Barclays - Earnings Call - Q4 2021 Fixed Income

Transcript

Speaker 0

Welcome to the Barclays full year twenty twenty one results Fixed Income conference call. I will now hand you over to Tushar Nazaria, group finance director.

Speaker 1

Good afternoon, everyone, and welcome to the Fixed Income investor call for our full year 2021 results. I'm joined today by Dan Fairclough, our interim group treasurer. Let me start with slide three and make some introductory comments on our full year performance and outlook before handing over to Dan. Through the year, the strength of the CIB has continued to offset the effects of the pandemic on our consumer businesses, where we are now seeing initial signs of recovery. Overall income was up 1% year on year despite an 8% weakening in the average US dollar exchange rate.

Costs increased by 600,000,000.0 to 14,400,000,000.0 as a result of an increase of 300,000,000.0 in structural cost actions and 200,000,000.0 in performance costs. However, base costs, excluding these items, were flat at 12,000,000,000 in line with our guidance. Following an impairment charge of 4,800,000,000.0 in 2020, we had a net release of 700,000,000.0 for the year while maintaining strong coverage ratios in line with or better than pre pandemic levels. This resulted in a PBT of 8,400,000,000.0, a significant increase on the 2022 profit 2020 profit of 3,100,000,000.0 and EPS of 37.5¢. Overall, we generated a cash free RoTE of 13.4% for the year.

Our capital generation has put us in a position to pay a total dividend of 6¢ for the year and launch a further share buyback of up to 1,000,000,000, falling on from the 500,000,000 buyback executed in the 2021. We ended the year at 15.1% CET1 ratio or 14.8% adjusted for the proposed buyback above our target range of 13 to 14%. Then we'll talk about our capital position in more detail shortly. We achieved the 13.4% RoTE in 2021. Going forward, we're focused on delivering our target of double digit RoTE on a sustainable basis.

We're seeing some signs we are seeing some recovery in lead indicators for consumer income, and the CIB franchise continues to be well positioned. We believe our diversified income streams position us well to benefit from economic recovery and rising interest rates. Despite the impairment release, we have maintained strong coverage ratios, and we expect the impairment charge run rate to be below pre pandemic levels in the coming quarters. Work based costs in 2020 are expected to be modest modestly higher than in 2021 as a result of inflationary pressure, but remain a critical focus, and we will be disciplined on performance costs and the extent of further structural cost actions. Overall, we are well positioned to deliver sustainable double digit returns on tangible equity and making a project capital return to shareholders while maintaining a strong capital ratio.

And with that, I'll hand over to Dan for the balance sheet highlights.

Speaker 2

Thanks, Tushar. We ended the year with a robust position across all aspects of our balance sheet as evidenced on the slide. Our CET1 ratio was 15.1%. The spot UK leverage ratio ended at 5.3%, and MREL was 34.4% of RWAs ahead of

Speaker 1

our NCL requirements that came into effect at the beginning

Speaker 2

of the year. Liquidity continues to be strong with an LCR ratio of a 168%. I'll start with some comments on capital on slide seven. Our earnings in 2021 underscores strong organic capital generation of the group but it's slightly more elevated than a typical year. RWAs grew by £8,000,000,000 over the year driven by market risk model updates in q four and business growth in the CIB.

And we absorbed previously flagged headwinds, such as the reduction in IFRS nine transitional relief and pension contributions. Our strong capital position enabled us to distribute 72 basis points of capital to shareholders over the year in a combination of dividends and buybacks, including the buyback announced today of up to £1,000,000,000 or the equivalent of 30 basis points. On slide eight, we thought it would be helpful to show the effects on the CET one ratio of the share buyback and the regulatory changes which took effect from January 1. The effective regulatory changes is circa 80 basis points, similar to guidance we provided in the q three results last year. The combined impact of both of these items would take the CET one ratio to circa 14%, the top end of our target range of 13% to 14%.

We do not expect any further significant regulatory headwinds for the next couple of years. Looking further out, we provided an estimate of the initial quantitative impact from Basel 3.1, which is a five to 10% increase in group RWAs from our end two thousand twenty one position. As you'll be aware, there material uncertainty in the quantum and timing of the Basel 3.1 impact, particularly in The UK, and it will be some time before the impacts can be assessed with accuracy. Alongside the rest of The UK sector, we are awaiting the consultation paper from the PRA on rule finalization and timing of implementation. This is now expected in the second half of this year.

