Barclays PLC

Welcome to the Barclays Half Year 2019 Analyst and Investor Conference Call. I'll now hand you over to Jeff Daly, Group Chief Executive, and Tushar Mazaria, Group Finance Director.

Good morning, everyone. This was another resilient quarter of performance for Barclays. We balanced some headwinds in our UK consumer business with good performance coming from the corporate and investment bank. For the second quarter in a row, Barclays has generated a profit of over 1 billion pounds, and the bank delivered earnings per share of 12.6 pence for the first half of 2019. Excluding litigation and conduct, profit before tax was 1.6 billion pounds in the quarter and 3.1 billion pounds for the first half of the year. A group return on tangible equity of 9.3% for the quarter is a further step towards meeting our 2019 ROTE target of greater than 9%. It's worth noting that we have now produced a group ROTE of over 9% in five of the last six quarters we have reported. Turning to capital, our CP1 ratio increased by 40 basis points to 13.4%, demonstrating the strong capital generation achievable by the bank. In point of fact, if our operational risk-weighted assets were accounted for more like our UK peers, then our CT1 ratio would have actually stood at roughly 14% today. Tensable net asset value grew to 275 pence, representing the fifth quarter in a row of accretion in Barclays' book value. Our cost-to-income ratio rose a touch in the quarter to 63%. reflecting our commitment to invest in the growth of the bank. Management focus on cost control remains a high priority, however, and we expect to see positive jaws across the group in the second half of the year and for the full year. Accordingly, we have this morning affirmed that we now expect to reduce expenses to below 13.6 billion pounds for 2019, which was the bottom end of our guidance range for this year. Barclays UK produced an ROTE of 13.9% in the quarter, despite margin pressure. We continued to grow our mortgage and deposit balances with stable credit metrics. That said, we had a reduction in NIM from increased levels of consumers refinancing mortgages and lower interest earnings from a reduced UK card balance. We continued to invest in our digital capabilities. Online engagement with our UK customers is at an all-time high, with just under 8 million consumers now digitally active on the Barclays app. The corporate investment bank produced a 0.3% ROTE in the quarter. Excluding the trade web IPO gain, markets income overall was down 9% year-on-year on a dollar basis, which was broadly in line with our U.S. peers. Within that, equities had a challenging quarter compared to a very strong preparable last year. However, we did see market outperformance in fixed income, currencies, and credit. Banking fees were down a little, reflecting a reduced fee pool and debt underwriting, which was partially offset by strong performance in advisory. Overall, though, in the half, we gained share in investment banking fees, and our global rank also improved. placing Barclays as the sixth highest earner in investment banking fees globally and the fifth highest in the U.S. Our corporate banking franchise had a decent quarter with income up on the prior period as well as on Q2 of 2018. We are maintaining a strong focus on improving returns in the corporate bank with focused client-by-client plans to grow profitability. One mark of progress on this front is that the return on risk-added assets in our corporate bank has improved meaningfully in the first half of 2019, with transaction revenues up some 15% year over year. Consumer cards and payments continues to progress well, producing an ROTE of 18% for the quarter and 16.7% for the half year. We're happy with the prospects for this business, and we're pleased that in this quarter, we renewed a key U.S. card partnership with Wyndham Hotels and Resorts. Barclays' performance over the course of this year reinforces the confidence which the board and management feels in the capacity of this bank to generate sustained earnings. A key indicator of that confidence is in our announcement this morning regarding the ordinary dividend. As you will have seen, we have declared a half-year dividend of 3 pence per share. In normal circumstances, this would account for around a third of what we expect to pay in total in a given year. As such, this represents a significant increase in distributions over last year, which I hope will be welcomed by our shareholders. As I said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. Consequently, Barclay's capital returns policy of a progressive dividend An intention to supplement the ordinary dividend with additional cash returns, including share buybacks when appropriate, remains unchanged. Now let me hand it over to Tushar to walk you through the numbers in detail.

