our CET1 ratio grew by 90 basis points over the year to 13.3%, and we ended the year with a liquidity coverage ratio of 154%.

From a funding perspective, we continued our well-established HoldCo issuance program, issuing the equivalent of GBP 11.5 billion during 2017.

We also made good progress on our incenting plan, including the stand-up of our group service company in September.

And we're now poised, subject to court approval, to stand up our new ring-fenced bank in April.

We feel confident about the prospects ahead as we position the business for improved returns.

I will begin by looking at capital and leverage in more detail, which you can see on Slide 6. The net 90 basis point accretion in our CET1 ratio was driven by underlying profit generation of 90 basis points, 60 basis points from the sell-down of Barclays Africa and other RWA reductions of 40 basis points.

These actions more than offset around 100 basis points of impacts coming from dividends, the U.S. DTA remeasurement, litigation and conduct, pension contributions and the redemption of the 7.1% Series 3 U.S. dollar preference shares.

Turning now to leverage.

As a reminder, for consolidated leverage requirements, we are currently required to comply only with the U.K. regime, which exempts cash held with central banks.

From 2019, we will also be required to comply with the CRR regime.

We currently disclose the U.K. leverage ratio on an average basis each quarter using the month-end positions within the quarter.

We also disclose the U.K. and CRR ratios on a spot basis for the period end.

From Q1 of this year, the average reporting will move to a daily basis.

At full year, the average U.K. ratio was 4.9%, up 40 basis points year-on-year, driven by a decrease in leverage exposure from the sell-down of Barclays Africa and Non-Core reductions as well as AT1 issuance, comfortably above the expected 4% minimum U.K. requirement applicable from 2019.

We know that there is growing interest in leverage requirements, and we've included a new slide in the appendix which sets out an understanding of the key requirements under both the U.K. and CRR regimes.

We also note that the Financial Policy Committee plans to review the U.K. leverage ratio framework this year.

And we will, of course, watch these developments closely.

Based on the results of the 2017 Bank of England stress test, which resulted in a [5%] drawdown of the CET1 ratio and around a [1.4%] drawdown of the leverage ratio, we continue to review leverage as a backstop measure.

Turning now to Slide 7 and our future CET1 ratio expectations.

As a reminder of our approach to capital planning, we continue to manage our group CET1 ratio as assumption of expected future minimum levels and CRD IV buffers, plus a prudent management buffer designed to maintain the ratio comfortably above our mandatory distribution restrictions hurdle and to reflect stress test outcomes.

This slide will be familiar to many of you.

At Q3, we were already incorporating our 2018 Pillar 2A requirement.

However, as a percentage of our lower year-end RWAs, we're now showing Pillar 2A at 2.4%, up from 2.3% at Q3.

At 13.3%, our full year CET1 ratio remains comfortably within our expected end-state range of around 13%.

And we have material organic earnings capability, as the underlying 90 basis points of profit generation in 2017 demonstrated.

With the Triennial pension fund review concluded and the Day 1 impact of IFRS 9 estimated, we're operating from a position of capital strength shown in the planned restoration of the ordinary dividend.

It is, however, worth spending a moment on IFRS 9, which went live at the start of this year.

On a fully loaded basis, the estimated Day 1 impact on the CET1 ratio is around 34 basis points compared to the 40 basis points we estimated at Q3.

On a transitional basis, the ultimate end-state effect is expected to be a few basis points below this.

Remaining headwinds include litigation and conduct and the Basel III reforms, or so-called Basel IV.

Regarding Basel IV, we've cause to note that the finalized reforms were established on the 7th of December.

At this moment, we do not think it is appropriate to try and quantify the likely outcome for you, but we expect to do so once we have more clarity on the detailed calculations, the scope of PRA interpretations and of course, the impact of any management actions, and we remain confident in our ability to manage regulatory change.

However, the expected 2022 implementation date for these reforms as well as the market risk and the 5-year phase-in period for output floors to 2027 are very helpful in providing time for the sector to adjust to the new requirements.

With the advent of ring-fencing, there's been some interest in understanding the capital requirements of the future ring-fenced and non-ring-fenced banks.

Whilst some elements of the capital requirements remain to be finalized, we continue to guide to an end-state CET1 ratio of around 13% for the group, incorporating our expectations of utilization requirements for these entities.

