Barclays - Earnings Call - Q2 2025 Fixed Income

Transcript

Operator (participant)

Welc, ervga8ome to Barclays Half-Year 2025 Fixed Income Conference Call. I will now hand over to Anna Cross, Group Finance Director, and Dan Fairclough, Group Treasurer.

Anna Cross (Group Finance Director)

Good afternoon, and welcome to the Half-Year 2025 Fixed Income Investor Call. I'm joined by Dan Fairclough, our Group Treasurer. Let me begin with a brief overview of our financial performance. These results mark the midpoint of our three-year plan to deliver a better run, more strongly performing, and higher-returning Barclays. I am pleased with the Group's operational and financial progress so far. Return on tangible equity was 13.2% in the first half of the year and 12.3% in the quarter. Total income grew 14% year-on-year to $7.2 billion, while costs grew by 5%, supporting a 4 percentage point improvement in our cost-to-income ratio to 59%. By design, our plan is delivering operational improvements across each of our divisions to derive structurally higher and more consistent group returns in 2026 and beyond. All divisions generated a double-digit RoTE in Q2.

This included a 2.6% point year-on-year improvement in the Investment Bank's RoTE to 12.2% and a 1 percentage point improvement in the U.S. Consumer Bank to 10.2%. Our three-year plan set out in February 2024 outlined a roadmap to produce higher and more balanced returns. I would stress that our 2026 targets were never intended to be a resting place and do not represent the extent of our ambition. We are executing against our plan as we said we would. The momentum that we are seeing across the Group positions us well to deliver our RoTE guidance and targets by continuing to drive income growth, operating leverage, and business mix changes. Since 2023, we have deployed $17 billion of business growth RWAs into Barclays UK, the UK Corporate Bank, and Private Bank and Wealth Management. This includes $10 billion from organic growth.

This organic progress and the acquisition of Tesco Bank mean that we have now deployed more than half of the planned $30 billion by 2026. Within the Investment Bank, we have intentionally kept RWAs broadly stable for three-and-a-half-years to drive optimization and productivity. To ensure that the division is a consistent source of capital generation for the Group, which has not always been the case. Stable income streams now account for 40% of the Investment Bank's income in the past year, up from 29% in 2021. In addition, progress has been delivered alongside prudently managed risk reflected in stable VAR. By continuing to execute our plan, we will produce structurally higher and more consistent returns supported by our diversified business model. As debt investors, I appreciate credit quality is a key focus area, so I will cover this topic in more detail on the next slide.

The Q2 Group impairment charge of $469 million equated to a loan loss rate of 44 basis points. The U.K. credit picture remains benign, with low and stable delinquencies in our consumer books, and wholesale loan loss rates below or through the cycle expectations. The Barclays UK charge was $79 million in Q2, resulting in a loan loss rate of 14 basis points. The improvement versus Q1 reflected a release of credit card provisions and diminishing post-acquisition stage migration effects for Tesco Bank balances. The U.S. Consumer Bank charge of $312 million was stable year-on-year and down 22% versus last quarter. Consumer behavior remains resilient, with payment rates in our book above pre-COVID levels and consistent with Q1, and a stable mix of new account acquisitions, as can be seen on slide 23 in the appendix.

This is reflected in stable 90-day delinquencies and 30-day delinquencies, which fell 20 basis points versus Q1 to 2.8%, consistent with normal seasonal trends. Looking forward, the acquisition of General Motors' card balances is expected to lead to a circa $100 million day-one charge in Q3 and a post-acquisition stage migration charge of circa $50 million for the next few quarters from Q4. Including this charge, we continue to expect a group loan loss rate within the through-the-cycle guidance of 50-60 basis points for full year 2025. I'll now hand over to Dan for the balance sheet highlights.

Dan Fairclough (Group Treasurer)

Thanks, Anna. Let me begin first with capital on slide seven. We ended with a CET1 ratio of 14%, or 13.7% adjusted for the announced H1 buyback. This is in line with our guidance that we expect to operate towards the upper half of our 13%-14% target range. This is a deliberate consequence of the strategy, which was designed to drive higher and more consistent returns and improved capital generation. We generated 100 basis points of capital from attributable profits in H1 and expect around 170 basis points this year, aligned to our circa 11% RoTE guidance versus around 150 basis points in 2024. Looking ahead, we note the recent PRA publications on Basel 3.1. We remain confident in our existing guidance of GBP 3-10 billion of RWA inflation from Basel 3.1.