Thanks, Jeff. As usual at half-year, I'll begin with a slide on the results for the first six months and then focus my comments on Q2 performance and the half-year balance sheet. reported a profit before tax of 3.1 billion for the first half, generating 12.6 pence of earnings per share, excluding litigation and conduct. I'll exclude litigation and conduct charges in my commentary as usual, but the gap of statutory profitability was limited with a statutory EPS of 12.1 pence. We've been paying a half-year dividend of 3 pence per share in September, and we've indicated that our half-year dividends are expected to be around one-third of the full-year total under normal circumstances. Group ROTE for the half was 9.4%, with double-digit returns for both BUK and BI, but the drag from head office does take us to below 10%. As Jeff mentioned, we continue to target an ROTE for the full year of over 9%, based on a 13% CT1 ratio. The first half represents a good base for this, but there is work to be done in the second half. The income environment was challenging and reported income down 1% for the half. Costs were up 1% year-on-year, but we expect positive jewels in H2 and for the year as a whole. Given the income environment, cost control will remain a major focus through the second half, and we reduced our cost guidance based on 30th June exchange rates to below 13.6 billion, which was the lower end of the guidance range we had previously given. I'll comment further on costs as I go through the businesses. Focusing now on the second quarter, Income decreased 1%, reflecting the challenging environment, which affected both CIB and BUK. The cost print of 3.5 billion reflects investment in a number of areas. But as you can infer from our guidance, we would expect a lower cost-run rate in the second half, excluding the Q4 bank levy. Impairment was 480 million, up 197 million year-on-year, due to the non-reoccurrence of favourable US macroeconomic updates and single-name recovery. However, this was just 32 million higher than Q1, Delinquencies remained stable, and the net write-offs in the quarter were just below the impairment charge of $465 million. The effective tax rate was 19.4%, just below our full-year guidance of around 20%, and attributable profit was above $1 billion, as in Q1. This delivered an ROT of 9.3%, excluding litigation and conduct. TNAV of 275 pence was up 9 pence in the quarter, driven by earnings per share of 6.3 pence, and a tailwind from reserve movements due to currency and interest rate moves, and despite the payment of the full-year dividend of 4 pence in the quarter. We reported an increase in the CT1 ratio from 13 to 13.4%, and we are now above our target ratio and continue to be confident in our ability to generate capital. We are now in a position to increase our dividend payout, as just mentioned. Looking now at the businesses in more detail, starting with BUK. The UK reported an ROT of 13.9% for Q2, despite a challenging income environment, with income down 4%. In personal banking, we saw volume growth in mortgage balances of 1.5 billion net, more than offset by margin pressure, including the effect of increased refinancing by customers. In Barclaycard, balances were broadly flat, but interest earning balances reduced, reflecting our reduced risk appetite and customer behaviour, including the impact of current economic uncertainty. Margin pressure and the continuing growth in secured lending resulted in a lower net interest margin of 305 basis points for Q2, but we're expecting them to stabilise around this level for the second half of the year, despite further growth in secured lending. Costs were up year on year as we continued with the first half investment stand we flagged in Q1. This includes a range of upgrades to our Barclays app and our digital offering more broadly. We no longer expect to report year on year income growth for full years, but we are expecting higher income in H2 compared to H1, and positive jewels for H2 as cost reductions come through. Positive balances continue to go strongly to reach £200 billion. With impairment of £230 million, we were just a little above the run rate of around £200 million we've referenced in the past. The UK car delinquencies remain stable, and I think this remains a sensible average run rate to think of for the year as a whole. Turning now to Barclays International. BI delivered an RIT of 10.8% for the quarter, one income of 3.9 billion. The BI cost-income ratio was flat at 62%. The main driver of the year-on-year decline in PBT was the increase in impairment from the low charge of 68 million for Q2 last year. The latter was driven by macroeconomic updates and single-name recovery. Although we are keeping a close eye on the economic outlook in the UK and US particularly, we don't see signs for concern in the current credit metrics. As we said before, we have positioned ourselves conservatively for this uncertain macroeconomic environment. Looking now in more detail at CIB. CIB reported an ROT of 9.3% for the quarter, up from 9.1% last year. Overall income was up 8%. This included a gain of $166 million on our staking trade web in our markets business. Excluding this, income still grew by 2%. We saw a resilient performance, particularly from FIT, which was up 25% or 2% excluding trade web, and that would be down 2% in dollars. This compared favorably with peers and reflected strong performance in credit and grossing securitized products. Equities was down 14% on the record Q2 last year, resulting in overall markets revenues up 7% or down 5% excluding trade web. Banking decreased 1% year-on-year or 5% in dollars, reflecting a reduced industry fee pool, particularly in debt underwritings. Corporate income line was up 13%, reflecting growth particularly in treasury and transaction banking. The significant negative mark-to-market on hedges we highlighted in corporate lending at Q1 did not reoccur. Cost increase by 5% resulted in positive jewels of 3%. We also had positive jewels for the first half overall and expect positive jewels for the second half. We retained significant flexibility on costs, including in performance costs should the income environment in the second half disappoint. There was an impairment charge of $44 million compared to a net release of $23 million last year, but broadly in line with the average run rate we've discussed before. The only significant movement in CIB assets in the quarter was the result of flattening of interest rate curves, which led to similar increases in derivative assets and liabilities. RWAs were broadly flat at $175.9 billion and down around $5 billion year-on-year. The franchise is in good shape and remains focused on delivering improved and sustainable returns, despite periodic fluctuations in market conditions. Heading now to consumer cards and payments. We continue to generate attractive returns in CCT while growing the business. The