We note that for the rest of Europe, implementation was further delayed to 02/2025, and we await to see if this will be followed in The UK. On slide nine, we pretend to lay out at a high level our philosophy towards capital management and how we intend to allocate capital going forward. As 2021 is proven, the group is able to generate meaningful organic capital from earnings. Achieving that greater than 10% return on tangible equity consistently would translate to a 150 basis points of annual capital ratio accretion. This capital can then be used in three ways.

Firstly, and most importantly, to maintain a strong capital position, which is the foundation of our 13 to 40% CET1 ratio target. Secondly, to selectively invest for growth in demand led and capital light organic and inorganic opportunities. And finally, to distribute an appropriate proportion to shareholders. Holding an appropriate headroom above our NDA hurdle is a critical part of our capital management framework. And looking ahead, we are comfortable that the 13 to 14% target range accommodates for the regulatory measures that we see on the horizon.

At the end of the year, our buffer to the MDA hurdle of 11.1% was 400 basis points or circa £13,000,000,000 of capital. With Bank of England reintroducing The UK countercyclical buffer or CCYD from December 2022, the MDA hurdle will increase over time as illustrated on the slide. The UK CCYD translates at circa 50% for the group given our geographical exposure. Therefore, the 1% CCYB's application in December 2022 becomes a circa 50 basis points capital buffer, which would increase our MDA hurdle to 11.6%. If the CTYD were to be increased further to 2% in q two two thousand twenty three, as Bank of England has indicated in May, then this would result in a circa 100 basis points total additional buffer for us, bringing the MDA hurdle to 12.1%.

However, as we experienced in both 2016 and 02/2020, the TRA has moved swiftly to remove the CTYB in the event of a real or potential macroeconomic stress, and so we do view this element of our capital requirement as a stress buffer. The PRA have also said that they intend to review their pillar to a methodologies in more detail by 2024 in light of changes in buffers and improvements in the way RWAs are measured following the finalization of Basel 3.1. As such, we may well see some offset in our MTA requirements. This would be consistent with prior official sector comments on the adequate levels of capital in The UK banking system. All in all, we believe that the 13 to 14% target is calibrated to provide an appropriate headroom to the NDA hurdle, reflecting this evolving regulatory environment.

Turning to the next slide, which illustrates the structure of that total capital stack. We continue to run a robust 81 level and maintain a conservative headroom over the regulatory minimum. Our thoughts in this area are unchanged. The headroom primarily serves to manage any RWA and FX fluctuations. In addition, as we've noted before, running at this 81 level also supports leverage, and we continue to see attractive opportunities in parts of our markets business where returns on leverage balance sheet are in excess of the cost of 81.

Finally, I would note that we do have a regular core profile of 81. For example, the recently announced calls of our $1,500,000,000, 7.875% tier one bond two weeks ago. So we have the ability to manage this ratio dynamically if we choose. Of course, this is subject to market conditions and regulatory commission at the relevant time. In tier two capital, we aim to hold appropriate levels of tier two to meet our total capital requirement.

On legacy capital, we remain comfortable with our position given it's a very small part of our capital stack and is not counted within our NREL position. We have around £1,700,000,000 worth of legacy instruments, which could exist beyond 02/2022. The vast majority of these instruments continue to qualify as own funds until 2,025 or beyond. Our approach remains unchanged, and the and the own funds eligibility aspect that I just mentioned is a component that informs our decision making on resolvability when assessing each in each each instrument. This reflects the understanding that qualifying own funds securities remain in scope for regulatory stabilization powers.

We continue to assess our position, and we'll consider each security on a case by case basis. In addition, we have no legacy capital securities issued from our group resolution entities, Barclays PLC. This is something we've mentioned previously and is important to us as legacy capital will not impact the single point of entry resolution model. We continue to be engaged with our regulators on legacy capital, which forms a part of our overall resolvability assessment framework, the summary of which is due for publication later this year alongside our peers. 2021 was a milestone year for MREL.

As the transitional requirements have come to

Speaker 1

an end, we are pleased to

Speaker 2

have been compliant with our end state MREL requirements for some time, the culmination of a near decade long journey from when we started in 2013 with our first hold conditions. As you can see on slide 12, we have a prudent MREL position and are in excess of average minimums. For 02/2022, our MREL issuance requirements are expected to be around £9,000,000,000, lower than the circa £12,000,000,000 of total redemptions of holding company and operating company term securities. Within this £9,000,000 issuance plan, we expect to be active across all MREL debt classes as usual in senior, in tier two, and eighty one formats. We are pleased that she already kick started our plan with a 1,250,000,000 senior transaction at the January, leaving us with around £8,000,000,000 of MREL issuance still to do for this year.

