Barclays PLC

Welcome to the Barclays Half Year 2020 Results Analysts and Investor Conference call. I will now hand you over to Jeff Staley, Group Chief Executive, and Tushar Mazari, Group Finance Director.

Good morning, everyone. And thank you for joining us today. First of all, let me say that I hope you and your loved ones have been keeping safe and well as we continue to navigate the COVID-19 pandemic. These remain extraordinary circumstances for all of us. And the impact of this crisis weighs heavily on our professional and personal lives. For me, this past quarter for Barclays has been a story of two things. The first is the resilience of the bank, underpinned by the diversification of our strategy and evident in our performance. And the second, made possible by that underlying soundness and strength, has been Barclays continued support for our customers, our clients, our colleagues, and the communities where we live and work around the world. As I said before, the key difference between the financial crisis of 2008 and 2009 and now, is that in a way the banks in 2008 and 2009 were the catalyst for the crisis. While this time we can be a firewall, helping to mitigate the impact of this crisis. I do believe this is a large part driven by regulatory and central bank policies of the past 10 years, which have aimed at moving the economy from an over-dependence on bank balance sheets to much greater reliance on the capital markets to fund economic growth. You can see the evidence of that approach in central bank actions since the beginning of the crisis, particularly in the unprecedented injections of liquidity and huge purchases of corporate debt to bolster the capital markets globally. That strategy has proven to be a very positive shift in terms of the ability for corporates and governments to remain well-funded and liquid as this health crisis moves towards an economic one as we contemplate how to support a sustainable recovery. I welcome the opportunity and obligation for Barclays to help alleviate the social and economic impact of COVID-19. And that effort remains a core priority for Barclays. I've been especially proud of the way our colleagues across the bank have risen to the challenge. Our business touches half the households in the UK. Five months into the crisis, we provided an enormous amount of reassurance and support to a million of customers facing financial challenges and with understandable concerns about the future. In practical help, so far we've granted repayment holidays on 121,000 mortgages and on 76,000 personal loans. We're providing an interest-free buffer on overdrafts for 5.4 million UK customers. And beyond that, we've reduced in cap banking charges. We've waived late payment fees and cash advance fees for 8 million Barclay Card customers and granted some 157,000 payment holidays. And we've exercised similar forbearance across both our businesses in the US and in Europe. 817 branches are open across the UK, providing critical frontline banking services, especially to our most vulnerable customers. We've also trained thousands of branch colleagues to help ease the burden on our call centers. These colleagues are helping handle some 200,000 customer calls a week, representing a whole new engagement with customers from our branches. As the economic consequences of COVID-19 begin to bite, it's more important than ever to help businesses get through this period intact and to do what we can to protect and preserve jobs. That's clearly a top government priority and equally a priority for Barclays. We have all seen the unprecedented effort from the treasury and from the Bank of England to back businesses in the UK. And we've been playing our part to help get that support to companies that need it. As of the beginning of this week, Barclays has now approved nearly 9,000 loans to mid-sized corporates in the UK, with a total value of two and a half billion pounds. Perhaps even more importantly, Barclays has delivered bounce-back loans to nearly a quarter of a million small businesses across the United Kingdom, with a value of some 7.75 billion pounds, helping to preserve hundreds of thousands of jobs. To give you some sense of the relative scale of that, we would historically make that number of loans and of that size over around a three-year period. We delivered the majority of support in just 12 weeks. Behind those numbers are stories of businesses and jobs surviving this crisis, which is what these programs are all about. Take Carras Plating in Greater Manchester, for example. Carras is a -year-old company specializing in electroplating, surface coating, and metal finishing. A 250,000 civils loan has enabled them to adjust their manufacturing process, to plate urgently needed parts for ventilators, provide electrical connectors for the Nightingale hospitals, as well as continue to supply critical components to the food and power sector. We'll take the UK's leading Thai restaurant group, Giggling Squid. Our support and delivery in its 5 million civils loans has helped safeguard 920 jobs at 235 restaurants across the Middle East and Southern England. In nearly a quarter of a million bounce-back loans to small businesses, like Jeweler Arnace Rose in London or the caterer Papadelli in Bristol, there's been a difference between survival and failure for companies up and down the UK. We're proud to be playing our part in that. With our investment banking expertise, we've also been a leader in helping large businesses to access the Bank of England and Treasury's commercial paper program. So far, we've arranged over 11.7 billion pounds of funding for UK corporates, representing some 48% of the total funding access to the CCFF scheme. To date, across all the government-backed programs, Barclays has delivered some 22 billion pounds in COVID-related support to businesses. In the round, these programs represent an extraordinary effort by the government to preserve jobs. And we are proud to support them in that effort. In addition to our backing for those government schemes, we've also been able to provide significant help of our own to business clients. For example, we waived everyday banking fees and overdraft interest for 650,000 of our small business customers. And we've put in place 12-month capital repayment holidays for most SMEs with loans of over 25,000 pounds. We're continuing to extend credit to companies, and Barclays has maintained billions of pounds in credit facilities for clients around the world to draw upon. We're also steadfastly supporting clients globally in advisory and in the equity and debt capital markets. For the second quarter, we advised on 580 capital market transactions that collectively raised a total of over three quarters of a trillion dollars in funding. Of note in the UK, we helped listed companies raise almost six billion pounds in the equity capital market, including household names such as William Hill, Austin Martin, and the Compass Group. There is perhaps no greater stabilizing effect for a company during a time of stress than the injection of new equity. And Barclays is the number one underwriter of equities for British companies year to date. In the US, we served as lead left book runner on a 1.5 billion term loan and a 3.5 billion secured bond offering for Delta Airlines. The term loan represented the first broadly syndicated institutional term loans to clear the market since the start of the COVID-19 crisis. On the advisory side, we were pleased to act as the lead financial advisor to Dominion Energy and the company's 9.7 billion divestiture of its midstream business to Berkshire Hathaway. It was announced earlier this month. We'll continue to evolve our approach in offering to clients, big and small, to help them through this crisis. It's crucial that we preserve as many businesses and jobs as we can to aid the recovery. Barclays has deep roots in the communities where we live and work. And I'm proud of everything our colleagues do year round to support their local areas. We are delivering our core finishing programs in communities such as life skills, unreasonable impact, and connect with work with a particular focus on helping mitigate the impacts of COVID-19. We're delighted that so far we have allocated 45 million pounds of our 100 million pound community aid package to charities in the UK, US, and India to support the people hardest hit by the crisis. From providing food to vulnerable families, to purchasing protective equipment for NHS staff. We understand that our fortunes are intertwined with those of the communities and economies we serve. Times like this, more than ever, our obligation is to support them. And we're going to continue to do that. Before I head over to Tuchar to take you through the numbers and details, I want to provide some overall thoughts on our financial performance in the first half and the second quarter. As I said at the top of these remarks, the first half has clearly demonstrated the resilience of this bank, underpinned by the diversification of our universal banking model. That diversification has enabled Barclays to deliver a robust operating performance in an extremely challenging macro environment. In the first half, income increased 8% to 11.6 billion pounds, with costs down 4% to 6.6 billion pounds. Resulting in positive jobs of 12% and an improved cost to income ratio of 57%. Pre-provision profits were strong, up 27% to five billion for the half. Notwithstanding the impairment reserve of 3.7 billion pounds in the first half of this year, including a further 1.6 billion pounds in the second quarter, that operating performance, led by our investment bank, meant we remained profitable in both quarters. Tuchar will talk more about the assumptions we have made about the macroeconomic outlook, which are a big part of our impairment bill. But we certainly feel that Barclays is appropriately positioned. For instance, taking the unemployment rate, a key driver of consumer credit risk, we've assumed a prolonged period of heightened unemployment in both the UK and US, that is some way above current levels. Yet despite the 3.7 billion impairment number, Barclays still ended June with a CT1 ratio of 14.2%. That's the highest capital ratio in the bank's history. In our corporate investment bank, in the first half, income increased 31% to 6.9 billion pounds, driven by a standout performance in our markets business, particularly in FIC, of 83% year over year, in our equities business, up 26%. The majority of our markets revenue is derived from trading securities and derivatives, and earning the bid-off or spread intraday. We also saw an 8% increase in banking fee income through continued momentum in both debt and equity underwriting. The share gains we have made across markets, and our performance in banking over the past two years, reflect client confidence in our capabilities, and we are pleased at how well the franchise has done in these volatile markets. While we don't expect these extreme levels of volatility to continue, the markets business remains attractive. In the first half, our CIV performance offset a much more challenging time for our consumer businesses. Income decreased by 11% for Barclays UK, and 21% in consumer cards and payments in the first half of the year. This is as a result of low interest rates, and few interest earning balances, reduced payments activity, and decisions to waive various fees and charges to support customers. This all translated into marginal profitability overall for Barclays UK in the period, and a loss of some 500 million pounds post-tax in consumer cards and payments. Dramatic falls in consumer spending in the second quarter have been well documented. We are now actually starting to see some encouraging signs of recovery, including strong demand in the mortgage market in the UK, and card spend trends on both sides of the Atlantic, and payment acquiring volumes. If that recovery continues further into the third quarter, this should lead to a better income and impairment environment, with the resulting improvements in underlying profitability for both the UK and our international cards and payments business. Finally, the investments we have made over the past five plus years in our digital capabilities have enabled us to serve our customers seamlessly through this period, including via the UK's number one banking app. As you'd expect, one consequence of the pandemic lockdown has been to increase demand for our digital services. So to conclude, and in summary, my colleagues and I are, today primarily focused on supporting our customers and clients, our communities, and the wider economy to navigate the pandemic. The strength of our business and the resilience of our strategy means we can both run this bank safely, and profitably, and provide that support to our customers and clients until this crisis passes. I'm gonna hand over to Tushar to take you through the performance for the quarter with some more detail.

