Welcome to the Barclays half-year 2020 results analyst and investor conference call. I will now hand you over to Jes Staley, Group Chief Executive, and Tushar Morzaria, 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. 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. 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.
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 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-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 U.K. Five months into the crisis, we've provided an enormous amount of reassurance and support to millions 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 U.K. customers. Beyond that, we've reduced and capped banking charges. We've waived late payment fees and cash advance fees for 8 million Barclaycard customers and granted some 157,000 payment holidays. We've exercised similar forbearance across both our businesses in the U.S. and in Europe. 817 branches are open across the U.K. 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 U.K., 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 U.K. with a total value of GBP 2.5 billion. 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 GBP 7.75 billion, 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 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 Karas Plating in Greater Manchester, for example. Karas is a 75-year-old company specializing in electroplating, surface coating, and metal finishing. A GBP 250,000 CBILS loan has enabled them to adjust their manufacturing process to plate 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 sectors. Take the U.K.'s leading Thai restaurant group, Giggling Squid. Our support in delivering a GBP 5 million CBIL loan has helped safeguard 920 jobs at 235 restaurants across the Midlands and Southern England.
Nearly a quarter of a million Bounce Back Loans to small businesses, like jeweler Anais Rose in London or the caterer Papadeli in Bristol, have been the difference between survival and failure for companies up and down the U.K. We're proud to be playing our part in that. With our investment banking equities, we've also been a leader in helping large businesses to access the Bank of England and Treasury's Commercial Paper programme. Far, we've arranged over GBP 11.7 billion of funding for U.K. 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 GBP 22 billion 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. We've put in place 12-month capital repayment holidays for most SMEs with loans of over GBP 25,000. 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 the equity and debt capital markets. During the second quarter, we advised on 580 capital market transactions that collectively raised a total of over $0.75 trillion In funding.
Of note in the U.K., we helped listed companies raise almost GBP 6 billion in the equity capital markets, including household names such as William Hill, Aston 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. 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 $1.5 billion term loan and a $3.5 billion secured bond offering for Delta Air Lines. The term loan represented the first broadly syndicated institutional term loan 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 in the company's $9.7 billion 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 this 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 in communities such as LifeSkills, 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 GBP 45 million of our GBP 100 million Community Aid Package to charities in the U.K., U.S., 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. At times like this, more than ever, our obligation is to support them, and we're going to continue to do that. Before I hand over to Tushar 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 GBP 11.6 billion, with costs down 4% to GBP 6.6 billion, resulting in positive jaws of 12% and an improved cost-to-income ratio of 57%.
Pre-provision profits were strong, up 27% to GBP 5 billion for the half. Notwithstanding the impairment reserve of GBP 3.7 billion in the first half of this year, including a further GBP 1.6 billion in the second quarter, that operating performance, led by our investment bank, meant we remained 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 build. 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 U.K. and U.S. that is some way above current levels. Despite the GBP 3.7 billion impairment number, Barclays still ended June with a CET1 ratio of 14.2%. That's the highest capital ratio in the bank's history.
In our Corporate and Investment Bank, in the first half, income increased 31% to GBP 6.9 billion, driven by a standout performance in our markets business, particularly in FICC, up 83% year-over-year, and our equities business up 26%. The majority of our markets revenues derive 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 two years reflect client confidence in our capabilities. 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 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 to marginal profitability overall for Barclays UK in the period, and a loss of some GBP 500 million 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 U.K., in card spend trends on both sides of the Atlantic, and in 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 U.K. 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 U.K.'s number 1 banking app. As you'd expect, one consequence of the pandemic lockdown has been to increase demand for our digital services. 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, Jes. As usual, I'll summarize the first half results, then focus on the second quarter performance. 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-19 pandemic. Where possible, I will try to give pointers for the coming quarters. As Jes mentioned, the result of the first half showed the benefit of our diversified business model. Despite the impairment charge of GBP 3.7 billion, we reported a statutory profit before tax of GBP 1.3 billion, generating GBP 0.04 of earnings per share. Mitigation in conduct was immaterial, on this call I'll reference the statutory numbers.
