Earnings Call: Q2 2019

Aug 1, 2019

Good morning, everyone. This was another resilient quarter of performance for Barclays. We balanced some headwinds in our UK consumer business with good performance coming from the corporate and investment bank. For the Q2 in a row, Barclays has generated a profit of over £1,000,000,000 and the bank delivered earnings per share of 12.6 dollars for the first half of twenty nineteen. Excluding litigation and conduct, profit before tax was £1,600,000,000 in the quarter and £3,100,000,000 for the first half of the year. Our group return on tangible equity of 9.3% for the quarter is a further step towards meeting our 2019 RoTE target of greater than 9%. It's worth noting that we have now produced a group ROTE of over 9% in 5 of the last 6 quarters we have reported. Turning to capital, our CET1 ratio increased by 40 basis points to 13.4%, demonstrating the strong capital generation achievable by the bank. A point of fact, if our operational risk weighted assets were accounted for more like our UK peers, then our CET1 ratio would have actually stood at roughly 14% today. Sensible net asset value grew to 2.75p representing the 5th quarter in a row of accretion in Barclays book value. Our cost income ratio rose a touch in the quarter to 63%, reflecting our commitment to invest in the growth of the bank. Management focus on cost control remains a high priority however and we expect to see positive jaws across the group in the second half of the year and for the full year. Accordingly, we have this morning affirmed that we now expect to reduce expenses to below £13,600,000,000 for 2019, which was the bottom end of our guidance range for this year. Barclays UK produced an RoTE of 13.9% in the quarter despite margin pressure. We continue to grow our mortgage and deposit balances with stable credit metrics. That said, we had a reduction in NIM from increased levels of consumers refinancing mortgages and lower interest earnings from a reduced UK card balances. We continue to invest in our digital capability. Online engagement with our UK customers is at an all time high with just under 8,000,000 consumers now digitally active on the Barclays app. The Corporate Investment Bank produced a 0.3% RoTE in the quarter. Excluding the Tradeweb IPO game, markets income overall was down 9% year on year on a dollar basis, which was broadly in line with our U. S. Peers. Within that, equities had a challenging quarter compared to a very strong comparable last year. However, we did see market outperformance in fixed income, currencies and credit. Banking fees were down a little, reflecting a reduced steep pool in debt underwriting, which was partially offset by strong performance in advisory. Overall though, in the half, we gained share in investment banking fees and our global rank also improved, placing Barclays as the 6th highest earner in investment banking fees globally and the 5th highest in the U. S. Our corporate banking franchise had a decent quarter with income up on the prior period as well as on Q2 of 2018. We are maintaining a strong focus on improving returns in the corporate bank with focused client by client plans to grow profitability. One market progress on this front is that the return on risk weighted assets in our corporate bank has improved meaningfully in the first half of twenty 19 with transaction revenues up some 15% year over year. Consumer cards and payments continues to progress well, producing an RoTE of 18% for the quarter and 16.7% for the half year. We're happy with the prospects for this business and we're pleased that in this quarter, we renewed a key U. S. Card partnership with Wyndham Hotels and Resorts. Parkview's performance over the course of this year reinforces the confidence which the board and management feel in the capacity of this bank to generate sustained earnings. The key indicator of that confidence is in our announcement this morning regarding the ordinary dividend. As you will have seen, we have declared a half year dividend of 0.3p per share. In normal circumstances, this would account for around a third of what we expect to pay in total in a given year. As such, this represents a significant increase in distributions over last year, which I hope will be welcomed by our shareholders. As I said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. Consequently, Barclays capital returns policy of a progressive dividend and intention to supplement the ordinary dividend with additional cash returns, including share buybacks when appropriate, remains unchanged. Now let me hand it over to Tushar to walk you through the numbers in detail. Thanks, Jeff. As usual at half year, I'll begin with a slide on results for the 1st 6 months and then focus my comments on Q2 performance and the half year balance sheet. Reported a profit before tax of $3,100,000,000 for the first half, generating 0.12.6p of earnings per share, excluding litigation and conduct. I'll exclude litigation and conduct charges in my commentary as usual, but the GAAP statutory profitability was limited with a statutory EPS of 12.1p. We've been paying a half year dividend of 0.3p per share in September, and we've indicated that our half year dividends are expected to be around onethree the full year total under normal circumstances. Group RoTE for the half was 9.4% with double digit returns for both BUK and BI. The drag from head office does take us to below 10%. As Jes mentioned, we continue to target an RoTE for the full year of over 9% based on a 13% CET1 ratio. The first half represents a good base for this, but there is work to be done in the second half. Income environment was challenging and reported