Barclays - Earnings Call - Q2 2021 Fixed Income

Transcript

Speaker 0

Welcome to the FUXESS half year twenty twenty

Speaker 1

one results fixed income conference call. I will now hand you over to Tushyam Kharia, group finance director.

Speaker 2

Good afternoon, everyone, and welcome to the fixed income investor call for our half year twenty twenty one results. I'm joined today by Catherine Pennant, our group treasurer and Dan Dan Fairclough, our group head of balance sheet management. Let me select start with slide three and make a few brief comments before handing over to Catherine. I'll start with a summary of our h one performance before providing further details on the impairment. We again saw the benefit of our diversified business model as the strength of the CIB performance continued to offset the effects of the pandemic on our consumer businesses.

Overall income decreased 3%, albeit on a constant currency basis, income was up. The cost increased by 600,000,000 to 7,200,000,000.0, including structural cost reductions of 300,000,000.0. After a small impairment charge in q one, we had a large release in q two, even a net release for the half of £742,000,000 This resulted in a PBT for the half of £5,000,000,000 a significant increase on the 1,300,000,000.0 for h one last year, generating an RoTE of 16.4% for the half. The CET one ratio ended the half at 15.1%, well above our target range of 13 to 14%. Let me provide further color on impairment.

There was a net impairment release in each of the businesses in q two, and the largest release was in b u k followed by CIB, as you can see from the chart on the left. On the right, we've shown the split of the charge for recent quarters, and you can see in q two that we've seen a net release in of stage one and two impairment of just over 1,000,000,000, while the stage three impairment was 221,000,000, resulting in the net release of 800,000,000.0. The stage one and two release was driven by the increased macroeconomic variables used in our scenario refresh, summarized on the next slide, and lower unsecured balances. Our coverage ratios remain above pre pandemic levels. The meds used for q two model impairment are shown on the upper table, and you can see the significant improvements in the 2021 and '20 forecast.

However, there still remains significant uncertainty levels of default with the extensive support schemes that were round down. We wanna make all to be a plus high improvement. Always made risk macro small of the that are could be the most at risk from the training of support, containing a significant antiqueonic uncertainty PMA, which has increased slightly to 2,100,000,000.

Speaker 3

In the appendix, there is

Speaker 2

a summary of the coverage ratios across our lending portfolios, and you'll see that they are significantly higher versus prepayment damage across wholesale and unsecured consumer lending. Let me pause there and hand over to Catherine to run through the balance sheet highlights.

Speaker 1

Thanks, Tisha. As you can see on this slide, we finished June with a robust balance sheet across all our key metrics. Our CET one ratio was 15.1%. Emerald finished ahead of our end state requirement at 23.7% of RWA, and our LCL remains at a very strong position of a 162%. I'll start with some comments on capital on slide eight.

Our reported CET one ratio increased over the quarter by 50 basis points to 15.1%, which is flat compared to the end of last year despite our share buyback and other headwinds. The group delivered strong profitability in both quarters this year, which contributed to our capital base. Specifically, in the second quarter, the lower stage two impairment balances led to a reduction in the RSS nine transitional relief of 30 basis points, resulting in a convergence between the transitional and fully loaded ratio to the pre pandemic levels of around 40 basis points. RWAs were down around £7,000,000,000 over the quarter, adding 32 basis points to the c p p one ratio. The next slide provides what we hope is some useful color on how we see the capital trajectory from here.

You'll see on this chart a rebate q two CET one ratio of 14.8%, which takes into account the share buyback and the scheduled pension deficit reduction contribution in q three. Looking ahead, our prudent capital planning takes into account both the headwinds and tailwinds we foresee. Importantly, over up to all of these plans, it's our confidence that our diversified business model will continue to generate capital, more than offsetting upcoming headwinds. And given the capacity created by our profitability, we expect to continue to return capital to shareholders over time. This reflects the soundness of our capital management and, of course, with the decision taken hand in hand with our regulator in the normal course of business now that the temporary guardrails have been lifted.

We're planning very to see the anticipated headwinds, and over the year, we continue to highlight the potential of stage three impairment migration, to impact the amount from transitional asset line relief, and we also anticipate RWA is likely to increase from the June 30 level. We've listed below the known capital headwinds we see coming next year. Firstly, the software benefits will be reversed at the 2022 as you would have seen in the TRA's quality statement 17 published earlier this month. The IFRS nine transitional release schedule will continue to amortize through the 2024, and are the slide in the appendix that provides further details on us. For SCCR, which we have flagged in the past, the guidance remains of low single digit premiums of RWA.

Finally, the pension deficit reduction plan is 300,000,000 payments next year, well below the 700,000,000 contribution in 2021. You may have noticed that two items that we had previously highlighted as headwinds are now not expected to materialize. The first is the post cyclical impact in RWAs that we previously anticipated as we've achieved continued macroeconomic deterioration would lead to high risk weight density. While we still remain cautious and our internal capital plans continue to be alert to these risks, We acknowledge the now improved and more stable economic outlook in our main market. We're no longer calling out material price cyclicality in our base case.