Thanks, Jeff. As usual, I'll summarize the first half results and focus on the second quarter performance. As at Q1, we are facing a period of uncertainty, which makes it particularly difficult to give forward-looking guidance, but we can now see the initial effects of the COVID pandemic, and where possible, I will try to give pointers for the coming quarters. As Jeff mentioned, the results of the first half show the benefit of our diversified business model. Despite the impairment charge of 3.7 billion, we reported a statutory profit before tax of 1.3 billion, generating four pence of earnings per share. Mitigation and conduct was immaterial, so on this call, I'll reference the statutory numbers. As for Q1, profits for the half overall was down on last year, reflecting the increase of 2.8 billion in the impairment charge, but income growth of 8% and a reduction of 4% in costs resulted in a profitable half, and an ROT of 2.9%. Given the uncertainty around the economic downturn and low interest rate environment, we do expect the environment in H2 to remain challenging. While we continue to believe that above 10% ROT is the right target for Barclays over time, we need to see how the downturn plays out before giving any medium-term guidance. That income growth reflected a 31% increase in CID, more than offsetting income headwinds in the consumer businesses. The cost reduction delivered positive draws of 12% and an increased cost income ratio of 57%. As a result, pre-provision profits were up 27% to 5 billion. A capital position is strong with a CT1 ratio ending the half at .2% upon the year-end level of 13.8, despite dipping to 13.1 at Q1. The strength of the balance sheet was reflected in the rise in TNAV from 262 pence to 284 pence. Moving on to Q2 performance. Income decreased 4%. Continued strong performance by CID, particularly in markets, was offset by income headwinds in the UK and CCT. Cost decreased 6%, delivering positive draws of 2% and a 62% cost income ratio. As a result, pre-provision profits were broadly stable year on year at 2 billion. However, we provided a further 1.6 billion for impairment of 1.1 billion to add to the 2.1 billion we provided at Q1. This charge included a further 1 billion net increase from modeling revised COVID-19 scenarios with macroeconomic inputs based on a slower recovery than we had modeled at Q1. Continue to see limited effects of the pandemic on delinquencies, partly as a result of support programs. Net write-offs in the quarter were just 0.5 billion and 0.9 billion for the half. Assuming no further deterioration in the macroeconomic variables we are using, we would expect to report a lower impairment charge in the remaining quarters of the year. Before I go into the performance by business, a few words on income costs and impairment overall. The quarter showed the benefit of the diversification of our sources of income across consumer and wholesale businesses. CID income increased 19% to 3.3 billion, driven by an increase of 49% in markets, which is down just 8% on Q1. Conditions remain challenging for our consumer businesses with reduced balances in a low rate environment, as we'll show on the next slide. However, with the recovery in levels of consumer spending, there are encouraging signs starting to emerge. We've highlighted here the headwinds from balance sheet reductions in -U-K and U.S. cards, and also summarize the interest rate developments that have put pressure on income across our lending businesses. You've seen some signs of recovery in consumer spending in both the U.K. and U.S. through June and into July as lockdowns are eased, but of course there will be some time lag in converting this spending to associated increases in interest earning balances. Spending recovery should have a quicker transmission to income levels in U.S. cards, due to the higher interchange income we earn on card spend in the U.S. We've also put on the slide a reminder of the headwinds in -U-K we quantified at Q1. We've continued in H2, but following the repricing of deposits, the margin compression may moderate in H2. Looking now at costs. With the 8% increase in income and cost down 4% in H1, the group delivered positive jewels of 12%, and the cost income ratio reduced from 64% to 57%. I would remind you that costs in H2 will include the bank levy, and we expect the additional costs relating to the pandemic to outweigh cost categories, such as travel, which are reduced in the short term. Of course, the level of costs in H2 will vary with the performance related cost flex in the CID. Pandemic is also changing the ways in which we work, so our continuing focus on cost discipline remains critical to our performance going forward. I've mentioned the additional impairment charge in Q2. As you can see, there was a -on-year increase across all businesses, but the -on-quarter progression shows an increase in -U-K, reflecting a slower forecast economic recovery, but a decrease in CCP. The effect of this slower forecast recovery in the US was offset by a lower 2020 peak for unemployment and the significant reductions in US card balances. In CID, we had lower single-name charges than in Q1, but the effect of the slower recovery on expected losses in corporate lending kept the charge at an elevated level. We've shown on the next slide a breakdown of how we built up the Q2 charge, and the macroeconomic variables, or MEVs, underline the expected loss calculation. We used a similar format to Q1 to explain the workings behind the charge. The modeled impairment calculated during the quarter, using the MEVs we set prior to running the COVID scenario for the Q1 close, generated a figure of 0.4 billion. I think of this as a sort of baseline model charge. In addition to this, we had another 0.2 billion in respect to single-name wholesale charges in the CID. As in Q1, some of these names may have been affected by the pandemic, but the sum of these two is not materially about and is a result of our underlying quarterly run rate in previous years of around 0.5 billion. The remainder of the increase reflects the 1 billion net impact from updated COVID scenarios, reflecting the deterioration in forecast MEVs, and an overlay of 150 million for selected sectors. This book up, as I call it, compares to the 1.35 billion we charged in Q1. We've shown on the slide some of the key UK and US macroeconomic variables used, and there's more detail in the results announcement. The key changes are that while the peak unemployment level in the US is lower in the Q1 COVID scenario, the unemployment levels for both the UK and US remain high for longer. The modeling is subject to inherent uncertainty with respect to forecasting incremental credit losses, and it is difficult to give guidance on the charge going forward. The levels of defaults flowing through will be a key determinant of the charges for the next few quarters. The extension of support programs may delay visibility as to the ultimate level of such defaults, and to the extent that they were already included in the expected loss book up. Taking a step back from the level of the Q2 charge, it's important to look at the coverage ratios to see the full extent of our cumulative protection against downside risk. This slide summarizes the loan books, impairment bills, and resulting coverage ratios for the wholesale and consumer portfolios over the last two quarters. You can see that our coverage ratio increased at the group level from 1.8 to 2.5%. Of course, coverage ratio is very material across the secured and unsecured portfolios. The wholesale coverage has increased from 0.8 to 1.4%. Now, a large portion of this is in the selective sectors, which we consider to be more vulnerable to the downturn, which I'll cover shortly. I would remind you that we are looking at the major risks in corporate lending on a -by-name basis, including taking into account assessment of any value of collateral. The other major area of focus is the coverage on the unsecured consumer books, with a ratio increase from 8.1 to 12% overall, and to .1% on stage two balances, most of which are not past due. We've spit out the unsecured portfolios on the next slide. You can see here the increase in the coverage ratio across the UK and US card portfolios at 16 and .9% respectively. The coverage on stage two balances has increased to 28 and 24.5%. Turning now to the wholesale coverage on selective sectors, we've shown here our exposure to those sectors which we feel are particularly vulnerable to the downturn. I won't go through each of them, but you can see that the balance sheet exposure is just over 20 billion, and our overall coverage ratio across these sectors has increased from 2.3 to .0% through H1. I'd also highlight that as a result of our cautious approach to wholesale risk management, we have synthetic protection in place, covering over 25% of our exposure. As I've mentioned before, we've been happy to sacrifice some income in order to reduce the downside on credit risk. Before I move on to individual businesses, a few words on payment holidays. We've set out on this slide the balances in the major portfolios receiving payment holidays as at 30th of June, staging of those balances and coverage ratios. As you can see, 10% of the mortgage book was on a payment holiday, but these are mainly stage one balances, and the average LTV is 57%. In UK and US, cards with a percentage of balances with holidays was much lower at 5% and 3% respectively. The portion of these that are stage two balances is considerably higher, where the coverage ratios on those balances are well above average stage two coverage on cards at 43.9 and .3% respectively. That means the total uncovered balances on payment holidays across UK and US cards was under 1 billion at 30th of June, and you'll see on the next slide that this is coming down materially in July. It's still too early to draw firm conclusions from the behavior of customers rolling off payment holidays. However, we've set out here the evolution of holiday grants and roll-offs through to the 22nd of July. You can see that as the first wave of holiday grants have started to expire, a significant portion have been rolling off payment holidays, and many of these are returning to regular payment schedules as their payments become due. So there was a marked decline during June in net balances still on payment holidays, and this trend is continuing in the first three weeks of July. Sending now to the performance of individual businesses. We mentioned at Q1 some of the income headwinds the UK is facing, and these are reflected in the Q2 performance, with income down 17% in line with consensus. Although we saw recovery in spending towards the end of the