Barclays PLC (LON:BARC)

Earnings Call: Q2 2020

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Jul 29, 2020

Welcome to the Barclays Half Year 2020 Results Analyst and Investor Conference Call. I will now hand you over to Jeff Staley, Group's Chief Executive and Tushar Mazaria, 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-nineteen 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 2 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 in large part driven by regulatory and central bank policies of the past 10 years, which have aimed at moving the economy from an overdependence 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. Health remain well funded and liquid as this health crisis moves towards an economic one and 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-nineteen. 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 U. K. 5 months into the crisis, we provided an enormous amount of reassurance and support to 1,000,000 of customers facing financial challenges and with understandable concerns about the future. In practical health, so far we've granted repayment holidays on 121,000 mortgages and on 70 6,000 personal loans. We're providing an interest free buffer on overdrafts for 5,400,000 U. K. Customers. And beyond that, we've reduced and capped banking charges. We've waived late payment fees and cash advance fees for 8,000,000 Barclaycard customers and granted some 157,000 payment holidays. And we've exercised similar forbearance across both our businesses in the U. S. 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-nineteen 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 midsized corporates in the UK with a total value of £2,500,000,000 Perhaps even more importantly, Barclays has delivered bounce back loans to nearly a quarter of a 1000000 small businesses across the United Kingdom, with a value of some £7,750,000,000 helping to preserve 100 of 1000 of jobs. To give you some sense to the relative scale of that, we would historically make that number of loans and of that size over around a 3 year period. We delivered the majority of the 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 Caris Plating in Greater Manchester, for example. Caris is a 75 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 place urgently needed parts for ventilators, provide electrical connectors for the Nightingale Hospital, 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 in delivering a 5,000,000 civil loan has helped safeguard 9 20 jobs to 235 restaurants across the Midlands and Southern England. And nearly a quarter of a 1000000 bounce back loans to small businesses like Jewellery on 8th Rose in London or the caterer Pappadelli in Bristol, there have 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 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 £11,700,000,000 of funding for U. K. Corporates, representing some 48% of the total funding access to CCFF scheme. To date, across all the government backed programs, Barclays has delivered some £22,000,000,000 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 put in place 12 month capital repayment holidays for most SMEs with loans of over £25,000 We're continuing to extend credit to companies and Barclays has maintained 1,000,000,000 of pounds in credit facilities for clients around the world to draw upon. We're also steadfastly supporting clients globally in advisory and the equity and debt capital markets. During the Q2, we advised on 580 capital market transactions that collectively raised a total of over $0.75 Of note in the U. K, we helped listed companies raise almost £6,000,000,000 in the equity capital markets, 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 U. S, we served as lead left book runner on a 1,500,000,000 term loan and a 3,500,000,000 secured bond offering for Delta Airlines. The term loan represented the 1st broadly syndicated institutional term loan to clear the market since the start of the COVID-nineteen crisis. On the advisory side, we were pleased to act as the lead financial advisor to Dominion Energy in the company's $9,700,000,000 divestiture of its midstream business to Berkshire Hathaway as announced earlier this month. We will continue to evolve our approach and offering to clients, big and small, to help them through crisis. It is 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 citizen programs and communities such as life skills, unreasonable impact and connect with work with a particular focus on helping mitigate the impact of COVID-nineteen. We're delighted that so far we have allocated £45,000,000 of our £100,000,000 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 Tushar to take you through the numbers in detail, I want to provide some overall thoughts on our financial performance in the first half and the Q2. 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 £11,600,000,000 with cost down 4 percent to £6,600,000,000 resulting in positive jobs of 12% and an improved cost of 57%. Pre provision profits were strong, up 27% to $5,000,000,000 for the half. Notwithstanding the impairment reserve of £3,700,000,000 in the first half of this year, including a further £1,600,000,000 in the quarter, that operating performance led by our investment bank meant we remain profitable in both quarters. Tushar will talk more about the assumptions we have made about the macroeconomic outlook which are a big part of our impairment deal. But we certainly feel that Barclays is appropriately positioned. For instance, taking the unemployment rate, a key driver of consumer credit risk, we will assume a prolonged period of heightened unemployment in both the UK and U. S. That is some way above current levels. Yet despite the $3,700,000,000 impairment number, Barclays still ended June with a CET1 ratio 14.2%. That's the highest capital ratio in the bank's history. In our Corporate and Investments Bank, in the first half, income increased 31 percent to £6,900,000,000 driven by a standout performance in our markets business, particularly in FIC, up 83% year over year and our equities business up 26%. The majority of our market revenue is derived from trading securities and derivatives and earning the bid offer 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 2 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 CIB performance offset a much more challenging time for our consumer business. 