Barclays PLC (BCS) 2018 Q4 法說會逐字稿

Welcome to the Barclays Full Year 2018 Results Fixed Income Conference Call.

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

Good afternoon, everyone, and welcome to the Fixed Income Investor Call for our Full Year 2018 Results.

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

Let me start with Slide 3 and make a few comments on our full year performance before handing over to Kathryn.

Our 2018 results demonstrate the progress we are making towards achieving our group financial targets.

In particular, our RoTE targets of greater than 9% and greater than 10% in 2019 and 2020, respectively.

We reported an 8.5% group RoTE, excluding litigation and conduct.

This improved performance on prior yield was driven by year-on-year increase in PBT of 20% to GBP 5.7 billion, with lower costs driving positive cost-to-income jaws.

Impairment was 37% lower in 2018 at GBP 1.5 billion, reflecting an update for consensus-based macroeconomic forecasts in the U.S. and U.K. during the year and the prudent management of credit risk.

U.K. economic environment continued to be benign, with delinquency rates remaining at low levels in U.K. Cards.

Despite this, in Q4, we took GBP 150 million specific impairment charge to reflect the impact of the economic uncertainty in the U.K. In addition, as we have said previously, our bias remains to grow the secured lending book over the unsecured lending in the U.K.

With its economic backdrop and conservative positioning, Barclays U.K. reported an RoTE, excluding litigation and conduct, of 16.7%, underpinned by prudent mortgage balance growth of GBP 4.4 billion year-on-year and continued focus on our digital agenda, growing digitally active customers to 10.8 million at year-end.

The RoTE for Barclays International nearly doubled to 8.7% in 2018, within which, the CIB RoTE increased 490 basis points to 7.1%.

We acknowledge that we have work to do to further improve the CIB returns, but the actions we have taken over the last 5 quarters through the talent, technology and capital redeployment initiative we have undertaken have enabled us to improve market share.

This is evidenced by the 50 basis points of market share growth we attained across our markets products, which led to a year-on-year income print which compared favorably to our peers.

Consumer, Cards and Payments printed a very strong 17.3% RoTE for 2018.

US Card net receivables increased 4% on an underlying basis year-on-year to $26.9 billion.

And we have been particularly pleased by the growth in our American Airlines and JetBlue prime partnership balances, which have seen double-digit growth.

Turning now to Slide 4. One of the key achievements of Barclays in 2018 was the successful stand-up of our U.K. ring-fenced bank on 1st of April.

We were the first U.K. bank to execute on our plans 9 months ahead of the regulatory deadline, which was a testament to our strong execution capabilities.

Having completed a restructuring of the bank and resolved significant legacy litigation and conduct matters in the first quarter of the year, the bank was well positioned to deliver improved operating performance and retained more of the significant capital the bank generates from profits, 140 basis points in 2018.

We maintained our group financial targets, which are outlined on this slide.

And with that, I'll hand you over to Kathryn, who will provide a comprehensive update on our capital, funding and liquidity positions as well as other areas of particular interest.

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

This improved financial performance we delivered in 2018, with profits up 20%, was achieved whilst maintaining very robust balance sheet metrics.

We prudently managed the group's capital position, ending the year with a CET1 ratio of 13.2%, at our target of around 13%.

We continued to make strong progress towards our expected 1st of January 2022 MREL requirement, issuing over GBP 12 billion of MREL-eligible debt from our holding company across a variety of currencies and tenors over the course of the year.

This resulted in a HoldCo MREL ratio of 28.1% at the year-end, comfortably above our 2019 and 2020 requirements.

And finally, our liquidity position remains a key credit strength for Barclays, with a year-end LCR of 169% and a liquidity pool of GBP 227 billion, representing approximately 20% of the group's total balance sheet.

I'll go into each of these areas in more detail shortly.

But before I do so, I wanted to touch on one of the 2018 highlights, our performance in the Bank of England and Fed stress tests.

We passed our first public CCAR for the U.S. IHC at the end of June on both a quantitative and qualitative basis, which was testament to the careful capital planning for this entity since it was established in 2016.

Also reassuringly, our 2018 Bank of England stress test, CET1 ratio drawdown was 100 basis points lower than last year.

This is evidence of the derisking the bank has achieved in recent years and the benefit of having resolved significant legacy litigation and conduct issues.

The Bank of England stress test results also highlight our resilience to a severe adverse stress scenario across our key markets.

And it's further evidence that we are well positioned for Brexit and other macro stresses should they occur.

The Bank of England highlighted that the 2018 U.K. stress scenario was more severe than their disruptive and disorderly Brexit expectations.

Our conservative credit risk positioning and these robust capital, funding and liquidity positions provide reassurance that we have the resilience to withstand U.K., U.S. and global economic shocks.

I will begin by looking at the group's capital position, which you can see on Slide 7. At the end of 2013, the group's CET1 ratio stood at 9.3%.

During the 4-year period to the end of 2017, Barclays' CET1 ratio accreted 400 basis points to 13.3%, achieving our target of around 13%.

This afforded us welcome capital flexibility in 2018.

As a result, our group CET1 ratio remained broadly stable over the year, ending at 13.2%.

There were, however, many moving parts during the year, including the resolution of a number of headwinds.

Importantly, the group is highly capital generative.

We generated GBP 4.2 billion or 140 basis points of underlying profit.

This profit generation was partially offset by GBP 2.1 billion or 71 basis point impact as we resolved significant legacy litigation and conduct headwinds.

This included the settlement of the U.S. DOJ RMBS litigation for $2 billion in Q1 of 2018, which we'd always said was the most material litigation matter to put behind us.

We would expect these headwinds to be substantially reduced going forward.

The group's profit generation enabled us to pay a total dividend of 6.5p for 2018 and redeem legacy capital instruments, a combined GBP 2.2 billion capital impact from these actions.

These redemptions included the $2.65 billion 8 1/8% legacy retail preference shares and the call of our first HoldCo $2 billion dollar 8 1/4% AT1 security, which will result in an ongoing earnings benefit, albeit with an upfront impact of 33 basis points of CET1 as these instruments were held on the balance sheet at historic FX rates.