One of the three strategic priorities for the group that we encapsulated out this morning was to support the transition to a low carbon economy. This this transition will involve a fundamental reorganization of the global economy, and treasury is playing a critical role in supporting Barclays' initiatives in this space. We are we are facilitating investment, including our own capital, into new green technologies and infrastructure projects that will build up low carbon capacity and capability. Within treasury, our sustainable impact capital program has a mandate to invest up to a £175,000,000 of equity capital in sustainably focused startups by 02/2025, helping to accelerate our clients' transition towards a low carbon economy. The program is seeking out and supporting clear, scalable propositions that deliver both environmental benefits and economic returns.

£54,000,000 of our target has already been deployed with £30,000,000 invested in the last year. In terms of future fundraising, we have ambitions to continue to expand our environmental and social issuance. These include the continued building out of our green liability programs and issuance on existing programs, such as our green structured notes program. We continue to develop the product offering, such as our green commercial paper program launched this month. We are also active as an investor with £3,400,000,000 of green bond assets held in our liquidity portfolio.

Speaker 1

On that note, let me

Speaker 2

now turn to slide 14 to talk about our liquidity position in more detail. The liquidity pool of £291,000,000,000 and our pillar one LCR ratio of a 168% represent a £116,000,000,000 surplus above the minimum regulatory requirements. You'll see that the LCR position has been stable throughout the year, maintaining a prudent balance between holding a healthy excess and deploying the liquidity to our businesses, enabling them to capitalize on the prevailing market opportunities. Maintaining this prudent liquidity position comes at low cost to the group in the current environment. Let me now turn briefly to our funding profile on the next slide.

We continue to see the group loan to deposit ratio trends lower. In 2,019, it stood at 82%, and at year end, it was 70% with deposits across the group of £519,000,000,000, up 25% over the past two years. The deposit growth has been observed across the market largely due to global monetary policy actions. Looking forward, we believe that deposit trends will depend largely on the wider macroeconomic environment and in The UK, determined by how rapidly the Bank of England unwinds QE. The deposit book currently remains stable, but as you would expect, we continue to monitor it closely.

In our structural hedge program, we identified further deposit balances suitable for hedging and grew the program by £40,000,000,000 last year. However, we're retaining a significant buffer buffer of unhedged balances that we keep under review. Before I conclude, let me spend a moment on credit ratings. Improving our credit ratings profile continues to be a strategic priority for the group. We ended the year with positive outlooks for Barclays PLC with S and P and Moody's.

With S and P, we went we underwent a double revision in the space of four months from negative to stable in February, followed by stable to positive in June. With Moody's, the outlook was revised from stable to positive last November. These were actions in recognition of strengths specific to our credit fundamentals, most notably in how we've demonstrated an improved and sustainable profitability level throughout pandemic. We will continue to seek active dialogue with the agencies to move forward with the positive momentum that we have. So to wrap up, we continue to manage the group with a strong balance sheet, a prudently managed CET1 ratio and robust liquidity metrics.

Our diversified business model continues to deliver meaningful capital generation, giving us comfort in our 13% to 40% CET1 ratio target. We continue to approach our capital market issuance in a responsible and measured way. We look forward to engaging with all of you and the rest of our fixed income stakeholders over

Speaker 1

the coming months. And with that, I'll hand back to Tushar. Thank you, Dan. We'd now like to open up the call to questions, and I hope you have found this call helpful. Operator, please go ahead.

Speaker 0

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 2. When preparing to ask a question, please ensure that your phone is unmuted locally. To confirm, press star followed by 1 to ask your question. Our first telephone question today is from Paul Finner from Societe Generale.

Your line is now open. Please go ahead.

Speaker 3

Oh, hi, team. Hi, Ken. Hi, Tushar. And Tushar, congratulations and all the best for the future. I got I guess I got three questions.