As we had said previously, we expect the legal entity requirements to be broadly consistent with the group.

In terms of our U.S. IHC, we're looking to take our first public CCAR exercise this year, having completed a private exercise last year.

We expect the results to be published in June.

The approach we will take to managing legal entity requirements will reflect that of the group, and the management of excess capital will continue to be determined by the group in line with our stated strategy and risk appetite, just as it is today.

As our focus turns to driving returns, the continued management of capital across the group and its legal entities to optimally meet internal and regulatory requirements whilst, of course, taking consideration of credit ratings, will remain a key focus.

Moving on now to CRD IV capital, which you can see on Slide 8. At full year, our total capital ratio was 21.5% on a transitional basis and 20.7% on a fully loaded basis, representing increases of 190 and 220 basis points, respectively, from the prior year.

These increases were driven by CET1 ratio accretion and AT1 and Tier 2 issuance.

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

We currently hold 2.9% of AT1s in the capital stack.

We are planning to maintain this surplus to provide optionality to manage our core profile, to accommodate variability in both RWAs and FX, and also to manage our leverage ratio.

We also continue to expect to hold at least 3.1% of RWAs in Tier 2 format, again reflecting group Pillar 1 and Pillar 2A components.

We are comfortably above that ratio at 4.2% on a transitional basis, and we will continue to manage our HoldCo Tier 2 stack as OpCo Tier 2 reduces over time.

Turning now to our MREL position on Slide 9. We remained active in 2017, issuing a total of GBP 11.5 billion equivalent from the HoldCo in maturities ranging from 5 to 30 years and comprising GBP 6.1 billion of senior debt, GBP 2.9 billion of Tier 2 and GBP 2.5 billion of AT1.

We were really pleased to be the first bank to issue a bond in Green format based on qualifying U.K. assets.

During the same period, GBP 6.1 billion of BB PLC public senior and subordinated instruments either matured or were redeemed.

These included the Series 3 7.1% U.S. dollar preference shares, which we redeemed in March, saving around $100 million per year in coupon costs.

For this year and subject to market conditions, we expect to issue around GBP 10 billion equivalent in total from the HoldCo.

On this slide, we show our current HoldCo MREL position compared to expected end-state requirements.

We follow the debate on European Commission MREL proposals and continue to expect that all of our HoldCo issuance to date will benefit from permanent grandfathering.

At full year 2017, our HoldCo MREL ratio was 25% compared to 28.2% on a transitional basis.

We expect the group end-state 2022 requirement of 29.1% of RWAs to be our binding constraint, given that OpCo legacy capital is not expected to qualify from that time.

As you can see, the expected end-state requirement takes into account an anticipated 1% countercyclical buffer, which translates to around 50 basis points at Barclays and is prior to any MREL management buffer.

We've got off to an active start this year, issuing GBP 2.4 billion of senior unsecured debt from the HoldCo.

We've also been active in the market in preparation for ring-fencing.

For example, following our GBP 1 billion 3-year covered bond in May of last year, we returned to that market with a GBP 1.25 billion 5-year transaction in January.

Upon ring-fencing, covered bonds are expected to transfer to Barclays Bank U.K. PLC through the ring-fencing transfer scheme, supplementing its sizable and high-quality deposit base.

Whilst the [public] funding is expected to remain the mainstay of Barclays Bank U.K. PLC funding base, modest secured and short-term issuance, such as CDs, CP and MTNs, are expected to complete its funding profiles along with internal MREL.

Also, in January, we returned to the public market for OpCo debt issuing (inaudible) of 3-year paper from Barclays Bank PLC, the first such public offering in several years.

These reflect our long-standing strategy of issuing shorter-dated funding, MTNs and structured notes from Barclays Bank PLC.

Barclays Bank PLC funding base is expected to comprise a diversified funding mix of deposits, residual outstanding Barclays Bank PLC issued senior debt and capital, secured funding, as well as likely shorter-dated transactions such as 3-year deals, alongside CDs, CP and internal MREL.

And so as we complete our MREL build, we expect to remain predominantly a HoldCo issuer for public unsecured funding for 3 years or more, and we are pleased with the continued progress we have made on this transition.