The updated capital management framework we outlined today acknowledges our commitment to maintaining an appropriate balance between maintaining a strong capital position for bondholders, total cash return to shareholders and investment in the business.

Turning now to Slide 8, where we recap how we think about our capital requirements and why 13% is the appropriate CET1 ratio for Barclays.

As you would have heard from us before, we manage our CET1 ratio considering a number of factors.

First and foremost, for our bondholders, we need sufficient headroom above the distribution restrictions minimum.

With our MDR at 11.7%, this currently affords us a headroom of 150 basis points to our year-end CET1 ratio of 13.2%.

The second factor is the ability to pass stress tests, both Bank of England and our own internal stress tests.

In the 2018 Bank of England stress test, Barclays' drawdown was 440 basis points to a low point of 8.9%.

This afforded us headroom of 100 basis points to the 7.9% hurdle rate, a comfortable pass.

The 440 basis points drawdown included around 40 basis points related to the now settled U.S. RMBS litigation.

Excluding that charge, the drawdown was 100 basis points smaller than the drawdown in the prior year's test.

This drawdown was also lower than our major U.K. peers.

This reduced sensitivity to stress demonstrates the derisking activities undertaken in recent years and the significantly reduced legacy litigation and conduct headwinds.

When we also compare our CET1 ratio target against that of our U.S. and European GCIB peers, at 13.2% our CET1 ratio is in line with U.S. peers' average of 13.1% and above the European peers' average of 12.2%.

The Bank of England comments about the U.K. banking system being resilient to deep simultaneous recessions in the U.K. and broader global economy as well as the permission we received to redeem the preference shares and AT1 in December should provide additional reassurance to investors.

Finally, we also consider, of course, the PRA buffer, which is informed by the Bank of England stress test results when assessing our CET1 ratio target.

So in summary, considering these factors, we believe that around 13% is the appropriate CET1 ratio for Barclays both from a risk perspective and enabling us to execute on our strategy.

A brief comment now on leverage, which we continue to see as a backstop capital measure.

At year-end, the U.K. leverage ratio was 5.1%, unchanged from year-end 2017 and well in excess of the 4% minimum U.K. requirement applicable from the beginning of this year.

This represents a surplus of around 150 basis points to the 2018 Bank of England stress test hurdle rate of 3.6%.

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

And of course, the year-end ratio remains the starting point for stress tests.

We will closely watch how the PRA looks to implement the CRR II standard on leverage.

However, based on what we can see, we still view the risk-based RWA measure as the primary capital measure for the group.

As we have said previously, the CET1 ratio for the group of around 13% accommodates the capital requirements of all of our key legal entities.

As you can see on Slide 9, at year-end, Barclays' Bank U.K. PLC or BBUKPLC and Barclays Bank PLC or BBPLC printed transitional CET1 ratios of 14.2% and 13.5%, respectively.

Consistent with the group, we view the risk-based RWA measures as a binding constraint for both legal entities.

And while they're not currently subject to leverage requirements, the legal entities do have 0 leverage ratio disclosure obligations, which were 4.9% and 4% for BBUK and BBPLC, respectively, at year-end.

For the U.S. IHC, capital continues to be regulated on a standalone basis by the Fed, and the required levels of capital are largely driven by the CCAR stress test outcomes.

Management of legal entity regulatory requirements has been fully embedded in our capital and leverage planning for some time.

Subject to appropriate governance, we expect excess capital in the respective legal entities to be upstream to the holding company, where the group will decide how and where best to deploy it.

Before moving on to MREL, I wanted to remind you of how we think about the other elements of the CRD IV capital structure, in particular, AT1 and Tier 2, which you can see on Slide 10.

As you know, we are incentivized to hold at least 2.4% of RWAs in AT1 form, reflecting the current group Pillar I and Pillar 2A capital requirements allowable in this form.

However, as we have said before, we intend to maintain headroom to the 2.4% to accommodate variability in both RWAs and FX, including under stress.

AT1 capital also has a secondary benefit in contributing to our leverage ratio.

When we consider these factors, we believe it is appropriate to maintain the AT1 component around the current level.

We also consider our core profile when assessing the appropriate level of AT1.

And as you will be aware, whilst we cannot make any specific comments on our intention to call AT1s or otherwise ahead of time, I thought it would be helpful for us to outline the factors we do consider when making these decisions.

Our existing call policy still stands, in that these decisions will be made on a case-by-case basis considering the economics in the round at the time.

These economic factors include: direct earnings implications around the refinancing, considering the relative cost of issuing AT1 at prevailing market levels; the impact on our broader wholesale funding, including cost and capacity; and the day 1 capital impact on redemption of non-sterling AT1s due to the FX impact on redemption from rebasing the value of the bond to current FX rates.

In addition, we consider our forecast capital position, and of course, we require PRA approval to redeem any capital instrument.

Considering now our Tier 2 securities, we are incentivized to hold at least 3.2% of RWAs in this form.

And again, we intend to maintain headroom to the 3.2% level.

While we are comfortably above that ratio at 3.7% on a transitional basis, GBP 5 billion or over 40% of this Tier 2 is OpCo-issued debt.

Hence you would expect us to continue to issue HoldCo Tier 2 as OpCo Tier 2 reduces over time.

There has been much discussion on legacy OpCo Tier 1 and Tier 2 capital resulting in an MREL add-on for issuers should it be outstanding post 1st of January 2022.

As we highlighted previously, our legacy capital tail, post 2022, is modest and short-dated, with nearly 95% of that tail maturing by the end of 2022.

We therefore do not view this as a concern for Barclays.

Finally, we note the conclusion of the EU banking reform package, and the future capital eligibility provisions appear manageable for our legacy OpCo stack.

As you can see on Slide 11, we remained active in the debt capital markets throughout 2018, issuing GBP 12.2 billion equivalent from the holding company, similar to the volumes of the last 2 years.

GBP 10.2 billion of that was is in senior debt form, with GBP 1.9 billion in AT1.

This compares to GBP 2.4 billion of maturities and redemptions from the HoldCo during the year.

We were pleased with the currency diversification of our HoldCo issuance in 2018 as we issued around 14% in non-G3 currencies.