The second item is the mortgage changes from the PRA. The aggregate impact of days past due changes and move to a hybrid through the cycle and point in time model and a portfolio level risk weight floor is now expected to be negligible. And so the previous guidance of an increase of low single digit millions of other states next year no longer applies. Taking all of these factors into account, we continue to target a CET one ratio of between 1314% over our planning cycle, and I'll spend a moment on this on the next slide. As you can see on slide 10, our buffer to the MDA hurdle is 11.2% to three hundred ninety basis point twelve billion pounds, holding an appropriate headroom while MDA hurdle continues to be a critical part of our capital framework.

Over the remaining of the year, we expect some decline in the ratio as it's like some of rate increase, but we would expect to end the account this year up to 30 to 14%. Okay. You to be mindful of the headwinds that I just talked about, miss Gray. But time we remain in the opposition to the effect of new policy take hold. And therefore, reflects prudent to trade as we navigate headwinds we see ahead.

Turning now to leverage. The leverage ratios of 54.8% on a spot on average basis, respectively, reflect our continued sound leverage profile. As you can see on the slide, we offer well above minimum requirements, and our leverage profile has been running at a consistent level for the last four years. We note the consultation paper published by the SEC and PLA last month, which broadly maintains the current UK leverage framework both in terms of calibration and requirements. Therefore, our approach to managing the leverage ratio remains unchanged.

Turning to MREL on slide four, due to the prudent build of MREL eligible debt over many years, we are now ahead of our 2022 requirement. You know from earlier calls, we have assumed that the RWA calculation basis would be the most finding and our base case from an annual planning perspective. This does remain the case given the recent leverage CP, which proposes to The UK leverage framework with a cash exemption and which we expect will also apply to the Emerald framework. Although we will, of course, wait for final confirmation on the conclusion of the FTC and TRA's leverage review, which remains out for consultation, we do not anticipate a change to our base case. Our emolations plan for the remainder of the year is consistent with what we've got at the beginning of the year, namely a full year target of around £8,000,000,000.

As of June, we have issued 5,300,000,000.0. Since we have been active already this year in tier two transactions, we expect our remaining funding over the year to be senior and 81. As you know, we have been active with green issuance in the past, having been the first mutual bank to issue a green bond a few years ago. And I'm pleased that we've released our updated and expanded green issuance framework to enable a broader set of liabilities for future issuance. Second, we've highly to illustrate the structure of our total capital position.

We continue to target a conservative 81 headroom. We've noticed before that this may temporarily run at an elevated level given the 81 also supports leverage, and we see attractive high returning opportunities in part of our market business where returns and maturity excesses of 81. Through the cycle, our principles that underpin our 81 target remain the same. This can serve to manage any RWA and FX fluctuations and possible redemptions and refinancing activity. In the near to medium term, this means include the other two and I mentioned a moment ago and planning for possible call dates by 81 in in 2022 and 2023.

And any call decisions would, of course, be subject to regulatory approval. We also manage new risk in our tier two capital and so also aim to hold an amount in excess of the 3.2% requirement. With regards to legacy capital securities, we often get asked about the Bank of England's CFO letter from last month and the upcoming end to the original CRL transition rules in December. I think it's worth providing some detail here. Ultimately, our thinking remains unchanged.

It's not an area of concern for us given the modest and short tail of 1,700,000,000.0, which could exist beyond 2022. Individual capital security, and it will be a factor in other. As qualifying, it simply remains for risk stabilization powers. Overall, our analysis is on a case by case basis subject to relevant regulatory considerations, and we will assess each security on its own merits. We are engaged with the Bank of England and the PRA on this topic.

And so given these securities are listed, the minds will have the sensitivities of this topic and so do not wish to discuss individual securities. There are two main areas that the Bank of England is looking at, infection risk and impediments to resolvability. Infection risk relates to legacy capital securities, which impact own funds and or ML eligibility. In Barclays, this issue can be solved by the subordination of some internally issued 81 relative to other securities outstanding, subject to regulatory approval. And so we do not see this as a concern.

And the other area of focus, namely, to resolve ability, we have no externally issued legacy capital securities outstanding from our group resolution entity, Barclays plc. Furthermore, the vast majority of our legacy capital securities who exist continue to qualify for going funds in full capacity to 2025 or beyond. From the end of this year, they will also not be included by meeting our MRO comments of the rating entity, Barton Frank's ERC, or the group. For these reasons, we're comfortable with our position. We will continue to engage with the Bank of England and the PR on this topic, including as part of our resolvability assessment framework submission, which is due in October.