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 to marginal profitability overall for Barclays U. K. In the period and a loss of some £500,000,000 post tax in consumer cards and payments. Dramatic falls in consumer spending in the Q2 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 in payment acquiring volumes. If that recovery continues further into the Q3, 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 5 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 going to hand over to Tushar to take you through the performance for the quarter in some more detail. Thanks, Jeff. As usual, I'll summarize the first half results then focus on the Q2 performance. As of Q1, we are facing a period of uncertainty, which makes it particularly difficult to give forward looking guidance. 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 Jes mentioned, the result of the first half show the benefit of our diversified business model. Despite the impairment charge of $3,700,000,000 reported a statutory profit before tax of €1,300,000,000 generating 0.4p of earnings per share. Litigation 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 CHF 2,800,000,000 in the impairment charge, but income growth of 8% and a reduction of 4% in costs resulted in a profitable half and an RoTE 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% RoTE 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 CIB, more than offsetting income headwinds in the consumer business. The cost reduction delivered positive jaws of 12% and an improved cost income ratio of 57%. As a result, pre provision profits were 27% to CHF 5,000,000,000 Our capital position is strong with the CET1 ratio ending the half at 14.2%, up on the year end level of 13.8 percent despite dipping to 13.1 percent at Q1. The strength of the balance sheet was reflected in the rise in TNAV from 2.62p to 2.84p Moving on to Q2 performance. Income decreased 4%. Continued strong performance by CIB, particularly in markets, was offset by income headwinds in BUK and CCP. Costs decreased percent, delivering positive jaws of 2% and a 62% costincome ratio. As a result, pre provision profits were broadly stable year on year at £2,000,000,000 However, we provided a further CHF 1,600,000,000 for impairment, up CHF 1,100,000,000 to add to the CHF 2,100,000,000 we provided at Q1. This charge included a further $1,000,000,000 net increase from modeling revised COVID-nineteen scenarios with macroeconomic inputs based on a slow recovery than we had modeled at Q1. We continue to see limited effects of the pandemic on delinquencies, partly as a result of support programs. Net write offs in the quarter, which are €500,000,000 €900,000,000 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 shows a benefit of the diversification of our sources of income across consumer and wholesale businesses. CIB income increased 19% to CHF 3,300,000,000 driven by an increase of 49% in markets, which was 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 BUK and U. S. Cards and also summarized 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 have eased. But of course, there will be some time lag in converting this spending to associated increases 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 BUK we quantified at Q1. These continue 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 the 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 Pandemic is Pandebic 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 year on year increase across all businesses, but the quarter on quarter progression shows an increase in BUK, reflecting a slower forecast economic recovery, but a decrease in CCP. The effect of this slower forecast recovery in the U. S. Was offset by lower 2020 peak for unemployment and a significant reductions in U. S. Card balances. In CIB, 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 underlying the expected loss calculation. We've used a similar format to Q1 to explain the workings behind the charge, the modeled impairment calculated during the quarter using the MEV as we set prior to running the COVID scenario for the Q1 close generated a figure of $400,000,000 I think of this as a sort of baseline model charge. In addition to this, we had another $200,000,000 in respect to single name wholesale charges in the CIB. As in Q1, some of these names may have been affected by the pandemic, but some of these two is not materially above our underlying quarterly run rate in previous years of around $500,000,000 The remainder of the increase reflects the $1,000,000,000 net impact from updated COVID scenarios, reflecting a deterioration in forecast MEVs and an overlay of $150,000,000 for selected sectors. This book up, as I call it, compares to the $1,350,000,000 we charged in Q1. We've shown on the slide some of the key U. K. And U. S. Macroeconomic variables used and there's more detail in the results announcement. The key changes are that while the peak unemployment level in the U. S. Is lower in the Q1 COVID scenario, the unemployment levels of both the U. K. And U. S. Remain high for longer. The modeling is subject to inherent uncertainty with respect to forecast in 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 ratio 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 