We successfully issued public benchmark transactions in Australian dollars, Japanese yen and Swiss francs.

In addition, we executed private placements in Swedish krona and Norwegian krona.

We value this currency diversification and the ability to attract new investors.

And we expect to continue issuing in these currencies in the future, while also considering other currencies.

On Slide 12, you can see the strong progress we have made over recent years in our MREL issuance.

At the end of 2018, our MREL ratio was 28.1% on a HoldCo basis and 30.5% on a transitional basis, in excess of the 2019 and 2020 interim requirements as OpCo legacy capital continues to qualify until 2022.

We currently expect the group 1st of January 2022 requirement of 30% of RWAs to be our binding constraint.

We expect to hold a prudent headroom above this minimum requirement and remain confident in being able to achieve our MREL targets.

With that in mind, we are now expecting around GBP 8 billion equivalent of gross HoldCo issuance in 2019.

Senior debt will naturally account for the largest share.

But as I mentioned previously, we also expect to be a regular issuer of both AT1 and Tier 2.

As ever, the timing of our planned issuance will be subject to market conditions and investor appetite.

As you can also see on this slide, we have approximately GBP 11.6 billion of HoldCo and OpCo debt maturing, all callable in 2019.

Finally, as we've said many times, we expect our term debt with tenors of 3 years and out to be issued from the holding company.

This is driven by the single point of entry funding model being the preferred resolution approach of the PRA.

And therefore, HoldCo funding is a requirement to qualify as MREL.

Term debt with tenors of 3 years and in are likely to be issued at the operating companies on a more opportunistic basis, given the very diverse funding profiles of our operating companies, which you can see on Slide 13.

To put the scale of the HoldCo MREL funding into context, at GBP 49 billion, it represents only 8% of our total group funding sources.

This GBP 49 billion is then predominantly downstreamed to BBUKPLC and BBPLC, commensurate with their RWAs and in line with the requirements set by the Bank of England.

The downstreamed MREL remains a small proportion of the overall legal entity funding.

The funding sources of these 2 entities are both very well diversified, including strong and stable deposit funding.

While deposit funding will remain the mainstay of BBUK's funding base, we have an established covered bond program, having successfully issued a GBP 1.25 billion transaction in 2018.

We also have active Gracechurch cards and our RMBS securitization programs and completed a $650 million issue from the cards program in 2018.

We expect to remain active in these programs and to supplement them with short-term operational funding when required.

Similarly, BBPLC's funding base comprises a diverse mix of deposits from the corporate, private banking and U.S. consumer businesses.

The entity also benefits from the residual outstanding BBPLC issued senior debt and capital.

Funding is also provided by the Dryrock card securitization program, for which we issued $650 million last year, alongside very well established programs for issuing structured notes, shorter-dated senior transactions, CD and CP for operational funding purposes.

It is important to highlight that late last year, we updated the documentation associated with our internal MREL funding arrangements to downstream HoldCo debt on a subordinated basis to the legal entities.

This enabled us to be compliant with the Bank of England's internal MREL requirements by the 1st of January 2019 deadline.

Turning now to liquidity.

Slide 14 shows the growth in the group liquidity pool to GBP 227 billion by the end of 2018, representing more than 20% of the group's total balance sheet, and its composition remains conservative.

This translates into a Pillar I LCR of 169% and represents a surplus of GBP 90 billion to the 100% requirement, comfortably above the peer average of 138%.

As I've said before, the quality and quantum of our liquidity are inexpensive credit strength.

We're reminded to run at these high levels of liquidity during this period of macroeconomic and political uncertainty.

The GBP 227 billion pool, split between BBUKPLC and BBPLC, and their respective pools are sized at GBP 45 billion and GBP 182 billion.

These contribute to an LCR for BBUKPLC of 164% and a domestic liquidity group LCR for BBPLC of 147%.

You can also see on this slide that the reporting of customer deposits within our overall group funding profile and the resulting loan-to-deposit ratio of 83% has remained very stable.

We've continued to reduce our reliance on short-term wholesale funding with only GBP 47 billion or 30% maturing in less than 1 year.

As a result, the group liquidity pool at year-end exceeded wholesale funding maturing in less than 1 year by GBP 180 billion.

Our preparations to ensure continuity of business with European clients in the event of Brexit at the end of March are also well advanced, as we have summarized on Slide 15.

Barclays Bank Ireland, or BBI, in its expanded form, is the vehicle which will provide passported activity for EEA-domiciled clients post-Brexit.

In October last year, we received Central Bank of Ireland's approval to proceed with our expansion plans.

In its expanded form, BBI will be regulated by both the Central Bank of Ireland and, given its size, the ECB under the single supervisory mechanism.

We've been engaging with our EEA-domiciled clients on our Brexit plan since Q2 of last year, including plans to establish a relationship with BBI.

All new business from these clients will be conducted from BBI from the end of March.

And while we're assuming that some balance sheet related to these clients may be retained in BBPLC, many clients have expressed the intention to consolidate their counterparty relationship in BBI.

Migration of client contracts and positions will be executed using a combination of consensual negotiations and a Part VII legal transfer.

This is similar to the scheme we used for the creation of the U.K. ring-fenced bank in April last year.

At the end of January, we received High Court approval to execute the transfer of business to BBI under a Part VII court order.

This will enable us to duplicate or transfer contracts currently in place with BBPLC to BBI rather than requiring clients to sign new documentation.

The process will take effect over a period of just under 6 months from the 1st of February 2019 with the transfers being staggered over a series of dates so as to minimize disruption to EEA customers, clients and counterparties.

As part of our plans, all of the existing EU branch network and associated divisions that have historically rolled up under BBPLC are being transferred to roll up under BBI, but the entity remains a wholly-owned subsidiary of BBPLC.

We have completed the migration of 3 branches to date, with the remaining 4 branches due to be migrated shortly.

Following these migrations, BBI will consist principally of the current corporate, investment and private banking activity across Europe and the Barclaycard consumer business in Germany.

The credit ratings of BBI are aligned to BBPLC at A+ with Fitch and A with Standard & Poor's.

On this slide, we've also updated the illustrative pro forma financials of BBI in its expanded form, which we have refined following the client outreach we have conducted.