Progress on relevant regulation also continued in 2017.

We welcomed the October consultation paper from the Bank of England on internal MREL.

A policy statement is due to be published later this year, which will facilitate the documentation of our internal funding arrangements in order to be compliant with our 2019 MREL requirements.

The October 2017 consultation paper on double leverage was also noteworthy.

It provided a helpful insight into how double leverage could potentially be deployed within the U.K. framework as it is in other jurisdictions.

Importantly, the PRA expects to monitor and assess [these who] double leverage and will require firms to carefully manage and mitigate cash flow risk arising in normal and stressed conditions.

We are reviewing this area as part of our overall approach to capital management, of course, also being mindful of rating agency criteria.

Turning now to our liquidity position on Slide 10.

We further increased our liquidity pool during 2017, ending the year at GBP 220 billion, an increase of GBP 55 billion over the course of the year.

The Pillar 1 LCR was 154%, a surplus of GBP 75 billion to the end-state 100% requirement.

Our NSFR also continues to exceed 100%, well ahead of implementation timelines.

The increase in the liquidity pool this year has been driven by an increase in cash and deposits from central banks and has been achieved without a corresponding increase in U.K. leverage due to the current treatment of eligible deposits.

As we've said before, the quality and quantum of our liquidity are inexpensive credit strengths, which we value.

Turning now to our overall group funding profile on Slide 11.

On this slide, we set out the components of our funding profile.

You can see here an increase in the proportion of customer deposits within our overall funding profile, which has remained very stable over the last several years, and the reduction in our loan-to-deposit ratio to 80%.

We've also improved the maturity profile of our wholesale funding, reducing reliance on less-than-1-year funding, which now represents some 36% of total wholesale funding, down from 44% in December 2013.

I will now turn to Slide 12 to provide an update on structural reform.

We continued to make good progress on ring-fencing in 2017.

We stood up Barclays Services Limited, the group service company or ServCo, in September last year and successfully migrated the requisite assets, contracts and employees to the entity without issue.

We've also successfully completed our sort code migration process.

The ring-fencing transfer scheme court hearing and the associated objection process are due to be completed shortly.

Subject to court approval, we remain on track for the transfer of Barclays U.K. into the new legal entity as a direct subsidiary of Barclays PLC in April.

Today, we have published unaudited pro forma consolidated financial information for both Barclays Bank U.K. PLC and Barclays Bank PLC.

This information includes illustrative balance sheet and income statements and provides an indicative view of these 2 groups at year-end 2017.

We've also provided bridges between divisional and legal entity disclosures, which you can find in the appendix.

Going forward, we plan to publish consolidated legal entity accounts for both Barclays Bank U.K. PLC and Barclays Bank PLC with our H1 results.

On a much smaller scale, our preparations for Brexit continue at pace.

These plans are built around an expanded Barclays Bank Ireland being operational by March 2019, in line with the anticipated exit date.

The eventual size and nature of the entity is subject to a number of variables, especially the outcome of government negotiations as well as to the requirements of its regulators and clients.

And our plans currently remain flexible to meet the varying potential outcomes.

Our working assumption is that EU-related business and activity would be transferred to Barclays Bank Ireland to enable us to continue to carry out passported activity.

Barclays Bank Ireland is expected to remain a wholly owned subsidiary of Barclays Bank PLC.

It is expected to be subject to the full credential regulatory regime of the Central Bank of Ireland and the ECB.

So we envisage a moderately sized and well-capitalized entity with a balanced mix of assets and liabilities.

Liabilities would include diverse and independent sources of funding as well as MREL provided by the group.

The entity would continue to operate from a business perspective as an integrated part of the overall business of Barclays Bank PLC.

Our objective is to obtain a ratings profile commensurate with that for Barclays Bank PLC and which reflects the increased long-term significance of this entity within the group.

We are comfortable with our progress and the ability to execute on time and within existing group cost targets.

Turning now to our ratings profile on Slide 13.

Our ratings profile has evolved constructively over the last year as rating agencies have expressed their views on ring-fencing and provided initial ratings for our future ring-fenced bank, Barclays Bank U.K. PLC.

Summarizing [internal] ratings with each of the 3 main agencies.

Fitch has assigned an expected long-term rating of A+ to Barclays Bank U.K. PLC.