0.8% 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%. And 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 name 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 increased from 8.1% to 12% overall and to 23.1% on Stage 2 balances, most of which are not past due. We split out the unsecured portfolios on the next slide. You can see here the increase in the coverage ratio across the U. K. And U. S. Card portfolios at 16% 13.9%, respectively. And coverage on Stage 2 balances has increased to 28% 24.5%. Turning now to the wholesale coverage on selected 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 €20,000,000,000 and our overall coverage ratio across these sectors has increased from 2.3% to 4.0% 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 set out on this slide the balances in the major portfolios receiving payment holidays as at 30th 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 1 balances and the average LTV is 57%. In U. K. And U. S. Cards, the percentage of balances with holidays was much lower at 5% and 3%, respectively. The portion of these that are Stage 2 balances is considerably higher, where the coverage ratios on those balances are well above average Stage 2 coverage on cards at 43.9% 35.3%, respectively. That means the total uncovered balances on payment holidays across U. K. And U. S. Cards was under €1,000,000,000 at 30th 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 set out here the evolution of holiday grants and roll offs through to the 22nd July. You can see that as the 1st wave of holiday grants have started to expire, a significant portion have been rolling off payment holidays and many of those fees 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 1st 3 weeks of July. Turning 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. There was a significant increase in business banking lending with CHF 7,000,000,000 combined in bounced bank loans and CBILS. Meanwhile, deposit balances continue to grow, resulting in a loan to deposit ratio of 92%. Overall, as indicated at Q1, NIM was down materially in the quarter at 2.48 basis points from 291 for Q1. We still expect the full year NIM to be in the range of 250 to 2 60 basis points. Costs in the quarter decreased 4% as efficiency gains were offset by costs related to the pandemic and circa €25,000,000 of costs were transferred with our partner finance business from Barclays International. Impairment for the quarter was €583,000,000 an increase on the Q1 level of CHF481,000,000 reflecting the updated COVID scenario that I mentioned earlier. As I noted earlier, arrears rates at 30th June do not yet reflect the developing economic downturn. Turning now to Barclays International. The BI businesses delivered an RoTE of 5.6% for the quarter, down year on year as a positive jaws from a 3% increase in income and 10% reduction in costs were more than offset by an increase of €800,000,000 in impairment. I'll go into more detail on the businesses on the next two slides. CIB delivered an RoTE of 9.6% in Q2 with another strong performance in markets more than offset the increased impairment provision. Income was up 19% at $3,300,000,000 Our costs were down 10%, delivering positive jaws of 29%. Markets grew income to £2,100,000,000 up 49%. The increase was driven by slow trading as in Q1 with increased client activity and the trading businesses capturing a good portion of the widened bid offer spreads as a result of the heightened volatility. This was despite sizable headwinds from hedging counterparty risk, including funding valuation adjustments. FICC income was up 60% on last year or up 90%, excluding the net effect of the Tradeweb gains, with a particularly strong performance from Flow Credit. Equities had a record quarter in terms of sterling income at £674,000,000 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 mark to market moves on loan hedges. And in Q2, we saw most of the Q1 benefit reverse as market conditions improved, with circa €280,000,000 negative in total from mark to market and carry costs of the hedges. We also had some positive marks on our leverage loan commitments, dollars taken through the income line. Costs reduced 10%, resulting in a costincome ratio of 51 percent. Impairment increased to $596,000,000 driven by the effect of the updated COVID scenarios on some single name charges. RWAs reduced by $3,000,000,000 in the quarter to $198,000,000,000 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% year on year. This included £101,000,000 write down on Visa preference shares. Excluding this, income was still down 28% year on year, reflecting a significant reduction in U. S. Card balances, which were down 18% in dollar terms. In addition to affecting balances, lower spend volumes are also a headwind for interchange income in cards and payments income. Although the income environment is expected to remain challenging in recent spend data from June and into July, particularly in the U. S, 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 areas rates have not yet responded to the downturn, we have taken additional impairment provision of €400,000,000 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 loss before tax was £321,000,000 up significantly year on year and quarter on quarter. The negative income reflects the main elements I've referenced before, like a €30,000,000 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 were partially offset by the Absa final dividend of circa €40,000,000 Q2 also included some mark to market losses on legacy investments in the income line and a write down through the other net expenses. These were each of the order of £40,000,000 to £50,000,000 After an unusually low Q1 print, cost of £109,000,000 were above the usual run rate of £50,000,000 to €60,000,000 due to the inclusion around half of the community