ROT was 18% down year-on-year due to the unusually low impairment in Q2 last year, but up on the 15.4% reported at Q1. Income decreased by 19 million year-on-year, reflecting the non-recurrence the gain of 53 million on sale of the OLB partner portfolio. We grew US card receivables by 6% in dollars. Again, the airline portfolios, notably JetBlue and American, reported strong balance growth. Cost increase year-on-year as we continue to invest in the growth of international cards payments and the private bank, but we're down on the Q1 level. Again, we expect positive draws in H2. The payment of $203 million was only slightly higher than the $193 million reported for Q1, but we would expect Q3 and Q4 to be higher, as we have said before, reflecting seasonality and portfolio growth. However, credit metrics remain well controlled, with 30- and 90-day arrears down slightly in the quarter. Heading now to head office. As usual, the head office result was driven by the level of income expense, which was $136 million. compared to last year's positive income of 33 million, which reflected a Lehman gain of 155 million. As in Q1, there was a 90 million impact from legacy funding costs in Q2, which were reduced to under 30 million from Q3 onwards, following the redemption of the 14% RCI in June. The hedge accounting expenses and residual treasury charges will continue through Q3 and Q4, while Q3 income will have a positive contribution from the up to dividends. Those elements are relatively predictable, while the head office cost base has been tracking at around 50 million a quarter. There will always be a few lumpy items in head office, but over time I would expect the loss to decrease. I'm including this cost summary again to emphasise our continuing focus on cost efficiency, to fund investment spend and to deliver absolute cost reductions when the income environment requires it. As I mentioned earlier, we have taken the current environment into account in moving our guidance to below 13.6 billion. That's based on June FX rates, notably $1.27 to the pound. We are confident we can deliver this while still pursuing key investment opportunities that we believe are in the best interest of the group. Key cost levers we are using as we go through the year include flexibility in compensation costs, particularly in the CIB, which depend on the income performance, and we've been prioritizing and adjusting the pace of our investment spend as appropriate. CNAP increased in a quarter by 9 pence to 275 pence, Earnings per share of six pence were partially offset by the payment of the full-year dividend of four pence. Net reserve movements were positive, reflecting strengthening of the dollar, and rate movements which benefited both the fair value and cash flow hedge reserves. I'd also call out the increase in the net pension surplus to 1.6 billion. On capital, we reported an increase in the CT1 ratio from 13 to 13.4%, with an increase in capital on broadly flat RWAs. and that was a 70 basis points increase before taking the deduction for foreseeable dividends, including 81 coupons. Profits contributed 38 basis points, and reserve movements more than offset the Q2 deficit reduction contribution of 250 million. And I'd remind you that the pension contribution reoccurs in Q3. The foreseeable dividend deduction of 22 basis points reflected the increased dividend expectation we indicated earlier. A capital ratio won't increase every quarter, but we are now above our target ratio, and our confidence in our ability to continue to generate further capital is reflected in the capital returns policy, which we have reiterated, combining a progressive dividend and buybacks as and when appropriate. To remind you, with our current regulatory minimum at 11.7%, we remain comfortable with a capital ratio of around 13%. Our reported ratio is based on the current treatment of our CRISPR WA's, As I mentioned at Q1, we are exploring with the PRA the possibility of removing the flaw that was introduced in our operational risk RWAs. This would have the effect of reducing Pillar 1 RWAs, but would be expected to lead to an increase in Pillar 2 requirements. A reported CT1 ratio would thus increase, as Jeff mentioned, as would our regulatory minimum. In assessing the adequacy of our capital, we do factor in future headwinds from regulatory changes in RWAs. Over the next couple of years, We have the PRA's proposed changes to mortgage risk weight in BUK from the end of 2020, and in CIB, changes to securitization risk weightings in early 2020, and changes to standardized counterparty credit risk from mid-2021. We currently expect each of these three changes to result in RWA increases of low single-digit billions. This is based on our current balance sheet and business mix, and doesn't take into account any further mitigating action. We're confident these changes are manageable and they are factored into the way we look at capital distribution. Regarding leverage, there is an expected leverage benefit from SACCR change with a modest reduction in leverage exposure. We already have a strong leverage position. For Q2, the average UK leverage exposure was 4.7%, slightly up on 4.6% for Q1. The spot leverage ratio was 5.1%, but comfortably above the minimum UK requirement of around 4%. Our funding and liquidity position remains strong. In Q2, we issued 1 billion pounds of AT1 to add to the $2 billion we issued in Q1. And we've announced today that we're calling three outstanding AT1s on the 15th of September, totaling 2.3 billion sterling equivalent. I'd remind you that these calls will result in a headwind for our Q3 capital ratio of around 13 basis points. Looking at MREL overall, we've issued 7.1 billion equivalent in the year today, against our current plan to issue $8 billion this year. And our MREL is currently at 30.2%, around our expected end requirement. The liquidity coverage ratio was 156% at the end of the quarter, with a liquidity pool of $238 billion. And our lowest deposit ratio was 82%, positioning us conservatively in light of the continuing Brexit uncertainty. So to recap, we remain on track in the execution of our strategy, reported an ROTE of 9.3%, excluding litigation and conduct, or 9% on a statutory basis, and continue to target an ROTE of greater than 9% and 10% for 2019 and 2020, respectively, based on a CT1 ratio of around 13%. Remain very focused on cost control, and given the challenging income environment, we have reduced our guidance for the year to below 13.6 billion. Reported another quarter of teen arbitration, We are above our CT1 target of around 13% and are reiterating our capital returns policy and paying an increased half-year dividend of 3 pence per share, indicating our confidence in the future of the group. Thank you. I will now take your questions. As usual, I would ask yourself to limit yourself to two questions a person so we get a chance to get round to everyone.