As for Q1, profits for the half overall were down on last year, reflecting the increase of GBP 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 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 businesses. The cost reduction delivered positive jaws of 12% and an increased cost-income ratio of 57%. As a result, pre-provision profits were up 27% to GBP 5 billion.
Our capital position is strong, with the CET1 ratio ending the half at 14.2%, up on 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 GBP 2.62 to GBP 2.84. Moving on to Q2 performance. Income decreased 4%. Continued strong performance by CIB, particularly in markets, was offset by income headwinds in BUK and CC&P. Cost decreased 6%, delivering positive jaws of 2% and a 62% cost-income ratio. Pre-provision profits were broadly stable year-on-year at GBP 2 billion. We provided a further GBP 1.6 billion for impairment of GBP 1.1 billion to add to the GBP 2.1 billion we provided at Q1. This charge included a further GBP 1 billion net increase from modeling revised COVID-19 scenarios, with macroeconomic inputs based on a slower 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 were just GBP 0.5 billion and GBP 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 cost and impairment overall. The quarter showed the benefit of the diversification of our sources of income across consumer and wholesale businesses. CIB income increased 19% to GBP 3.3 billion, 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. We have 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. Of course, there will be some time lag in converting this spend into 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 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 4% in H1, the group delivered positive jaws of 12% and the cost- income ratio reduced from 64% to 57%. I would remind you that cost 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 cost in H2 will vary with the performance-related cost flex in the CIB. The 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 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 CC&P. The effect of this slower forecast recovery in the U.S. was offset by a lower 2020 peak for unemployment and the 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 MEVs we set prior to running the COVID scenario for the Q1 close generated a figure of GBP 0.4 billion. I think of this as a sort of baseline model charge. In addition to this, we had another GBP 0.2 billion in respect of single name wholesale charges in the CIB. As in Q1, some of these names may have been affected by the pandemic, but the sum of these two is not materially above our underlying quarterly run rate in previous years of around GBP 0.5 billion. The remainder of the increase reflects the GBP 1 billion net impact from updated COVID scenarios, reflecting the deterioration in forecast MEVs, and an overlay of GBP 150 million for selected sectors. This book-up, as I call it, compares to the GBP 1.35 billion 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 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 ratios vary materially across the secured and unsecured portfolios. The wholesale coverage has increased from 0.8% to 1.4%. A large portion of this is in the selected 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, where the 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% and 13.9% respectively. Coverage on Stage 2 balances has increased to 28% and 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 GBP 20 billion, and our overall coverage ratio across these sectors has increased from 2.3%-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'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 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% and 35.3% respectively. That means the total uncovered balances on payment holidays across U.K. and U.S. cards was under GBP 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.
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. 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. Turning now to the performance of individual businesses. We mentioned at Q1 some of the income headwinds the BUK is facing, and these are reflected in the Q2 performance, with income down 17%, in line with consensus.
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 GBP 7 billion combined in Bounce Back Loans and CBILs. Deposit balances continued to grow, resulting in a loan-to-deposit ratio of 92%. As indicated at Q1, NIM was down materially in the quarter at 248 basis points from 291 basis points for Q1. We still expect the full- year NIM to be in the range of 250-260 basis points.