So turning now to liquidity, which you can see on slide 14. The liquidity pool of £291,000,000,000 and our LCR pillar one ratio of a 162% represents a surplus of a 100% regulatory requirement of a £180,000,000,000. You'll see that the LCR position has been stable throughout this year, maintaining a prudent balance between holding a healthy excess and deploying the liquidity to our business to enable them to capitalize in providing market opportunities. Let me now turn briefly to our own funding profile and loan to deposit ratio on the next slide. We continue to see an elevated level of deposits across the market driven by government and central bank quality.

There's no money supply growth unprecedented levels. By May, it had grown by 17% versus the 2019. As you can see, even before the pandemic, we're running at a conservative LDR of 82% as of the 2019. And today, it stands at 70%, with deposits across the group up by 20% since the 2019. We have conservative assumptions in our funding plan, being mindful of potential pressures on the deposit book.

Though as you heard from Trisha on this morning's call, we do feel much of this deposit growth will be on our balance sheet for some time. Turning now briefly to our main subsidiaries, which you can see on slide 16. Continue to manage the regulatory requirements of all of our subsidiaries prudently, and you can see here the reported metrics of both Barclays Bank plc and Barclays Bank UK plc. In the second quarter, the US IHC passed the most recent CCAR exercise with our capital metrics either in the top or second quartile amongst all participating banks, providing further evidence for our ability to manage capital appropriately across our subsidiaries. Turning now to our holding company and subsidiary credit ratings, which you can see on slide 17.

Improving our credit ratings profile continues to be a strategic priority for the group. It was particularly pleasing to see our outlook with Standard and Poor's undergo a double revision in the space of four months from negative to stable in February and stable to positive in June. These were actions in recognition of strength specific to our credit profile. Most importantly for them was a stable strategy that has been underpinning our financial performance. There were also sector wide revisions to outlook for European banks, which recently revised all Barclays outlook from negative to stable, and Moody's also stabilized with The UK's outlook.

All outlooks for all our entities are now either on stable or positive outlook, and our credit rating position is in a definite place than immediately prior to the pandemic. So to wrap up, we continue to manage through an uncertain time with a strong balance sheet, a prudently managed CET one ratio, and robust liquidity metric. Our diversified business model continues to deliver meaningful capital generation. And as we look ahead, we're in a strong position to support the economy, serve our customers, and look after the interest of colleagues and other stakeholders. And with that, I'll hand back to Tushar.

Speaker 2

Thank you, Catherine. We'd now like to open up

Speaker 4

the call to your questions.

Speaker 2

I hope you found this call helpful. Operator, please go ahead.

Speaker 1

If you change your

Speaker 0

mind and wish to remove your question, please press star followed by 2. While you're trying to ask your question, please ensure that your phone is unmuted lately. To confirm that, star followed by 1 to ask a question. Your first telephone question today is from Lee Street of Citigroup. Your line is now open.

Please go ahead.

Speaker 4

Hello. Thanks for taking my questions. I have two questions for you, please. First one, just a bit broader. So you've got a lot of excess capital.

You've got, you know, quite big in terms of the provision still even after the year. You've reversed it today. My question is, what what what what keeps you awake at night? What what can go wrong from here? Because, obviously, everything looks like it's relatively well set as on the horizon.

And my second question, you touched on the legacy security in saying that, you know, you could leave them outstanding beyond the year end. And as you relates to LIBOR, what's the sort of regulation, the the FCA's expectation there? Is it sufficient that you offer people a consent? And if they choose not to accept it, you know, they're they're okay. You've done everything within your control to to try and address that, therefore, you know, they'll they'll not have an issue leaving outstanding.

Anything you can, again, talk around that would be much appreciated. Thank you.

Speaker 2

Yeah. Thanks, Lee. It's Tushar here. Why don't I have a a go at your first question, and and Catherine and Dan may wanna add, and then I'll ask Catherine to cover your question on on LIBOR. What

Speaker 5

keeps us

Speaker 2

awake at night? I think you're I agree with you that we feel our capital position is is reasonably prudent, and we think our provisioning levels are also reasonably prudent.

Speaker 1

I think

Speaker 2

that the real unknown with all of this is that we've got government schemes, support schemes that are being unwound. And, you know, it's the first time we're gonna experience what the real sort of life consequences of that are both both actually in The UK and, to some extent, in The United States as well as as unemployment benefit and extensions of income sort of come to an end as well, as well as some of the support schemes around SMEs and and and corporates. Hence, the the level of provision that we're carrying, and we we have a management overlay to ensure that we're prudently provided against that. But I guess that I guess that's a little bit of voyage of the of the unknown. We, you know, we we we don't exactly know how that that will work out.

It could be much more orderly adjustment than than people anticipated. It could could be a bit more rockier. I guess, with that coupled with albeit economies are opening up and case loads, at least in The UK, seem seem to be dropping. There's still a little bit of unknown to whether, you know, this is the the end and the final wave or whether as you get into the winter months, you know, things may change again. So it's it's just being a little bit cautious and prudent, but but no more than that.