Barclays Bank PLC is currently rated A and was placed on Rating Watch Positive in September due to the expectation that there will be a sufficient pre-placed MREL within the entity to receive 1 notch of qualifying junior debt under their methodology.

Barclays PLC remains A with stable outlook.

Moody's has assigned a provisional long-term rating of A1 to Barclays Bank U.K. PLC.

Barclays Bank PLC and Barclays PLC rated A1 and Baa2, respectively, both remain on negative outlook for a number of reasons, including Moody's views on profitability and the impact of ring-fencing for the former.

S&P has assigned a preliminary long-term rating of A to Barclays Bank U.K. PLC, the same as that of Barclays Bank PLC following an upgrade in October and reflecting the core status of both entities under S&P's methodology.

Barclays PLC is rated BBB.

The ratings of Barclays Bank PLC and Barclays PLC were stabilized in November, following S&P's improved view of the U.K. banking sector which informs the rating.

As we have said before, ratings are strategically important to us and the successful execution of our strategy should strengthen our credit proposition, thereby supporting our ratings profile over time.

So to summarize on Slide 14.

In 2017, we completed the group's restructuring, selling down Barclays Africa, closing Non-Core 6 months early and positioning our business for future improved group returns.

Our balance sheet is robust with a 13.3% CET1 ratio, high liquidity, a stable funding profile and high-quality assets.

Our preparations for ring-fencing are nearing completion and Brexit planning is on track.

We remain confident in our ability to deliver on the group strategy.

Tushar, with that, I'll hand back to you.

Thank you, Kathryn.

I hope you have found this call helpful.

We would now like to open the call up to questions.

Please go ahead.

(Operator Instructions) And your first question comes from the line of Corinne Cunningham of Autonomous.

I've got a few questions.

I'll just ask 2 and then we can come back if we've got time at the end.

The first one I wanted to ask about was your -- how much AT1 you actually think you need.

You're obviously running a bit of a cushion now.

Is that just because you've pre-issued ahead of the maturity of the $2 billion that gets to the call date this year?

Or we've heard from some of the other U.K. banks that they're actually consciously going to run with a cushion of around about 50 bps on Tier 1.

And the second question was about leverage.

In your own presentation, you mentioned that new slide there.

It looks like you would actually miss on the stress test basis if you actually drew down the 1.45.

You would drop below the 3.8 requirement.

So I'm a little bit puzzled why you're relaxed on leverage.

So if you wouldn't mind addressing those 2, that would be great.

Yes.

Thanks, Corinne.

Why don't I hand over to Kathryn on the AT1 and I'll do leverage.

Why don't I do leverage now, then Kathryn can come back on AT1.

Yes, I mean, leverage is something, Corinne, as you are probably familiar with, we've been on the wrong side of in the past and ended up actually having to raise capital -- equity capital in 2013.

So it's something we are acutely, in some ways, quite sensitive to and remember the consequences of getting on to the wrong side of that.

But it's something, internally, we spend an awful lot of time making sure that we feel comfortable with.

In terms of our leverage position at the moment and stress testing as it's currently defined, we actually feel pretty comfortable with where we are.

And clearly, [the now] drawdown from the most recent stress test is quite a meaningful component from stressed conduct, and we do expect that to lessen over time.

Quite materially, we've put several of the more significant cases behind us.

You may have seen this morning that we put another FX-related matter behind us.

We put the FERC case behind us, et cetera.

I also think in terms of managing our leverage, if we sort of wind the clock forward into sort of a Basel IV type regime, it's a little bit uncertain as to how that may manifest itself in the timing.

It does feel some distance away yet.

And obviously, with national discretion, it's hard to know exactly how that will be applied.

But we feel we have a lot of levers available to us to manage through that.

Of course, Kathryn talked to you a little bit about AT1.

But more importantly, you see that we run a fairly significant-sized liquidity pool.

We certainly have flexibility and the time to manage that.

Obviously, the mix in that liquidity pool as well, between cash and government bonds, flexing that mix can also actually have an impact in a constructive way in terms of our stress test minimum requirement, as well as in some places even the ratio itself.

So at this stage, with everything we can see out and the stress test experience, we feel pretty comfortable with where we are.