To give you a sense of size of the expanded entity, the pro forma financial information is shown as at 2018 year-end, taking EEA-domiciled client positions at the time and assumes our current estimate of migrated business.

This would have resulted in an end state external balance sheet of just under GBP 160 billion, less than 15% of total group assets.

Pro forma BBI revenue for 2018 would have been less than 10% of the group.

BBI shareholders' equity would have been around GBP 5 billion.

And we expect BBI's capital ratios will be broadly in line with those of BBPLC and the group.

The funded balance sheet would have been GBP 34 billion.

The balance sheet will be funded by a diverse mix of Corporate, Private Bank and Barclaycard customer deposits, a mix of short- and long-term sources of wholesale funds and internal MREL and equity provided by the group.

These funding sources will also ensure the entity has strong liquidity metrics.

With just over a month until the U.K. is due to leave the European Union on the 29th of March, we expect to be fully operational ahead of this time.

Although, of course, we continue to monitor the progress of the political negotiations, which may result in changes to the current timelines and allow further time for our clients and the industry to restructure their operations.

Before I conclude, I will quickly summarize the current key ratings of the group on Slide 16.

Standard & Poor's assigned a long-term rating to Barclays PLC of BBB.

BBUKPLC and BBPLC, both have A ratings, which reflects the core status of both entities under S&P's methodology, as each of these entities have stable outlooks.

Fitch assigns a long-term rating to Barclays PLC of A. BBUKPLC and BBPLC were upgraded by 1 notch in December to A+ due to there being sufficient preplaced MREL within the entities to receive 1 notch of qualifying junior debt.

As with S&P, each of these entities have stable outlooks.

Finally, Moody's assigns a long-term rating of Baa3 to Barclays PLC.

BBUKPLC is rated A1, and BBPLC is rated A2, with each of these entities again on stable outlooks.

As we've said before, ratings are strategically important to us.

They're a significant focus of senior management.

And as you would expect, we have a regular and close engagement with each of the rating agencies.

We continue to focus on the successful execution of our strategy to strengthen our credit proposition and therefore improve our ratings profile over time.

In terms of the implications of Brexit on our ratings, each of the rating agencies has signaled that an orderly Brexit is assumed in the current ratings.

However, even under a no-deal scenario, our geographical diversification should provide some mitigation for the group's ratings from U.K. macro-driven downwards ratings pressure.

So to conclude, my treasury priorities for 2019 are split into 2 key areas.

The first is to maintain the robustness of the group's balance sheet, given the uncertain political and economic backdrop.

This includes managing the group's capital position around our target CET1 ratio of 13%, continuing to build our MREL funding position with a plan to issue around GBP 8 billion equivalent from the HoldCo in 2019 and running a prudent liquidity position.

The second is to support the group in the achievement of its financial targets.

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 up the call to questions.

Operator, please go ahead.

(Operator Instructions) Our first question today comes from the line of Paul Fenner of Societe Generale.

I've already bugged James this morning, but I've got a remaining question, which I didn't ask him.

And it's around AT1 calls.

Sorry, I can hear you moan.

The -- what I think I'd like to know is just a reminder of how the mechanics of seeking approval work in the sense of the time line and whether you need to get something back on a bond-by-bond basis?

Just a little bit of color around that would be helpful.

The second is, we're going into a period that could be fairly tumultuous, right?

I mean, if we go deal or no deal, the market could get a bit messy in the near term, and it could last for a while.

I guess my question is, what would the regulators' attitude be to you calling all of the bonds, the ones that are coming up for call in September, without prefinancing or without any immediate intention of refinancing because the market was closed or it was just too expensive?

Just to get a feeling for how you think they would feel about you losing whatever it is, 150 basis points or so of total Tier 1?

And then the third question comes to the point where -- you were trying to make and I -- about being holistic in your approach to the economics of these calls.

How bad does the market need to be for you to think, actually, it would be sending the wrong signal to be calling these bonds?

So at some stage, you need to -- there must be a MAC clause that you can draw on.

Just a little bit of color around this, is it 150 basis points?

Or whatever you can tell us around that would be really helpful.

Thanks, Paul.

Kathryn, why don't you take that one?

I'll kick off.

And yes, Paul, I think we had somewhat anticipated we'd get this question.

And so I guess, in the remarks, I reminded you guys how we think about these call decisions, which I would highlight probably 5 months or 6 months or so away, and that we take a very thoughtful approach to these call decisions.

We're obviously not making any comment now.

But our policy really hasn't changed much in terms of thinking about the securities, on the economics on a case-by-case basis, the impact on our broader liability structure.

We also have FX and driven day 1 capital impacts.

And we want to also think about having a prudent capital position.

And linked to that, also, is having some thought around our future capital trajectory.

And in terms of commenting about the regulator, I don't think it's appropriate to go into details of conversations with the regulator.

But you'll be more than aware that we do need regulatory approval for the call of these securities.

And you've seen what we've done historically in terms of calling securities.

And obviously, also, you've seen the approval we were given by the PRA for calling the preference shares at the end of last year, which had the day 1 capital hit.

I would just say that I think the regulator would take a thoughtful approach, but it's probably not sensible to get into the details of those discussions.

In terms of the preparedness and potential reaction to a period of heightened market volatility, as you've seen in our numbers today, our balance sheet remains incredibly strong, both in terms of capital metrics, liquidity metrics, the funding requirements.

So I think we are in a very good position in terms of potential market volatility.

And so again, it's probably a little bit premature to potentially anticipate what might happen should there be a dramatic market move in terms of any response by the regulator.

But I think you've seen probably all the U.K. banks are in a pretty good position.

And from our perspective, we've been very happy to grow our liquidity position to the LCR 169% and have a strong liquidity pool and similarly, with a strong capital ratio at 13.2% at the end of the year.

So that probably covers, I think, most of the questions in terms of what we can say sitting where we are now.

The only thing I'd add to Kathryn's point is, obviously, the Bank of England ran a kind of a hard Brexit stress as part of their annual stress testing last year to, I guess, make sure they were fully informed of how well banks were capitalized, both CET1, total capital, leverage, et cetera.