Cost in the quarter decreased 4% as efficiency gains were offset by costs related to the pandemic and circa GBP 25 million of costs were transferred with our Partner Finance business from Barclays International. Impairment for the quarter was GBP 583 million, an increase on the Q1 level of GBP 481 million, reflecting the updated COVID-19 scenario that I mentioned earlier. As I noted earlier, arrears rates at 30th of 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 GBP 0.8 billion 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 GBP 3.3 billion, while costs were down 10%, delivering positive jaws of 29%. Markets grew income to GBP 2.1 billion, up 49%. The increase was driven by flow 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 GBP 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 mark-to-market moves on loan hedges. In Q2, we saw most of the Q1 benefit reverse as market conditions improved, with circa GBP 280 million negative in total from mark-to-market and carry costs of the hedges. We also had some positive marks on our leverage loan commitments, totaling circa GBP 140 million taken through the income line. Costs reduced 10%, resulting in a cost-income ratio of 51%. Impairment increased to GBP 596 million, driven by the effect of the updated COVID scenarios on some single name charges. RWAs reduced by GBP 3 billion in the quarter to GBP 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 CC&P was down 37% year-on-year. This included GBP 101 million 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 H2, 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 arrears rates have not yet responded to the downturn, we have taken an additional impairment provision of GBP 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 loss before tax was GBP 321 million, up significantly year-on-year and quarter-on-quarter. The negative income reflects the main elements I've referenced before, circa GBP 30 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. That is expected to continue in H2. These were partially offset by the absence of final dividend of circa GBP 40 million. 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 GBP 40 million-GBP 50 million. After an unusually low Q1 print, costs of GBP 109 million were above the usual run rate of GBP 50 million-GBP 60 million, due to the inclusion around half of the community aid programme of GBP 100 million 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 had 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 pre-tax 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. 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. First, I'll go into detail on the RWA bridge. Here we've broken down the elements of the GBP 6.6 billion decrease in RWAs. The procyclicality we had anticipated at Q1 only partially materialized. 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 billion. However, other credit risk movements reduced RWAs by a total of GBP 7.6 billion. Over half of the March drawdowns on revolving credit facilities were repaid in Q2, contributing GBP 3.7 billion to that credit RWA reduction after an increase of circa GBP 7 billion in Q1. Counterparty RWAs reduced by GBP 3.1 billion, and in market RWAs, management actions we were able to take resulted in a GBP 2.7 billion net reduction in the quarter. A good result given our strong performance in the markets businesses. Our plans for running the 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 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 countercyclical buffer in Q1 and the recent reduction in Pillar 2A. Our MDA has reduced by 130 basis points to 11.2%. Our Q2 ratio of 14.2% 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 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 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. To recap, we are profitable in Q2 as well as for the first half overall, despite the effects of the COVID pandemic. 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-over-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.
Our continuing focus on cost discipline remains critical to our performance going forward. We have 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 remain strong and put us in a good position to support our customers and clients during this difficult period. Although 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. 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'd ask you to limit yourself to two per person so we 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 Jefferies. Joseph, your line is now open.
Hi. Thank you for taking my question. 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? 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 and your own commentary, 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?
Thanks, Joe. Let me take both of those questions, and Jes 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. 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 Barclays UK and indeed CC&P, there'll be the mechanical effect of lower deposit rates just coming through in the third and fourth quarter. 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. Our deposits actually reprice in July onwards. You get the sort of no effect in the second quarter, but a full effect in Q3 and Q4. In CC&P, for example, we have dropped our deposit rates in the U.S. from about 1.5% to 1%, but that reduction was very much towards the back end of the second quarter. You'll see the full effect of that come through in Q3 and Q4. In addition to that, we've noticed some peers that have lowered deposit pricing yet again.
We'll take a look at that, and there's a reasonable chance we may follow suit given how strong our funding position is. 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 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 a continuing decline in spending and balances. As we exited the second quarter, of course, those lockdowns were being reduced. Therefore, we've seen spending pick up. In fact, in the U.K., spend levels are down only sort of single- digit percentage points from pre-lockdown levels. We've seen a material pick up. 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 open during the lockdown. More than 90% are now operating. This stuff transmits to income relatively quickly. On the back of that, actually in the U.S., of course, it transmits into income just through your transactor 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 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 margins and indeed net interest income. The final point, Joe, just on impairments. Yeah, we 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 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.