I I think, you know, we we're through all of that, and we're sort of back to, if you like, a proper post pandemic environment. We'll we'll probably run everything a little bit prudently. Patrick, do wanna add to that? Or Yeah. It's it's reliable.

Speaker 1

I I think the only other, I guess, subject that everyone has read about is the the prospect of inflation at some point. And, obviously, the uncertainty that Tushar talked about in terms of government support schemes is, obviously, a degree of discussion around central bank policy response, tapering QE, hiking rates. So just, I think, being Michael was it might be a lower probability risk just thinking around the balance sheet and thinking about, you know, prospects of inflation, albeit, certainly, it did not abate. So that's obviously had a fair degree of commentary. But I think that's the only other thing I mentioned

Speaker 5

to me. Just on the topic of inflation,

Speaker 4

I think it's interim. Oh, yeah. And I'm I'm going jumping a a little way ahead. How many rate hikes do you think you think you could possibly see before it actually starts to to really bite in terms of credit quality? So, obviously, historically, rate hikes do impact credit quality, you know, because I'm believing the first couple probably doesn't have that much impact and actually supports you from a margin perspective.

So what what is there any potential most of what would the pricing point that start to worry you?

Speaker 2

Yeah. It's a it's a tricky one, Lee. I mean, I guess, you know, we would probably need something like three hikes before we get back to base rates in The UK pre pandemic. So and even that, you'd be somewhere 75 basis points or so. So my my sense is it'll it'll some time.

And I guess the environment of rate hikes, if it's purely sort of anti inflationary and and sort of stock making economy, that's obviously a bit more credit problematic if it's on the back of, you know, an economy that's sort of growing above trend and and and it's just sort of good monetary policy in the back backdrop of that. That's that's probably not so much of a problem. I I I'm not sure where as Catherine says, you know, I I guess it's a remote possibility that you you get a sort of an unraveling inflation that could be difficult, but but we've probably got that in the in the low probability camp. And and I wouldn't So are the ones that keep us awake at night.

It's just one of the things we've got in the back of our minds to, you know, to make sure we don't get caught caught out by if if it does happen. But I think it'll be a number of break likes before we really, really feel we we'd wanna reconsider our credit stubs. Okay.

Speaker 1

And then so answering your question on on LIBOR, obviously, from our perspective, what we've been doing is, obviously, a huge amount of work happening internally, very mindful of what's happening with the official sector news externally. And, obviously, q two for us starting to much more clearly actively track new LIBOR products, obviously, very mindful of what's allowed there. We saw the development from the Fed with the legislative change regarding dollar securities. But in terms of The UK regulator, in terms of an existing LIBOR securities that we have after the consent solicitation that we did at the end of last year, which you'll remember, we're essentially still waiting for some guidance and the final outcome around the definition of tough legacy and what that means for synthetic LIBOR. And, of course, as you know, there are ultimately fallback provisions as well.

So we're essentially, look, in a wait and see mode waiting for further guidance around that top legacy.

Speaker 4

Okay. Fair enough. Thank you very much for for the responses.

Speaker 2

Thanks very much, Lee. Can we have the next question, please, operator?

Speaker 0

The next question is from Paul Fenner of Societe Generale. Your line is now open. Please go ahead.

Speaker 4

Hello, team. Just checking that you can hear me alright.

Speaker 2

Yeah. Loud and clear, Paul.

Speaker 6

Yeah. Perfect.

Speaker 4

Lovely. And so my my I've got it's it's really a a an asset quality question, but I guess it it it's not divides into into a couple of separate questions. So if I look at just your stage migration, I mean, it it looks as if the portfolio is really behaving extremely well and probably counterintuitively. So, you know, nominal stage threes have have dropped quite a, you know, significant amount in the in the last six months. And the ratio is now, you know, 2.2% having come down, you know, pretty consistent over the last couple of quarters.

So my question is on stage three. Have have we seen the peak in in as a proportion of of of of your your book? And, you know, if we haven't, where where do you when do you think that peak is, and and how far away are we? I I know, you know, I'm not looking for a specific ratio, but just the sort of timelines just to get get a sense. I get asked that question all the time, and I can never really answer it very well.

And then also on I was we're at it on on asset quality on on stage two. One of the I would also like to know what what normal looks like. So right now, you got something like 11% of your portfolio. I think that's right. 11 or 12% of your portfolios in stage three, which is kind of down as well.

What what does normal look like as you look into 2020 you know, 2021, 2022? I thought I forget what it was like pre crisis. I I I love to get a sense. And the other thing I found quite interesting is that the drop in stage two is was was was just as big in retail as it was in corporate. And I thought it was corporate that was the most sensitive to your macro outlook.

So a little bit of color around that would be very helpful. And then the very last question is on supply. Catherine, I think you said that you're you know, the remaining sort of whatever it is, 3,000,000,000, 2 and a half billion, is basically between 81 and senior Holco. I just wanted to check that I I I heard you right, because I wasn't expecting you to do an an 81, and it hasn't happened yet. Thank you.