quarter, as I showed earlier, unsecured balances reduced significantly, with interest earning card balances down 18% year on year. Mortgage balances, on the other hand, were up year on year and broadly flat on Q1, with slightly improving pricing. With a significant increase in business banking lending, it's seven billion combined in bounce bank loans and C bills. Meanwhile, deposit balances continue to grow, resulting in a loan to deposit ratio of 92%. Overall, as indicated at Q1, NIM was down material in the quarter at 248 basis points, from 291 for Q1. We still expect the foliar NIM to be in the range of 250 to 260 basis points. Cost in the quarter decreased 4% as efficiency gains were offset by costs related to the pandemic, and circa 25 million of costs were transferred with our partner finance business from Barclays International. In payment for the quarter was 583 million, an increase on the Q1 level of 481 million, reflecting the updated COVID scenario that I mentioned earlier. As I noted earlier, arrears rates at 30 as of June do not yet reflect the developing economic downturn. Turning now to Barclays International. The BI businesses delivered an ROT of .6% for the quarter, down year on year, as a positive jolts from a 3% increase in income and 10% reduction in costs were more than offset by an increase of 0.8 billion in impairment. I'll go into more detail on the businesses on the next two slides. CIB delivered an ROT of .6% in Q2 with another strong performance in markets more than offset the increased impairment provision. Income was up 19% at 3.3 billion, while costs were down 10%, delivering positive joules of 29%. Markets grew income to 2.1 billion, up 49%. Increase was driven by slow trading, as in Q1, with increased client activity, and the trading businesses capturing a good portion of the widen bid-offer spreads as a result of the heightened volatility. This was despite sizable headwinds from hedging counterparty risk, including funding valuation adjustments. FIC income was up 60% on last year, or up 90% excluding the net effect of the trade web gains, with a particularly strong performance from flow credit. Equities had a record quarter in terms of sterling income at 674 million, up 30%, with particularly strong increases in derivatives and cash equities. Banking increased 5%, reflecting improved performance in DCM and ECM, but lower advisory revenues. Overall, it was a strong performance by historical standards. We talked at Q1 about the effect of the corporate lending income of -to-market moves on loan hedges. And in Q2, we saw most of the Q1 benefit reverse as market conditions improved, with circa 280 million negative in total from -to-market and carry costs of the hedges. We also had some positive marks on our leverage loan commitments, totaling circa 140 million, totaling circa 140 million, taken through the income line. Cost reduced 10%, resulting in a cost income ratio of 51%. Impayment increased to 596 million, driven by the effect of the updated COVID scenarios on some single-name charges. RWA is reduced by 3 billion in the quarter to 198 billion, significantly lower than anticipated. I'll come back to that when I talk about capital progression. Turning now to consumer cards and payments. Income in CCP was down 37% -on-year. This included a 101 million pound write-down on visa preference shares. Excluding this, income was still down 28% -on-year, reflecting a significant reduction in US card balances, which were down 18% in dollar terms. In addition to affecting balances, lower spend volumes are also a headwind for interchanging income in cards and payments income. Although the income environment is expected to remain challenging in H2, recent spend data from June and into July, particularly in the US, have suggested some recovery in income, if those trends continue. Costs were down 11%, reflecting both cost efficiencies and lower marketing spend in light of the pandemic. While the ERIO's rates have not yet responded to the downturn, we have taken additional impairment provision of 0.4 billion as a result of running an updated COVID scenario with a slower economic recovery than forecast at Q1, partly offset by lower balances. Turning now to head office. The head office lost before tax was 321 million, up significantly -on-year and -on-quarter. The negative income reflects the main elements I've referenced before, like the 13 million of legacy funding costs and residual negative treasury items, while hedge accounting this quarter generated negative income, compared to a positive contribution in Q1. And that is expected to continue in H2. These are partially offset by the final dividend of circa 40 million. Q2 also included some -to-market losses on legacy investments in the income line, and they'll act when they're right down through the other net expenses. These were each of the order of 40 to 50 million. After an unusually low Q1 print, cost of 109 million, were above the usual run rate of 50 to 60 million, due to the inclusion around half of the community age program of 100 million we announced at Q1. Moving on to capital. We began the quarter at a C to one ratio of 13.1%, having seen a material increase in RWAs in Q1. We had guided for a slightly lower ratio at Q2, as further pro-cyclical increases in RWAs were expected to more than offset capital generation. As we flagged our announcement a couple of weeks ago, the combination of some beneficial regulatory changes and lower RWAs have contributed to a higher than expected ratio, ending the quarter at 14.2%. We continue to generate capital with profits adding 60 basis points of capital, excluding the pre-tax impairment charge. The full impairment charge would have taken 51 basis points off the ratio. This was partly offset by IFRS 9 transitional release of 35 basis points, which included the benefit of the rule changes in Q2. We've shown how these new rules work in the call out box, and there's more detail in an appendix slide. The PVA reduction added 10 basis points, which includes the adoption of the rule change in Q2. There are also increments from fair value moves and the pension position. I'll say more about the way we are looking at our capital flight park in a moment, but first I'll go into detail on the RWA bridge. Here we've broken down the elements of the 6.6 billion decrease in RWAs. The pro-cyclicality we had anticipated at Q1 only partially materialized, and we were able to take management actions to mitigate potential increases. We did see some credit RWA inflation from credit quality deterioration, which we estimate at circa 5 billion. However, other credit risk movements reduced RWAs by a total of 7.6 billion. Over half of the March drawdowns on revolving credit facilities will be paid in Q2, contributing 3.7 billion to that credit RWA reduction after an increase of circa 7 billion in Q1. Counter-party RWAs reduced by 3.1 billion, and in market RWAs, management actions we were able to take resulted in a 2.7 billion net reduction in the quarter, a good result given our strong performance in the market's businesses. Our plans for running the businesses do currently assume some further pro-cyclical effects materializing H2, but as we have seen, forecasting the timing of such effects is difficult. Overall, I would expect the RWA flight path to be a headwind to the capital ratio in H2. The other headwind I'd call out is the potential capital effect of the H2 impairment charge to the extent it has an increased element generated by defaulted balances, which should not be eligible for the increased transitional relief that benefited the Q2 ratio. This would limit the capital generation from pre-provision profitability in H2. Looking at the next slide at our capital requirement, we've shown here our current capital requirement and how it is reduced to reflect the removal of the counter-cyclical buffering Q1 and the recent reduction in Pillar 2A. As a result, our MDA has reduced by 130 basis points to 11.2%, so a Q2 ratio of .2% represents a 300 basis point buffer. We also expect some further reduction in our MDA hurdle in percentage terms over the stress period through some further reduction in our Pillar 2A requirement. With regards to Headroom, our capital ratio has strengthened over the recent years to put us in a position to absorb precisely the type of stress we are now experiencing. In this environment, we will manage our capital ratio through this stress period to enable us to support customers while maintaining appropriate a buffer above the MDA. I wouldn't look at a 300 basis points buffer as any sort of benchmark. We expect the buffer that we consider to be appropriate to evolve over time, having regard to the expected flight parts of both our ratio and our capital requirement. In summary, we are comfortable with our capital ratio and would be comfortable for it to reduce in H2, but it's too early to give definitive guidance on the H2 flight path. Finally, a few words about our liquidity and funding. You can see on this slide some of the key metrics showing we are well positioned to withstand the stresses that are developing and to support our customers. So to recap, we were profitable in Q2 as well as for the first half overall, despite the effects of the COVID pandemic. Although some income headwinds across the consumer businesses are expected to continue into 2021, we do expect a gradual recovery from the Q2 levels. We continue to see the benefits of our diversified business model coming through with strong income growth in the CIV in H1 and our franchise is well positioned for the future. Costs were down year on year resulted in positive jills for the quarter. The pandemic has increased costs in certain areas, but is also changing some of the ways we work. So our continuing focus on cost discipline remains critical to our performance going forward. We've taken very significant impairment charges in Q1 and Q2. While the future is hard to forecast, without further deterioration in economic forecasts, we expect to report lower charges for the remaining quarters of the year. Our funding and liquidity remains strong and put us in a good position to support our customers and clients during this difficult period. Though we may face further headwinds in H2, our improved CT1 ratio of 14.2%, puts us in a good position to deal with further challenges resulting from the pandemic. However, I won't comment further on the potential future capital distribution at this stage. The board will decide on future dividend and capital returns policy at the year end. Thank you. I will now take your questions and as usual, I would ask you to limit yourself to two person so he can get a chance to get around to as many as we can.