Although we are still working through the details regarding the option to delay implementation of the model aspect of FRTB, some elements of the PRA proposals have increased our confidence in this range. For the avoidance of doubt, the range itself reflects fine-tuning of implementation and potential business responses to provide mitigation. It is not specifically related to the FRTB rule set. In addition, I would note that the proposals do not deal with the divergent international position, which is a principle that we will continue to engage with regulators on. As previously noted, we expect some offset in Pillar 2A. We are still awaiting further guidance in this area, which is an important element of the final impact.

On the topic of Basel 3.1, we note that European banks have recently provided detail on the effect of the output floor, which for Barclays is not expected to be binding at any point. This reflects our business mix and applies at both the Group and the Ring Fence level. Moving up the capital stack on slide eight, we show our Tier 1 and total capital requirements as a proportion of RWAs. We continue to target a prudent buffer against each of these requirements, which helps us manage any RWA and FX movements, as well as our issuance and redemption profiles. Our Tier 1 ratio is 17.8%, with a healthy headroom above our 14.6% regulatory requirement. Within this ratio, we had an AT1 component of 3.8%. We continue to operate with higher levels of AT1 versus tier two.

This reflects AT1's contribution to a number of regulatory metrics, specifically Tier 1, total capital, MREL, and leverage requirements. As a result, AT1 supports the deployment of leverage balance sheet into liquid areas such as financing within the Investment Bank, which generates returns significantly in excess of the cost differential between AT1 and tier two. Clearly, our regular core and issuance schedule provides the opportunity to adjust this if required. In line with previous guidance, we expect AT1 issuance and redemptions to be broadly balanced over time. For 2025, we've so far issued $2.2 billion equivalent of AT1 against up to $3.1 billion of potential core decisions. Turning now to slide nine, our MREL ratio was 35.4% as at H1. We are pleased with the progress made against our GBP 14 billion issuance plan, which is now over 70% complete.

Following this, we may look at some pre-funding subject to market conditions. We continue to seek MREL currency diversification where it makes sense. For example, during H1, we successfully issued an AUD 1 billion offering and our first offshore Chinese Renminbi private placement. We have also been proactive and thoughtful in extending our weighted average life at historically tight spreads when compared to long-run averages. This can be helpful in reducing our overall sensitivity to spreads and annual issuance requirements. Finally, a brief word on our legacy capital. We have made continued progress on redeeming legacy instruments, such as the call of the Euro preference share announced in May. We remain comfortable with our residual position, which is now less than GBP 1 billion, representing a very small amount when compared to our overall capital stack.

The largest position within this is our U.S. dollar preference share, where we do not have an issuer call until 2034. Given this, you should not expect to hear much more from us on legacy capital. Onto the next slide on liquidity. Our average LCR of 178% represents GBP 135 billion in excess of our regulatory requirements and includes the initial effect of methodology changes introduced in June. The average net stable funding ratio was 136%, and the loans to deposit ratio was 74%, both demonstrating a continued robust liquidity position. To give a bit more detail on the revised methodology for the LCR, we're making changes to the way we measure outflows from our secured financing activities. These changes result in a higher and more conservative net outflow calculation from modeling a more asymmetric unwind of client activity, which we have not observed in actual client behavior.

As this is being implemented prospectively in our reporting, we expect a reduction in our average LCR ratio over time from current levels, which have grown over recent years. Although these changes will utilize some of the Group's surplus funding position, we expect the LCR to remain broadly within levels reported in recent years, as shown on the slide back to 2022. We will continue to hold a liquidity surplus well above regulatory requirements and maintain a robust and prudent approach to liquidity. Moving on to slide 11, total deposits have increased around GBP 4 billion year to date. The diversification of our deposit base has supported this outcome, with growth in deposits from corporates and banks offsetting a small contraction in consumer deposits.