So they probably already have a good sense.

And you can see from their commentary that they felt reasonably comfortable with the U.K. sector in terms of Barclays.

I guess the one thing that would be helpful to know, do you -- does the Bank of England and the PRA, do they agree a glide path?

So in your regular communications with them, is it a glide path to capital during which you will discuss taking out certain securities?

Or is it like a more bond-by-bond thing that you need to get an email saying, yes, you can take this one out.

Yes.

Look, we have a -- what we call a close and continuous dialogue.

So it's very much a bilateral discussion.

Ultimately, because these are capital instruments, you do need approval specifically for the instrument.

But these are some things that we, Kathryn and team would -- and even myself, would be in very regular dialogue throughout the year.

But if you just wondered whether it's a sort of, you can spend this much capital or you can retire this much capital, it's really -- the application is ultimately instrument-by-instrument.

The next question comes from Robert Smalley of UBS.

I had a couple of questions.

First one on capital.

I think you were asked and just some -- for some clarity in the earlier call about the charge to Head Office, how it was GBP 300 million plus more.

And I think the answer was that, it -- that will go down once the legacy funding instruments drop out.

Would that be this year?

Would that be over the course of time?

Are all of the legacy instruments kind of housed in Head Office that way?

That's my first question.

Secondly, and this might be a little too simplistic.

But with the excess capital stress test result and excess -- and outsized liquidity you have, you still decided to take GBP 150 million charge for U.K. economic uncertainty.

How come?

And then I also wanted to ask just in terms of credit card loan loss provision, that went up a lot.

And what was that tracking?

Thanks, Robert.

So why don't I take them.

And Kathryn or Miray, if you want to add to them, please do so.

In terms of the P&L in Head Office, you're right that the legacy funding instruments that we have are allocated to them.

We actually had -- I guess the most significant one -- well, one of the most significant ones is actually being retired, which is the U.S. dollar retail preference shares that we called in the fourth quarter.

Just as an accounting matter, if you're interested in that, that's -- was equity accounted, so it doesn't flow through the revenue line or income line, but used to flow through what's called the noncontrolling interest line.

But obviously, it's not there anymore.

The next most significant one, the reserve capital instruments, which are sort of [crisis or] legacy Tier 1 instruments.

They are due for call in, I think, July of this year.

So obviously, we can't -- let you know whether we'll call them or not, but we will probably behave very economically.

So hopefully there are no trade secrets I've just given out there.

And they're probably the most significant.

Now -- so there are the other ones that are due for call to come out later on in the year, the call date -- sorry, not later on this year, in subsequent years, so -- and are less significant.

Of the GBP 90 million or so that goes through the income line, sort of 2/3 of that is covered by these RCIs that are due to be called in summer.

The second question on the impairment charge, I mean, here this is, unfortunately, a little bit techy because it's the new accounting standard that we have, IFRS 9. What we have to do with the IFRS 9 is take a view of the future economic environment that we may operate in and take lifetime expected losses for assets that are sort of categorized in Stage 2 and beyond, across that lifetime.

So I guess where I'm going with this is, we need to have a view on the U.K. economic outlook.

And the way we do that is we have a baseline view, which we source from published consensus, economic -- economists that publish.

And then we derive from there an upside -- 2 upside scenarios and 2 downside scenarios and run a weighted average.

The challenge we had at year-end was that in the U.K., particularly, because of the complexity of the Brexit negotiations, and you recall, the important vote, the meaningful vote in Parliament that was due to take place before Christmas was canceled by the prime minister.

And so -- there was a very stale consensus when we looked at -- where economists were trying to look at the future.

And so we took a management view that we felt that the downside risks in the U.K. weren't being reflected in that sort of economic forecast.

It turns out that since the turn of the year, for example, the Bank of England and various publishing economists now have downgraded the outlook for the U.K. So the provision was really to capture that.

You may recall earlier in 2018, in the U.S., we actually saw publishing economists upgrade the outlook for the United States, and that resulted in provision releases.

So this is, in some ways, the reverse of that in the U.K. Now it is just a forecast.

If the economy turns out to be better than forecasted, obviously, we're overprovided.

If the economy turns out to be worse than where forecast, it turns out will be underprovided.

So there will be sort of an implied versus actual true-up, as we go along.

And that's just how sort of the new accounting standard will work.

The final question on credit cards.

I think it was about the U.S. card impairments.

Yes, and the fourth quarter is always going to be the largest impairment quarter.

So it will be the same in 2019, 2020 et cetera.

And the reason for that is in the U.S., particularly, the spend season is seasonally high in the fourth quarter due to the Thanksgiving and Christmas period.

So card balances sort of climb up as does transactional revenues, in fact.

And usually, what happens is balances [stop,] then decline in the first quarter and the second quarter.

And you've also got the U.S. tax season.

Particularly, last year and probably this year as well, there'll be some sort of personal tax refunds coming through with a reduction in personal tax rates that we found last year fed their way into paydown of balances, and we would expect something similar this year.

The reason why it might look quite a meaningful jump from the third quarter to the fourth quarter was in the third quarter, we had one of those revisions to U.S. economic forecast, which was beneficial.

So it was a -- probably a lower impairment charge than you would typically expect, were we not doing any revisions.

But if you are just sort of interested in it, I think, you would have seen the highest quarter probably until you get to the fourth quarter again next year, and then it really depends on the function of how much the book has grown and what balances are left with at the end of the year.

Thanks, Robert.

We appreciate your comments on -- hoping this is a helpful time to you, so thanks for that feedback.

The next question on the line comes from Lee Street of Citigroup.

And three from me, please.

Just firstly, on those CIB entity, when do you expect that to actually earn its cost of equity, because, I guess it always -- and how does that link into your [non-intensive] return on tangible equity targets because it always feels like that division that drags on spreads and ratings of the overall group?

Secondly, on leverage, your average leverage was -- average U.K. leverage score was 4.5% in the quarter.

So obviously, you referred to it as a backstop measure.

But if I look at the headroom (inaudible) minimum relative to your headroom on risk-weighted asset basis, so 11.7% versus 13.12%, the actual difference isn't that much.