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 the question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, that's star followed by one to ask your question. Our first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, your line is now open.

Hi, good morning. Thanks for taking my question. Two questions. First of all, there was a press article earlier this month talking about, or earlier last month, talking about Barclays targeting 20 billion of assets from Deutsche. And I was just wondering if you can make any comments about how do you think the restructuring there is going to benefit you? What kind of good market share can you take? Is that going to be profitable? And just generally, if there's any change to your RWA commitment to the division or leverage commitment, given the opportunity there, just commentary on that. And the second question is around your capital distribution. You've increased the payout, which has been well received. But as you sort of debate internally, I'm just wondering when you've decided to go for the dividend versus the buyback, Is this payout the payout we should think about, the payout ratio we should think about going forward? And from a financial perspective, is it not better to do buybacks? It also has obviously a signaling effect. So just wondering about your thoughts and for us what to expect going forward.

Thank you. I'll take the first question and then Tushar will take the second one. Vis-a-vis prime balances, It is true that we gained some prime balances recently, roughly in that neighborhood. It's very good business for us. Obviously, it's net interest earnings. It's part of the markets business where you earn revenue on Saturdays and Sundays and holidays. So it's quite good business. It also reinforces the important relationships you have with principal actors in the capital markets. is very profitable, and we'll continue to pursue that business. I would say overall, our commitment to the capital markets globally, but principally in New York and London and across Europe, obviously will reflect when capacity is leaving the capital markets in terms of the intermediaries. we're committed to the strategy, and the prime brokerage business is an important component to that.

Yeah, thanks, Alvaro. Just to come back to your question on capital distributions, as we sort of said earlier, our capital distribution policy does remain unchanged. We would expect to have an appropriate mix of ordinary dividends, which we've talked about this morning, and at the right time, additional distributions, possibly through buybacks. I think the way we think about it is It's important to set the ordinary dividend distribution to the right level first. Obviously, as you think about it, from both a board matter and a regulator matter, there's a higher hurdle. We think of these as perpetual distributions, not one-time in nature. So we would have to have not only conviction in our capital position now, but a conviction in the future capital position of the company, and importantly, earnings both now and in the future. Looking at sort of, you know, we obviously have slightly more optimistic outlook for this year in terms of earnings than consensus does at the moment, given our returns target. But even on consensus earnings, you know, we think the dividend guidance that we've provided will still get you to a pretty comfortable payout ratio. So it's important that we get that right. And to the extent we generate... you know, further excess capital from here, you know, we'll consider what we do with that, but leaving our distribution policy unchanged. I think that's probably it for now. Thanks for your question, Alvaro. Thank you. Thanks, Alvaro. Can we have the next question, please, operator?

Of course. The next question on the line comes from Jonathan Pierce of Numis. Jonathan, please ask your question.

Morning, chaps. Thanks for the questions. I've got two. The first one's on gilt gains and the second one on the UK margin, please. On the gilt gains, there's about $216 million booked in the half, which is a big reversal on the $200 million-odd loss that we saw in the second half of last year through the P&L. Just remind us where these get booked. And on the assumption that, as of today, there's probably... A stock of these gains still of sort of £500 million or so, order of magnitude. Is there an assumption that we're going to get more of these gilt gains in the second half? And is that a big part of the delta between where consensus is sat on your return for the year and your 9% return target? So that's the first question, gilt gains and the outlook for those. Do you want the second question on the UK margin as well?

Yeah, if you want to get both, Jonathan, and we'll answer in one shot.

Yeah, so on the UK margin, just trying to interpret this comment on the impact of refinancing, are you sort of suggesting actually that it's a bit more complicated than it looks in the sense that there's a sort of EIR, one-off EIR assumption change in the half because customers are refinancing away more quickly? Is that what you're trying to tell us here, or is it purely just that there's a lot more new business coming on at lower spreads?

Okay, yeah, thanks, Jonathan. Why don't I take both of them? In terms of gilt gains, I'm not sure how far you've got through our disclosures yet, but you'll see in the notes that we split out how much of the, I feel like the revaluation of our AFS reserve has been recycled to P&L in a sort of normal course of business as we recycle our liquidity pool positions. It's actually slightly lower H1 2019 than H1 2018 on an after-tax basis. I think a little less than £100 million this half and a little over £100 million last half. I think your question about future looking, of course, as bonds have rallied very substantially, there are a lot of gains there. The way we think about it is we're not really trying to do anything too clever here. Of course, if we're recycling those gains into income, obviously that will lower net interest income into next year unless yields back up. So, you know, I'm not sure there's anything that we're doing that's anything beyond we would have normally done. So I wouldn't give any sort of different guidance. It'll be regular way disposals as we would have done anyway and recycling of the pool. UK NIM, yeah, the refinancing activity is essentially translated itself through an EIR adjustment. Essentially what we've been seeing is customers, the behavioral life of those customers are just shortened. And I guess it's a function possibly of just the ease in which you can switch products. There's a lot of digitization going on through the industry and probably aided and abetted by some incentives that brokers have as well. So as people come off, for example, their typical fixed rate, two-year fixed rate product, they tend to stay on a follow-on rate for less time than they used to historically and will sort of refinance into a new fixed rate, for example. So when you look at the reduction in our NIM sort of in the quarter, about a third of it was probably from that EIR adjustment. A third of it was just on having lower unsecured card balances, which is some sort of very deliberate action that we've taken, and about a third of it just from the mix in secured lending versus unsecured lending, but obviously growing our mortgage book. I think where we look at it from here, obviously the EIR adjustment is really just an adjustment to the stock. It doesn't really change the NIM from this point on, assuming we've calibrated customer behavior appropriately, which we believe we have. I think we're done with the specific actions we took in reducing interest earning card balances, so that'll be broadly stable from here, and we'd expect our mortgage book to continue to grow. So I guess a few things I'd just remind people of. One is we do expect our NIM to be about at these levels for the remainder of the year, and we expect our mortgage book to grow. And I guess what does that all mean? It means we'd expect our income in Barclays UK in the second half actually to be higher than the first half. And obviously sitting here in the beginning of August, we have reasonable visibility of that. So comfortable giving that guidance. So hopefully that's helpful.

