Barclays Plc · LSE:BARC
Barclays — Investor Day (November 2023)
18 slides from Barclays's investor day presentation, Nov 28, 2023
Slide 1: Structural hedge
Structural hedge Daniel Fairclough, Group Treasurer 28 November 2023
Slide 2: Contents
Contents The structural hedge reduces interest rate risk and smooths net interest income over the interest rate cycle 1 Interest rate risk 2 Which products are subject to the structural hedge 3 The purpose of the structural hedge 4 Structural hedge execution 5 Economic, notional and duration conside
Slide 3: The banking book has inherent interest rate risk
1 The banking book has inherent interest rate risk Balance sheet consists of a trading book and banking book Assets Liabilities Trading book Trading book Trading book Assets and liabilities broadly matched assets liabilities Interest rate risk managed on a broadly matched book basis Banking book
Slide 4: Treasury proactively manages banking book interest rate risk
2 Treasury proactively manages banking book interest rate risk Sources and uses of funding are managed by Treasury on a floating rate basis • Product hedges: Fixed rate products with a defined maturity are swapped to floating rate1 • Structural hedge: Undated rate insensitive products that are behav
Slide 5: Without structural hedging, margins are subject to volatility
3 Without structural hedging, margins are subject to volatility Illustrative example of a rate insensitive current account without structural hedging 1 Cash 3 Cash 2 Fixed rate 4 Floating Barclays Customer Barclays Business Treasury Without hedging… …business margins are subject to volatility 1 Cust
Slide 6: With structural hedging, margins are more stable
3 With structural hedging, margins are more stable Illustrative example of a rate insensitive current account with structural hedging Cash Cash Fixed rate Floating Barclays Customer Barclays Business 6 Floating Treasury 5 Fixed Floating 7 Fixed Market With hedging… …business margins are more stable
Slide 7: The structural hedge comprises numerous swaps, executed over time
4 The structural hedge comprises numerous swaps, executed over time Illustrative simplified example of a structural hedge 1 This example includes six 5-year swaps with the same notional value 2 One swap has been executed each year, at the prevailing swap rate 3 Ref Date swap Swap Years to Swap I
Slide 8: The hedges are executed so only a portion matures at any one time
4 The hedges are executed so only a portion matures at any one time Illustrative “caterpillar hedge” example 2 3 T-5 T0 1 T+5 T-5 T0 T+1 T+5 T-5 T0 T+1 4 T+6 1. Average hedge yield is the average fixed 2. Each period, part of the structural hedge 3. A new swap is executed onto the prevailing yield r
Slide 9: Higher swap rates can offset a lower structural hedge notional
5 Higher swap rates can offset a lower structural hedge notional As rates increase, rate sensitive deposits may migrate but the yield on swaps will increase Illustrative example Example 1: 100bps reduction in rates Maturing yields are currently 1%, whilst the current swap rate is 5% Ref Swap durat
Slide 10: Structural hedge notional considerations
5 Structural hedge notional considerations Banks structurally hedge the stable portions of exposures Q323 total deposits and equity to structural hedge notional1 General principles £617bn 1. Exclude floating rate balances and items with a contractual maturity 2. Behavioural analysis removes volatile
Slide 11: Structural hedge duration considerations
5 Structural hedge duration considerations Behavioural life Duration sensitivities Duration is dependent on the underlying product behaviour Weighted average life o Equity typically has a longer duration than current accounts Longer Shorter Earnings Lower, as the hedge takes Higher, as the hed
Slide 12: Performance of the structural hedge over time
Performance of the structural hedge over time The structural hedge smooths income and protects against sharp downwards movement in interest rates 6% 5% 4% 3% 2% 1% 0% -1% Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Dec 18 Dec 19 Dec 20 Dec 21 Dec 22 1 2 5YOIS BoE Ban
Slide 13: Q323 Barclays structural hedge disclosure
Q323 Barclays structural hedge disclosure Another quarter of locking in future gross hedge income Q323 4.06% 4.57% GBP 5yr swap 0.67% 1.05% rate1 -0.01% >95% of expected income (c.£3.6bn) locked in for FY23 Q323 • £3.3bn at H123 Average 1.54% Slide 7 hedge yield 1.08% 0.94% 0.87% c.£3.4bn of inc
Slide 14: Summary
Summary The structural hedge reduces interest rate risk and smooths net interest income over the interest rate cycle 1 Banks generally seek to hedge balances back to floating rate Structural hedging is undertaken on fixed rate or rate insensitive liabilities that are challenging to product 2 hedge 3
Slide 15: Appendix
Appendix
Slide 16: Balance sheet considerations
Balance sheet considerations Assets Liabilities Trading book Trading book Trading book Fair value accounted assets liabilities Capitalised through Value at Risk Income classified as trading income Liquidity pool Banking book Banking book liabilities Accrual accounted Capitalised through Pi
Slide 17: Treasury hedges and funds multiple Barclays businesses
Treasury hedges and funds multiple Barclays businesses Structural hedge Product hedges Cash Cash Cash Cash Certain Fixed Floating Floating Fixed Certain Barclays Barclays Barclays liabilities assets and and equity Business Floating Treasury Floating Business liabilities Fixed Fixed Floating Fixed Ma
Slide 18: Disclaimer
Disclaimer Important Notice The terms Barclays or Group refer to Barclays PLC together with its subsidiaries. The information, statements and opinions contained in this presentation have been provided by Barclays solely for use at this presentation. By attending this presentation, or by reading this