Speaker 2

Thanks, Paul. Why don't I start on, you know, questions on asset quality and and then discussing the slide because you may wanna work some comments on asset quality as well. The first part of your question, I think, was the sort of the peak in the order or the development stage three balances. When is it gonna happen and where it already happened? Where did it settle down?

The honest answer is we we don't know. Our our view is, having said that, that the management overlay that we're carrying is really there to guard against an increase in default as we go through the removal of government support schemes. Now, you know, with these all estimates and we've done our own modeling, but, of course, it's there's sort of historical precedent we can calibrate our models or anything too. So there there is definitely high degree of judgment here. But our our our view is that there ought to be a pickup in default and credit stress within the level of provision that we're carrying, and that's what that overlay specifically designed for.

If if we don't see that, if it's a very orderly adjustment and the government support schemes have worked, you know, perfectly in the sense that they've reached everybody to, you know, their their their job or the the the company sort of reopening again and I think it's the same itself, then then we'll see that management overlay won't need to be digested against defaults, and we'll we'll just sort of be released back through p and l and ultimately back into capital. So I guess I guess, Paul, the you would expect the peak in in stage three to to be in front of us, but but not that far in front of us. I think both sides of Atlantic now are beginning to sort of taper their schemes over the next, you know, handful of quarters. In terms of the the run rate on Stage three from that point on, if you look at sort of the loan loss rate, let's say, on the more riskier parts of our business, say credit cards, roughly about 3% loan loss rate on either side of the Atlantic. I'd I'd probably say that the book ought to be probably a bit higher quality compared to pre pandemic.

Obviously, that was quite a long cycle. And one of the things about having a cycle is you sort of flush out the weaker credits one way or the other. On top of that, you've also got, generally speaking, consumers in those remaining consumers will be in in decent financial positions. You see our deposits, you know, tick tick up again quite materially even in the second quarter in our consumer, both in The U. S.

And in The U. K. So the deleveraging of consumers, the amount of cash on balance sheets will be very supportive. And also, as we're originating, you know, you're sort of early in the credit cycle, so new originations ought to be, you know, relatively lower risk. So I I would say probably, all things being equal, you should have a probably a lower loan loss rate on the riskier parts of our book once a year, if you like, in a in a post proper post pandemic world.

At stage two, you have a couple of questions there about the sensitivity to to macro across corporate and consumer and also sort of what's the what's the normal level of of stage two. One thing I would say on that is that it's quite hard to answer that question precisely in the way the way you indicated yourself. What what I'd probably say though is if I look at coverage levels pre pandemic, if you look at our cards business, we were at 8.1% loan loss provisions to to balance sheet, and we're currently over 10%. So we're still, you know, quite prudently covered relative to pre pandemic levels. I think when it's all said and done and we've gone through the government support schemes and and things are sort of normalized out, and we accept the premise that the books also be on a like for like basis of of of the asset quality.

You you'd probably expect the coverage levels to be at least back to pre pandemic levels or if not, a touch lower. Now that will either be effectively utilizing those provisions against defaults as we're expecting them or those provisions will be released into P and L. So answer your question about Stage two. It's a combination of Stage one and two, principally. But it probably gives you a sense of it.

It probably ought to be a bit lower than than pre pandemic, all other things being equal. And in terms of the macro sensitivity, and that's really tricky because, I mean, these these models are devilishly complicated. But they're also they're also sort of the the reason why it's also complicated, you've got multiple scenarios, and you've got various different parameters that impact consumers and wholesale credit in quite different ways. So, you know, workforce engagement, for example, impacts wholesale in a way that's slightly different to general population unemployment, which which does impact our models for consumer side. It's hard for me to give you a a straight answer on that.

But, yeah, unfortunately, that that's a tough one. It depends on the the scenario weighting, the the span of scenarios and, you know, exactly how far out the peaks and troughs are. It's unfortunately not a small and easy answer to give. I don't think it gives you a little bit of context anyway.

Speaker 4

Catherine, anything more you wanna add to that? No. No. Nothing wrong. Okay.

Speaker 2

That's great. I'll let you carry on then.

Speaker 1

I was just gonna get Paul, I was just gonna ask you a question on funding. And so our needs haven't changed at all since since the full year, and you're right. We've done the $75,000,000,000, almost 5 and a half in the first half. And we have done two benchmark tier two transactions. So in the second half of the year, the 8,000,000,000, the the remainder of that will be most likely in the form of senior and 81, and that's very consistent with the exact same as what we indicated earlier in the year.

And as you know, we've also talked in the past about being a programmatic issuer of of AT one securities. So, yes, it does remain part of the funding plan for the second half of the year.

Speaker 4

Thanks, Paul. Thanks, Paul.

Speaker 2

We have the next question, please, operator.

Speaker 0

The next question is from Robert Smalley of UBS. Your line is now open. Please go

Speaker 4

ahead. Hi.