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 two. When preparing to ask your question, please ensure your phone is unmuted locally. To confirm, that's star followed by one to ask a question. Our first question on the line comes from Joseph Dickerson of Jeffreys. Joseph, your line is now open.

Hi, thank you for taking my question. Just the first question is, do you expect any benefit on capital in the second half from the recent changes around the treatment of software intangibles? And then secondly, from a top down standpoint, everything that you're saying suggests that you have reached an inflection point on margins. It sounds like volumes at the system level are picking up from what we saw from the BOE data today in your own commentary, and then provisions coming down in the second half. It seems like there's a fair amount of earnings momentum available to you in the second half. Would you agree with that?

Yeah, thanks Joe. Let me take both of those questions and Jeff may wanna touch on the operating environment in the second half as well. In terms of tailwinds to our capital with regards to potential rule changes around software intangibles, to the extent they go through, it's in the order of somewhere around 20 basis points for us. Let's see if it goes through. If it does, that's what it is, but we'll see how that evolves. In terms of the operating environment into the second half of the year, in many respects you are right in the sense that we should see some sort of, if you like, mechanical benefits coming through in the second half of the year, particularly in our consumer businesses. For example, if you take net interest income, for both the UK bank and indeed CCP, there'll be the mechanical effect of lower deposit rates just coming through in the third and fourth quarter in the UK, obviously just under UK rules, we're not able to pass on lower base rates for a period of time, so our deposits actually reprice in July onwards, so you get the sort of no effect in the second quarter, but a full effect in Q3 and Q4. In CCP, for example, we have dropped our deposit rates in the US from about .5% to 1%, but that reduction was very much towards the back end of the second quarter, so you'll see the full effect of that come through in Q3 and Q4, and in addition to that, we've noticed some peers that have lowered deposit pricing yet again, and we'll take a look at that, and there's a reasonable chance we may follow suit given how strong our funding position is. I think the other thing on the consumer businesses that's sort of worth bearing in mind is, obviously the decline in income that you saw in the second quarter, that quarter was characterised by both the UK and the US being principally in lockdown for the entirety of that quarter, and therefore you've seen continuing decline in spending and balances. As we exited the second quarter, of course those lockdowns were being reduced, and therefore we've seen spending pick up. In fact, in the UK, spend levels are down only sort of single digit percentage points from pre-lockdown levels, and we've seen a material pick up you've seen in our slides. In the US as well. Another sort of data point to tell you how quickly spending seems to be recovering, if you look at SMEs that we have in our acquiring business, less than half were actually open during the lockdown, more than 90% are now operating. This stuff transmits to income relatively quickly. And on the back of that, actually in the US of course it transmits into income through your transactor balances, both on the card interchange, as well as on the UK side on the acquiring fees that we earn as well. If spend continues into the third and fourth quarter, as we've seen at the moment, anywhere around these levels, you would expect to see interest earning balances on the unsecured credit side also begin to recover as well, and that would be helpful both to Martins and indeed net interest income. And the final point, Joe, just on impairments. We've tried to be conservative where we felt it was appropriate. We'd encourage folks to look at coverage ratios to give you a sense of how much protection we have against a downturning credit. Of course, these coverage ratios are principally driven by the provisions we have against non-defaulted credit, so these are sort of anticipating losses. And I think if we don't feel the need to increase those coverage ratios any further, absent the significant changes in the macroeconomic outlook, then you would expect our impairment charge to be lower. But that is a difficult thing to forecast with a high degree of certainty, just given we're just going into a sort of lockdown environment in most of those economies and the next few months will be critical in that. But absent any changes, this year I expect impairment charges to be quite a bit lower than we had in the first half. I think that's probably all we need. Is there anything else you wanted to address? No. I think hopefully that's helpful, Joe.

Yeah, that's helpful. That's helpful. I think that you had guided on the kind of roundtable following Q1 for Circa. I think we tallied the five-day impairment charge for the year. I think the consensus that you all sent around was for around $5.7 billion, which looks like a two-bill kind of incremental charge in the second half. Are you still comfortable with that guidance? Or how would you position the current outlook now versus to what you saw coming out at the time of Q1?

Yeah, the way I think about that, Joe, is if you think about the charge we had in the second quarter, the three building blocks for that, if you look at the underlying baseline run rate, absent any changes or updates to economic forecasts, we called out $400 million. In addition to that, we had single-name charges of $200 million, giving you a total of $600 million. That's the kind of run rate that we're experiencing at the moment, absent any changes to macroeconomic forecasts. If economic sort of forecasts don't change much from here, let alone improve, then obviously the impairment charge ought to be a lot lower. If economic forecasts deteriorate, the thing that's most relevant to us is long-term unemployment. And you see we've increased the levels of long-term unemployment going into 2021, quite materially, particularly in the UK. The other thing to bear in mind here, of course, is just what happens when the government support schemes come to their natural end, whether they're the furlough schemes or various other things. We'll just have to see how the economy responds to that. But I think all things being equal, as we see today, those kind of underlying impairment levels that are running at the moment would be how we looked in Q2, and you can build from there as appropriate.

Very helpful.

Thank you. OK, thanks, Joe. Can we take the next question, please, operator?

The next question comes from Jonathan Pierce of Numis. Jonathan, your line is now open.

Morning, chaps. I've got two questions, please. The first on impairment, the second on reslated assets. The first question on impairment is more qualitative, really, and it's the same question as Q1. I'm just interested in how your thoughts have developed since then on how these models are going to work. So I guess the general expectation is the genuine impairments will pick up into the back end of this year and next year. But how do you think the models will react to that, the forward-looking provisions you've taken so far?