aid program of €100,000,000 we announced at Q1. Moving on to capital. We began the quarter at a CET1 ratio of 13.1%, having seen a material increase in RWAs in Q1. We have guided for a slightly lower ratio at Q2 as further procyclical increases in RWAs were expected to more than offset capital generation. As we flagged in 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 pretax impairment charge. The full impairment charge would have taken 51 basis points off the ratio. This was partially offset by IFRS 9 transitional relief 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 path in a moment. But first, I'll go into detail on the RWA bridge. Here, we've broken down the elements of the £6,600,000,000 decrease in RWAs. The procyclicality 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 GBP 5,000,000,000 However, other credit risk movements reduced RWAs by a total of €7,600,000,000 Over half of the March drawdowns on revolving credit facilities were repaid in Q2, contributing $3,700,000,000 to that credit RWA reduction after an increase of circa $7,000,000,000 in Q1. Counterparty RWAs reduced by €3,100,000,000 and in market RWAs, management actions we were able to take resulted in a €2,700,000,000 net reduction in the quarter, a good result given our strong performance in the markets businesses. Our plans for running businesses do currently assume some further procyclical effects materialize in 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 Looking at the next slide at our capital requirement. As shown here, our current capital requirement and how it is reduced to reflect the removal of the countercyclical buffer in Q1 and the recent reduction in Pillar 2A. As a result, our MDA has reduced by 130 basis points to 11 point 2%. So our Q2 ratio of 14.2% represents a 300 basis point buffer. We also expect some further 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 buffer above the MDA. I wouldn't look at a 300 basis points buffer as any sort of benchmark. The buffer that we consider to be appropriate to evolve over time having regard to the expected flight path 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 are 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 CIB in H1 and our franchise is well positioned for the future. Costs were down year on year resulted in positive jaws 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. And while the future is hard to forecast, without further deterioration in economic forecast, we expect to report lower charges for the remaining quarter of the year. Our funding and liquidity remained 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 CET1 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 2 person, so you can get a chance to get around to as many as we can. Our first question on the line comes from Joseph Dickerson of Jefferies. 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 both 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? Yes. Thanks, Joe. Let me take both of those questions, and Jess may want to 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 U. K. Bank and indeed CCP, there'll be the mechanical effect of lower deposit rates just coming through in the 3rd Q4 in the U. K. Obviously, just under U. K. 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 Q2, but a full effect in Q3 and Q4. In CCP, for example, we have dropped our deposit rates in the U. S. From about 1 point 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 Q2. That quarter was characterized by both the U. K. And the U. S. Being principally in lockdown for the entirety of that quarter. And therefore, you've seen continuing declines in spending and balances. As we exited the Q2, of course, those lockdowns are being reduced. And therefore, we've seen spending tick up. In fact, in the U. K, spend levels are down only sort of single digit percentage points from pre lockdown levels. And we've seen a material pickup you've seen in our slides in the U. S. As well. Another sort of just a data point to tell you sort of how quickly spending seems to be recovering. If you look at SMEs that we have in our acquiring business, less than half were actually during the lockdown, more than 90% are now operating. So and this stuff transmits to income relatively quickly. And on the back of that, actually, in the U. S, of course, it transmits into income just through your transaction balances, both on the card interchange as well as on the U. K. Side on the acquiring fees that we earn as well. If spend continues into the 3rd Q4, 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 margins and indeed net interest income. And the final point, Joe, just on impairments. Yes, we tried to be conservative where we felt it was appropriate. We encouraged folks to look at coverage ratios to give you a sense of how much protection we have against a downturn in 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 post sort of lockdown environment in most of those economies and in the next few months, we'll be critical in that. But absent any changes, yes, 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 want to address now? So I think hopefully, that's helpful, Joe. Yes, that's helpful. I think that you had guided on the kind of roundtable following Q1 for circa. I think we tallied the $5,000,000,000 impairment charge for the year. I think the consensus that you all sent around was for around $5,700,000,000 which looks like a $2,000,000,000 kind of incremental charge in the second half. Are you still comfortable with that guidance? Or how would you I guess, how would you position the current outlook now versus to what you saw coming out at the time of Q1? Yes. The way I think about that, Joe, is if you think about the charge we had in the Q2, the 3 building blocks for that, if you look at, if you like, the underlying base line