Corporate deposit growth has been driven by the development of our U.S. dollar offering in the International Corporate Bank and an improved market share in the U.K. Corporate Bank. In Barclays UK, savings deposit balances reduced slightly as customers took advantage of favorable term deposit rates around the new ISA season. We were disciplined around pricing for term deposits, which was competitive in the first half of the quarter. This dynamic moderated later in the quarter, and our market share in current accounts has remained stable. Moving on to slide 12, income from the structural hedge is material and predictable and underpins our confidence in delivering our income targets. We have now locked in GBP 11.1 billion of gross structural hedge income across 2025 and 2026, up from GBP 10.2 billion last quarter. Beyond 2026, we currently expect the structural hedge to deliver multi-year NII growth.

As we said in April, our plan assumes that we reinvest around 90% of maturing hedges at a 3.5% yield. In each case, the Q2 outcome was more favorable than these assumptions. On rates, we locked in hedges at a higher rate of circa 3.7%, and we kept hedge balances flat, reflecting the continued stability of hedgeable deposits. Finally, a quick word on credit ratings. Our aim remains for Barclays PLC Senior to qualify a single-A composite across all indices. We will continue to engage with all credit rating agencies and view this objective as consistent with the delivery of our three-year plan. Throughout 2025, we have continued to demonstrate the strength of the Barclays balance sheet. We expect our plan to continue to deliver increased capital generation supported by a more balanced business model and growth in more stable income streams. With that, I'll hand back to Anna.

Anna Cross (Group Finance Director)

Thank you, Dan. In conclusion, this is the sixth quarter of progress against our 2026 targets that we are reiterating today and remain on track to deliver. We'll now open the call for questions. Operator, please go ahead.

Operator (participant)

If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove your question, please press star followed by two. Our first question today comes from the line of Lee Street from Citigroup. Please go ahead. Your line is now open.

Lee Street (Market Strategist)

Hello. Good afternoon all. Thank you for taking my questions and well done on the results today. Two from me, please. Just on the U.S. Consumer Bank, I was just wanting to understand how does that fit? How do you see that as fitting with the rest of Barclays' businesses that they operate, the synergies? How does it actually fit in? How should I think about that in terms of its strategic significance given its current size? Secondly, on capital, I know there were lots of questions this morning. I'm not going to ask what you think is going to happen, but if capital requirements were to, say, drop by 100 basis points, just to pick a round number for whatever reason, is it fair to assume that your target CET1 ratio would also commensurately drop by 100 basis points? That's what I'd like to understand.

That would be my two questions. Thank you.

Anna Cross (Group Finance Director)

Okay. Thanks for the questions, Lee. Why don't I start, and then I'll ask Dan to add. Strategically, where does the U.S. Bank fit? I mean, from our perspective, we believe that this is a business where we can make good returns, and you can see that progress over time. So RoTE that we reported this morning is over 10%. We are focused on getting that business to be in line with the Group at greater than 12% for 2026. Beyond that, we think we can get it back to the sort of mid-teens that we operated this business at historically. To get there, there's a number of things that we need to do, work on the NIM, and you can see that improving through time. We repriced the book last year, and you can see it coming through.

We're also really focused on generating dollar deposits in that business, which are up 27% year-on-year. The cost base is also important. You can see the cost-to-income ratio falling to 48%. We want that to be mid-40s. Delinquency is well under control, as you can see. We do have confidence in the operating moving parts. Beyond that, how does it connect to the rest of the Group? I think it's important to understand that we see this because it's a partnership business. It's not a direct-to-consumer business in the same way as our UK business is. We really see this as a business with 20 million customers. Yes, of course, but it's actually 20 significant corporate clients. We see ourselves as providing consumer credit to those largely IB clients. That's really what's different about the bank, or that part of the bank.

You can see the nexus that it's got to the IB, but it's also important to just stress the amount of connectivity between the two cards businesses on either side of the Atlantic. We share modeling and capital approaches. We also are able to use the capability that we have in the U.S. to bring across to Barclays UK. You can see it increasingly running a partnership model, not just with Tesco, but with Amazon and with Avios. All of that capability and attitude comes from the U.S.. There's quite a connectivity here. As a standalone business, its customer service record and its level of digitization is very high. Actually, it sets a good track for the rest.