Are you

expecting those to start releasing fairly quickly as we actually get the pick-up in stage three, or is it going to be this period of almost double counts where the reserves remain elevated but the stage three charges pick up sharply? So I'm interested in how your thoughts have developed on the working of the models into higher stage three charges. The second question on reslated assets, I wonder if we could just press you a bit more on where we may go in the second half, because in Q2, there was obviously a 2% fall in reslated assets, but there was lots of big moving parts contributing to that. So maybe you could give us a feel for your thoughts on the book size in the credit portfolio. That fell $8 billion in the quarter, but I guess the RCS and the movements there level out, credit card balances may level out. So perhaps those are flat in the second half. Counter-party credit risk, that was down, I think, $4 billion in the second quarter, should we assume that levels out as well, so that the second half movement in reslated assets is really all about pro-cyclicality, and maybe give us a feel as to where we could end the year in reslated assets.

Okay, yeah, thanks, Jonathan. Why don't I take a crack at both of them. With impairments, yeah, this is a really good question in terms of how the models behave. I think what we'll see is, the way I think about it is, the book hop that we've taken, if you like, the anticipated expected loss over the cycle of 2.4 billion, if our models are, I guess, two sort of things you've gotta believe. One, our models are perfect at forecasting. No models have gone through this particular sort of unusual scenario, so you have to sort of put a bit of a caveat there. And secondly, that we've forecast the economy perfectly as well, we may be too conservative, we may not be conservative enough, again, we'll find out. But on the assumption, we've got the call on the future economy, right, and our models indeed are perfect. In principle, we've already taken the loss associated with future expected losses. However, I think your question's a good one, because the timing of that will be important. So typically, what will happen is, you'll have some credits that go all the way through to default, and we would write them off ultimately, and some credits won't go through to default and will sort of cure back into lower stages. I think what will typically happen is, the defaults, we would be sort of conservative and maybe recognize them sooner. Well, you recognize them all, see, as they default, but I suspect they will happen sort of earlier on in that cycle, and we're probably gonna be conservative in curing, if you like, those undefaulted credits sort of back into lower stages. So I think the net P&L charge, if they're right, is gonna be around that sort of level, but you may see a sort of a mismatch in terms of timing with defaults happening slightly earlier than cures. It remains to be seen, of course, we've got government support measures going on here, so that might delay, if you like, those credits that were gonna default until much later, and maybe that gives time for good credits to cure back. So it's a little bit uncertain, but hopefully that gives you a sense of at least how we think about it. RWAs, and sort of guidance, prospectively, on that, again, I'm always a bit nervous to say this now after the first quarter, just shows how quickly things can change. But things feel very different now to when they did at the back end of April, when there was quite a meaningful degree of prospecticality, and draws on revolving credit facilities, and economies going into lockdown, et cetera. Economies have sort of, or asset markets, if you like, have sort of calmed down a bit. You've seen very strong capital markets activity, which is a good representation of that. And we've continued to see, for example, RCF draws reverse even since the end of the second quarter, so that trend has somewhat continued. I do expect that the economy will be, or it will be difficult to forecast the economy over the next sort of short to medium term. You have got the difficulty in knowing exactly how governments and economies will respond to if there is another wave of infections. I don't have a crystal ball on that, but that's a level of uncertainty. We've got elections in the US, we've got geopolitical stuff going on. So there may be some choppiness in markets, and if there is some choppiness in markets, then there may be some prospecticality that comes through. And we'd sort of be fine with that, with a jumping off level of 14.2%. If we do get that prospecticality, and capital goes back a bit, I think we'd be quite comfortable with that. Absent any sort of choppiness in markets, and if it's more of a normal year, then you've seen that we should be, continue to hopefully be profitable, and that will be reflected somewhat in our capital ratio as well. The other final thing I'd just say, Jonathan, which I know you're aware of, the MDA level may move as well. It's now a variable actually, on a positive light, because it's sort of a fixed quantum pillar of our RWA inside our sort of capital stack. It does mean it gets reset as a percentage of RWAs, so it may go up or may go down, depending on where our RWAs are. And of course, you've got the reevaluation of pillar two, at the back end of the year, so that will come through as well. But hopefully that's helped, Jonathan.

Yeah, that's really helpful, but can I, because it is extremely difficult now, sort of to model RWAs, as I'm sure it is within the bank itself, but would it be as good a guess as any at this stage, just to bolt on another couple of quarters of maybe five billion pro-siccuality to leave as year-end? It's around 330, I mean, excepting it could be miles away from that, but is that a good a guess as any?

Yeah, look, it's tough, Jonathan. The best I'd say is if markets are choppy, you know, the models, the whole framework is designed to be pro-siccual, so it will respond to that. If markets aren't choppy, then you've probably got sort of previous quarters that you can refer to as how we sort of normally fare in the second half of the year. I think for me to give a number out, it's very difficult to forecast, given I don't have the crystal ball on how choppy or not markets may do. Yeah, understood. All right, thanks a lot. Thanks, Jonathan. To be out there, next question, please, operator.

The next question is from Andrew Kims of City Group. Please go ahead, Andrew.

Good morning. If I could ask a couple of follow-ups, please, relating to slide seven. The first question is on the weekly spend data that you provide. Thank you for that. UK looks almost back to normal. The US is still lagging down 25% year on year. Interested to see if you are seeing divergence between the northern and southern states within that, and if you could elaborate as to how Farquhar's US credit card splits out regionally, as obviously the consumer card spend will drive the balances and the revenues from here. And the second question, I guess, kind of relates to the right-hand side chart on slide seven, looking at a digital versus branch engagement. The branch engagement is starting to come back, but it's still running 40% below where it was, and it may never fully recover. At what point do you take another look at the branch footprint? When do you review that as a potential further cost-save opportunity?

So I'll get Jeff to talk about the sort of digital branch footprint, and why don't I talk about some of the US, sorry, UK-US sort of spend trends that you're seeing. First thing I would say is that the graph here, and I'm not sure we've put it in the caption, and I'd be so apologized if we didn't, but the UK is a measure of debit and credit spend, whereas the US, we've only measured credit here. Now in the UK, what we have seen is a pickup in debit spend, so as spending has improved, it's been more skewed towards debit cards, so that's probably why you've seen a difference in those two graphs. But coming back to your question on the US and the sort of differences by states, a few comments from us. One is, obviously as you know, in our business, we are probably overweight in sort of the airlines and travel retailers. We've been watching whether the spend on our cards relative to industry spend levels is any different, and actually it's been remarkably consistent. We are slightly lower in travel spend itself, so to the extent people are, we're booking in the second quarter sort of flights and things like that, because slightly more of a larger spend category, but only slightly more relative to the industry for us, we did see that. But on the flip side, on other types of spend, we were bang in line or sometimes slightly better than the industry. So that's very positive. In terms of by states, individual states, the large economies, things like California, Texas, the tri-state area, are also important to us in our cards. We're not very, if you like, sort of clustered by state. It's relatively representative. It's more clustered by partner rather than by state. And if you look at our data, now we're not like sort of a nationwide sort of open card type business. It is tied to the retailer. So we don't get a great sort of, if you like, index view of the US in the same way we do at the UK. But on our spend at least, we're not seeing any discernible differences between, if you like, those states that are having higher infection rates and talk of maybe some sort of restrictions coming in, for example, like Texas, versus other states which are probably not experiencing those level of infection rates. At the moment, it feels quite balanced from our perspective. And card spending is improving. You've seen it sort of down almost 50% and recovered quite sharply. And looks like it's got some momentum still going into the third quarter. And we'll obviously see how economies perform further into the third quarter. Jess, do you want to talk more about sort of use of branches in digital?