It's something we will keep a very close eye on and are watching (inaudible).

Kathryn, do you want to cover AT1?

Yes.

So Corinne, in answer to your question regarding our current levels of AT1 and our plan for future issuance, we've also noticed the comments from some of our peers around their intentions in that area.

And you're right, we're currently running about 60 basis points of a buffer above the 2.3%, with the GBP 9 billion outstanding, obviously, having access to the market last year.

You also observed that there are some calls coming up for some of these securities, and then certainly there's some benefit in having flexibility around our redemption profile.

So I think we do anticipate staying at around about this buffer in terms of AT1 outstanding.

We do value, as I said in the remarks, the flexibility it does give us around some of the movements in both RWAs and foreign exchange.

And as you heard from Tushar, it also provides some benefits in terms of our leverage ratio.

So you should expect to see us being a measured but consistent issuer of AT1 over time in the market.

Your next question is from the line of Robert Smalley of UBS.

Thanks for doing this in accessible hours for those in the U.S. too.

Just to round out a little bit more on Corinne's question.

So when we look at the GBP 10 billion of MREL to do, does it -- for 2018, does it fairly well map what we did -- what you did last year in terms of senior Tier 2 and AT1, acknowledging the calls and replacement there?

And if it does, I guess the bigger swing factor is probably the Tier 2 more than the senior HoldCo.

Yes.

Kathryn, do you want to talk about MREL issuance?

And then I have another larger question after this.

Yes.

Rob, do you want to just ask your other question then?

We'll try and cover them both in one go.

So -- and when we look at your credit spreads, they're trading wide versus a number of your peers.

When talking to people in the market, they cite litigation risk, they cite Brexit as well as volatility in income because of market-related earnings.

On the other hand, you're able to return capital and you clearly have the regulators' blessing to do that.

So what is the -- what's the fixed income market missing here?

Because it seems like their perception is really skewed toward the litigation, Brexit, et cetera, side while you've gotten a green light from the regulators to return capital, which is a clear positive.

Yes.

Thanks, Robert.

So I think -- well, then Kathryn can talk about our MREL issuance and cover that question.

And Miray is here as well, who runs our Capital Markets Execution.

He's sort of in the markets with our paper regularly.

I'll ask him to talk to you about his view on our credit spread.

Yes.

So Robert, in relation to the anticipated profile of the GBP 10 billion of MREL issuance we have planned for this year, as I mentioned, you would have seen already we've done GBP 2.4 billion already in January, which is a good start to the year.

And last year, we accessed a range of currency tenors, and across the capital spectrum as well, so AT1, Tier 2 and senior, with meaningful amounts in the dollar market and also in sterling, and some in euros.

So I think what I would encourage you to think is that over the course of 2018, we'll probably have a similar diversification in terms of the types of security that will be issued.

I mentioned that we see value in AT1.

We do have Tier 2 outstanding and plans for Tier 2 and also senior debt.

So we will be thoughtful as we access the markets.

And I think we also mentioned in the early remarks that we have access to the markets already also in 2018 across secured formats and in a shorter-dated transaction from our operating company, so continuing to strategically diversify the investor base and the sources of funding we will take from the market in 2018.

Yes.

Rob, good to talk to you again.

I think you made the right points really because we're also asking our investors, and those are the 2, 3 things that always come up.

So really, what we're going to continue to do is to execute our strategy as we have talked about for a number of quarters, most importantly, this morning; engage with investors.

And hopefully, we'll come to see with Kathryn shortly and tell our story.

And we think our spreads will catch up with the rest of the market.

That's what we expect.

Your next question is from the line of Lee Street of Citigroup.

I've got 3. So firstly, on risk-weighted assets, and I'm not asking about Basel IV here.

But I just wanted to know what you see as the key risks regarding RWA inflation over the coming 3 years from any other types of regulatory change.

Secondly, as regards to the USD tax requirements, do you think that could force you to issue debt out of your U.S. business or U.S. entity?

And finally, on your holding company Tier 2 rating at Moody's currently at Baa3 neg outlook.

Obviously, if you were to get downgraded, it would remove your IG index eligibility and -- well, obviously, it could potentially (inaudible) [cost of] Tier 2 funding.

Is that a concern?

