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FIGCovered Bonds

Crisis Talk — with Miray Muminoglu, head of long-term funding and capital at Barclays


Barclays was positively surprised at how quickly capital markets reopened and it wasted little time issuing senior and tier two deals while its treasury team were still working from home. The UK lender is likely to use the Bank of England's Term Funding for Small and Medium-sized Enterprises (TFSME) facility, which will lower its secured funding needs. The bank was well capitalised going into the crisis and has buttressed itself against the expected tide of credit impairments with a prudent level of provisioning.

GlobalCapital: How has your funding changed since March 1?

Miray Muminoglu, Barclays: The most important part of our funding is still the regulatory funding which is managing our minimum requirements for own funds and eligible liabilities (MREL) and I think we were all very positively surprised how quickly the market came back helped by the initiatives taken by governments and central banks globally. 

We will continue to issue MREL as per our plan. Our MREL ratio stood at 29.3% as of March 31 which compares to an estimated requirement around 30.6% January 1, 2022.

Unlike some of our UK peers we don’t typically plan for operating company-level issuance. Our public benchmark outlet is the holding company, which means opco issuance is only issued on an exceptional basis. A few weeks ago was one of those exceptions where we issued $1.75bn of two year debt in May. 

Other than this trade our wholesale approach has not changed. These are uncertain times and we felt that getting some wholesale opco liquidity made sense. We hadn’t issued an opco trade in two years, so it has some value for us to establish a curve to remind investors of the Barclays bank credit.

In addition to this trade we also issued a €2bn five year non-call four in late March and a £500m 10.5 year non-call five and a half tier two in mid-May. Other banks have also issued additional tier one (AT1) which shows the market is open, so the only thing that’s really changed here is the spreads we issued at.

Otherwise we’ve experienced strong deposit inflows and the overall funding platform has continued to work well in terms of commercial paper and certificates of deposits, structured notes and so on. So obviously the cost of wholesale funding has risen temporarily, but otherwise the approach hasn’t changed a whole lot.

How helpful is the TFSME scheme?

We’ve historically used the Term Funding Scheme (TFS) facility and under our latest disclosure of December 2019 we had around £13bn outstanding from the TFS, which is equal to 2% of total group funding, so it is not material. It has been designed by Bank of England to produce cost-effective funding that every bank, including Barclays, is supposed to consider.

The TFSME presumably lowers your pure funding need.

Yes, but there is one difference compared to our peers. Our ringfenced entity is Barclays UK, which is the retail network and it has historically been flush with deposits. After deposits, that entity’s first port of call would have been secured funding — covered bonds and securitizations. 

That is the entity that has access to the TFS. The non-ringfenced Barclays Bank entity is the one that did the opco funding and, of course, that entity doesn't have access to the TFS in any major way.

Other than central bank funding, do you anticipate a change in the mix of instruments that make up your market funding?

If we end up using TFS that certainly will mean that we might issue less in secured funding, because that would be the right comparable. Although, strategically, we never want to be absent from the secure funding market for a long time as we think it’s important to keep our name and credit at the forefront of investors’ minds. So, our plans have still called for a modest amount of secured funding which might be adjusted depending on where we end up with TFS.

How has your balance sheet changed in the first quarter, has there been growth?

Yes, total assets increased from £1.04tln to £1.44tln so that's about 27%, quarter-on-quarter. This was driven by an increase in derivative assets, an increase in cash, collateral and settlement balances and an increase in financial assets. The first quarter is generally a rather active period for us but, having said that, we still had a loan to deposit ratio of 79% compared to 82% in December 2019 which shows we still broadly managed to keep the same ratio of deposit-based funding.

How do expect risk-weighted assets (RWA) to grow?

We had RWA growth of a little over £30bn in the first quarter and we told investors during our first quarterly results that we expect the second quarter’s growth to be less than that as the stress really picked up in March and this pro-cyclicality is expected to continue.

Clearly, for most banks elevated revolving credit facility draws were a big item during the first quarter but they peaked in March and declined towards the end. The drawdown in April has been immaterial compared to what we saw in March. We would expect lower RWA inflation, but it really all depends on how the market develops in relation to Covid-19.

Do you have any visibility on how deferred loan payments and how non-performing loans are likely to evolve?

We were in a strong position ahead of this crisis and, whilst we do anticipate some deterioration, we have planned for that. We also built a prudent level of provision in the first quarter of £2.1bn in anticipation of what might happen in our lending book, across different businesses, including, of course, credit cards and mortgages.

In our UK credit card portfolio, we've seen only about 3% of borrowers requesting deferrals and for the mortgage book 10% have requested deferrals. That compares to around the mid to high teens for some of our peers. 

Our mortgage book has a lower average loan to value profile than our peers with fewer first time buyers and we are a lot more focused on London and the southeast where mortgage holders are less likely to be on furlough. We think those factors probably led to lower deferral requests, but we'll see how it pans out and will probably will see the impact in our second quarter numbers.

What have national regulators and supervisors done to help alleviate potential problems?

The reduction in the Countercyclical Capital Buffer (CCyB) from 1% to 0% has been very helpful in terms of creating more room for banks to lend. Also the forbearance to banks, in terms of reducing their maximum distributable amounts (MDA), have given comfort to investors and allowed banks to continue to lend — all that has obviously been welcome and very important.

Our core equity tier one ratio stands at 13.1%, which is well above the MDA of 11.5%, though this hurdle is expected to be reduced as a result of some anticipated movements in the Pillar 2A ratio requirement.

We're also all aware of what the government is doing in terms of loan guarantees, commercial paper facilities and what have you. And then finally the UK regulator has been very clear about the treatment of those customers who are granted payment holidays, saying that they don't want deferred loan payments to automatically be counted under IFRS 9 Stage 3 as non-performing. I think the regulators across Europe have been very careful to avoid unwanted accounting outcomes.

Have there been any major challenges while working from home?

I think Barclays treasury was lucky because we’d already developed the habit of working from home as it’s always been something that’s been very much encouraged all the way up to the CFO level. That meant a large number of us had the infrastructure in place and some people had invested in extra screens a long time ago to make working from home feasible. 

I’ve been working from home for eight weeks now and I'm actually very proud of how the system has coped with the move. At some points we’ve had in excess of 70,000 staff logging in from home out of a total of about 85,000 which is very encouraging.

We’ve also issued three bonds while I’ve been at home which have all been settled without a problem, so the model clearly works. But I would not say this is the future because, if you're part of a complex operation like treasury, you can't afford to be in a silo mentality. 

When you're sitting in Canary Wharf on the treasury floor you pick up so much more information dealing with the liquidity team, the capital team and so forth. Those informal conversations actually make you a lot better in your job and we’re missing these chats.

We published our first quarter results from home and, as you can imagine, that is a massive undertaking. Now we're preparing for the mid-year results and, in the meantime, our colleagues in the branches are still doing what they need to do.

Last week, after our results again, we lined up a series of investor audio and video calls. And I was surprised how efficient it was. In one week we talked to about 40 investors, and the week after results, we spoke to a further 25-30. Very quickly we’d reached close to 100 investors, whether that be via group calls or one-on-ones, and I'm thinking that that ought to be part of the future. 

I think we're going to have to think more carefully over whether we need to take each and every long haul flight. I know personal relationships also really matter, but I'm struggling to see how I can justify flying off to see four or five investors when we can easily arrange virtual meetings.

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