So what gives you such confidence that the leverage is just a backstop measure for you?

And just finally, anything you'd like to flag in terms of risk-weighted asset inflation that you can see over the course of 2019 and 2020, please?

That will be my 3 questions.

Yes.

Thanks, Lee.

Why don't I cover the CIB returns, and Kathryn can cover the -- your question on leverage and sort of RWA inflation over 2019.

The CIB, the returns have improved, I mean, we're at 7.1%, which is up from the previous year.

Of course, it's not where we would like it to be.

We would like it to be into double digits, and that's a journey that we're on.

I mean, it'll come from, there are sort of 3 prongs that we have in terms of improving returns in the CIB, making sure that we've got the right level of financial capital.

So you may recall that we did deploy additional leverage into the CIB, which was sort of spare leverage as we would define it.

I mean, it's very productive in the CIB, particularly in some of our markets-facing financing activities, which provide very good returns over sort of risk-based capital, but also a stability of revenues as well that provides a nice sort of accrual-like, sort of feature to what is otherwise a much more cyclical business.

The second component is the investment in technology.

You know -- we, as we were restructuring the bank, went through some very substantial restructuring, and probably went on a bit on the investment diet.

And as a consequence of that, some of our -- certainly our e-capabilities were lacking.

We used to have probably one of the better FX platforms on the box, probably one of the better sort of electronic equities offerings.

And I think over the years gone by, some of our dark pool activity, some of our electronic market-facing technology and algorithms, et cetera, haven't really kept up with the best-in-class.

So that continuous technology investment is beginning to pay dividends.

We have seen that in our improved revenues relative to our peers and therefore picking up share there.

And the third thing is the human capital to make sure, and we're not talking here just traders, bankers, et cetera.

It's actually the management of the unit.

We sort of depleted several layers of management, really, over the last 5 years.

And so in 2017, we hired in very experienced senior risk-takers to really manage that business, and there's a new management team in place, and I -- 2018 is their sort of first year together.

And that's I think shown what value they're adding to the business and expect that to continue into 2019.

So it's not where we like it to be, but it is successive years of improvement.

And our objective function, of course, is to get into double digits.

The one thing I would say, and it's is probably relevant from a credit-investor perspective is for Barclays Group, diversification is very important.

And we are in sort of consumer credit markets here, which exhibit sort of record low levels of unemployment.

And credit stress is incredibly benign.

And therefore, the returns for those sort of consumer-facing businesses are probably above sort of trend average.

Likewise, wholesale markets have been a tough journey for many people.

And I would characterize them as probably being below long-term trend.

Those things will change, and that diversification is something that's important to us.

And that sort of shows through in some of the stress testing results.

If you look at the Bank of England stress test, we have one of the lower drawdowns.

And some of that is because, for example, we have a lot of exposure to U.S. dollar revenue pool.

So if you stress sort of a hard Brexit with a [lost] sterling devaluation, then the diversification in terms of our geography and products, that plays to our strengths.

But very much a work in progress.

Why don't I pause there and hand over to Kathryn on to your questions about capital.

Yes.

So starting, Lee, with your questions on leverage.

And you may have heard, Tushar and Jes were asked a few questions about leverage this morning, and they reiterated again that RWA is the binding constraint.

Leverage is the backstop at the group and legal entities.

And I guess it is interesting that we only have a requirement at the end of December '18 at the group level on a U.K. leverage basis.

The U.K. ring-fenced bank, the U.K. does have a U.K. leverage requirement coming in this year.

And you can see the CRR leverage ratios that we've been reporting at the group and the legal entities for some time.

But those requirements don't come in until 2021.

Now I think the key point really is, as Tushar remind this morning, which is we manage the bank to the average leverage ratio.

So today, the average ratio that we've been reporting for the whole of 2018, and we manage it very carefully.

And when you look at the average ratio that we reported at the end of the year, 4.5% for the group, we certainly feel that it is a plentiful enough buffer versus the minimum requirement, and we're comfortable with that.

And of course, at this date, still the key point for the stress test remains the spot ratio, which ended 2018 at 5.1%.

So we are looking clearly at leverage across the group.

But we feel comfortable, very comfortable that at BBUK, the nonringfence bank BBPLC and also at the group that it does remain the backstop measure.

So talking now about our RWA inflation coming from regulatory change.

I think you heard the senior management talk on this morning's call about some of the Basel IV proposals.

And clearly, for many of these, we do always hope to provide guidance to the market when the numbers settle down and when it is helpful.

And for that, one of the key elements is clearly getting some direction from our national regulator where there are areas of discretion.

As you probably know, there is IFRS 16, which does impact in 2019.

That really is quite modest for us.

It's sort of mid-single digits in terms of capital impact.

And the U.K. banks, at the very end of 2020 have to respond to the definition of default for U.K. mortgages.

Again, we're not really in a position yet to believe that it would be helpful to provide guidance on that.

But both of those, we feel very confident and we have meaningful capital generation, which we showed last year.

We also now clearly have fewer headwinds ahead of us, having done conduct litigation, in particular, last year.

So as we do our capital planning, we've got conservative assumptions, and feel very confident that we'll have a strong capital trajectory over the next few years.

The next question on the line comes from Corinne Cunningham of Autonomous.

Just a question perhaps on AT1 versus equity in terms of where the priority sits.

I know you've talked about economics, but I think, this morning's call was also hinting at possible share buybacks at some point.

So how do you balance the 2 when you're thinking about economics of how much Tier 1 you want and the cost of AT1, et cetera?

Would it always be in favor of the equity investor, I suppose?

And then something I've been asking other banks as well, is just on LIBOR succession planning, how that's going?

How long it's likely to take?

And whether you think it's possible to deliver within the -- I think, it's by the end of 2021 that's meant to be all done.

Thanks, Corinne.

I'll -- let me have a go at both of them, and Kathryn or Miray may want to add some comments.

In terms of balancing the economics between, if you like, canceling or repurchasing common equity shares or using capital capacity to call AT1, I think Kathryn mentioned this, we need to look at this in the round, so I wouldn't just sort of take this as a just a purely, which one gives off the best return on capital.

We are very aware of the expectations of AT1 holders.