Speaker 7

Thanks, and thanks for taking my questions. A lot has been asked and answered, so a couple of follow ups. I appreciate the intricacy of model changes, particularly given the peculiarity of this economic environment. But maybe you could talk a little bit about differences in credit card, U. K.

Versus U. S. So far, they numerically performed roughly the same way. Do you see any divergence there? And any things that you would look at different for behavior one versus the other in your modeling?

That's my first question. And second, you had mentioned that possibility of going below pre pandemic level on reserves. But I guess from your comments that'll take a few quarters at least to get there. Could you you're you're pretty close on card already. So would that come from SMEs and other corporate lending?

Where would you see that? And given the headwinds that you outlined for capital, is there an impetus to do that sooner than later, even though you had also mentioned you wanted to prudent holding the reserve? And then finally, on on funding, maybe early days, but do you have you're you're a negative issuer in 2021. Do you have any visibility to 2022? And do you think you'd also be a negative issuer then?

Thanks.

Speaker 2

Yeah. Thanks. Thanks, Rob. I why don't I tackle the questions on provisioning and handle to Catherine on on funding? US and UK cards, yes, they are behaving remarkably similarly, although I would expect a divergent cross divergent prospectively.

I think we would expect to see a build in US card balances, just just revolving credit balances sooner in The US than we would in The UK. I think there's a couple of reasons for that. One is just that The US economy sort of opened up earlier than than The UK, so it's sort of further ahead in its recovery. And you're into a sort of a a period of time, you know, summer vacation, like, to school, Thanksgiving, Christmas, where you get more discretionary spend behavior, and that tends to stimulate revolving credit balance growth. I think it impacted by, of course, specifically to our business, we'll be adding the American Airlines it's not American Airlines, American Retirees card partnership in the third quarter, and, you know, we've got some well known retailers or one well known retailer that we're adding into next year alongside organic growth.

So I think you'll see balance and therefore provision build much sooner in US cards than UK cards. UK card out our expenses, even though both sides of Atlantic spending, at least on our data, is back to pre pandemic levels, the level of sort of discretionary spend that's gonna that's taking place on card. It it still takes some time before that sort of translates into into balanced growth. So, yeah, I think you will see a divergence, and that's simply just the where where they each are in their own respective cycles with respect to recovery. The the final thing I'll say on UK and US cards, in US cards, we're we're certainly adding more I mean, the nature of the business is you're adding more customers, and we're spending money on opening new accounts, stimulating card spend.

The FICO scores in The US, again, it's it's relatively high quality stuff. Part of it is just the nature of because we're sort of biased towards airlines and things like that in our portfolio. But, you know, it's it's it's it's it's sort of arguably, at the lower end of margin, but lower end of risk with respect to sort of US card business. In terms of provisioning levels and sort of getting back to pre pandemic or better, where is that gonna come from? I mean, I think, actually, you say we're sort of not so far away from cards, but, you know, the bulk of our provisions are are actually from the cards business in a disproportionate amount.

And coverage levels pre and post on on an average basis, you know, cards, we're we're still over 10% covered. And pre pandemic, we were just about 8%. I mean, that's a, you know, that's a, like, a 20% reduction in in coverage. Well, that's that's a big old number given the most of our our balances provisions are against card balances. There is some in in in corporate and SME issues.

SME is not so much actually. It's relatively small. Most of the lending in in SME tends to be secured. And in corporate credit, yeah, there are there are some vulnerable sectors. But in terms of the pace at which these things sort of, if you like, normalize away, I I think it's a number of quarters.

I I it's very difficult to put a time on it, but I think our approach has been to build reserves quickly and to release them quite slowly until we're absolutely certain that the necessity for holding those provisions is behind us. So we will be pretty cautious in in in releasing them. And so, say, even after today's release, our our coverage levels are materially above where they were pre pre pandemic. And and by the way, the the credit indicators that we sort of have in front of us are are as you know, there's no real signs of stress in our in our books as we see it. So we will be continuing to be quite cautious.

So, Catherine, you wanna pick up from there?

Speaker 1

Yes. So in terms of the issuance versus redemption, as you said, this year was a net 1,000,000,000, and that obviously was supported by, on the redemption side, meaning from that coming from our off code. It is, as you know, too early for us to guide on issuance for next year, but I'll hand over to Dan who can talk a little bit more about the funding profile that we have.

Speaker 3

Yeah. So next year, we've got about 10,000,000,000 as maturity in calls across the end and VVPLC. So quite a significant redemption profile again. That's a little bit higher than the 9,000,000,000 that we had this year. So if you take out sort of average run rate of issuance in in historic years, which is, like, 10,000,000,000, then I think there's a decent chance that we would continue to be a a net negative issuer.

But as Catherine said, we'll we'll update more of the full year on the issuance plan.

Speaker 7

Okay. That's that's all very helpful. And again, and thanks.

Speaker 2

Thanks very much, Rob. Could we have the next question, please, operator?