Yeah, so a couple of trends, I think, coming out of the pandemic. For sure, the use of digital networks from our consumers and small businesses across the UK has been increasing. And use, for instance, of cash has been by the spending item that has most contracted during the pandemic. And while in the short term, that clearly impacts our transactional volume, particularly in the branches. In the long term, the more we can get consumers migrating to our digital offering and using the mobile banking app and online to manage their transaction volumes, the better for us. There's a higher margin way to engage with our consumer. These would be the branches. We're running some 800 branches now. We've been slowly decreasing our branch footprint for the last couple of years. The branches were very important during this pandemic, though. You know, a lot of customers and small businesses that are under stress, that are concerned about their financial future. And having the ability to go in and to talk to someone physically in a branch is very important for the wellbeing of our consumers. And we see it in the engagement scores we have with our consumers. I think the impression that Barclays has remained open for business through its branches has been providing support to the communities where we live. There clearly is value there. The other thing that we did as response to the pandemic, our call volumes overall of customers with issues, with concerns. And at some point in time, we're up four to five X what they were this time last year. In order to give relief to our call centers, we actually began to retrain a lot of people in our branches so that as of now, we are fielding about 200,000 incoming consumer calls every week with our personnel that are resident in the branches. So rather than just being there waiting for someone to walk in the door, we're actually repositioning the branches to do much more than that, to incoming calls, make upcoming calls, to keep that engagement with our consumers in the time of this crisis as high as we can. In the longer term, as finance increasingly digitizes, I think we will always be evaluating our branch footprint. And I would imagine the trend that we've seen over the last couple of years will continue.

Thanks for the question Andy. Thank you. We have the next question please operator.

We have a question from Chris Kahn from Autonomous. Chris, please go ahead.

Good morning. Thank you for taking my questions. One on cost and then a follow on RWA's please. The cost income ratio across the UK and CC and P, I know you've shut some stuff between divisions, but if I just smush them together to ignore that, was 67% in the second quarter after adjusting for the preference share impact. I understand that you expect some top line recovery there, but if I look at one H, which obviously includes the first quarter when you didn't have the impact of the rate cuts in and COVID wasn't in full flow, it will be 62% across those two divisions. Again, adjusted for visa. You've still got your target of less than 60% for the group over time, including head office, which is a drag and CIB, which would normally be above that level. So what do you expect the cost income ratio for your retail facing businesses to be if you think about the UK, CC and P in the round? What do you expect the cost income ratio to be next year and looking into 2022? And on a related point, the cost income ratio for the CIB of 49% looks unsustainably low. And it looks low versus what the CIB divisions that other banks have printed. Could you comment on your compa-cruel policy please? What is going on there? Because it looks like you're not really reflecting the very strong performance in the bonus accruals. And I'm just not sure how your year end conversations with DeftKeds will go later in the year, given that you're also flagging the strongest ever capital ratios. Should we be worried about a 4Q comp catch up again? And just one quick follow up on autumn raise please on Jonathan's question. I understand the reluctance to guide, but it does feel like this is a bit of a random number generator from the outside. First, do you have any more model change impacts in your back pocket to come through in the second half? And what's the quantum please? Presumably you do have visibility on management actions. And you said to look at prior period movements, T.Shar, last year we saw a 14 billion reduction in the CIB in the fourth quarter. Are you suggesting we might see the same this year absent a big spike in volatility? Thanks.

Thanks, maybe make an opening comment then let T.Shar answer the rest of your questions. One, we stand by our target of a 60% cost income ratio for the bank over time. The first half we delivered 57%. So those are the numbers. Obviously in an environment like this, when spend just literally fell off a table on our two principal consumer businesses, UK and US, you're gonna have a move in your cost income ratio. And also remember, we felt it was very important that this bank stay open for business and stay engaged with our small business and consumer clients and maintain the employment headcount for us to do that. We also publicly came out and said that we were going to cancel any redundancy moves in our consumer businesses until we get through the end of September. During a moment of crisis like this, it just didn't seem appropriate to us that we start laying off a lot of people. So I don't think the current cost income ratio in our consumer's business at all are reflective of what will be in a normal state. And they have been comfortably below 60% in the past and they, I don't feel comfortably good, get below 64. In terms of the CIB, that cost income ratio, obviously very, very strong in the first half of the year. I would expect that to go up as the market progress. So you essentially have the pandemic creating a distortion on one level in BUK and then creating a distortion to a certain extent on the level on the CIB to the positive. And our anticipation is in the third and fourth quarter and next year you'll start to normalize those cost income ratios and our target remains the same. In terms of accrual for compensation, again, the ultimate decision around compensation will be made at the end of the year and beginning of next year. We are very aware that we are in an industry with competitors and we have to recognize what the industry is doing and we wanna pair, compensate people fairly, but also we have a very uncertain economic environment right now and we need to be mindful of that. We are accruing and I think I'm not worried about being able to keep the very talented people that help us in the wholesale side of our business.

Yeah, and just around that off Chris, I think the other thing I just, I know probably those that spent a long time looking at our numbers are aware of, but there's a more broader comment. Our costs have been declining in absolute terms for a number of years now, regardless of size, shape and environment that we're operating in. So cost discipline is an important thing for this management team and then perhaps even more so given some of the uncertainty we have on the top line. Your question on RWA, as I said, in terms of, are there any sort of, I think your question was either have we got any sort of model changes or something like that in the back pocket? Nothing I would call out. I mean, there's a rule change that may or may not happen on software intangibles as SME factors that we didn't put through, but these are relatively small and I wouldn't call them out as sort of big drivers of our capital ratio. I think really what will be the, as we look at it now for the third or third week into July, will be just whether volatility in market sort of goes back to anything like they were sort of in the March, April period that that will transmit some pro-siccality. If that does, RWA will inflate and we're okay with our capital ratio going back at it. If it doesn't, then it may be sort of more what you're used to. In terms of the fourth quarter, it does tend to be, it's just the way the, because you've got Christmas and New Year right at the back end, the trading book settlement balances et cetera just tend to be very low at that point in the year. So you do get a sort of an additional, if you like, tailwind if that remains the case this year into the fourth quarter, which I think you've seen in most years now. But not much more I'd give other than that,

Chris. Thanks very much, Chris.

Yeah, thanks for your question, Chris. Can we have the next question, please, Alvaro?

Our next question comes from Alvaro Serrano, Morgan Stanley, please go ahead.

Hi, can you hear me all right? You've

got a slightly ugly line, Alvaro. Is

this better?

Yeah, slightly better, yeah, go

ahead.

Sorry, most of my questions have been answered, but I had a follow-up question on provisions. You've seen quite a lot, I mean, you've done obviously a good effort topping up the reserve bill and credit cards, but just qualitatively, your balances in credit cards are down 18%, I think, in the UK, and certainly more than doubled it in the US. From a qualitative point of view, can you give us an impression how that has de-risked your book? What kind of clients are paying down the balances? I don't know if you have any color on the rating of those clients. Is it good clients that are paying it down or is it across the board? Is it high balance, small balance? Is there something that can give us a qualitative impression of is that really de-risking the book or the riskier clients are still there? Obviously, payment holidays have almost reduced to zero, but just qualitatively on the balances. And related to that, obviously in Q1, you had a big oil reserve, I think it was 300 million, oil prices now much better, versus your Q1 in your wholesale exposure. What areas of portfolio are you more concerned about? Would you say retail is now the major concern? And there, how do you see the reserve building up in the wholesale? In the second half, and not just in the second half, but medium term, again, from a qualitative point of view. Thanks.

Yeah, thanks, Alvaro. Why don't I have a take over then? In terms of the balance reductions, I'd almost characterize it as a vertical slice. We didn't see a particular skew towards more riskier or less riskier credits, both in the US and the UK. I think the reduction in balances was as much driven by just people spending less and not finding its way into lower balances rather than those that could afford to just pay off their cards and those that couldn't were leaving their balances running. We didn't really see that at all. What we did see at a very marginal level was on payment holidays, those that are, if you like, more riskier credits, having a higher propensity to take payment holidays. But looking at the numbers now, I'd say that's behind us. And these are back in the books, if you like, rather than in the special payment holiday category, as you can see in our disclosures. For example, you'll see our FITO scores in the US, broadly speaking, what they were before the pandemic. So we haven't really deteriorated there either. In terms of, the other thing I would say, just in terms of just asking everybody to take a look at coverage ratios, because provisioning is something that is difficult given that we're making quite long range estimates based on uncertainty around the economics, uncertainty around government support schemes, customer behaviors, or whatever. What we've tried to do is to be as prudent as is appropriate and have what I consider strong coverage ratios on some of our more riskiest parts of the book. So on the retail side, UK cards were at 16% provision rates, and US cards at 14%. I mean, these are pretty high by any historical measure, if for those of you that will have this data. The last financial crisis, say UK cards business at NPL, the cumulative NPL was 6.9%. So we feel appropriately provided given the credit profile of the book there. Your other question on wholesale, the areas we're most focused on, we've called out on a slide, it's about 20 billion of exposure. And it's in the sectors that you would expect, transportation, retail, hospitality, et cetera. We're 4% covered there. Now you've got to remember, most of that again is non-defaulted. So these are sort of book off type provisions. We do do quite a bit of hedging there. We're 25% synthetically hedged across those sectors. We obviously have collateral levels, covenant triggers, we're insiders to the company. And these are much more of a sort of, if you like, bottoms up name by name assessment of what's the right provision level. So you'll have the numbers there in the slide, but we think we're well provided and relatively modest in terms of exposure to us. So hopefully that helps you with the qualitative commentary.