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. That is a difficult thing to forecast with a high degree of certainty, just given we're just going into a post-lockdown environment in most of those economies, and the next few months will be critical in that. Absent any changes, yeah, I expect impairment charges to be quite a bit lower than we've had in the first half. I think that's probably all. Is there anything else you wanted to address? No. Ho pefully that's helpful, Joe.
Yeah, that's helpful. I think that you had guided on the kind of round table following Q1 for circa, I think we tallied the GBP 5 billion impairment charge for the year. I think the consensus that you all sent around was for around GBP 5.7 billion, which looks like a GBP 2 billion kind of incremental charge in the second half. Are you still comfortable with that guidance? I guess, 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 GBP 400 million. In addition to that, we had single name charges of GBP 200 million, giving you a total of GBP 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. 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 natural end, whether they're the furlough schemes or various other things. We'll just have to see how the economy responds to that. 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.
Okay. 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. Got two questions please. First on impairment, 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. I guess the general expectation is the genuine impairments will pick up into the back end of this year and next year. 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? Is it going to be this period of almost double counts, where the reserves remain elevated, but the Stage 3 charges pick up sharply?
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. Maybe you could give us a feel for your thoughts on the book size and the credit portfolio. That fell GBP 8 billion in the quarter, but I guess the RCFs and the movements there will level out. Credit card balances may level out. Perhaps those are flat in the second half. Counterparty credit risk, that was down, I think, GBP 4 billion in the second quarter.
Should we assume that levels out as well, so that the second half movement in risk-weighted assets is really all about procyclicality? Maybe give us a feel as to where we could end the year in risk-weighted 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, 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 GBP 2.4 billion. I guess two sort of things you've got to believe. One, our models are perfect at forecasting. No models have gone through this particular sort of unusual scenario. You have to sort of put a bit of a caveat there. 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. 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. 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. 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 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. We're probably going to be conservative in curing, if you like, those undefaulted credits back into lower stages. I think the net P&L charge, if we're right, is going to be around that sort of level.
You may see 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 going to default till much later and maybe that gives time for good credits to cure back. It's a little bit uncertain, but hopefully that gives you a sense of at least how we think about it. Our RWAs and sort of guidance prospectively on that. Again, I'm always a bit nervous to say this now after the first quarter. It just shows how quickly things can change. Things feel very different now to when they did at the back end of April when there was quite a meaningful degree of procyclicality and draws on revolving credit facilities and economies going into lockdown, et cetera.
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. We continue to see, for example, RCF draws reverse even since the end of the second quarter. That trend has somewhat continued. I do expect that it will be difficult to forecast the economy over the next 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 geopolitical stuff going on. There may be some choppiness in markets.
If there is some choppiness in markets, then there may be some procyclicality that comes through. 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, then if it's more of a normal year, then you've seen that we should continue to hopefully be profitable, and that will be reflected somewhat in our capital ratio as well. The other final thing I'll just say, Jonathan, is, which I know you're aware of, MDA level may move as well. It's now a variable actually in a positive light because it's a sort of a fixed quantum Pillar 2A inside our capital stack. It does mean it gets reset as a percentage of RWAs.
It may go up or may go down depending on where our RWAs are. Of course, you've got the reevaluation of Pillar 2A at the back end of the year. That will come through as well. Hopefully that's a help, Jonathan.
Yeah. That's really helpful. Because it is extremely difficult on the outside to model our RWAs as I'm sure it is within the bank itself. Would it be as good a guess as any at this stage just to bolt on another couple of quarters of maybe GBP 5 billion procyclicality to leave us year end at around GBP 330 billion? Accepting it could be miles away from that, but is that as good a guess as any?
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, 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 be.
Yeah. 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 seven. The first question is on the weekly spend data that you provide. Thank you for that. U.K. looking much back 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 US credit card splits out regionally. Obviously the consumer card spend will drive the balances and the revenues from here. The second question, I guess kind of relates to the right-hand side chart on slide seven, 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.