run rate, absent any changes or updates to economic forecasts, we called out €400,000,000 In addition to that, we have single name charges of €600,000,000 sorry, €200,000,000 $1,000,000 giving you a total of $600,000,000 That's the kind of run rate that we're experiencing at the moment, absent any changes to macroeconomic forecasts. So if economic sort of forecasts don't change much for me, let alone improve, then long term unemployment. Long term unemployment. And you see we've increased the levels of long term unemployment going into 2021, quite materially, particularly in the U. K. The other thing to bear in mind here, of course, is just what happens when the government support schemes come to their as we see today as we see today, those kind of underlying impairment levels are running at the moment would be how we looked in Q2, and you can build from there as appropriate. Very helpful. Thank you. Okay. Thanks, Joe. We'll take the next question, please, operator. The next question comes from Jonathan Pierce of Numis. Jonathan, your line is now open. Good morning, Charles. Two questions, please. The first on impairment and the second on risk weighted 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 pickup in Stage 3? Or is it going to be this period of almost double counts where the reserves remain elevated, but the Stage 3 charges pick up sharply? So I'm interested in how your thoughts have developed on the working of the models into higher Stage 3 charges. The second question on risk weighted 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 risk weighted assets, but there was lots of big moving parts contributing to that. So maybe you could give us a feel from your thoughts on the book size in the credit portfolio. That fell $8,000,000,000 in the quarter, but I guess the RCFs and then moved themselves level out, credit card balances may level out. So perhaps those are flat in the second half counterparty credit risk that was down, I think, dollars 4,000,000,000 in the second quarter. Should we assume that levels out as well so that the second half movement in the Western assets is really all about pro cyclicality? And maybe give us a feel as to where we could end the year in risk weighted asset terms. Okay. Yes. Thanks, Jonathan. Why don't I take a crack at both of them? With impairments, yes, 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 up that we've taken, if you like, the anticipated expected loss over the cycle of $2,400,000,000 If our models are, I guess, 2 sort of things you've got to believe. 1, our models are perfect at forecasting. None of 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 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 is 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, obviously, if they default, but I suspect they will happen sort of earlier on in that cycle. And we're probably going to be conservative in curing, if you like, those undefaulted credits sort of back into lower stages. So I think the net P and L charge, if they're right, is going to be around that sort of level. But you may see a mismatch in terms of timing with defaults happening at 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 going to default till much later, and maybe that gives time for good credits to queue 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 Q1, just shows how quickly things can change. But things are still very different now to when they did at the back end of April when there was quite a meaningful degree of pro cyclicality and draws on revolving credit facilities and economies going into lockdown, etcetera. Economies have sort of 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 continue 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 the crystal ball on that, but that's a level of uncertainty. We've got elections in the U. S. We've got markets, then there may be some procyclicality that comes through. And And we'd sort of be fine with that, with a jumping off level of 14.2%. If we do get that procyclicality 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, is, which I know you're aware of, our 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 2A 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 2A at the back end of the end BSR. So that will come through as well. But hopefully, that's helpful, Jonathan. Yes. That's really helpful. But can I because it is extremely difficult on the outside 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 €5,000,000,000 pro cyclicality to leave at year end at around 3.30, I mean, accepting it could be miles away from that, but is that as good a guess as any? Yes. Look, it's tough, Jonathan. The best I'd say is if markets are choppy, the models, the whole framework is designed to be procyclical, 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 know, the crystal ball on how choppy or not markets may be. Yes. Understood. All right. Thanks a lot. Thanks, Jonathan. Could we have the next question please, operator? The next question is from Andrew Coombs of Citigroup. Please go ahead, Andrew. Good morning. If I could ask a couple of follow ups, please, relating to Slide 7. The first question is on the weekly spend data that you provide. Thank you for that. UK, that's from respect to normal, U. S. 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 Barclays U. S. 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 7, looking at the 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. So 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 U. S. Sorry, U. K, U. S. Sort of spend trends that you're seeing. First thing I would say is that the graph here, and I'm not sure we put it in the caption, Andy, so I apologize if we didn't. But the UK is a measure of debit and credit spend, whereas the U. S, 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 card. So that's probably why you've seen a difference in those two graphs. But coming back to your question on the U. S. And the sort of REIT differences by state, 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 2nd 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 state, individual states, the large economies, things like California, Texas, the tristate area, are also important to us in our cars. 