Okay. So that, yeah, it is. And sorry, just to follow up quickly. So that one third of the margin drop was the EIR, and that's a one-off adjustment. So presumably that's, I don't know, 25, 30 million hits to net interest income in the quarter that won't repeat going forwards.

That's right. Probably a little bit lower than that, but yeah, in that sort of zip code. Okay, great. Thanks a lot for that. Thanks, Sean. I think we have the next question, please, operator.

The next question on the line, gentlemen, comes from Joseph Dickerson of Jefferies. Joseph, your line is now open.

Hi, thanks for taking my question, Tushar. You already answered one of them, so the other one is just on the liquidity pool that's a very high LCR ratio, and it looks like you've got $83 billion of surplus against what's a quite overfunded balance sheet. So I guess thinking about this, you mentioned the Brexit uncertainty. Has there been any, either in direct terms or indirect terms, a drag to net interest margin from this, and would you be willing to quantify it? Number two, certainly there's an opportunity cost here from... from not lending these funds out. So if loan demand picks up, presumably that would provide quite a tailwind. I'm not saying in the second half of this year, but in the future to your net interest margins, irrespective of what's happening with rates.

Yeah, no, thanks, Joe. A couple of comments on that. You know, you've seen our deposit balances continue to pick up quite nicely both in commercial banking, corporate banking, as well as in our UK bank. In our UK bank, for example, I think we hit £200 billion of deposits, and that may be the first time in, well, it may be the first time, I haven't gone back and checked records, but certainly it's been quite strong deposit growth. And it's good business for us because we're not paying up for those deposits. If you do just a straight comparison, you'll see us with probably one of the lower rates in the UK market. So having that sort of liquidity that, you know, will just be in our liquidity pool given its, you know, recent cash has arrived is a profitable activity for us. Your other point, though, is also fair, which is, you know, we do have a relatively conservative loan-to-deposit ratio. The group is in the low 80s. In the U.K. bank, for example, it's in the sort of mid-90s. And that compares quite favorably with some of our peers. So I think that potentially gives us an opportunity into the future when things perhaps have settled down. At the moment, we're seeing a reasonable amount of customer caution, so a lot of cash being left with us and less demand, if you like, for borrowing. To the extent that changes as we go through this sort of period of somewhat uncertainty, I think that's a pretty interesting opportunity for us of how we really recalibrate. liquidity pooling by sort of inference, our loan to deposit ratio. Great. That's helpful. Thank you. Thanks, Joe. Can we have the next question, please, operator?

The next question on the line today comes from Chris Kant of Autonomous. Chris, your line is now open.

Good morning. Thank you for taking my questions to, if I may, completely unrelated. The first You've given us some incremental disclosure around your structural hedge. Thank you for that. I was just going to invite you, if you could, to quantify the potential drag from the structural hedge into 2020 in the same manner that one of your large peers did this week. And also, where does that net income from the hedge get assigned divisionally? Is that primarily in the UK division? That would be the first one. On your 13.6 or sub-13.6 cost guidance, you said that was based on a $127 FX rate. I mean, we're 4.5% below that level at present. Does that 13.6 still hold on current FX? Or if this FX rate persists, would you expect to be above that? And really, as a broader point, it would be really helpful if you could give us a sense of how much of your revenues are in dollars and how much of your costs are in dollars to enable us to better understand how that dynamic might play out through a further hard Brexit hit to sterling rates. Thank you.