income down 1% for the half. Costs were up 1% year on year, but we expect positive jaws in Page and for the year as a whole. Given the income environment, cost control will remain a major focus through the second half, and we reduced our cost guidance based on 30th June exchange rate to below £13,600,000,000 which was the lower end of the guidance range we had previously given. I'll comment further on costs as I go through the businesses. Focusing now on the Q2. Income decreased 1%, reflecting the challenging environment, which affected both CIB and the U. K. The cost print of GBP 3,500,000,000 reflects investment in a number of areas. As you can infer from our guidance, we would expect a lower cost run rate in the second half, excluding the Q4 bank levy. The payment was $480,000,000 up $197,000,000 year on year due to the non recurrence of favorable U. S. Macroeconomic update and single name recoveries. This was just $32,000,000 higher than Q1. Delinquencies remained stable and the net write offs in the quarter were just below the impairment charge at 465,000,000 dollars Effective tax rate was 19.4 percent, just below our full year guidance of around 20% and attributable profit was above €1,000,000,000 as in Q1. This delivered an RoTE of 9.3 percent excluding litigation and conduct. TNAV of 2.75p was up 0.09p in the quarter driven by earnings per share of 6.3p and a tailwind from reserve movements due to currency and interest rate moves and despite the payment of the full year dividend of 4p in the quarter. We reported an increase in the CET1 ratio from 13% to 13.4%, and we are now above our target ratio and continue to be confident in our ability to generate capital, we're now in a position to increase our dividend payout that Jess mentioned. Looking now at the businesses in more detail, starting with BUK. BUK reported an RoTE of 13.9% for Q2 despite a challenging income environment with income down 4%. In Personal Banking, we saw volume growth in mortgage balances of 1,500,000,000 net, more than offset by margin pressure, including the effect of increased refinancing by customers. In Barclaycard, balances were broadly flat, but interest earning balances reduced, reflecting our reduced risk appetite and customer behavior, including the impact of current economic uncertainty. Margin pressure and a continuing growth in secured lending resulted in a lower net interest margin of 3 0 5 basis points for Q2, but we expect the NIM to stabilize around this level for the second half of the year despite further growth in secured lending. Costs were up year on year as we continued with the first half investment spend we flagged in Q1. This includes a range of upgrades to our Barclays app and our digital offering more broadly. We no longer expect to report year on year income growth for full year, but we are expecting higher income in H2 compared to H1 and positive jaws for H2 as cost reductions come through. Deposit balances continue to go strongly to reach £200,000,000,000 With the impairment of £230,000,000 we were just a little above the run rate of around £200,000,000 we referenced in the past. The U. K. Car delinquencies remained stable, and I think this remains a sensible average run rate to think of for the year as a whole. Turning now to Barclays International. BI delivered an RoTE of 10.8% for the quarter, on income of €3,900,000,000 The VI costincome ratio was flat at 62%. The main driver of the year on year decline in PBT was the increase in impairment from the low charge of £68,000,000 for Q2 last year. The latter was driven by macroeconomic updates and single name recoveries. Although we are keeping a close eye on the economic outlook in the U. K. And U. S. Particularly, we don't see signs of foreconcerning the current credit metrics. As we said before, we have positioned ourselves conservatively for this uncertain macro environment. Looking now in more detail at CIB. CIB reported an RoTE of 9.3% for the quarter, up from 9.1% last year. Overall income was up 8%. This included a gain of $166,000,000 on our stake in Tradeweb in our Markets business. Excluding this, income still grew by 2%. We saw a resilient performance, particularly from FICC, which was up 25% or 2% excluding Tradeweb, and that would be down 2% in dollars. This compares favorably with peers and reflected strong performance in credit and growth in securitized products. Equities was down 14% on the record Q2 last year, resulting in overall markets revenues up 7% or down 5% excluding Tradewell. Banking decreased 1% year on year or 5% in dollars, reflecting a reduced industry fee fall, particularly in debt underwriting. Corporate income line was up 13%, reflecting growth particularly in Treasury and Transaction Banking. The significant negative mark to market on hedges we highlighted in corporate lending in Q1 did not reoccur. Costs increased by 5% resulted in positive jaws of 3%. We also had positive jaws for the first half overall and expect positive jaws for the second half. We retain significant flexibility on costs, including in performance costs should the income environment in the second half disappoint. There was an impairment charge of £44,000,000 compared to a net release of $23,000,000 last year, but broadly in line with the average run rate we've discussed before. The only significant movement in CIB assets in the quarter was the result of flattening of interest rate curve, which led to similar increases in derivative assets and liabilities. RWAs were broadly flat at €175,900,000,000 and down around €5,000,000,000 year on year. The franchise is in good shape and remains focused on delivering improved and sustainable returns despite periodic