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 U. S. In the same way we go to the U. K. 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. So 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 Q3, and we'll obviously see how economies perform further into the Q3. And Jess, do you want to talk more about sort of use of branches in digital? Yes. 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 the use for instance of cash has been probably 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 will be the branches, and 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 well-being 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 recall volumes overall of customers with issues with concerns. At some point in time, we're up 4x to 5x 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 residents 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, take 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 Kann from Autonomous. 1 on cost and then a follow on arguably raise please. The cost income ratio across the UK and CC and P, I know you've shuffled some stuff between divisions, but if I just push 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 1H, which obviously includes the Q1 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 2 divisions, again, adjusted for Visa. You 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 BUK, CC and P and 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. It looks low versus what the CIB divisions that other banks have printed. Could you comment on your comp accrual policy, please? What is going on there? Because it looks like you're not really reflecting very strong performance in the bonus accruals. And I'm just not sure how your year end conversations with desk heads 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's Raised, 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 to Charles last year we saw a $14,000,000,000 reduction in the CIB in the 4th quarter, you're suggesting we might see the same this year absent a big spike in volatility? Thank you. Yes, thanks. Maybe make an opening comment and let Tushar answer the rest of your questions. 1, we stand by our target of a 60% cost to 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 2 principal consumer businesses, U. K. And U. S, you're going to 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 that 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 to income ratio in our consumers 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 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 3rd Q4, 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 want to 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. Yes. And just to round 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 by shape and environment that we're operating in. So cost discipline is an important thing for this management team and 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, are there 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. I mean, these are relatively small. I mean, 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 3rd or 3rd 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 procyclicality. If that does, RWAs will inflate, and we're okay with our capital ratio going back a bit. If it doesn't, then it may be sort of more what you're used to. In terms of the Q4, 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, etcetera, 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 Q4, which I think you've seen in most years now. But not much more I'd give other than that, Chris. Thanks very much, Ben. Yes. Thanks for your question, Chris. Can we have the next question, please? Our next question comes from Alvaro Serrano of Morgan Stanley. Please go ahead. Hi. Can you hear me all right? It's better. Slightly fine, Alvaro. Is this better? Yes, probably better. Yes, go ahead. Sorry. Most of my questions have been answered, but I had a follow-up call follow-up question on provisions. You've seen quite a lot I mean, you've done obviously a good effort topping up in the reserve build and credit cards. But just qualitatively, your balances in credit cards are down 18%, I think, in the UK and certainly more than double digit in the U. S. From a credit 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 or small balance? It's something that can give us a qualitative impression of is that really derisking the book or the riskier clients are still there. Obviously, payment holidays have almost reduced to 0, but just quality on the balances. And related to that, in obviously in Q1, you had a big oil sort of reserve, I think it was €300,000,000 oil price is 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. Yes. Thanks, Alvaro. Why don't I take both of them? In terms of the balance reductions, I'd almost characterize it as particular skew towards more riskier or less riskier credits both in the U. S. And the U. K. I think the reduction in balances was as much driven by just people spending less and that finding its way into lower balances rather than those that could afford to just paying off their cars 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 sort of behind us and these are sort of in the back in the books, if you like, rather than in the sort of a special payment holiday category, as you can see in our disclosures. For example, you'll see our FICO scores in the U. S. Broadly speaking, what they were sort of 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 sort of making sort of 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'd consider strong coverage ratios on some of our more risk parts of the book. So on the retail side, U. K. Cards were at 16% provision rates and U. S. Cards at 14%. I mean, these are pretty high by any historical measure. For those of you that will have this data, the last financial crisis, our U. K. Cards business at NPLs, cumulative NPLs 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 €20,000,000,000 of exposure. And it's in the sectors that you would expect, transportation, retail, hospitality, etcetera. 