Speaker 0

The next question is from Daniel David of Autonomous. Your line is now open. Please go ahead.

Speaker 4

Thanks. Congratulations on the results and thanks for taking my questions. I've just got a couple. And the husband just touched on legacy and and reaching those comments that he opens with, yeah, the mitigations you mentioned on infection risk. I just wanted to have a quick question.

Just in a recent '81 monitoring report, the EPA raised concerns over a multi layered tier two structure, and they were referring to a cascading tier ones, which I think is a trick of the way that you try and treat your tier ones. You mentioned concerns about no credit or worse off than than VRRP and and conflicts alike. Is that something you're thinking about? Is that a concern that we should be thinking about with the legacy stack? And the second one is just on ESG.

And in the recent MREL consultation paper, I noted there was a comment that firms may wish to structure the MREL instruments to include ESG linked features. That was quite interesting. I'm just quite interested to hear your take on whether that would mean we see a a different type of ESG issuance maybe linked to certain other ESG targets. Thanks.

Speaker 2

Thanks, Daniel. Pat, why don't you take the first part of that question and then maybe something on ESG? Yeah. Yeah. I mean,

Speaker 3

to to some extent, the multilayer tier two arguably already exists today with the old half tier two and the lower tier two. So it's not something we're hugely concerned about. I think for us, the key point on the infection risk is the fact that we will want qualifying 81 securities to be the most junior form of instrument outstanding, and we think that's gonna be the key point for for for the Bank of England. So as Catherine alluded to in the speech, that's a relatively easy thing for us to achieve just by amending the sworn nation language about downstreams APAC 81. So, overall, that's think we don't think that's a huge risk in

Speaker 4

terms of

Speaker 3

the Bank of England.

Speaker 1

And then in terms of the question around green AMRAL, yes, we we we did see that in the CP. And, certainly, you you heard this morning and this afternoon rather as we've updated our green bond framework. And what we've done is align it to our sustainable finance framework, which covers overall the group's plans to hit quite ambitious targets that we have, net zero, and really focusing very much on the asset side. So now we have our liability funding programs linked to the asset side and have the flexibility now to issue different forms of liabilities. We can do CP structured notes and covered bonds.

So I do think that there will be probably some innovation in this area as, obviously, we we we have COP twenty six coming up and UK banks look at their own ambitions on the green agenda and perhaps there's some interesting developments in the green space. And, obviously, we've also seen securities amongst our international peers linked to other ESG criteria and targets the banks have. So there could be some interesting developments in this space. I would just caution, I suppose, a little bit that, you know, many banks are very well funded, and we've talked about the very liquid balance sheet for the deposit. So well and, obviously, we're very well advanced on the MREL plan.

So it will be, obviously, within the overall funding needs of the EJ banking sector.

Speaker 4

Thanks, guys.

Speaker 2

Thanks for your question. Are there any other questions, operator?

Speaker 0

We currently have a we have just had a question registered. Our question is from Ioann Peshwa of Goldman Sachs. Your line is now open. Please go ahead.

Speaker 5

Hi there. Thanks for holding the call. And apologies in advance for yet another question on legacy securities. But can I just go back to comment about the impediment to resolvability and how you are actually seeing that? Just I I guess I just didn't catch that in the context of the legacy security being issued out of the operating company, please.

Speaker 3

Yes. I there are two there are two aspects to consider here. The first one is infection risk. So, you know, have have we got a structure that contaminates regulatory capital eligibility? And the point that I was making there is that as long as that internal 81 is the most junior form of capital of the operating company, which can be achieved through in during a simple internal restructure, We don't think that is an impediment in in any way.

Yeah. The sort of the the the second group is obviously the the outstanding legacy securities that we have. And as Catherine said in in the main speech, you know, we've got a very short tail of those securities, and we have none of those legacy securities issued at the EPLC. So we feel generally in a in a good place.

Speaker 2

Does that answer the question?

Speaker 5

Sort of. We did. I mean, I was I suppose that what I was trying to get out of it is that are you trying are you implying that having a small stock of security at the opco level is not actually an impediment to resolvability? Or I just don't know how I mean, I understand also the point around it's actually there is a restructuring internal agreement. Just more on the second point, how the fact that they are OpCo is actually being addressed because I I don't get that part.

Speaker 3

Well, look. It's it's from my perspective, these securities become particularly problematic when they lose regulatory capital eligibility. We've got a very small number out standing, and they retain capital eligibility, you know, significantly through the transition profile. So, you know, we actually think that the the the problem here is extremely modest. Obviously, we've we've we've completed our submission to the Bank of England on that, and, you know, ultimately, we'll hear more and you'll hear more from them when they publish their resolvability assessment.

But from our perspective, we really do think it's a it's a relatively small issue.

Speaker 4

Got it.

Speaker 5

I I agree. It's a small issue.

Speaker 2

Got it. For sure.

Speaker 5

Alright. Thank you for that.