And we expect to be a regular issuer in the market, so we want to be responsible and try and be transparent as to how we think about it.

And I wouldn't say we look through one lens or another.

Having said that, of course, a priority of the board and of management is to start returning cash distributions back to our equity holders, and that will be in the form of a progressive dividend supplemented with share repurchases as practical.

And we'll really look to balance both.

I'm not sure I would say that one ranks any higher than the other one.

Both are very important constituents.

And we will absolutely look to balance both and try to be very transparent as to how we do that.

And I think that's when Kathryn -- when she took you through her scripted comments, sort of gave you a number of lenses that we look through just for -- just for AT1, sort of look at it in that sort of that holistic view.

In terms of LIBOR succession, I have the -- I was going to say privilege, but I'm not sure that's the right word, that I chair the risk-free rate working group for the sterling.

So that's the sort of the industry working group that's working with the Bank of England and the FCA on replacing sterling LIBOR.

So as chair of that group, of course, I would say we're incredibly confident and fully committed towards ensuring that we complete the project for sterling by the end date.

And actually, and sort of being a bit more serious for a sec, I think in sterling, we are quite far advanced.

Obviously, SONIA is a rate that exists.

It's real.

It does trade.

And of course, there are cash instruments as well that are referencing it.

I think one of the next steps for us, important next step will be to make a final decision.

Do we need a term rate?

And if so, exactly how that's going to be defined and what conventions do we use and apply that to use cases, particularly -- perhaps away from the derivatives market and maybe into the loan market, particularly for corporates and sort of less large companies.

And also get cracking with the -- once we've got that behind us -- and get cracking with the infrastructure, there'll be a lot of the kind of cash market use, vendor type platforms like Loan IQ or whatever and there's going to be a lead time to get that done.

And then move on with actually doing some repapering and transfer.

So a very complicated project.

We have representation from all stakeholders, buy side, sell side, corporates, agencies, regulators, et cetera, working very closely on doing that.

But I'm confident we'll get it done, but it is a lot of work.

And what you were saying, was that -- would that all related to sterling?

Or were you thinking dollar and euro, et cetera?

Yes, there are similar working groups in dollars, euros, Swiss and yen.

And there is a level of international coordination.

It is going to be quite complicated because in the U.K., we've chosen an unsecured risk-free rate.

[U.

S. offer] which probably doesn't -- it's sort of probably a little bit newer that SONIA is in the U.S., of course, is more akin to a repo rate, more of a secured rate.

So there's definitely complexities in sort of -- if you got multicurrency revolving credit facilities to get them sort of papered over, given the mix of risk free rates that may be used.

So I think that will be complicated.

But I think within single currency world, certainly speaking for sterling, I think we're in a reasonable place and making good progress.

Our next question on the line comes from Arnold Kakuda from Bloomberg Intelligence.

So you have a robust liquidity levels GBP 227 billion, 169% LCR.

So my question is what is kind of the optimal level that you think you can bring it down to?

Is it more kind of closer to the 140% level that your peers are at?

And in terms of the mix, you have a peer that's talked about maybe trying to optimize the cash, the conservative cash and the reserves held at the Central Bank versus security, so is there opportunity to improve that mix as well to help your profitability?

And then on the topic of profitability, I think your RoTE targets over the next 2 years exclude litigation and conduct charges.

So beyond that horizon, perhaps, can -- do you think that those things might settle down?

I know you a had big settlement in 1Q '18, but do you think that you can provide an RoTE target after this 2-year horizon, including any possible litigation?

And then lastly, on ratings.

Your [bill and eligible] senior debt ratings is on the lower end of peers.

So would you say kind of the biggest thing to improve that is that pretty much on the execution of your improved profitability plan?

Thanks, Arnold.

Why don't I quickly cover your second question on sort of the litigation conduct and how it feeds into our returns targets, and I'll ask Kathryn to talk about, sort of optimal liquidity profile and your question on ratings.

With regards to litigation and conduct, I think that's largely behind us now.

We settled RMBS, which is probably the single largest case outstanding.

The SFO case was dismissed as far as the bank matter goes.

And I think PPI is sort of broadly behind us as well.

And they were probably the 3 largest individual items out there.

There is -- if you read our legal disclosures, we're very sort of cautious in making sure that we're wholesome in our disclosures.

So there are several pages of it.

But there's nothing on that list that I would call out as -- in the scale that we have had in the past.

I think, really, our statutory earnings and our earnings including litigation and conduct are going to be very similar from this point on.

Getting down to that we only had [16 million] for example, of litigation and conduct in the fourth quarter.

So that's not guidance for how we may look in subsequent quarters.

But I do think it's going to be substantially lower than you've seen historically.

I think beyond that, definitely, I think everything moves to statutory.

But I sort of would think that even over this year and next year, statutory, and our sort of definition of profits, excluding litigation and conduct, are going to be pretty, pretty close to each other.

Kathryn, do you want to comment on the other areas?

Yes.

Touching on our liquidity position, I guess the absolute amount of liquidity that we're holding and the composition of liquidity pool.

And as you heard, in my remarks, we also now have -- we have given disclosures around the liquidity pools within the 2 legal entities as well.

But I would say that we've grown the liquidity pool over the last few years, really.

We view it as an inexpensive credit strength, our deposits book continues to grow, I think north of GBP 14.5 billion gross over the course of 2018.

And the composition of the pool does still remain quite high in cash.

So with Brexit only several weeks away, I think you would expect us to continue to want to be very prudent with a very liquid balance sheet.

So we wouldn't be wanting to guide at this stage to any future LCR ratio.

It may move down somewhat, but I wouldn't see it moving materially.

We want to remain nice and liquid in this period of heightened uncertainty.

And similarly, we do focus clearly on the composition of the liquidity pool in terms of cash and types of securities.

But we feel that the cash levels are the right levels.

And we also, clearly look at the central banks that we hold the cash at, we have some leverage benefit for the cash within our U.K. leverage ratio.

So I wouldn't anticipate that the composition would change too much even if over the next year or 2 we see the liquidity pool potentially reducing once this period of uncertainty is gone.