fluctuations in market conditions. Turning now to Consumer Cards and Payments. We continue to generate attractive returns in CCC while growing the business. RoTE was 18%, down year on year due to the unusually low impairment in Q2 last year, but up on the 15.4% reported in Q1. Income decreased by $19,000,000 year on year, reflecting the non recurrence of the gain of $53,000,000 on sale of the L. L. Bean Partner portfolio. We grew U. S. Card receivables by 6% in volume. Again, the airline portfolios, notably JetBlue and American, reported strong balance growth. Costs increased year on year as we continue to invest in the growth of international cards, payments and the private bank, but were down on the Q1 level. Again, we expect positive jaws in H2. Payment of $203,000,000 was only slightly higher than the $193,000,000 reported for Q1, but we would expect Q3 and Q4 to be higher, as we have said before, reflecting seasonality and portfolio growth. However, credit metrics remain well controlled with 30 90 day arrears down slightly in the quarter. Turning now to Head Office. As usual, the Head Office result was driven by the level of income expense, which was $136,000,000 compared to largest positive income of $33,000,000 which reflected a Lehman gain of €155,000,000 As in Q1, there was a €90,000,000 impact from legacy funding costs in Q2, which were reduced to under €30,000,000 dollars from Q3 onwards following the redemption of the 14% RCIs in June. The hedge accounting expenses and residual treasury charges will continue through Q3 and Q4, while Q3 income will have a positive contribution from the Absa dividend. Those elements are relatively predictable, while the head office cost base has been tracking at around $50,000,000 a quarter. There will always be a few lumpy items in head office, but over time, I would expect the loss to decrease. I'm including this cost summary again to emphasize our continuing focus on cost efficiencies, to fund investment spend and to deliver absolute cost reductions on the income environment requirements. As I mentioned earlier, we have taken the current environment into account in moving our guidance to below £13,600,000,000 That's based on June FX rate, notably $1.27 to the pound. We are confident we can deliver this while still pursuing key investment opportunities that we believe are in the best interest of the group. Fee cost levers we are using as we go through the year include flexibility in compensation costs, particularly in the CIB, which depend on the income performance, and we've been prioritizing and adjusting the pace of our investments spend as appropriate. CDAB increased in the quarter by 0.09p to 2.75p. Earnings per share of 0.06p were partially offset by the payment of the full year dividend of 0.04p Net reserve movements were positive, reflecting strengthening of the dollar and rate movements, which benefited both the fair value and cash flow hedge reserves. I'd also call out the increase in the net pension surplus to 1,600,000,000 euros On capital, we reported an increase in the CET1 ratio from 13% to 13.4% with an increase in capital of broadly flat RWAs. And that was a 70 basis points increase before taking the deduction for foreseeable dividends, including 81 coupons. Profit contributed 38 basis points and reserve movements more than offset the Q2 deficit reduction contribution of 250,000,000 And I'd remind you that the pension contribution reoccurred in Q3. The foreseeable dividend deduction of 22 basis points reflected the increased dividend expectation we indicated earlier. Our capital ratio won't increase every quarter, but we are now above our target ratio and our confidence in our ability to continue to generate further capital is reflected in the capital returns policy, which we have reiterated, combining a progressive dividend and buybacks as and when appropriate. To remind you, with our current regulatory minimum at 11.7%, we remain comfortable with a capital ratio of around 13%. Our reported ratio is based on the current treatment of Opryx RWA. As I mentioned at Q1, we are exploring with the PRA the possibility of removing the floor that was introduced in our operational risk RWAs. This would have the effect of reducing Pillar 1 RWAs, but would be expected to lead to an increase in Pillar 2 requirement. Our reported CET1 ratio would thus increase, as just mentioned, as with our regulatory minimum. In assessing the adequacy of our capital, we do factor in future headwinds from regulatory changes in RWAs. Over the next couple of years, we have the PRA's proposed changes to mortgage risk weights in BUK from the end of 2020 and CIB changes to securitization risk weightings in early 2020 and changes to standardized counterparty credit risk from mid-twenty 21. We currently expect each of these three changes to result in RWA increases of low single digit billion. This is based on our current balance sheet and business mix and doesn't take into account any further mitigating actions. We're confident these changes are manageable and they are factored into the way we look at capital distribution. Regarding leverage, there is an expected leverage benefit from SA CCR change with a modest reduction in leverage exposure. We already have a strong leverage position. For Q2, the average UK leverage exposure was 4.7%, slightly up on 4.6% for Q1. The spot leverage ratio was 5.1%, quite comfortably above the minimum UK requirement of around 4%. Our funding and liquidity position remains strong. In Q2, we issued £1,000,000,000 of AT1 to add to the $2,000,000,000 we issued in Q1. And we've announced today that we're calling 3 outstanding AT1s on the 15th September totaling