Barclays PLC — 2018 Annual Report on Form 20-F
Reporting period: Year ended 31 December 2018, with comparison to 2017. This is an annual filing, not a standalone fourth-quarter report; the filing text does not provide a clear standalone Q4 income statement. Figures are in pounds sterling unless stated otherwise. Financial statements use IFRS as issued by the IASB.
Business context and reporting period
Barclays is a transatlantic consumer and wholesale bank, reported principally through Barclays UK and Barclays International. Structural reform established Barclays Bank UK PLC on 1 April 2018; the ring-fencing regime took effect on 1 January 2019. Barclays also reported full regulatory deconsolidation of Barclays Africa Group Limited (BAGL).
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total income | £21.136bn | £21.076bn |
| Net interest income | £9.062bn | £9.845bn |
| Net interest margin | 3.53% | 3.74% |
| Profit before tax, statutory | £3.494bn | £3.541bn |
| Profit before tax, excluding litigation and conduct | £5.701bn | £4.748bn |
| Profit after tax | £2.372bn | Loss of £0.894bn |
| Attributable profit/(loss) | £1.394bn | Loss of £1.922bn |
| Basic earnings/(loss) per share | 9.4p | (10.3p) |
| Operating expenses, statutory | £16.243bn | £15.456bn |
| Cost:income ratio, statutory / excluding litigation and conduct | 77% / 66% | 73% / 68% |
| Credit impairment charges | £1.468bn | £2.336bn |
| Loan loss rate | 44 bps | 57 bps |
Reported return on average tangible equity (RoTE) was 3.6%, versus negative 3.6% in 2017; excluding litigation and conduct, RoTE was 8.5%, versus negative 1.2%. These adjusted measures are non-IFRS measures and should be read alongside statutory results.
At year-end, total assets were £1,133bn and total equity was £63.8bn. Loans and advances at amortised cost were £326.4bn; deposits at amortised cost were £394.8bn, for a loan:deposit ratio of 83%. Wholesale funding outstanding, excluding repurchase agreements, was £154.0bn (£22.5bn secured and £131.5bn unsecured).
Liquidity pool was £227bn, up from £220bn; the liquidity coverage ratio (LCR) rose to 169% from 154%, with a £90bn surplus to the 100% regulatory requirement. The CET1 ratio was 13.2% (2017: 13.3%), against an end-state target of approximately 13%; CET1 capital was £41.1bn and risk-weighted assets were £311.9bn. The year-end UK leverage ratio was 5.1%; the average UK leverage ratio was 4.5%, down from 4.9%.
Cash from operating activities was £8.5bn, compared with £60.7bn in 2017; net cash increased £6.6bn to £211.2bn. Operating cash flow is affected by movements in bank balance-sheet and trading items and should not be read like cash flow at a non-financial company.
The total 2018 ordinary dividend was 6.5p per share (2017: 3.0p); the 4.0p final dividend was scheduled for payment on 5 April 2019. Tangible net asset value per share fell to 262p from 276p.
Material changes versus 2017
- Adjusted profit before tax rose 20% to £5.701bn, while statutory profit before tax was broadly flat. Attributable profit returned to a profit, principally reflecting the non-recurrence of the 2017 BAGL disposal loss and lower tax expense.
- Credit impairment charges fell 37%, reflecting recoveries, improved UK and US macroeconomic forecasts, the non-recurrence of 2017 single-name charges and a lower-risk US cards mix. A £150m charge for anticipated UK economic uncertainty partly offset the reduction.
- Net interest income declined 8% and net interest margin fell 21 basis points, partly reflecting portfolio mix, the ESHLA portfolio and changes following structural reform.
- Statutory operating expenses increased, including higher litigation and conduct charges and a £140m GMP pension equalisation charge. Excluding litigation and conduct, costs decreased to £13.9bn from £14.2bn.
- IFRS 9, adopted on 1 January 2018, introduced forward-looking expected credit losses. Transition increased impairment allowances by about £2.8bn and reduced opening equity by about £2.2bn; 2017 comparatives were not restated. IFRS 15 was also adopted, with no significant reported impact on revenue timing.
Outlook, commentary, risks and unusual items
Management reiterated targets for RoTE, excluding litigation and conduct, of greater than 9% in 2019 and greater than 10% in 2020, based on CET1 of approximately 13%. 2019 operating expense guidance was £13.6bn–£13.9bn, excluding litigation and conduct. The longer-term cost:income ambition was below 60%. These are forward-looking targets, not guarantees.
- Significant unusual items included the £2.207bn full-year litigation and conduct charge, including a £1.420bn charge associated with the US Department of Justice RMBS settlement, and the £140m GMP charge. The RMBS settlement was £2bn.
- The PPI provision was increased during 2018; the year-end provision was £888m, with substantial uncertainty around claims before the FCA’s August 2019 deadline. The report states cumulative PPI provisions of £9.6bn and utilisation of £8.7bn.
- Key risks include a disorderly UK exit from the EU, weaker economic conditions, interest-rate changes, UK property and consumer-credit stress, US consumer credit, market volatility, evolving regulation, cyber threats, operational resilience, fraud, model risk and legal or conduct matters. Management described Brexit preparations, including expansion of Barclays Bank Ireland, and continued investment in technology, controls and cyber resilience.
- Barclays reported that certain significant legacy matters were resolved during 2018, but numerous legal, competition and regulatory matters remain. The potential outcomes can be material, and the filing says estimates are not practicable for some matters. The group’s total contingent liabilities were £20.3bn and commitments were £324.2bn; these are contractual exposure amounts, not expected losses.
Important facts for investors to verify
- Reconcile statutory and adjusted profit, RoTE and cost:income measures, including the treatment of litigation, conduct and GMP charges.
- Assess the assumptions and sensitivity of IFRS 9 expected credit losses, particularly the £150m UK uncertainty adjustment and the effects of adverse economic scenarios.
- Track PPI claims, provision adequacy and the outcome of remaining litigation and regulatory matters, including the RMBS-related exposure.
- Monitor delivery against 2019–2020 RoTE and cost guidance, and the sustainability of earnings given lower net interest income and margin.
- Confirm capital, leverage and liquidity remain resilient through regulatory changes and market stress; review the impact of ring-fencing and Brexit execution.
- Consider the cash-flow statement’s balance-sheet-driven volatility and verify dividend capacity alongside capital requirements and obligations to more senior securities.
The 2018 financial statements received an unqualified audit opinion from KPMG, which also concluded that internal control over financial reporting was effective as of 31 December 2018.