The first one, the plans of funding. So you're saying $9.09 9,000,000,000. Would it be and and across the the the the spectrum, would it be fair to assume it's gonna be something like 5,000,000,000 Holocaust senior, 2,000,000,000 tier two, 2,000,000,081? Just a little bit of guide around the quantum at each level would be very helpful. And the second question is

Speaker 2

just looking at your asset quality because

Speaker 3

I know the outlook is all pretty benign, but the the stage two, it's what I think is around still around 1010% or so is still is historically quite high. Where where should that end up being or we are kind of at a naturally sort of higher state state of stage two. And then the third question is around, you know, the Thorny question around sanctions, you know, in against, you know, Russian institutions and potentially an escalation of the you know, the the size of the the banks over there. What what how should we think about the impact on, you know, someone like Barclays of these sanctions? What does

Speaker 4

it do for you and

Speaker 3

where does it hurt? And in particular, I guess, what what is the nervousness around shutting off SWIFT? And why is that the the the place where no one wants the the government to to go switching off SWIFT off of the the Russians? And and what would that impact you?

Speaker 1

Thank you. Yes, Paul. And appreciate your comments at the beginning of your question. I'll ask them to cover the funding plan and sanctions and the impact you may have on us. Why don't I quickly cover your question on asset quality and sort of impairment staging?

I'm not sure I'd be able to give you a sort of a a straightforward answer on what you'd expect for h two balances to be. The only thing I would say is that it's little bit complicated where we are at the moment because the way our models are written under IFRS nine, you know, we didn't really have the pandemic in in mind in terms of modeling sort of credit behavior, particularly on the consumer side. And therefore, we've had to use a series of management overlays to to really adapt the models to to take into account some of the unusual features of the pandemic. It's really the speed of building into recession and then recovering from it. And then, you know, then then and and once in a while, you get a sort of a temporary lockdown, which which the models find really, really difficult to to to calibrate to.

And you said that when you when you take a step back and I look at sort of general asset quality and the credit environment, I'm to make a couple of points. One is that the environment itself on all our leading indicators looks incredibly benign at the moment. Obviously, delinquencies, we look at spending patterns, look at customer indebtedness, of affordability levels, all the sort of leading indicators you'd expect us to be monitoring both on the consumer side, but even on the the wholesale side. Look look as benign as we've seen. Our watch list, when we look on the corporate side, is is is very low at the moment, and, again, we'll be towards the lower end of this as I've seen it.

Now we are, of course, got geopolitical events. We'll come up to that in a bit, and we've got, you know, the issues around potentially the cost of living rate cycle and and as other as energy bills or other forms of inflation that are coming through. So I think we'll spend a lot of attention just to monitoring very closely its affordability levels and the transmission effects on this. But at the moment, it it it does feel there's quite a decent level of resiliency at least as we see in our assets to to any shops. The other final thing I'd say, Paul, on the asset quality is we do look at coverage ratios in a lot of detail.

And one of the areas that we we wanna be conservative in the speed at which we were building our provisions and also, you know, cautious in the pace at which we released them. One measure of that will be the coverage ratios. So that you look at our unsecured books on the consumer side, they're still quite a bit above where they were pre pandemic levels. And even on stage two balances on the consumer side, I think they're running in the cards business something around 30%, and most of these balances aren't even past due. So some of that is a feature of deliberate sort of caution on our part in terms of, you know, Omicron was still an ongoing item when we were closing the books at the year end, and so

Speaker 2

it was appropriate for us

Speaker 1

to be cautious. But to get a sense, we feel we feel very well provided at the moment against a relatively benign sort of credit backdrop, consumer credit and wholesale credit backdrop. Dan, do you want

Speaker 2

to talk to any other questions? Yes. Hey, Paul. So just on the on the funding plan, I mean, as I said, we'll be active across all tiers of capital. Actually, I I won't comment on, you know, the individual makeup, but it wouldn't it wouldn't be dissimilar to prior years, the largest portion of it would certainly be in senior MREL.

Just on the the the sanctions question, I mean, there's obviously a couple of different avenues that we could be impacted by that we focus on. Firstly is, obviously, the direct credit exposure that could arise either in direct exposures or or or in securities form. And the second, which I think probably gets to your point about swift is where we might have nostril or boisterous exposures. So money is due or from to to to Russian banks. And, obviously, that could either be direct with them or where we are using them as a clearing counterparty.