At what point do you take another look at the branch footprint? When do you review that as a potential further cost save opportunity?
I'll get Jes to talk about the digital branch footprint and why don't I talk about some of the 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've put it in the caption, Andy, so apologize if we didn't, but the U.K. is a measure of debit and credit spend, whereas the U.S., we've only measured credit here. In the U.K., what we have seen is a pickup in debit spend. As spending has improved, it's been more skewed towards debit cards. That's probably why you're seeing a difference in those two graphs. Coming back to your question on the U.S. and the sort of 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. Actually, it's been remarkably consistent. We are slightly lower in travel spend itself. To the extent people were 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. On the flip side, on other types of spend, we were bang in line or sometimes slightly better than the industry. 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. If we 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. We don't get a great, sort of, if you like, index view of the U.S. in the same way we do at the U.K. 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. 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. We'll obviously see how the economies perform further into the third quarter. Jes, do you want to talk more about sort of use of branches and digital?
Yeah. 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 U.K. has been increasing. The use, for instance, of cash has been probably the spending item that has most contracted during the pandemic. 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. That is a higher- margin way to engage with our consumer. These would 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 have 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. 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, the call volumes overall of customers with issues, with concerns, at some point in time were up 4x-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 that as of now we are fielding about 200,000 incoming consumer calls every week with our personnel that are resident in the branches. 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 outcoming 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. I would imagine the trend that we've seen over the last couple of years will continue.
Thanks for the question, Andy.
Thank you.
Can we have the next question please, operator?
We have a question from Chris Cant from Autonomous. Chris, please go ahead.
Good morning. Thank you for taking my questions. One on cost and then a follow on RWA, please. The cost-income ratio across the U.K. and CC&P, I know you've shuffled some stuff between divisions, but if I just smoosh them together to ignore that, was 67% in the second quarter after adjusting for the Visa preference share impact. I understand that you expect some top-line recovery there, but if I look at 1H, which obviously includes the first quarter when you didn't have the impact of the rate cuts in and COVID-19 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.
What do you expect the cost-income ratio for your retail-facing businesses to be if you think about BUK, CC&P in the round? What do you expect the cost-income ratio to be next year and looking into 2022? 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 at other banks have printed. Could you comment on your comp accrual policy, please? What is going on there? 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 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? Just one quick follow-up on RWAs , 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? What's the quantum, please? Presumably, you do have visibility on management actions. You said to look at prior- period movements to show last year we saw a GBP 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? Thank you.
Thanks. Maybe make an opening comment, then let Tushar answer the rest of your questions. 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. In an environment like this, when spend just literally fell off a table in our two principal consumer businesses, U.K. and U.S., you're going to have a move in your cost-income ratio. 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. I don't think the current cost-income ratio in our consumers business at all are reflective of what will be in a normal state. They have been comfortably below 60% in the past, and I think they'll comfortably get below 60% . 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 markets progress. You essentially have the pandemic creating a distortion on one level in BUK and then creating a distortion to a certain extent on the CIB to the positive.
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 want to compensate people fairly. Also we have a very uncertain economic environment right now, and we need to be mindful of that. We are accruing, 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. Just to round that off, Chris. I know probably those that spend a lot of time looking at our numbers are aware of, but as a more broader comment, our costs have been declining in absolute terms for a number of years now, regardless of size, shape, and the environment that we're operating in. Cost discipline is an important thing for this management team. 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 like I think your question was 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.
There's SME factors that we didn't put through. 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 so week into July will be just whether volatility in markets sort of goes back to anything like they were in the March, April period, 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, it may be more what you're used to. In terms of the fourth quarter, it does tend to be, 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.
You do get 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. There's not much more I'd give other than that, Chris.
Thanks very much, guys.
Yeah. Thanks for your question, Chris. Could we have the next question please? Alvaro.
Our next question comes from Alvaro Serrano of Morgan Stanley. Please go ahead.
Hi. Can you hear me all right?