Finally, I'll just say in terms of the sort of overall capital efficiency of the bank, what the U.S. cards business does is it does candidly give us a better CCAR result because it creates diversification within the U.S.. You can see the low point of our CCAR was 10.8%, and our stress buffer is around 3.3%, pretty much in line with some of the other diversified banks in the U.S. That is really important. If we were not to have this business, we would be holding proportionately more capital against the IB in the States. Provided it can wash its face and generate good returns, it provides other ancillary benefits. As to your second question about CET1, we think about CET1 across a really long time horizon. We are satisfied with our target of 13%-14% now.

We are obviously mindful of regulatory change when and if that may come, but there are some significant pieces of that regulatory change that are still outstanding, notably what is happening on Pillar 2 as part of Basel, but also the international alignment. Dan?

Dan Fairclough (Group Treasurer)

Yeah. I mean, I'd sort of broadly say that it will be a big driver. What the regulatory expectations are will be a big driver of where our target is, but we will take into account a range of other things as well. We'll look at what investors expect. We'll look at where the peer set is and peer comparisons, and we'll look at it through stress. As well as BAU. There is a pretty strong link, but there are other factors as well.

Lee Street (Market Strategist)

All right. [crosstalk]

Anna Cross (Group Finance Director)

Okay. Thank you, Lee. Perhaps we could go to the next question, please, Operator.

Operator (participant)

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

Daniel David (Credit Analyst and Director)

Good afternoon. Congratulations on the results, and thanks for taking my questions. I just want to touch on a couple of topics. The first one on SRT and the second one on capital. On risk transfer trades, I appreciate the disclosure you have got in your bigger slide pack. I just wanted to ask, is there a kind of target level you plan to get to, noting that you are kind of one of the bigger users in Europe? And how SRT kind of plays into loan pricing? Is it something you think about when you write new corporate loans? And although unlikely, what would be the impact on CET1 if you could not roll over your current risk transfer trades? The second one, I guess, picks up on Lee's question somewhat.

I guess there is quite a bit of excitement growing on whether requirements could be lower for larger U.K. banks. I am just interested in your opinion. Is there any areas you think that should be kind of eased? So whether that is leverage, Pillar 2A, or countercyclical? And then the second part of that, I guess, is on your range. I think the lower end of the range makes us slightly nervous in that it is less than 100 basis points over the MDA. Do you think you are likely to operate at the lower end of the range, let's say, over the next year? I think we all appreciate that you are intentionally at the higher end at the moment, but just interested in hearing your thoughts there. Thanks.

Dan Fairclough (Group Treasurer)

Yeah. Thanks for the questions, Dan. On SRT, obviously, we consider market capacity quite carefully in sizing the SRT amount. We're also very aware, which links into the last point of your question, about the amount of RWAs that we would have amortizing in any particular period. We've said that for the Colonnade program, that's less than GBP 2 billion. That's something that we will use as a guide. We would always want to make sure that we could respond to any particular stress in the market. We think we're well positioned for that at the size that we're at. As we've said before, broadly, that Colonnade program is kind of at maturity in terms of scale. In terms of the loan pricing, we don't reflect it directly into the loan pricing. We don't provide details with the loan originators as to what's going into the pool and what's not.

We think that's just very clear that they would not be swayed in their commercial or credit decisioning based on whether we were getting protection or not getting protection on the assets. No, we keep those two things quite separate. It's more of a risk management tool rather than a commercial tool. In terms of the capital position, I think we've probably covered this broadly before. We took the decision to guide you to the upper half of the 13%-14% range. We did that because we thought it was appropriate compared to where the MDA was, which was 12.2%. We think that gives a sufficient comfort buffer, particularly bearing in mind both the CET1 generation that we've obviously now demonstrated very consistently and also the flexibility that we have on RWAs. I wouldn't sort of change your view of where we expect to operate in the range.

If you want to add anything, Anna.

Anna Cross (Group Finance Director)

Yeah. I mean, the only thing I would add, Dan, is that one of the things that we would hope that the regulator is seeking to achieve is actually how these different parts of the regulation fit together. Stress testing plus the capital rules plus leverage plus GSIB, quite frankly, all of those things together need to be taken as a whole. That is what we will be seeking to discuss and are discussing with the regulators in the background.