Yeah, no, thanks, Chris. So why don't I talk on the hedge contribution. I'll just make a couple of comments on costs and then I think Jess will want to add to that. On the hedge contribution, yeah, I know you've been asking for a while, so glad you appreciate this disclosure. Sorry it's taken us a bit of a while to get it across to you, Chris. But in terms of the direct question, if yield curves stay literally where they are today, and our intention would be just to roll our hedge, we don't actively manage it in the way some others may choose to, it would only really reduce net interest income by about $50 million into next year. Now, it's a combination of product hedge and equity structural hedges. So, actually, it's across the bank as a whole. Obviously, the equity position is for the whole company and the product component is just a component of it. So, I think the gist of your question is how much of that would be in the UK bank specifically. Obviously, just a portion of it, by no means the majority of it would go to the UK bank, but only sort of 50 million and there or thereabouts. In terms of costs, You know, I think a couple of points I'll make and then I think Jessa will want to add. Firstly, you know, we've taken some, you know, meaningful actions, I think, in the second quarter that ought to give us a much lower run rate going into the remainder of the year. You know, we've talked about headcount reductions that happened in the second quarter. We've made other changes to our physical footprint. We've deferred some investment spend that we don't think really makes a difference in terms of medium to short-term opportunity set. So we have good visibility into our costs. Your point around currency sensitivity is a good one, though, of course, a fairly meaningful move, and it looks like it's moved again this morning with sterling weakening is only PBT enhancing for us. As you've probably seen, I think, on slide 19, about half our revenues of the group are non-sterling generated. I take your point that we haven't given you the equivalent cost mix, and so that's something we should think about. But, you know, we're obviously positively geared towards a weakening sterling. But, Jess, you want to – any other comments you want to make on the cost base?

Just as, you know, as we've seen what we've – as we saw in the second quarter some of the weaknesses, and our decision to remain conservative in the credit card side. We did take action on the headcount side, and we're now down in headcount by over 3,000 FTEs, and that does have an expense to it, which you will feel the benefits of in the second half of the year. And going back into the strategy of being diversified geographically, is to try to minimize the impact of a falling sterling to us. And as Tushar said, it has a greater impact on revenues than costs. So whilst it may challenge us at the below 13.6, in terms of the overall jaws of the bank, it will be quite positive.

Okay, thank you. Thanks, Chris. Could we have the next question, please, operator?

The next question on the line comes from Martin Leitgeb of Goldman Sachs. Martin, your line is now open.

Yes, good morning. I have two questions, please. And the first one is just on Brexit and the kind of the broader impact Brexit might have on your franchise and what you're seeing at this stage in your various bits of the business. I'm just particularly interested if you have seen any change in customer behavior, whether that means either in terms of sentiment, loan demand, or either in terms of potential depositors or asset quality within the wider book. And the second question is more a general strategic question. Over recent weeks, we have had the announcement of one of your main competitors reassessing its strategy within the equity franchise. And out of memory, revenues in that segment were broadly similar to Barclays' revenues and equities over the years. And I was just wondering whether this has led you to re-evaluate the strategy of your franchise or how you see the opportunities for your franchise in that regard. Thank you.

I'll take that, Martin. So to the first question on Brexit, first vis-à-vis the bank's position, We began working right after the referendum vote to get the bank structured in such a way that we could deal with any possible outcome of Brexit. And what that really meant for us was changing the scope and scale of our bank subsidiary in Dublin, most likely become by the end of this year the largest bank in Ireland. Then we went through the process of every branch of the bank across Europe from Frankfurt to Madrid to Paris to re-license those branches as branches of the bank in Ireland. We built all the control systems necessarily. We moved the necessary people. And then over the last couple of months, we've gone through the client migration process. And we've sort of left it up to clients if they wanted to migrate from one platform to another. That's gone quite well. So from a bank operational point of view, even if we had a very hard Brexit at the end of October, the bank's totally prepared for it, and it would be really business as usual. In terms of what we're seeing over the last couple of months vis-a-vis clients and customers, as Tushar alluded to, I think people are modestly being more conservative. Our cash levels are up. Demand for credit on the margin is lighter. And then on the institutional side or the major corporate side, I think it's fair to say that some of the big decisions, whether they're M&A decisions or investment decisions, have been lighter than one might expect. If there's a possibility of a really no-deal hard Brexit, we want to be very mindful. One, we want to be very constructive in terms of helping small businesses in particular to think about cash flow levels, et cetera, and want to be obviously committed to being a partner to get in the UK economy through that event. But I think we are prepared, and going back to the opening comment that two years ago we looked at our unsecured credit card portfolio and really tightened our underwriting conditions since then, and I think hopefully that has put the bank in a pretty prudent position position as we go into the latter part of this year. These would be the equities business. We do believe it's important to look at the profitability of the markets business overall. There will be some aspects of your markets business which are less profitable than others, but there is a connectivity between the two of them. We are committed to our position in the U.S. and in the European capital markets across the equities platform. We have a very strong business, obviously, in equities prime financing. We have a strong business in equity flow derivatives. So we're going to stay committed both on the research side and on the execution side to equities.

Thanks, Martin. Thank you very much. Yeah. Can we have the next question, please, operator?

The next question on the line today comes from Guy Stebbings of Exane BNP Paribas. Guy, your line is now open.