Are there any actions you can -- you are or you're looking to take there to try and guard against that risk?

That would be my 3 questions.

Okay.

Thanks, Lee.

Why don't I cover RWA inflation and ask Kathryn to talk a little bit about any debt out of the U.S. operations, and Miray can cover our Tier 2 eligibility.

In terms of RWA inflation, and excluding Basel IV as your question referenced, I don't see a lot of inflation on the horizon that's going to be (inaudible) explicit in terms of any significant rule book changes that are coming down the pipe.

We've got a fundamental review of the trading book.

Again, that will come in over time.

We've given our guidance for that, but I do think that will be quite manageable for us.

So there will be stuff that I think investors don't necessarily see, whether you're equity or debt investors.

There are, of course, refinements to underlying models as sort of the way of life in large banks.

We expect some of them can reduce, some of them could increase RWAs.

It sort of depends.

But by and large, I don't think there's anything significant I would reference out.

Kathryn, you want to talk about the U.S. [portion].

Yes.

So your question on the IHC and how it will be funded on a term basis.

We did also share some of the discussion in the market around the impact of the -- on how the [FBAs] fund themselves in the U.S., and whether there was any anticipation that they might do more self-funding.

And certainly, when we think about our future plan for the IHC, at this stage, we envisage that it will continue to receive its TLAC downstream from BB PLC.

It is our understanding that should it self-fund, it would not qualify as MREL.

So I guess, more broadly also, we made some comments, Tushar and Jes, this morning around our expectations for the group in terms of tax and the impact of these.

But we would anticipate no change in our plans, and the IHC will receive its TLAC on a downstream basis.

Sure.

Lee, so on ratings, I mean, obviously, these negative outlooks were put in place summer of 2016 for us and a number of U.K. peers.

Agencies typically take 12 to 24 months to resolve those, but Moody's also mentioned that the time around ring-fencing might be a time period to say more about this.

So we're watching those developments.

I think as we always say, I mean, we can only focus on what we can control, so 2 things.

Certainly, we have to continue to successfully execute our strategy.

For Moody's purposes, clearly, increasing our HoldCo issuance does help with their metrics, and that's what we are doing as we have made our plans known.

In terms of indices, you would know also, it's quite a complicated metric in terms of which index, which combinations of ratings.

But certainly, certain outcomes might mean that our HoldCo futures may not qualify for one or more indices.

Now we'll have to see.

There are a number of other G-SIFIs with similar ratings profiles.

Again, I think our credit story and what we've done and what we're executing, we'd like to think that is going to be key and we should be able to maintain our access to all parts of the capital stack.

The next question is from the line of Arnold Kakuda of Bloomberg.

Once again, I echo Rob's comment in terms of thanks for having this call in U.S. time.

And then my question -- a couple questions.

First is on the leverage ratio.

Your 4.9% is above your 4% anticipated requirement, and you have a peer in Europe whose constraint is a bit on leverage.

So just wondering if you had opportunities to kind of deploy your strength in the leverage ratio to maybe take market share in certain areas.

Second question is on your 2018 MREL funding plan.

It seems like it's a little bit higher than what you had mentioned maybe 3 months ago.

I think you were targeting GBP 8 billion 3 months ago.

So what really changed in the past 3 months?

Is it -- you had a nudge up in your Pillar 2A requirement?

Or is it also maybe considering the higher equity returns maybe that you're planning to do?

Is that part of it?

And lastly, my third question is on liquidity.

Your LCR levels, 154% seems very robust.

But is it going to remain very elevated due to ring-fencing requirements where maybe the flow of capital -- flow of funds maybe aren't as seamless as it was before?

And if in case you do have excess liquidity, can some of that maybe perhaps be deployed into liability management exercises in terms of -- there was also a comment on the equity call where you mentioned the retirement of expensive debt?

Yes.

Thanks, Arnold.

And you're welcome in terms of timing this call.

Glad it's useful to have it done in afternoon hours in Europe.

I'll answer the question on leverage and I'll hand over to Kathryn to cover the questions on MREL and liquidity coverage ratio.

In terms of leverage, yes, we feel at the moment less leverage constrained than we have done for a while, notwithstanding the earlier question from Corinne.

And we -- it's something we pay a lot of attention to monitor carefully and closely.