Daniel David (Credit Analyst and Director)

Thank you very much. [crosstalk] Appreciate it.

Anna Cross (Group Finance Director)

Thank you. Thanks, Dan, for the question. Operator, can we go to the next question, please?

Operator (participant)

The next question comes from Paul Van Nermaal from Société Générale. Please go ahead. Your line is now open.

Paul Van Nermaal (Analyst)

Hi, Anna, Dan. Thanks for taking my questions. I've got a couple. Actually, the first one, I've got three, sorry. The first one was Dan, you mentioned when you were talking about supply. I'm sorry, I missed the comment you made, something about not having maturities or calls until 2034. What was it that I missed about that? That's part one on supply. The second was, is it fair to assume that you're still going to be doing another 81 to cover your calls and that you're done in tier two? That's that on supply. The second question relating to the U.S. Consumer Bank, much of that has been covered. I've just got kind of a mechanical question. So you've got in the non-UK credit card business, you've got 8% NPLs. I think I've got my maths right. If I don't, please let me know.

But you've got over 4% cost of risk. Have you just got enormous charge-offs? That doesn't really tally with your relatively low delinquency rates. What's happening with the mechanics there of the cost of risk versus the actual NPL balances, which seem reasonably low? And then the very last question is one I've asked before, but nothing seems to come of it, is what is it that you're looking for in terms of bad news around consumer behavior that you haven't yet seen? I mean, what's the first marker of that that you guys care about in terms of a risk metric to tell us that we're in a new and more negative environment? Thank you.

Dan Fairclough (Group Treasurer)

Thanks, Paul. I'll take the first supply question. I think Anna will pick up the rest. Just to clarify, the point about the call in 2034 was in relation to our legacy capital.

We haven't got very much legacy capital left, but one of the larger transactions is a dollar preference share. We were just clarifying that we don't have an issue at all on that until 2034. Not too much more to say on that. In relation to supply for the rest of the year, we haven't provided guidance on specific splits, but we do have, if we were to exercise at the first call, $3.1 billion of 81 calls, and we've only issued $2.2 billion. We said we would be a broadly balanced issuer in 81 as we go through the year.

Anna Cross (Group Finance Director)

Hi, Paul. Just in terms of your question about cost of risk, I mean, the way I think about it is cost of risk covers two things. It covers the piece that you've called out, which is your sort of real experienced sort of true risk, if you like, which is the NPLs. It also, in very large part, covers the sort of procyclicality of IFRS 9. What that requires us to do is basically to use macroeconomic forecasts to imagine what would happen to our portfolios in a range of economic scenarios. To give you an idea, the weighted average unemployment rate that we are using in our U.S. portfolio right now is 5.1%. You might recall in Q1, we took an additional charge because of the uncertainty.

All in all, that basically means that we are running a cost of risk here that is imagining a 5.75% unemployment rate in the U.S. It is just that procyclicality point. About IFRS 9, I think that is drawing that distinction for you. The second question that you've got, which is what really is it that we are looking for? I mean, be reassured, we look very hard at all of the data that we see, both in terms of our own portfolios, but also high-frequency data more generally. We see nothing either in the U.K. or in the U.S., and that includes retail and wholesale. Specifically for cards, the kind of thing I would be looking for would be either a marked change in the way people were spending their money. If anything, in the U.K.

in particular, I would say people are getting a little bit more confident. We are seeing credit card spend outstripping debit card spend. In the U.S., we have not really seen a huge change in spending patterns despite quite a lot of speculation about inflation and potential of inflation, but nothing significant. The other thing I would be looking for is change in payment rates. Are customers going much more to the sort of minimum payment level that we ask them for? The answer to that is we are not seeing that either. If anything, they remain higher than pre-COVID levels. That is true both of the U.K. and the U.S., and it is true all the way through the risk stack. We are seeing quite conservative consumer behavior that is pretty reassuring at this stage. Hopefully, that helps and answers your questions.

Lee Street (Market Strategist)

That's great. [crosstalk]

Anna Cross (Group Finance Director)

Thanks for that, Paul. Operator, please, can we go to the next question, please?