Thanks.

Thanks Alvaro. Will you have the next question please, operator?

The next question on the line comes from Rohit Chandra Rajan of Bank of America. Please go ahead.

Hi, morning, it's Rohit here. Just to follow up actually on Alvaro's question on just in terms of sort of behavioral activity that might give us some indication of credit quality going forward. I think the comments on the cards book and the payment holidays were helpful. You were able to expand that tool in terms of, I guess, the corporate business. You referred earlier to what your sort of acquiring businesses is telling you about SMEs open for business. Is it much there on activity levels or type of activities for SMEs? And then presumably on the large corporates, the fact that primary capital markets have been open presumably is helpful in those large corporates being able to refinance. So that was the first one just in terms of any lead indicators on credit quality. And then the second one was just the BUK NIMS. So the guidance reiterator for the 250 to 260 NIMS for the year as a whole. Looks like a spread of 230 to 250 in the second half. Just wondering what the uncertainties are that will drive that sort of 20 basis point range in that margin for the second half, please.

Maybe I can start to get some color on the first question and to start a pick up on the second one. And on the consumer side, I think what was a little bit of a surprise to us on receivables was I think historically going into an economic downturn, you see consumers and small businesses actually increase their reliance on short term credit in order to maintain a lifestyle or to keep a business functioning. And then as you come out of recession, they more normalized. In this event, clearly was driving consumer and small business behavior was fear. And so people of good credit quality and even those businesses that stayed open, use of short term credit declined. And they wanted to get their balance sheets in shape, less worried about their own personal income statement. And you also see that in the payment holidays, you see this very interesting move where we've done hundreds of thousands of payment holidays in the mortgage payment holiday portfolio, we're actually seeing a slight uptick and requests for extensions of payment holidays as the holiday periods come to an end. In the car side, as we showed, people are not asking to extend or roll their payment holidays. So the consumer is acting rationally in terms of, I will roll my debt, which has got a very low interest rate number to it, like a mortgage, but I'm not gonna continue the payment holiday on something that's got an interest rate in the high teens. So they're acting rationally. And I think it's resulting in a book, which is maintaining its overall credit quality. And we'll expect the thing to come back as we see spend numbers come back now. So then on the corporate and the SME side, what we're seeing in Merge Inquiry 1 is a pretty dramatic recovery in spend. And so at the trough of this crisis, spend was off anywhere 30 to 40%. You take away cash spend, and spend numbers are almost getting back to where they were a year ago this time, which is quite irreversible, and that's very encouraging in terms of what we see for SMEs. And then on the SMEs, and to a certain extent the corporates as well, two things are having a market impact on our credit risk to SMEs and corporates. And those are the government programs. We put 21 billion pounds into a quarter of a million small businesses and large corporations that are government programs to buy them liquidity and funding at extremely attractive rates. We've done close to 11 billion pounds of commercial paper issuance in the UK through us to treasury. And that's a lot more attractive funding than going to a bank revolving line of credit. So both corporates and the SMEs have been actively losing using government support mechanisms for credit. And that's clearly had an impact on the credit profile of Barclays. Then as you said, following an unprecedented injection of liquidity into the capital markets, as well as central banks around the world using their balance sheets to actually buy credits in the capital markets, those markets reopened with an extraordinary amount of volume. And as mentioned this morning, we participated as a manager in three quarters of a trillion dollars of debt issuance around the world. Most all of it in the second quarter. That's $3 trillion of funding for corporates that is not gonna find its way back into a request for our balance sheet. So on the one hand, we are open for business. We believe it's an obligation of this bank to keep our balances open and to have those facilities available to our customers. Between the government programs and the robustness of the capital markets, quite frankly, the demand's not there.

And your question on Nimrod, I mean, the trickier thing to gauge there, of course, is balances and just how quickly we recover. It's quite early on in sort of post-lockdown environment and quarantines and what else. But they are, I think we've seen a plateauing, we've seen, or balances that is, we've seen a fairly decent recovery in spend levels. I think if those spend levels stay anywhere where they are at the moment, let alone continue to recover, you ought to see balances sort of come after, growing shortly thereafter. But there is some uncertainty there. It's, we don't have much to model this stuff off and it's only a small number of weeks plus lockdown and that's why there's a sort of a broadish range.

Okay, so it's really about loan mix in terms of, in terms of the Buk, Nim uncertainty. So you have a clear understanding of what the deposit impact is, but it's the asset side of the balance sheet, which is the uncertainty.

Yeah, and you'll probably see mortgages continue to grow but if the unsecured card balances, how quickly they come back is a little bit harder to forecast. It's good signs, but we need to see that momentum continue.

Okay, thank

you very much. We're on both, thank you. Thank you, can we have the next question please operator?

Our next question comes from Guy Stebbings of Exame B&B Paribas, please go ahead Guy.

Morning, thanks for taking my questions. First, actually just a quick follow up on Buk and then a question on CCMP. I just want to check on the Barksley partner finance move, whether that was then captured in the Barksley card consumer line. If that's the case, I think balance will be that nine and a half billion X that change from 13.6 at the first quarter. So underlying declining balances are roughly sort of double the industry level. So there's going to be a call out there, which obviously feeds into the prior question on the NIM outlook. And then on CCMP revenues, you've talked to graduate recovery and some of the better spending trends in the US more recently. So I'm just trying to gauge what you expect to graduate recovery will look like and how it will be achieved. And we clearly sat here today, having delivered just 1.7 billion or just at 1.8 in the first half, if we add back the visa headwind and we balance it down to 33 billion, we need to see quite a strong recovery to get back to market expectations for the 3.9 billion this year and not for 4 billion thereafter. So should we assume a fundamentally different outlook to prior market expectations given the environment or what if not, what sort of revenue margin expansion and balance growth are you targeting? Thanks.

Yeah, thanks, Guy. Let me do the second one first and I'll come back to your first question on BUK. Yeah, there's three things on CCP that I think will be tailwinds into the second half of the year. I've talked about net interest margin on the liability side. Talked about a sort of 50 basis points margin pickup towards the back end of the quarter on our liability balances. And we may drop deposit rates again. So that is a tailwind, quite obviously very different from where we were in Q2. Second thing is payments. The transmission effect on payments is relatively quick. You've got, obviously in our acquiring business, now that the bulk of those businesses are actually open and you've seen spend levels, particularly in the UK where acquiring business is most important. Almost back to pre-COVID levels, that quickly transmits back into sort of fees. And in the US, those interchange fees are still quite attractive. The spend recovery in the US will sort of translate back into fees there pretty fast as well. And then the harder one to gauge is balances really, particularly on US cards. If spend levels continue, then balances will follow, but there is a delay effect there. And I think that's a little bit dependent on, obviously how the economy's performed in a post lockdown sort of period. Do they continue as they are at the moment? And in all intents and purposes, even though there's a lot of concern around infection rate and whatever, we're not really seeing any tail off in consumer strength at the moment, at which point we would expect to see balances and card openings increase. So I can't give you numbers on that. It's a bit too early in the quarter to start extrapolating, but those are meaningful sort of tailwinds that we'll have from this point on. And we've talked about a sort of a steady recovery. We'll see how strong that is as we go further into the quarter. Just to answer your first question, just to help with the geography, yeah, the Barclays partner finance business is recording the Perth Banking line. And if you wanna sort of just make sure you know where we're calling what out where, then you know, Chris or James behind the scenes can spend a bit of time with you just to point you into the right places into the disclosure that we've got.