Speaker 2

Thanks, Jacob. Operator, are there any other questions?

Speaker 0

Next question is from James Hyde of GTIN. Your line is now open. Please go ahead.

Speaker 6

Hi, Zushar. Hi, Catherine. I have a question on, actually, the ultimate statements and the whole

Speaker 2

Hey. You're going to you're little bit safe. Keep your mind Okay. Well, that's fine.

Speaker 4

How's this?

Speaker 2

Yeah. Much better. Yeah. I've got

Speaker 4

sorry. Yeah. So I have

Speaker 6

a quick I have one question on the whole revenue outlook. You're giving cost guidance. You've given provisions guidance. But on revenues, you know, a lot of the guidance on the this morning's call was about NIM and The UK and and and also the card volumes. But I just got

Speaker 3

the feeling looking at both

Speaker 6

the slides and, you know, what's happened in capital markets. You is that it looks like you're saying for you guys, the whole capital markets piece This is as good as good as it gets. And, you know, when you've got an ROT of 16% group and you promised 10% at the end, we will deliver on that. To me, it's it's it's all reads that from here, the only way for CIB is down. Am I misinterpreting that?

Because, I mean, you know, you've had, obviously, these four, five years of idiosyncratic market share gains. I should we read that that's kind of all over for you? That's the first question. And the second one is the old chestnut of Basel III final stage, Basel IV. Any sort of feel for guidance?

Thanks.

Speaker 2

Yes. Thanks, James. Why don't I cover the outlook for income, and I'll I'll hand over to Catherine to talk a more about, you know, Basel III point x or Basel IV. In terms of CIB, I I'm not sure we've seen the best of it yet. I think there is some some potential there.

I think in capital markets and advisory, so I'm talking here about capital markets, equity capital markets, m and a, etcetera, our deal pipeline is actually higher than it was in q one. Markets are still pretty constructive, and, you know, there's a there's a there's a lot of money sort of looking to to to find assets. So I I I think there is definitely scope for that to be a very good environment, and we'll see how well we do with that. We've we've made great progress. You know, we've been a very strong debt house over a number of years, but our our ACM and m and a practice both have had terrific quarters for for for where we are at least.

So I I think that probably still still a very constructive environment. I think on the sales and trading side, equities, again, we've we've we've done pretty well. We had record prime balances at the end of the second quarter. Both of those are very sort of, you know, stable, repeatable revenue spending of of the investment banking spreads and what have you on, you get the halo effect of more execution business as you're crying more clients. So the the equity story for us is is is quite good.

On the fixed income side, you know, that's definitely softened from the from the busy heights of of last year. I I I do think that, you know, we had a question earlier that, you know, we're gonna be an inflation shock and things like that. Those kind of things can all of a sudden cattle catalyze sales and trading to, you know, spurts of activity that are sort of way above sort of, you know, normal expected levels. So albeit, I think it's a fair comment to say, you know, how can the industry continue to post sort of, you know, record quarter after record quarter? I think this is absolutely a fair point that they're you know, that's that's unlikely to happen.

I I I I also don't necessarily see that there could be very strong quarters in the future or indeed even new records posted, and you might get sort of the intermittent spells of, you know, heightened volatility that can be quite profitable. We we are pretty constructive on on CIB top line. Jeff Staley, our CEO, always makes the point that if you look at the world of just financial assets, the the the absolute explosive growth in financial assets over the last number of years and being an intermediary in whether it's secondary or primary markets is, on a secular basis, is a is a good place to be. Now there'll be sort of ups and downs within the microcycles, but we believe that there's a a very strong secular case to be made in in that business. But, anyway, that's that's our thoughts on it.

Let me hand over to Catherine on Basel.

Speaker 1

Yeah. So look, I think you've seen that we've given quite detailed guidance around some of the near and medium term capital headwinds around, obviously, the software intangibles, FA CCR, IFRS nine pension contributions. And, certainly, we do always know that it's helpful to provide guidance to the market around some of these reg impacts that are coming down the pipe. But just at the moment, it probably would not be helpful. It's a little bit too early.

As you know, the the the PRA certainly needs to consider their own timetable for implementation, you know, their approach to some of the different components of the rules. And, obviously, the implementation is also at potentially twenty twenty eight once you think about some of the phasing of some of these changes in. So, certainly, when there's a little bit more clarity, we absolutely always do try and provide you with guidance around these impacts, but it's just probably still a little bit too early.

Speaker 6

Thanks, Steve. That's fair enough. Thank you.

Speaker 2

Yeah. Thanks for your question, James.

Speaker 4

Operator, any other final questions?

Speaker 0

We have no further questions.

Speaker 2

Okay. Well, thank you all for joining us. Hope you found this helpful, and I'm sure many of the team here, Catherine and team, will will, you know, get a chance to speak to you on the road as well. With that, I'll close the call. Thanks, everybody.

Speaker 1

Thank you. Back in today's

Speaker 4

conference call.