We do feel we have some flexibility with leverage.

And we have talked about, in late 2017, of deploying some of that leverage in our markets business, where returns are very attractive and actually quite stable.

The financing business is, particularly, whether it's in prime or fixed income financing or related activities, and more annuity-like rather than the more typical nature of just sales and trading revenues, which are somewhat driven just by client activity, which can ebb and flow as markets dictate.

So we do like that, and we have deployed some of that leverage that's also within our leverage ratio.

And where we continue to see opportunities, we will do that.

But we'll do that with an eye to making sure that we're absolutely at the right place in terms of leverage ratio requirements, anticipating to the extent there are any changes on the horizon that we adapt well in advance of that.

But by and large, the spirit of your question is, would we deploy leverage to improve earnings?

And the answer is yes, absolutely, on a very prudent basis.

Kathryn?

Yes.

So you're absolutely correct.

The guidance that we've given previously was around about GBP 10 billion.

But I think you saw that we raised GBP 11.5 billion in the market in 2017, and quite a similar quantum the prior year in 2016.

And the GBP 8 billion was essentially an average number over several years to meet our end-state MREL requirement.

So what we thought would be helpful is just to provide near-term guidance.

So the GBP 10 billion is our thinking for this year.

And it's certainly our intention, since we got off to a good start in January raising that GBP 2.5 billion, to try and access the markets very thoughtfully, as I said, across the range of tenors, currency and product, and take advantage of the benign market environment.

There's been a little bit of volatility, but clearly at reasonably good levels and a decent amount (inaudible).

So there's nothing else driving it in terms of changes.

It was a 10 basis point change, I think, in Pillar 2A, so that's -- our thinking in terms of our overall 29.1% MREL requirement is exactly the same.

It's nudged up a little bit, but we did want to provide more near-term guidance rather than the GBP 8 billion, which was an average.

And in terms of liquidity, it's a good question on the LCR ratio.

We have finished last year with a liquidity pool of about GBP 220 billion.

And our LCR ratio has nudged up to 154%, and we're actually very pleased holding this level of good liquidity.

It's actually pretty inexpensive funding for us.

We've grown deposits in the U.K. at a good rate, at pretty competitive levels.

We've taken advantage of the TFS scheme, as you know, last year.

And so this sort of LCR is actually broadly in line with many of our peers, also, at quite high levels.

[It's also] to provide, as you commented, an extra degree of conservatism and a strong position as we implement ring-fencing, but I wouldn't encourage you to think it's going to change dramatically.

We're quite pleased being a strongly capitalized, well-funded and a liquid balance sheet at the moment.

(Operator Instructions) And your next question comes from the line of Ebrahim Saeed of Deutsche Bank.

Two questions, if I may.

My first question is, I appreciate your commentary around maintaining some flexibility on the AT1, sort of the buffer you hold.

In keeping with that, you have some dollar redemptions coming up.

And I just wondered with respect to your CET1 guidance that you communicated to the market, do you already factor in any potential FX losses that may come through from this?

I appreciate it's more of a confirmation that, that would have been taken into consideration already.

And then the second question, Lee already asked it, but if I may pose it slightly differently.

With respect to the Tier 2 in particular, is this a high -- in order of priority, is it a very high priority or not a high priority to maintain the IG rating on that Tier 2 in particular, given that your -- I guess, your issuance requirements in Tier 2 are not that significant?

Just if I could get a sense of how management is thinking about that in terms of priority.

Yes.

Thanks, Ebrahim.

Why don't I ask Kathryn to cover the thinking around AT1 and FX-related matters, and I'll ask Miray to comment further on the Tier 2?

Yes.

So in relation to how we think about the potential impact to our capital ratio, I guess the first comment I'll make is that we're very pleased to have finished last year at 13.3%, which is comfortably within our target end-state range of around 13%.

And we've been very pleased to be able to resume the 6.5p dividend that we had 2 years ago.

So when we think about the capital trajectory over the next few years, the dividend is clearly a medium, long-term policy part of our capital management framework for the group.

We've had to manage FX risk on the redemption of some of the historic retail preferred shares.

There's some other equity account instruments that may be coming due over the next few years, both AT1 and obviously one final retail preferred.