There's some noise.
It might be the slightly fuzzy line, Alvaro.
Is this better?
Yeah. Slightly better. Yeah, go ahead.
Sorry. Most of my question has been answered. I had a follow-up question on provisions. You've seen quite a lot. You've done, obviously, a good effort topping up the reserve build in credit cards. Just qualitatively, your balances in credit cards are down 18%, I think, in the U.K., and certainly more than double digit in the U.S. 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? 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? 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 qualitative on the balances. Relates to that, also in Q1, you had a big oil sort of reserve. I think it was GBP 300 million. Oil price is now much better. Versus your Q1 in your wholesale exposure, what areas of the portfolio are you more concerned about? Would you say retail is now the major concern? There, how do you see the reserve building up in the wholesale in the second half? 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 takeaway for them? 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 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 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.
Looking at the numbers now, I'd say that's sort of behind us, and these are back in the books, if you like, rather than in a special payment holiday category, as you can see in our disclosures. For example, you'll see our FICO scores in the U.S. are broadly speaking, what they were before the pandemic. We haven't really deteriorated there either. The other thing I would say, just in terms of 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'd consider strong coverage ratios on some of our more riskiest parts of the book.
On the retail side, U.K. cards, we're at 16% provision rates and U.S. cards at 14%. 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 cumulative NPL was 6.9%. 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 GBP 20 billion of exposure. It's in the sectors that you would expect: transportation, retail, hospitality, et cetera. We're 4% covered there. You've got to remember, most of that, again, is non-defaulted. These are sort of book-up type provisions. We 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. These are much more of a, if you like, bottoms- up name- by- name assessment of what's the right provision level. You'll have the numbers there in the slide. We think we're well provided and relatively modest in terms of exposure to us. Hopefully that helps you with the qualitative commentary.
Thanks.
Thanks, Alvaro. Can we have the next question please, operator?
The next question on the line comes from Rohith Chandra-Rajan of Bank of America. Please go ahead.
Hi, morning. It's Rohith here.
Hi, Rohith.
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 business is telling you about SMEs open for business. Is there much there on activity levels or type of activities for SMEs? Presumably on the large corporates, the fact that its primary capital markets have been open, presumably is helpful in those large corporates being able to refinance. That was the first one, just in terms of any lead indicators on credit quality. The second one was just the BUK NIM.
The guidance reiterated for the 250-260 basis points NIM for the year as a whole. It looks like a spread of 230-250 basis points in the second half. I am just wondering what the uncertainties are that will drive that sort of 20 basis point range in that margin for the second half, please?
Yeah. Maybe I can start to give some color on the first question, Tushar will pick up on the second one. 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. As you come out of the recession, they more normalize. In this event, clearly what's driving consumer and small business behavior was fear. People of good credit quality and even those businesses that stayed open, use of short-term credit declined. They wanted to get their balance sheets in shape, less worried about their own personal income statement.
You also see 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 in 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. 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 the payment holiday on something that's got an interest rate in the high teens." They're acting rationally, and I think it's resulting in a book which is maintaining its overall credit quality.
We'll expect the thing to come back as we see spend numbers come back now. For sure, on the corporate and the SME side, what we're seeing in merchant acquiring, one, is a pretty dramatic recovery in spend. At the trough of this crisis, spend was off anywhere 30%-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. 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. Those are the government programs.
We put GBP 21 billion into a quarter of a million small businesses and large corporations that are government programs to provide them liquidity and funding at extremely attractive rates. We've done close to GBP 11 billion of commercial paper issuance in the U.K. through us to Treasury. That's a lot more attractive funding than going to a bank revolving line of credit. Both corporates and the SMEs have been actively using government support mechanisms for credit, and that's clearly had an impact on the credit profile of Barclays. As you said, following an unprecedented injection of liquidity into the capital markets, as well as central banks around the world using their balances to actually buy credits in the capital markets, those markets reopen with an extraordinary amount of volume.