Operator (participant)

Of course. Our final question today comes from the line of Robert Smalley from Verition Fund Management. Please go ahead. Your line is now open.

Robert Smalley (Research Analyst)

Hi. Thanks very much for taking my question. A lot have been asked and answered. Just a couple. First, you talked a little bit about the LCR and the LCR calculation. Can you talk about why these numbers went up so much, and what you think the proper running rate should be, if it should be in the 150s? Also, you're running a pretty hefty NSFR as well, if you could address that. Secondly, talked about this on the last call, but NDFI exposure, exposure to non-depository financial institutions. Could you give us an update on that specifically? What kind of exposure you have to alternative asset managers and BDCs? I know there's a lot of nomenclature issues around that, but that's really what I'm looking for as we continue to see banks lend more to their non-depository peers, competitors.

Third, you talked about raising deposits in the U.S., pretty active in the Yankee CD program. Can you see doing more, larger transactions, market transactions from the U.S. bank, the same way that some of your BCPers do, bank-level issuance in market size? Thank you.

Dan Fairclough (Group Treasurer)

Yeah. Thank you. Thank you, Robert. I'll make a start on those. You're right. We have operated at a pretty high level of liquidity. I'd say that's partly a function of the macroeconomics and money supply. To some extent, that's seen in banks globally. I think specifically as well, in terms of our case, we have got a strategy that kind of puts deposits at the center of the relationship in a number of different business lines. I'd call out the growth of our U.S. transaction bank that has obviously seen growth in deposits. Obviously, our private bank and wealth management has got a good deposit franchise as well. We're probably a significant beneficiary of that overall trend in money supply and in deposits. We called out today that we're making some changes in the LCR calculation that will bring the LCR down a little bit.

I think you should expect it to remain at high levels. We're kind of calling back, if you go back to '22 or '23, it was 156% or 161% LCR ratio. Just to sort of have that in your mind. Generally, we view it as still economic to run at that level of surplus liquidity just because the liquidity to us is low cost, and therefore it's efficient. Your second question on NBFIs. There's obviously been a bit of a push in the U.S. for the U.S. regulators to disclose more information on that. You can see some disclosure from us on those specific lending types. There is almost no exposure in our Barclays Bank Delaware or in our IHC entities. There is some exposure in our New York branch, which is where we would do a lot of that type of activity. The number there is about $20 billion.

It will be to a range of NBFIs. Maybe, Anna, you want to pick up on why we do this type of activity?

Anna Cross (Group Finance Director)

Yeah. Thanks, Robert. I mean, we do think that it occupies a really important part of the lending infrastructure more generally. Stepping back, regulation and impending regulation tends to penalize illiquid risk as it sits on bank balance sheets. Yet, the world, both in the U.S. and in the U.K., needs this sort of longer-term infrastructure spending. We think they do form a really important part of that infrastructure. We do have a very intertwined relationship with these parties, which does mean that we know them well. We can pick and choose the ones that we really want to do business with. Some providers are our competitors on a lending basis, but we may lend to them. We bring their companies to market. We are quite often offering bespoke risk management transactions for them. It is like any other counterparty, really. We choose those counterparties carefully.

We monitor their interactions with us carefully over time.

Dan Fairclough (Group Treasurer)

Robert, your last question on.

Robert Smalley (Research Analyst)

That's great. Oh, go ahead.

Dan Fairclough (Group Treasurer)

Just on U.S. wholesale funding. Look, we've got no plans to change the mix of U.S. wholesale funding that we do. Generally, wholesale funding would be at the more expensive end of our liability sources. We wouldn't do that unless we had a big push to. If anything, as we've discussed on this call, the funding strategy for Barclays Bank Delaware is actually to do more deposits, more retail deposits. If anything, sort of less CDs in that mix. No real change on the overall mix of the U.S. funding.

Robert Smalley (Research Analyst)

Very good. [crosstalk] Thank you both for all the detail.

Anna Cross (Group Finance Director)

Thank you. Thank you, Robert. Thank you for asking the questions. Thank you all for joining the call. Thank you for your continued interest and support for Barclays. We hope to see many of you on the road. If not over the next few days, then perhaps into September. Thanks very much. Operator, we can now close the call.