Okay, perfect. I don't know if I could just push you a little bit on the CCMP revenues. If those three items all do come through and the balance, I appreciate it's hard to gauge, but if that was to come through nicely over the course of the second half of the year, are you hopeful we can get back to a one billion type quarterly run rate revenue?

Yeah, look, I know you're keen on sort of trying to get me to get to a range, and I'm reluctant to do that only because it's quite a fair old extrapolation. All I would say is, you know, I'd be disappointed if there isn't a pretty, you know, a recovery into the third quarter that has momentum into the fourth quarter and beyond. You know, it's a momentum business, so once things start moving in the right direction, they'll be sort of followed through. How

strong

that follow through is, you know, the times look pretty okay at the moment. Spend levels are improving, margins improving on the liability side. If that all continues, then, you know, I think we're cautiously optimistic, but it's early days in a post-lockdown economy to give you too much precise guidance. Okay, great, thank you. All right, thanks, Guy. Could we have the next question, please, operator?

The last question we have time for today comes from Ed Firth of KBW. Please go ahead.

Yes, good morning, everybody. Hi, can I just ask you, bring you back to cost, because if I look at your, I think it was your second slide, Tushar, you're talking about income up 8% and cost down 4%, and I guess I've followed around banks a while, I mean, those numbers are almost unbelievable, and I guess, you know, looking at the share price reaction today, I'm not alone in that concern. So, and if I look into the second half consensus, you're looking, I mean, consensus seems to be looking at revenue falling something like 2 billion, and yet costs actually going up a little bit. So it almost felt like there's a complete disconnect between what's happening to your costs and what's happening to your revenue. So could you help me a bit with that? And in particular, I'm not asking for a number, but I mean, if the revenue environment stays very benign, should we expect costs at the current level? Should they grow quite substantially from here? And also if we see a big fall off in investment banking revenues, have you got flexibility? Could that minus four be minus six or minus eight at the full year? So, I mean, what are the sort of levers you can pull and what sort of comfort can you give us on that?

Yeah, so why don't I start, and Jess may want to add a few comments. Look, I think, first of all, the backdrop I'll start with is just, I'll give folks just look at the trend over the last two or three years. We have been reducing our cost base in absolute terms, regardless of size, shape, the company, and the economy we're operating in. So cost discipline is very important to us, and that's something that's a constant focus for this management team. And I'd like to think that we've got a track record of every year reducing our costs year on year. This year, obviously, much more complicated because, as Jess sort of mentioned earlier on in the call, when we went into lockdown, times that we had in place, we put on ice. So for example, we were very public that we wouldn't lay anybody off until at least September. People that we did lay off, actually, before we went into lockdown, we actually gave them, even though we had, this is completely discretionary on our part, but just to try and do the right thing for people, gave them the same terms as those that were on government furlough schemes were paid for by ourselves. So now that comes at a cost. Obviously, attrition levels fall quite meaningfully. The job market sort of dries up, so we've got a higher headcount on both levels, lower attrition and sort of staff reduction programs that we didn't implement. And then, of course, just the cost of keeping businesses open in, with social distancing requirements and deep cleaning and all the various other things that go alongside that. So it is an unusual cost shape. But I think as we go into, if you like, normalized operating environment, whatever that is in a post-lockdown environment, we will absolutely re-examine, all the new ways of working that we've learned. I mean, one of the things that I think is absolutely eye-opening in lockdown, there's some things we've been able to do as an industry and certainly as a bank that we thought were unachievable previously. I'll give you an example. Some of the largest capital markets transactions that were done quite early on in lockdown, you had the issuer working from home, you had the investors working from home, you had the research analysts working from home, the syndicates, the traders, the salespeople, I mean, even the settlements engine, the folks driving, even the mechanics are settling these trades, everybody at home. And yet we're, as Jess sort of mentioned, something like just for ourselves, three quarters of a trillion dollars of capital markets issuance rate. None of us would have thought that would be possible on the 1st of March. So that's a really interesting new way of working that we will examine and understand and look to take the benefits from. But that's probably more sort of looking into next year and beyond in terms of opportunities. But this year is just a slightly unusual year that we had good momentum in the back end of 2019 that's come through in the first half. But obviously, we put on ice a lot of the plans that we would have otherwise had that would be a slight headwind going into the second half. But cost discipline is super important, tools are very important to us, cost income levels are very important to us and that's something we're really focused on. Jess, anything else you wanna say?

No, again, putting in right quarter the sort of priorities we focused on in this unprecedented medical crisis leading to pretty much an unprecedented economic crisis leading to an unprecedented government and central bank response, first and foremost is the financial integrity of the bank. So tracking the liquidity profile of the bank, tracking the capital level of the bank and making sure if at all possible to remain profitable each quarter. And we, I think, accomplished all three of those in the first half of the year, record level of capital, record level of liquidity and profitable through each quarter. And in that profitability story, there's a 27% improvement in pre-provision earnings year over year. Now, we take a hard look at that and we are encouraged by the sort of move forward led by the CIB. But then the next thing you look at is, what can we do to give back to our communities? And we had 85,000 employees, we can move that employment number up and down. As we, when we got here four and a half years ago, we were about 120 some 1000 employees. So we will make the moves when we need to make it. We used to have, when we got here, 1,400 branches. Now we're running 800 branches. So we can manage our costs, but we're gonna do it with a focus on the challenges that particularly the UK is going through and we're gonna be there with payment holidays and overdraft fee waivers and bank fee waivers and keeping people employed. So you're gonna have for sure distortion in an environment like this, which will settle down I think as the economy starts to settle down and we hope to see that in the third and fourth quarter. So yeah, big positive job movement led very much by a markets business which hit all sorts of records. But no, we have our pulse on what's going on in the bank. We're serving the communities and the consumers that we need to. We're partnering with our regulators and the central bank and governments. I think the bank is in a good place. And so I guess that would be my comment.

So could I just come back quickly on that? I know I'm running out of time, but a lot of the things you highlight from the first half are things that I would have thought have increased your costs, not decreased them. You were stopping redundancy, relocating people, et cetera, et cetera. And so it's still a struggle to me to see why people seem to be expecting a big fall off in revenue in the second half, but actually costs to be actually up slightly. And I'm just trying to think, is that a sensible type of forecast? Is that, do you feel that that's the right way of looking at it or what?

Yeah, the only thing I'll say is we had, we were on a declining cost trajectory as we came into 2020. You've seen that momentum

in

the first half. That momentum will be frozen a little bit by deliberate actions that Jess called out that we've done. So we don't have the same momentum going into the second half. That's just the way it is for all of the good reasons we talked about. But there are new ways of working and new ways of doing things that none of us thought were that possible. That's a really interesting opportunity set that we'll start examining and see what that means. That's probably more a 2021 conversation. Income-wise, look, we'll see where the CIB goes. Like you talked about us expecting the consumer businesses to start recovering. So there'll be some different trends in the different businesses there.

Just two anecdotes. The technology spend of moving 60,000 people to work from their kitchen tables where we have compliance, where we have controls, where we have insights into what our systems are that disperse around the world. That's a lot of money to set all that up and track it. We gave pretty much carte blanche to our technology people to allow us to work as remotely as we have. Now the flip side of that, there aren't a whole lot of people jumping on airplanes right now. So our travel and leisure expense absolutely collapsed in the first half of the year. What's incumbent upon Two Star and myself is as the economy begins to normalize, we look at the spend and technology and ops. And as we bring people back into offices, does that decrease? And do we think about rationalizing the real estate footprint? And on the flip side, we'll probably start to let people to go out and visit a client every now and then. So I think, and we will keep our hand on those cost levers to ensure the financial integrity of the bank, the profitability of the bank, and the capital strength of the bank.

Great, thanks so much. Thanks, we've gone past our allotted time, so sorry to keep you on a bit longer. Hopefully we'll see you virtually in some way or another over the next few days and weeks. With that, we'll close the meeting here. Thank you very much.

Ladies and gentlemen, this does conclude today's call. Thank you for joining. You may now disconnect your lines. This presentation has now ended.