As mentioned this morning, we participated as a manager in $0.75 trillion of debt issuance around the world. Most all of it in the second quarter. That's $0.75 trillion of funding for corporates that is not going to find its way back into a request for our balance sheet. 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.
Y our question on NIM, Rohith. The trickier thing to gauge there, of course, is balances and just how quickly recover. It's quite early on in post-lockdown environment and quarantines and who knows what else. I think we've seen a plateauing of balances. 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 come after growing shortly thereafter. There is some uncertainty there. We don't have much to model this stuff off, and it's only a small number of weeks post-lockdown, and that's why there's a broadish range.
Okay. It's really about loan mix in terms of the BUK NIM uncertainty.
Yeah.
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.
Right. Yeah, 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 clear on both. Thank you.
Thank you. Can we have the next question please, operator?
Our next question comes from Guy Stebbings of Exane BNP Paribas. Please go ahead, Guy.
Morning. Thanks for taking my questions. Firstly, actually just a quick follow-up on BUK and then a question on CC&P. I just wanted to check on the Barclays Partner Finance move, whether that was then captured in the Barclaycard consumer line. If that's the case, the balance will be about GBP 9.5 billion ex that change from GBP 13.6 at the first quarter. Underlying declining balances are roughly double the industry level. And then the call out there, which obviously feeds into the prior question on the NIM outlook. On CC&P revenues, you've talked to gradual recovery and some of the better spend trends in the U.S. more recently. I'm just trying to gauge what you expect the gradual recovery will look like and how it'll be achieved.
Because we're clearly sat here today having delivered just GBP 1.7 billion or just over GBP 1.8 in the first half if we add back the Visa headwind, and with balances down to GBP 33 billion, we need to see quite a strong recovery to get back to market expectations for the GBP 3.9 billion this year and north of GBP 4 billion thereafter. Should we assume a fundamentally different outlook to prior market expectations given the environment? If not, what sort of revenue margin expansion and balance growth are you targeting? Thanks.
Thanks, Guy. Let me do the second one first, and I'll come back to your first question on BUK. There's three things on CC&P that I think will be tailwinds into the second half of the year. I've talked about net interest margin on the liability side. I talked about a 50 basis points margin pickup towards the back end of the quarter on our liability balances. We may drop deposit rates again. 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're seeing 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 fees.
In the U.S., interchange fees are still quite attractive. The spend's recovering in the U.S. which will translate back into fees there pretty fast as well. Then the harder one to gauge is balances really, particularly on U.S. cards. If spend levels continue, then balances will follow, but there is a delay effect there. I think that's a little bit dependent on obviously how the economies perform in a post-lockdown period. Do they continue as they are at the moment? 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. Look, I can't give you numbers on that. It's a bit too early in the quarter to start extrapolating.
Those are meaningful tailwinds that we'll have from this point on. We've talked about 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 recorded in the personal banking line. If you want to just make sure you know we're recording what out where, then Chris or James behind the scenes can spend a bit of time with you just to point you into the right places into the disclosures that we've got.
Okay, perfect. I don't know if I could just push you a little bit on the CC&P 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 GBP 1 billion type quarterly run rate revenue?
Yeah. Look, I know you're keen on trying to get me to get to a range. 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 recovery into the third quarter that has momentum into the fourth quarter and beyond. It's a momentum business, once things start moving in the right direction, they'll be followed through. How strong that follow-through is? Signs look pretty okay at the moment. Spend levels are improving, margins improving on the liability side. If that all continues, I think we're cautiously optimistic. It's early days in a post-lockdown environment 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.
Morning.
Hi. Could I just bring you back to cost? If I look at your, I think it's your second slide, Tushar, you're talking about income up 8% and cost down 4%. I guess I've followed around banks a while. Those numbers are almost unbelievable, and I guess, looking at the share price reaction today, I'm not alone in that concern. If I look into the second half consensus seems to be looking at revenue falling something like GBP 2 billion, and yet costs actually going up a little bit. It almost feels like there's a complete disconnect between what's happening to your costs and what's happening to your revenue. Could you help me a bit with that? In particular, I'm not asking for a number, but if the revenue environment stays very benign, should we expect costs at the current level?