I mean, fortunately, from our perspective, we've got very limited exposure to the Russian banking sector or or indeed Russia as a as a geography full stop. But we're clearly keeping it under under close review. And, hopefully, that's helpful. Yeah. On the Russians,

Speaker 1

I just wanna I just understand if we think you've been calling us for some time, Paul. You probably recall when we opened our noncore unit way back when one of the areas or geographies that we exited was Russia at that time. And so it's just part of our geographical shape now. As Dan mentioned, we don't really have any direct exposure, and therefore, even direct exposure is fairly fairly limited. So thank you for your questions.

Thanks, Paul. Can we have the next question, please, operator?

Speaker 0

Our next question is from Lee Street from Citi. Your line is now open. Please proceed with your questions.

Speaker 4

Thank you. Hello. Good afternoon all. I have three questions for you today, please. So firstly, you flagged no regulatory headwinds for capital after the start of this year, and you've you're somewhere around 14%.

So I guess my question is after accounting for for growth in this weighted assets, you sort of effectively saying you're gonna be distributing a 100% of your of your earnings if you can sort manage that 13 to 14% range. That's the first one. Second one, and this might be an impossible question, in order to get any thoughts on what what is the level of interest rates that you think represents the pricing point where the you can benefit the higher rates, you know, to to the benefit of revenues, it starts to become more than offset by higher than rising loan losses At what level do you think this creates, you know, such become a huge and constructive to to the business model? And finally, a technical one on the resolution assessment framework.

What what level of details do I actually expect to function? Is it is it like a one page summary of,

Speaker 2

you know, five pages, 10 pages, a

Speaker 4

100 pages, and or and is it up to you or will the packaging then effectively dictate to what you can actually publish? They will be my three questions. Thank you. Yeah. Thanks, Lee.

Speaker 1

Why don't I take the first one on distribution, then I'll ask Dan to comment on the other two. So, yeah, we don't see outside of the direct changes that we'll be putting through in the first quarter. We don't see too much on the horizon over, let's say, the next two year time frame. We've obviously called out Basel 3.1 remains to be seen exactly what that is for banking and the public there. I guess it's a consultation on that sometime before the end of this year, but we don't know exactly when that'll be, but it feels like it'll be towards the the sort of latter half of the year on the earlier part of the year.

So that feels like it's Europe's any guide, it's 2025 or, you know, perhaps even a bit beyond in terms of implementation. So therefore, given that there's no headwinds, I I I think we've had I don't wanna sort of say we'll be distributing literally down to the the very last basis point because, you know, we're very prudent and we're bank. So we will we'll sort of always be cautious in terms of ensuring that, you know, if there are changes in market environments or business cycles or whatever that we're appropriately capitalized. But distributing excess capital when we click when we don't think there's a need to retain it as a potential matter or indeed as a as a productive matter in terms of putting those so that capital towards is something we would look to get back into shareholders' hands. But I think you've seen, hopefully, in the past us operating fairly prudently, well above any sort of minimum level as we would define it, and that's obviously well above any regulatory minimum.

So, you know, we like, I guess, the the message I think is we will be a distributor of capital back to to investors, but with ensuring that our our stock remains prudent and appropriately prudent depending on where we are in business cycle. Dan, do you wanna cover the other two? Yeah. Just just on the interest rate point.

Speaker 2

I mean, obviously, we've we've disclosed the potential impact of 25 basis point rate moves. So clearly, we've got good positive gearing to to higher interest rates. I mean, in terms of, you know, when would we begin to see an impact in in in credit, and obviously, that needs to be a sort of impact in credit beyond what we're already provisioned for. I think the point that I'd probably make is just that we do stress test for materially higher interest rates at origination, which is that in particular on mortgages where we will be stressing up to interest rates of 6%. And obviously, there's the benefit of the LTV protection there.

So but hard to give a specific answer, but I do think we're pretty well protected and we stress for that pretty thoroughly point of origination. In terms of the legacy capital publication, we're in close discussions with the Bank of England on that now. And obviously, we'll be guided by them a little bit as to how much disclosure we we we put in that. And and, obviously, when we can say more on it, we we we will. Alright.

Speaker 4

Thanks. Thank you very much, and best of in

Speaker 5

your next role. Thanks.

Speaker 1

Yeah. Thanks, Lee. Could we have the next question, please, operator?

Speaker 0

Our next question comes from Corinne Cunningham from Autonomous. Your line is now open. Please go ahead. Thank you very much.