So we do take into consideration potential calls of these instruments.

We're not allowed to comment on any of the securities and give any intention as to whether or not we will call them, but we will have concerted assumptions in our plans on this and also other elements that may impact capital such as conduct and litigation.

And we've discussed previously some of the much more forward-looking but some of the Basel IV developments, which are some way out into the future.

So we do take all of this into consideration and in our confidence in the capital position we have now and our forward plans around the dividend.

Sure.

With regards to ratings, I think as Kathryn mentioned in her speech, ratings have been and are strategically important to us.

When we look at -- we don't really single out between security ratings or tranche ratings.

I think they're, as a whole, important.

And as I mentioned before, I think we will continue to execute our strategy, tell our story to both rating agencies and the investors.

And we will try to control what we can as a management team.

The next question comes from the line of [Joe Hopkins] of Morgan Stanley.

I have 2 questions.

My first question follows on from the comments made on this morning's call about taking out expensive debt.

Can you please elaborate on these plans?

And secondly, linked to this, how would you look at your legacy capital instruments as we approach 2021, particularly those which may cease to count as regulatory capital if CRR II is introduced?

Why don't I ask -- thanks, Joe.

Kathryn, why don't you cover the expensive debt and the plan there, and Miray can comment to Joe on legacy instruments.

Yes.

So I guess, Joe, over the last few years, we have undertaken various liability management exercises to optimize our liability structure and also help with the migration to the holding company and the single-point-of-entry model that we'll be adopting.

So we have done this, as a matter of course, thoughtfully with consideration to rating agencies, to our debt investors and obviously, thinking also about the overall cost for the group.

So in the comments made on the equity call, we do have a number of expensive instruments from the financial crisis, which has been discussed previously with both equity investors and fixed income investors, and some of them are callable next year.

And as I mentioned in my earlier answer, we also have a final retail preferred that's got -- it's callable every quarter and a relatively high coupon.

So we can't be specific around any particular security, but there are just several that are either callable in the next few years, and we will look to continue with the strategy we've done over the last few years of being thoughtful in the market, thinking about all stakeholders, but also optimizing where we can the cost of our liabilities.

Sure.

Joe, first of all, good to have you on the call.

We -- I'm looking at our list of legacy securities.

They are about 40 strong.

And my team and I, we run the rule over them periodically to really look at, are they doing what they were designed to do from a capital MREL perspective?

And if not, even for funding?

Where do they stand in terms of changing regulation, grandfathering, (inaudible) or not.

And then we run this analysis to see if there's anything available out there in terms of ways to retire this.

So I think that's an ongoing process.

Certainly, some of them, I think, will lose their eligibility.

Certainly, all of them will lose their MREL eligibility by 1/1/22.

Some of them will maintain a formal reg cap benefit for us.

And as you know, we're also following the debate between Commission and Parliament.

So I think we're going to have to see where that whole thing ends up.

In terms of MREL consultation, may have a few things to say about that as well.

So it's really an evolving scene, as you very well know, but we keep a very dynamic look at those to see what we might need to do or look to do in the future.

Your final question for today's call is from Corinne Cunningham of Autonomous.

Sneaking a quick one at the end.

It's about the LCR, actually.

Most of that -- the question I had has been answered, but just wondered what would the LCR ratio come in at if you netted out the FLS TFS and cash out on the other side.

Well, thanks for your sneaky question there, Corinne.

In terms of the LCR, if we netted off some of that -- I didn't bring a calculator with me.

We could probably calculate it quickly off the top of my head.

Should we -- I don't think it would be that significant, I guess, is where I'm going.

I'm just looking at Kathryn.

I don't have the number off the top of my head, Corinne, but I don't think it will be very significant.

And I think if we did net it down, I don't think you'll see a material reduction in the LCR.

Maybe even Kathryn and Miray are probably meeting you guys in person you can get into that in a little more detail.

Absolutely.

Well, thanks, everybody.

I hope you found this call helpful.

I'm sure Kathryn and Miray will look forward to seeing you on the road, and I look forward to speaking to you all next time.

Thank you.

Ladies and gentlemen, thank you for joining the Barclays Full Year 2017 Results Fixed Income Conference Call.

This call has come to a close, and you can now disconnect your lines.