Morning, Jez. Morning, Tushar. Thanks for taking my question. Most of my questions have been asked. Just a couple of points of clarification. Firstly, on risk-weighted assets, thanks for the new guidance on the regulatory changes. Can I just confirm that was low single digits for each rather than in aggregate, I presume? And then to follow up on RWAs, Jez, you mentioned again in the introductory remarks that the slightly harsh treatment, at least in Pillar 1 terms, an operational risk. I mean, should we take another reference there as suggesting that you're getting closer to a change and that being moved more into Pillar 2? And if so, when's your next ICAP when that could perhaps be signed off? And then just a final very quick point of clarification. In head office, I saw quite a big jump in the period end tangible equity. Could you explain what's going on there? Thanks.

Yeah, no problem, Guy. Why don't I take a couple of clarifications on RWAs and head office and just can talk about where we are on operational risk-weighted assets. Yeah, single-digit billions for each of those impacts, so for single-digit billions for mortgage risk weights and additional single-digit billions for securitization, et cetera, and obviously a benefit on counterparty credit risk as a leverage matter. And head office tangible equity... At the end of the day, I mean, we capitalize our businesses at our target 13% ratio, so to the extent we've got excess capital at 13.4, we leave that in head office pending distribution, investment, et cetera, so not much more than that. And, Jess, you want to talk about office?

On the office side, we're obviously in dialogue with our regulators, recognize that in many ways this is optics, as we've as it would result in a move from Pillar 1 to Pillar 2, roughly 60 basis points. Given that there has been optically questions about whether our CP1 ratio was sufficient or not, or whether we sufficiently capitalized, if and when we do gather that 60 basis points, and today it would land at 14%, plus what we're doing on the dividend, Hopefully we have finally arrested this question of whether we're sufficiently capitalized.

Okay, thanks. Any sort of timing you're able to give on the operational risk, or can't really comment given it's up to the regulator?

Yeah, look, we shouldn't give, we're in discussions with the PRA, you know, we'll keep you posted, but I don't want to give a sort of a timeline on it yet. Okay, thank you. Thanks, bye. Can we have the next question, please, operator?

The next question on the line comes from Andrew Coombs from Citi. Andrew, please go ahead.

Good morning. Firstly, I apologize, but I'm going to make you repeat yourself. The line just cut out as Jess was talking there about the benefit. Was it 60 basis points gross or net adjusting for the PO2?

So we would quote a CT1 ratio today of roughly 14%.

Yeah. And that's before the reg minimum goes up for the adjustment on PO2. Correct.

That's right.

Right, understood. Sorry about that. And then my two questions, both on the international bank. Firstly, I'd be interested in your thoughts on the implication of lower Fed rates on CCP NIMS, obviously most specifically the U.S. cards business. And secondly, the transaction banking number. There's quite a jump queue on queue from 415 to 444. You said that's due to deposit growth, but I'd be interested there because there's quite a big step change in that line. Thank you.

Yeah, why don't I take them, Andrew? The Fed cut, yeah, that does, it will feed through into NIM in the U.S. Of course, it's pretty high NIM anyway, so I don't think it will make a huge difference to us in the outlook for that business. I would expect, you know, even with the new Fed rates, income to continue to grow in the second half relative to the first half. And, of course, you know, a lot of that's just through the increase in balances that we've been generating over the course of the year. Transaction banking, yeah, it's been really good for us. I mean, some of that obviously is as a consequence of the deposit levels that are increasing in our commercial banking business. So as Jess mentioned, you know, the sort of general behavior we've seen from customers is slightly more cautionary. In other words, leaving a lot of cash with us and at the margin, less of a demand for credit. We've seen that in commercial as well as business banking. You know, whether that sort of continues, those deposit rates continue to go up or not, I guess it remains to be seen. We'd like to be lending out that cash at some point, which would be good. I think what is interesting, though, for us is, though, some of those deposits have been coming in really through for European corporates that wish to do business in both the UK, Europe, and the United States to be able to deal with all three of those currencies, and we're seeing some benefit come through there, and that's coming through to our results, so I'm optimistic about that.

A little more specificity there. We put a fairly substantial technology spend beginning in the end of 2017 to build across Europe so that we could expand our corporate bank platform from the UK to across Europe. And a lot of the deposit growth has come from, as we turned on, Germany and France and Spain, et cetera. A number of corporates, many of them connected, obviously, to our franchise here in the UK, are running their transactions and cash management through our pipes. And that's been probably the biggest contributor to the growth in deposits which has driven the transactions revenue in the corporate bank. The other thing I would say is we've actually been doing reasonably well in terms of growing our trade financing in the corporate bank as well, which has helped there. And on your first question, clearly the risk-free rate would have an impact in the U.S., but I think all the European banks would love to have the same risk-free curve in Europe.

Yeah, we sure would. Thanks for your question, Andrew. We have the next question, please, operator.

The next question, gentlemen, is from Robin Down from HSBC. Robin, please ask your question.