Speaker 6

Some of them are actually also I think most of it is just some answers. But have you already had your discussions in terms of what counts, what doesn't count? And mean, it's just literally kind of the the work published part that you're discussing? Or are they still pitching the meaningful and material conversations about exactly how your resolution framework should work?

That's probably still ongoing. And and then The UK bank call wouldn't be complete without a negative question. We we don't have a lot of questions to get to you. But just looking back, I wondered if the reason for calling the Sterling this day, the rationale for that largely liable system. Thank you.

Speaker 2

You wanna comment on that? Yeah. Sure. So, I mean, the resolvability dialogue with the bank is quite a broad topic. So it's not just, like, the security, it covers, you know, capabilities in funding and resolution, capabilities in value and resolution amongst other things.

So it's a it's a pretty broad ranging topic. We've submitted a self assessment to them and we've had some very detailed interviews with them. So I don't think there's too much more engagement for us to have that really. It's now just about finalizing the the publications for for for June. In terms of the Sterling the the the Sterling call, I mean, that

Speaker 1

was an instrument that

Speaker 2

lost own funds capital eligibility, and it was economic for us to to to call. So that that would be two main drivers for that security. Obviously, as we've said before, we'll look at all security on

Speaker 4

a on a case by case basis.

Speaker 2

That does that answer your questions, Cora?

Speaker 6

Yes. Yes, sir. Thank you very much.

Speaker 1

Thanks, Cora. Could we have the next question, please, operator?

Speaker 0

Our next question comes from Robert Smalley from UBS. Your line is now open. Please go ahead.

Speaker 5

Hi. Thanks for taking my question. And, Tushar, congratulations, and thanks for all your help, especially on these calls over the past couple of years. Couple of questions on credit cards and then one on liquidity. Could you talk about payment rates?

Are we starting to see that turning into revolving balances, differences in The UK versus The U. S? On the earlier call, there's discussion S. About the acquisition of TAP portfolio.

And is there really is it going to be more divergence in strategy, U. S, U. K, U. S. More targeted at buying portfolios, U.

K. More broad based. Where do you see credit normalizing for in the current space? And then on liquidity, obviously, you're carrying a lot of excess liquidity. You've also got still COVID reserves.

Are you looking to deploy that excess liquidity as rates are going up? And do you think that that's reflected in perception of where your your net interest margin is going for 2022?

Speaker 1

Thanks, Robin. Appreciate your comments at the beginning of your question. Why don't I cover the point on the card questions in general? I'll hand over to Dan on liquidity. On credit cards, in terms of payment rates, it was certainly more elevated than we'd hoped for, although not wholly surprising to us over the course of last year.

It's probably a little bit too early to tell because of the seasonal effects we sort of currently have going on at the moment. Obviously, we're off the back of the holiday spending period over Christmas and and New Year and the the sort of not even two months into this year. So it's a little bit hard to tell. But but generally speaking, I think the ingredients are there for balances to revolving balances to grow, particularly in The US. I mean, we've seen very good card opening metrics for our cards in The US.

We've seen very good utilization metrics, And we certainly haven't seen payment rates increasing, although it's just a sort of caveat that with the fact that, I think, seasonally, we'll have to skip through another month or two for now for sure. But we are reasonably optimistic as we get into revolving balances. And you're both in the in the certainly in The US and and and in The UK as well. In terms of the strategy there, yes, there is a divergence in in the sense that in The US, we are very, very focused on partnerships. And the the first of the gap portfolio is really to diversify into well, you know, we were very heavy on the travel and hospitality leisure sort of sector in The United States with the respective partners, And this takes us into retail, and if you look at it in real simple terms, half the market in The US is in the hospitality leisure travel space, and the other half is in retail.

So, you know, our first foray into retail is is is almost a brand new market. But it also takes us into white label or store cards, private label card, which is a a very different product, a different sort of credit proposition, different sort of socioeconomic demographics navigating this. So we think about it literally almost a a business line on in of itself. So they are quite diverse. In The UK, you know, because of the the lack of interchange, you you you don't really be getting the opportunity to run a a sort of a partnership business in the same way that you can in the in in The US.

So we we see that more as a sort of a box is branded product rather than issuing cards on behalf of partners. In terms of impairment normalization, in pre COVID, I think both businesses, coincidentally, were running at about 3% loan loss reserves. I I would think that early on in the credit cycle and and probably credit still still benign, notwithstanding sort of questions from earlier with potential inflation shocks and rate wise and stuff like that. But even then, you know, I'd expect it to trend below 3% for for some time actually. At some point, you know, if the cycle matures and, you know, in seasons well then that that may sort of build up to 3%.