And then finally, on ratings, and yes, we are -- concerning -- your comments, namely, but for us, clearly, the Moody's HoldCo rating is probably the key priority for us to get that rating upgraded.

We engage very closely with all 3 rating agencies.

But certainly, in terms of the best lever of getting an upgrade, it would be to continue to execute on our strategy and to continue to deliver improved profitability.

And I think I made some comments along those lines.

So we were pleased that they noticed our improved performance that we've delivered over the last few quarters.

And if we were to continue to execute the strategy and achieve our targets, we would hope that would translate into a positive ratings move.

The next question of the line comes from Aditya Bhagat of BlackRock.

It's really a follow-up on the IFRS comment on the Brexit-related charges.

Given the time line of Brexit, is again, going to be around Q1, and if we continue to be in the period of uncertainty close to that date, I just wanted to understand could there be -- would you have to again do a similar reassessment?

Or is this just an annual or semiannual exercise?

And is that reassessment done during the course of the quarter?

Is it done as of the March 31 cutoff date?

Just some color on that, that would be great.

Yes.

Thanks, Aditya.

Yes, it's something we do each quarter and at the end of the quarter.

And for example, and I'll give you sort of -- it was done, I guess, 3 times now.

So in Q1 of 2018, we did improve the economic forecast for the U.S. That was really on the back of U.S. tax reform that came in right at the back-end of 2017.

And then we also upgraded in the third quarter of 2018 as well.

Again, the U.S. economy continued to improve.

And in the fourth quarter of 2018, the GBP 150 million was our view that the downside risks to the U.K. weren't being reflected in the economists' forecast.

So in Q1, we'll look at where economists are forecasting.

Now I would expect in Q1, that there is no reason why we wouldn't just take the economists' forecast because it was very unusual situation at the year-end because there was a sort of a live, very complicated political situation and not many people were publishing, so we just felt that forecast was (inaudible).

In Q1 I would expect it to be a live forecast and we'll take you out there then from this point on.

But in summary, it's a quarterly assessment done at the end of each quarter.

Let me just say -- just perhaps, again, from credit investors it may be helpful to know why GBP 150 million.

And the way we did that is there's a sensitivity table that we published, which shows how sensitive our impairment provisioning is to changes in these economic forecasts.

And GBP 150 million in the U.K. was sized to a reasonable slowdown.

It was sized to a slowdown in GDP from a base case of 1.7% down to 0.3%.

And unemployment moved from a base case of 4.1% to an increase up to 5.7%.

So these are quite substantial moves.

And it just gives you a sense of we think we were quite prudent there.

Of course, if the comment turns out that publishing economists believe the economy is going to operate at those levels, then I guess we've already taken the provision.

If it's going to be worse than that we need to top up, but if isn't as bad as that then, then we may find ourselves overprovided.

But that obviously gives you a sense of how much things need to move by.

Of course, our final question today comes from James Hyde of PGIM.

I'm afraid it's about capital and capital ratios again.

I'm just thinking of Kathryn's defense or explanations of how you feel the ratio is sufficient or more than sufficient.

But the one consideration that I was wondering if you had at all is the drawdown in the stress test involves triggering AT1.

And I do think that at the time we saw the stress test, some of the reaction that I saw was, here they are again having to trigger AT1 in this scenario, and I think it has a bearing on your funding costs.

Now, I don't know, do you have any thoughts on that?

Or do you think quite simply this time conduct risk and other elements will mean maybe you won't have to trigger AT1 in this hypothetical scenario?

And secondly, also on capital.

I'm not sure if you can hear me.

Secondly, also on capital.

I mean, it's a minor thing, but looking at the Irish BBI, very helpful table there.

Sort of given what Ireland has been through, it doesn't look very heavily capitalized.

And I'm just wondering, is that the ECB who guides that?

Or is it the Irish regulator?

Is there not a domestic SIFI charge because this is like the biggest balance sheet in Ireland.

And the leverage ratio is not great.

So you haven't given risk-weighted assets.

So I was just wondering here is that really sufficient, in terms of capital in Ireland?

Thanks, James.

Kathryn, do you want to comment?

Yes, absolutely.

So, as you said, I think, in your question, the fully-loaded ratio under the Bank of England stress test was very clearly treated by the Bank of England as a hypothetical measure, which they just really did use for transparency purposes.

The transitional CET1 ratio is very much how we are regulated, and it's what we use for capital planning.

So the fully-loaded one really is not what we are using or what our regulator uses.

And so clearly, as you said, we had benefits in terms of improved conduct and litigation.

And I highlighted in my remarks that the drawdown was even less than that.

It was 400 basis points once you take out DOJ.

So we were a pretty comfortable pass above the hurdle rate.

And I think our drawdown was also pretty good compared to some of our peers.

So it is a very key element of our capital management planning.

And we are certainly focused on this year's stress test when we get the scenarios in March.

But we do feel that the bank is in a stronger position and is strongly capital generative with fewer headwinds ahead of us.

And so feel good about our potential performance in the stress test, but of course, we do take it very seriously.

Perhaps commenting now on Ireland.

As you said, the gross notional balance sheet is quite high.

But the actual method and funded balance sheets are much smaller.

But we've given the equity number that we would potentially hold, once we've completed the migration of the business into Ireland.

We are in very close discussions with the CBI.

And I mentioned, that it's also regulated by the ECB under the SSM.

And we would expect it to be consistent with other subsidiaries within the group.

And obviously, you've seen that the U.K. ringfenced bank is at 14.2%, and BBPLC, the nonringfenced bank, is at 13.5%, and the (inaudible) at 14.5%.

So we would expect when you see the final actual numbers for Ireland, the capital ratio and the European requirements will be consistent with other legal entities, but very much under European requirements with a European capital stack supporting it.

And obviously, on the funding side, I made some comments and remarks that it will also be funded by a diverse mix of internal MREL, external funding.

And similarly, we'd expect a conservative profile akin to what you've seen across other entities and the group as a whole.

Thanks, James.

I think that's it for questions.

So thank you very much for joining us today.

I hope you found it useful.

And I'm sure Kathryn, Miray and the team will see you on the road over the next few days.

Thank you again.

Thank you.

That concludes today's conference call.