Good morning, guys. Can I ask you a kind of variation on the question I asked you at 19Q1 about the consensus? I mean, we are on kind of 1st of August now, and you're still repeating the 9% plus ROT target for this year. And I think, as Tushar said earlier, even on consensus, consensus is obviously much lower than that. When I look at consensus, obviously it has a very big marked revenue decline, H2 and H1, even allowing for seasonality within bar cap. If that sort of revenue decline came through, how much flex do you actually have on the cost line? Obviously, consensus costs now are slightly below the sort of 13.6 number already. But how much lower could you go? And if you could go much lower than that, would that come from the bonus pool or would that come from coming back investment? I just don't know if you could give some color around that. And obviously, anything else you would pick out in consensus that you think that maybe we've missed something in terms of your outlook that hasn't yet been factored in? Thanks.

Okay, okay, Robin. So why don't I start, and Jeff will add some comments. Look, I think, you know, we obviously have a, you know, the market sort of is closer to an 8% return, and we still have a degree of confidence we'll get to 9% and better. I think I have a different shape on income outlook, and I think that's the gist of your question. If the income outlook is closer to your or the market's view relative to our view, you know, what leaders do we have? But just to touch on income, You know, I would expect, if I look at half on half, I would expect UK income to be better. I sort of guided to that. I would expect consumer cards payments income to be better. I've guided to that. I would, of course, we've got the redemption of the 14% reserve capital instruments that you're aware of. That'll drop out of head office, so that's a tailwind as well. I also think if you look at the... pipeline that we have in our investment banking fee business. Capital markets look pretty good at the moment, quite constructive, and we've got a very good pipeline. So as you say, as Jeff mentioned, I think we're in the top five in U.S. in terms of deal logic fee share. That's a really nice position for us to be in. And ourselves in trading business, we've continued to accrete market share steadily over the last sort of half a dozen or so quarters. So We probably do have a different income shape to you. The other thing I would say is that it goes back to the earlier question about sensitivity to currency rates. We're starting to remain weak. Of course, that is not necessarily accretive to returns because obviously our capital is held in dollars, and you can see that in our tangible book value accreting, but certainly earnings per share. that's definitely a positive. And, you know, it's been quite a reasonable move in cable, and that can only be helpful for us. I think on the cost side, we've taken a bunch of actions already. And you kind of saw that in Q2 numbers because of the headcount reductions. Jeff has talked about some changes to our physical footprint, deferral of Some investments, obviously, there's a cost to sort of repositioning the pace of that investment as well. So I think we have good control of our ability to glide those costs up. I think as you get later on in the year, of course, performance costs principally in the investment bank become more and more important. Of course, that will be linked to income performance there. But, Jess, do you want to add any more?

I just add two things. One, again, to underscore our commitment on the cost side and our focus on it, part of the cost numbers in the second quarter that you've seen, something that we as an adjunct team early on in the quarter took decisions to drive down the cost in the second half of this year so we could land below 13.6. A lot of those cost decisions raise your costs in the second quarter, but that should underscore our commitment to use costs as much as we can to deliver that 9% return on tangible equity. And you can also see in the financials that we published today that our variable cost number year over year was down 18% in the first half versus the first half of last year. So we are committed as best we can without putting the franchise at risk anywhere to use the cost number and manage costs to deliver a level of profitability that we've committed to our shareholders.

Great.

Thank you. Thanks, Robin. Could we have one more question, please, operator, and I think we'll end the call after this.

The final question today, gentlemen, is from Edward Firth from KBW. Edward, please go ahead.

Thanks very much. Morning, everybody. I just had a quick question on your Level 3 disclosures, which you very kindly enhanced, I think, on page 68. And in particular, I just wanted to check that I understand them correctly. So if I look in your income statement, you've got around, what, $700 million of contribution from valuation of Level 3 assets. Firstly, is that correct? That's obviously a marked change on what we've seen in the past. And secondly, what is driving that? And then I guess related to that, in the table below, I guess we've talked a lot before about the asymmetry on your valuation of Level 3 assets. That seems to be expanding now even further. And again, just trying to get a sense, what are the key drivers in that? It looks like non-asset-backed loans is one part of that. Is that leveraged loans, or what are those in particular? Thanks very much.

Yeah, these disclosures, Ed, as you know, are quite tricky to work through, and the reason for that is level three assets, of course, are just one sort of aspect of matched positions. So you'll have, for example, long-dated fixed-rate loans, for example, Now, obviously, we've had a big move in interest rates, so those customer positions in of themselves revalue quite meaningfully, but of course, from our perspective, they're hedged through other interest rate products that won't necessarily be level three, well, actually won't be level three, otherwise they wouldn't be able to be hedges, that would revalue in the opposite direction. So, you know, it's really more a function of just the very large movement in interest rates to interest rate-sensitive products. but are matched. So I think that's all I'd say on that. There's nothing else cleverer than that that's going on.

Is it, it's not possible to give us some idea of what the matched move is?

The net move, you mean? Yeah, yeah. Yeah, we don't sort of do things on an instrument-by-instrument basis. These are portfolio-managed positions. So, yeah, that's not how sort of risk management tends to work for us. You have Lots and lots of interest rate risks coming from lots of customer-facing positions that are ahead with the portfolio of interest rate hedges.

Okay. Thanks so much.

Okay. Thanks, Ed. And thank you all for your questions. No doubt Jess and I will get a chance to meet some of you soon after over the next few days. Thanks again.