But I'll I think it will

Speaker 2

be pretty some time to see that's

Speaker 1

a 3% loan loss rates this time around. Dan, do want to cover the funding? Oh, sorry. Liquidity. So

Speaker 2

Yes. Yes. I mean, obviously, you completely agree. We've got very high levels of of of liquidity right now. I would point out that it's very low cost liquidity, both in terms of the Mhmm.

Of the franchise that we've got and and obviously, the TFS and the accruals that we've made in the year. It's certainly available and ready to be deployed into the business. So that's something we would like to do subject to the client demand. Obviously, that's going to be most impactful in the BUK sector in terms of actual impact on NIM. I think as Tushar alluded to this morning, there is some expectation of growth in those NIM forecasts, particularly in the secured space given the likely activity that we'll see in the remortgage market and some expected normalization of the unsecured card balances.

But, yeah, certainly, that that liquidity remains available to be deployed.

Speaker 5

Thanks very much. Appreciate it.

Speaker 1

Thank you very much, Robert. Can we have the next question, please, operator?

Speaker 0

As a reminder, if you wish to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Alvaro Ruiz de Elja from Morgan Stanley. Please go ahead. Your line is now open.

Speaker 7

Thank you very much for taking my questions. Best of luck with the new role. And I have two questions. The first one, I think, is quite difficult to answer, but I'm trying my best about the risk liability as in the framework. Given the deadline is in June and you already had all the most relevant conversation with the regulator, do we expect any kind of surprise in terms of not only about legacy instruments, but as well about the structure of the bank if basically, I just want to see if we can receive any feeling about any changes once 2023 is published?

And the second one is about legacy, and if you can give us an update on regarding the remaining debt of securities. And that's all. Thank you very much.

Speaker 1

Yes. Thanks. I've already prepared comments at the beginning of the question. Why don't I talk about resolvers resolvability assessment framework, and I'll ask Mike to talk about the the latest instruments including the discourse. You're right.

It's a tricky question to answer. We are we are in in close dialogue with the PRA. We we've been in close dialogue for some time, and they've obviously looked at our resolvability assessment framework. They've looked at the work we've done, the assurances that we've taken, the governance that we've had, kind of the percentage nature of the work that's completed, it's funding and resolution, evaluation and resolution, operational continuity, you know, contract continuity and phase and what have you. All of the eight sort of objectives or impediments that they see to resolvability.

Where we are at the moment is we are sharing with them our final work, which they they they're giving us feedback on our draft work. So we we've received feedback from them. No surprises there. And so we've we've taken on that feedback and and addressed it. We're sharing that work with them.

And the next day, we need to share our own disclosures with them, and they will probably give us the exact receipt feedback on that. So I don't think I don't think the Bank of England are interested in sort of creating any surprises here either at the point of disclosure or in terms of what to expect between bank's own assessment, their own resolvability, and their own assessment. But, you know, it's something that we'll we'll know when we get there. But at at the moment, I would say it it it all feels like it's going to plan, and there's a very healthy two way dialogue to, you know, to to be transparent in that communication between each other in terms of expectations. But it's probably not much more than than what I can say at this stage, Alvaro.

Tan, do you wanna cover legacy? Yeah. I mean, at the

Speaker 2

risk of beating myself a little bit, I mean, we're very comfortable with our legacy capital position. It's obviously a a small number of securities outstanding. We've got no legacy securities outstanding at the BPLC holding company. So we do feel pretty comfortable. In terms of the DISCO specifically, obviously, as we've disclosed in the pre report, these are own funds until 2025 in our view.

So we don't need to do anything specifically on them. Obviously, we we won't comment on future calls, but we'll look at the security portfolio kind of on a case by case basis

Speaker 1

as we as we go. Okay. Sounds good.

Speaker 7

Thank you very much. Sorry. Just

Speaker 1

Thank you very much. Operator, are there any other questions?

Speaker 0

We have no further questions, so I hand it back for closing remarks.

Speaker 1

Okay. Well, thank you very much. We hope you found the call helpful. I'm sure Dan and the team and and even myself will maybe see you on the on the road. But with that, I'll close the call, thank you very much for joining us.

Speaker 3

This presentation has now ended.