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. We have the next question, please, operator. The next question on the line comes from Rohit Chanwarajan of Bank of America. Please go ahead. Hi, morning. It's Ravi 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. Are you able to expand that at all 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 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 second one was just the BUK NIM. So the guidance reiterated for the 2.50 to 2.60 NIM 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 give some color on the first question and Tushar will 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 the recession, they more normalize. In this event, clearly what's 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 the in the payment holidays, you see this very interesting move where we've done 100 of 1000 of payment holidays. In the mortgage payment holiday portfolio, we're actually seeing a slight up tick and requests for extensions of payment holidays as the holiday periods come to an end. In the card side, as we showed, people are not asking to extend or roll their payment holidays. So the consumer is acting rationally in terms of, okay, I will roll my debt, which has got a very low interest rate number to it like a mortgage, but I'm not going to continue with the payment holiday on something that's got an interest rate in the high teens. So they're acting rationally and I think it is 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. And for sure so then on the corporate and the SME side, what we're seeing in merchant acquiring, 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 a reversal and that's very encouraging in terms of what we see for SMEs. And then on the SMEs and to the certain extent the corporates as well, 2 phenomenon or 2 things are having a market impact on our credit risk to SMEs and corporate. And those are the government programs. We put £21,000,000,000 into a250,000 small businesses and large corporations that are government programs to buy them liquidity and funding at extremely attractive rates. We've done close to £11,000,000,000 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 market. Those markets reopen with an extraordinary amount of volume. And as mentioned this morning, we participated as a manager in $0.75 of $1,000,000,000,000 of debt issuance around the world, most all of it in the second quarter. That's $3,000,000,000,000 of funding for corporates that is not going to 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 is not there. Yes. And your question on NIM, Rohit. I mean, the trickier thing to gauge there, of course, is balances and just to adequately 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 balances that is. We've seen a fairly decent recovery in spend levels. And 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 the BUK NIM uncertainty? Yes. So you have a clear understanding of what the deposit impact is, but it's the asset side of the side of the balance sheet, which is the uncertainty. Right. Yes. And you'll probably see mortgages continue to grow. And but if the unsecured card balances, how quickly they come back is a little bit harder to forecast. So it's good signs, but we need to see that momentum continue. Okay. Thank you. Very clear on both. Thank you. Thank you. Can we ask the next question please, operator? Our next question comes from Guy Stebbings of Exane BNP Paribas. Please go ahead, Guy. Good morning. Thanks for taking my questions. First, actually just a quick follow-up on BUK and then a question on CCNP. I just want to check on the Barclays partner finance move, whether that was then captured in the Barclays Card consumer line. If that's the case, I think balance will be about $9,500,000,000 ex that change from $13,600,000,000 at the Q1. So underlying declining balances are roughly sort of double the industry level. So I don't know if anything you call out there, which obviously feeds into the prior question on the NIM outlook. And then on CC and P revenues, you talked to a gradual recovery and some of the better spend trends in the U. S. More recently. So I'm just trying to gauge what you expect a gradual recovery will look like and how it will be achieved. So we clearly sat here today having delivered just 1,700,000,000 dollars or just at 1,800,000,000 in the first half if we add back the Visa headwinds and we balance it down to $33,000,000,000 we need to see quite a strong recovery to get back to market expectations for the $3,900,000,000 this year and north of $4,000,000,000 thereafter. So should we assume a fundamentally different outlook to prior market expectations given the environment? Or if not, what sort of revenue margin expansion and balance growth are you targeting? Yes. Thanks, Guy. Let me do the second one first, and I'll come back to your first question on the U. K. Yes, we there's 3 things on CCT that I think will be tailwinds into the second half of the year. I 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 U. K, where our acquiring business is most important, almost back to pre COVID levels. That quickly transmits back into sort of fees. And in the U. S, those