Should they grow quite substantially from here? Also if we see a big fall-off in investment banking revenues, have you got flexibility? Could that - 4% be -6% or - 8% at the full year? What are the sort of levers you can pull and what sort of comfort can you give us on that?
Yeah. Why don't I start, and Jes may want to add a few comments. Look, I think first of all, the backdrop I'd start with is just ask you folks to just look at a trend over the last two or three years. We have been reducing our cost base in absolute terms regardless of size, shape of the company and the economy we're operating in. Cost discipline is very important to us. That's something that's a constant focus for this management team. 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 Jes mentioned earlier on in the call, when we went into lockdown, plans that we had in place we put on ice.
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 was 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 but paid for by ourselves. Now that comes at a cost. Obviously, attrition levels fall quite meaningfully. The job market dries up. We've got a higher headcount on both levels, lower attrition and staff reduction programs that we didn't implement. Of course, just the cost of keeping businesses open with social distancing requirements and deep cleaning and all the various other things that go alongside that. It is an unusual cost shape.
I think as we go into a normalized operating environment, whatever that is in a post-lockdown environment, we will absolutely reexamine all the new ways of working that we've learned. One of the things that I think is absolutely eye-opening in lockdown, there are some things we've been able to do as an industry and certainly as a bank that we thought were unachievable previously. To 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, you had the syndicate desk, the traders, the salespeople. Even the settlements engine, the folks driving even the mechanics of settling these trades, everybody at home.
We were, as Jes mentioned, something like just for ourselves, $0.75 trillion of capital markets issuance raised. None of us would have thought that would have been possible on the 1st of March. That's a really interesting new way of working that we will examine and understand and look to take the benefits from. That's probably more 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. Obviously, we put on ice a lot of the plans that we would have otherwise had that will be a slight headwind going into second half. Cost discipline is super important. jaws are very important to us.
Cost income levels are very important to us, that's something we'll be focused on. Jes, anything else you want to say?
No. Putting in rank order the 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. Tracking the liquidity profile of the bank, tracking the capital level of the bank. Making sure if at all possible to remain profitable each quarter. 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. In that profitability story, there's a 27% improvement in pre-provision earnings year-over-year. We take a hard look at that, and we are encouraged by the move forward led by the CIB.
The next thing you look at is what can we do to give back to our communities? We have 85,000 employees. We can move that employment number up and down. When we got here four and a half years ago, we were about 120,000 employees. 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. We can manage our costs, but we're going to do it with a focus on the challenges that particularly the U.K. is going through. We're going to be there with payment holidays and overdraft fee waivers and bank fee waivers and keeping people employed.
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, we hope to see that in the third and fourth quarter. Yeah, big positive job movement led very much by a markets business which hit all sorts of records. 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. I guess that would be my comment.
So—
Yeah.
Could I just come back quickly on that? I know I'm running out of time, 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. 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, actually costs to be actually up slightly. I'm just trying to think, is that a sensible type of forecast?
Yeah, Ed—
Do you feel that that's the right way of looking at it, or what?
Yeah. Ed, the only thing I'll say is we were on a sort of declining cost trajectory as we came into 2020. You've seen that momentum—
Yeah.
In the first half. That momentum will be frozen a little bit by deliberate actions that Jes called out that we've done. 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.
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.
Yeah.
You talked about us expecting the consumer businesses to start recovering. There'll be some different trends in the different businesses there.
Just two anecdotes, Ed. 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 dispersed 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. The flip side of that, there aren't a whole lot of people jumping on airplanes right now. 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 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?
On the flip side, we'll probably start to let people to go out and visit a client every now and then. 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, Ed.
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.