interchange fees are still quite attractive. The spend recovering in the U. S, which will sort of translate back into fees there pretty fast as well. And then the harder one to gauge is balances really, particularly on U. S. Cards. If spend levels continue, then balances is will follow, but there is a delay effect there. And I think that's a little bit dependent on, obviously, how the economies perform 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 rates 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 look, 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, Perficient Banking line. And if you want to sort of just make sure you know where we're calling, what out, where, then Chris or James behind the scenes can spend a bit of time with you to point you into the right places into the disclosures that we've got. Okay. Perfect. And I don't know if I could push you a little bit on the CC and P revenues. I mean, if those three items all talk 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 £1,000,000,000 type quarterly run rate revenue? Yes. 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 I'll be disappointed if there isn't a pretty a recovery into the Q3 that has momentum into the Q4 and beyond. It's a momentum business. So once things start moving in the right direction, there'll be sort of follow through. Is that how strong that follow through is? The times look pretty okay at the moment. Spend levels are improving, margins improving on the liability side. If that all continues, then I think we're cautiously optimistic. But it's early days in a post lockdown in economy to be to give you too much precise guidance. 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. Good morning. Hi. Can I just ask you bring you back to cost because if I look at your I think it's 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 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 looks seems to be looking at revenue falling something like €2,000,000,000 and yet costs actually going up a little bit. So it almost felt 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 falloff in Investment Banking revenues, have you got flexibility? Could that minus 4 be minus 6 or minus 8 to the full year? So I mean, what are the sort of levers you can put on? What sort of comfort can you give us on that? Yes. So why don't I start and Jes may want to add a few comments. Look, I think, 1st of all, the backdrop I'll start with is just I'll keep close to just look at trend over the last 2 or 3 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 of 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 Jeff sort of mentioned earlier on in the call, when we went into lockdown, plans 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 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 that paid for by ourselves. So now that comes at a cost. Obviously, attrition levels fall quite meaningfully. The job market sort of then 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 reexamine 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, then syndicate that's the traders, the salespeople. I mean, even the settlement engine, the folks sort of driving, even the mechanics are settling these trades, everybody at home. And yet we're, as Jeff sort of mentioned, something like just for ourselves, dollars 3,250,000,000,000 of capital markets issuance rate. None of us would have thought that would be possible on the 1st 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. For this year, it's 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 will be a slight headwind going into the second half. But cost discipline is super important. Jewels are very important to us. Cost income levels are very important to us, and that's something we're just focused on. Just anything else you want to say? Yes. Just no, again, putting in rank order 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. 1st 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, which 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 have 85,000 employees, we can move that employment number up and down as we when we got here 4.5 years ago, we were about 120 some odd 1,000 employees. So we will make the moves when we need to make it. We used to have, when we got here, 1400 branches. Now we're running 800 branches. We can manage our costs, but we're going to do it with a focus on the challenges that particularly the UK is going through and we're going to be there with payment holidays and overdraft fee waivers and bank fee waivers and keeping people employed. So you're going to 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 3rd Q4. So yes, big positive job movement led very much by a markets business, which hit all sorts of records. But 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 in 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? And 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, etcetera, etcetera. And so it's still a struggle to me to see why people seem to be expecting a big falloff 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 Or Yes. Ed, 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 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 they have where we have compliance, where we have controls, where we have insights into what our systems are that dispersed around the world, that's a lot of money to set all that up and track it. And 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, 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 Tushar and myself is as the economy begins to normalize, we look at the spend in 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. But hopefully, we'll see you virtually in some way or another over the next few days 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.

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