GBP 2,300,000,000 equivalent. I'd remind you that these calls will result in a headwind for our Q3 capital ratio of around 13 basis points. Looking at MREL overall, we've issued £7,100,000,000 equivalent in the year to date against our current plan to issue £8,000,000,000 this year. And our MREL is currently at 30.2 percent around our expected end requirement. The liquidity coverage ratio was 156% at the end of the quarter with a liquidity pool of €238,000,000,000 And our loan to deposit ratio was 82%, positioning us conservatively in light of the continued Brexit uncertainty. So to recap, we remain on track in the execution of our strategy. We reported an RoTE of 9.3%, excluding litigation and conduct or 9% on a statutory basis and continue to target an RoTE of greater than 9% 10% for 2019 and 2020, respectively, based on a CET1 ratio of around 13%. We remain very focused on cost control. And given the challenging income environment, we have reduced our guidance for the year to below €13,600,000,000 reported another quarter of TNAV accretion. We are above our CET1 target of around 13% and are reiterating our capital returns policy, paying an increased half year dividend of 0.03p per share, indicating our confidence in the future of the group. Thank you. I will now take your questions. As usual, I would ask yourself to limit yourself to 2 questions a person, so we get a chance to get around to everyone. Our first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, your line is now open. Two questions. First of all, there was a press article earlier this month talking about or earlier last month, talking about Barclays targeting €20,000,000,000 of assets from Deutsche. And I was just wondering if you can make any comments about how you think the restructuring there is going to benefit you? What kind of good market share can you take? Is that going to be profitable? And just generally, is that is there any change to your RWA commitment to the division or leverage commitment given the opportunity there? Just commentary on that. And the second question is around your capital distribution. You've increased the payout, which has been well received. But as you sort of debate internally, I was just wondering when you've decided to go for the dividend versus the buyback, Is this payout the payout we should think about the payout ratio we should think about going forward? And from a financial perspective, is it not better to do buybacks? It also has, obviously, a signaling effect. So just wondering about your thoughts and for us what to expect going forward? Thank you. I'll take the first question and then Tushar will take the second one. Visavis prime balances, it is true that we gained some prime balances recently roughly in that neighborhood. It's very good business for us. Obviously, it's net interest earnings. Part of the markets business where you earn revenue on Saturdays Sundays and holidays. So it's quite good business. It also reinforces the important relationships you have with principal actors in the capital markets. It is very profitable and we will continue to pursue that business. I would say overall, our commitment to the capital markets globally, but principally in New York and London and across Europe, obviously will reflect when capacity is leaving the capital markets in terms of the intermediaries. So we're committed to the strategy and the prime brokerage business is an important component to that. Yes. Thanks, Alvaro. And just to come back to your question on capital distributions. As we sort of said earlier, our capital distribution policy does remain unchanged. We would expect to have an appropriate mix of ordinary dividends, which we've talked about this morning and at the right time, additional distributions possibly through buybacks. I think the way we think about it is, it's important to set the ordinary dividend distribution to the right level first. Obviously, as you think about it from both the Board matter and the regulator matter, there's a higher hurdle. We think of these as perpetual distributions, not one time in nature. So we would have to have not only conviction in our capital position now, but a conviction in the future capital position of the company and importantly earnings both now and in the future. And looking at sort of, we obviously have slightly more optimistic outlook for this year in terms of earnings than consensus does at the moment given our returns target. But even on consensus earnings, we think the dividend guidance that we provided will still get you to a pretty comfortable payout ratio. So it's important that we get that right. And to the extent we generate further excess capital from here, we'll consider what we do with that, but leaving our distribution obviously unchanged. I think that's probably it for now. Thanks for your question, Alvaro. Thank you. Thanks, Alvaro. Can we have the next question please, operator? Of course. The next question on the line comes from Jonathan Pierce of Numis. Jonathan, please ask your question. Morning, champs. Thanks for the questions. I've got 2. The first one's on gilt gains and the second one on the U. K. Margin, please. On the gilt gains, it's about €216,000,000 booked in the half, which is a big reversal on the €200,000,000 odd loss that we saw in the second half of last year through the P and L. Can you just remind us where these get booked? And on the assumption that as of today, there's probably a stock of these gains still of sort of £500,000,000 or so order of magnitude. Is there an assumption that we're going to get more of these gilt gains in the second half? And is that a big part of the delta between where consensus is sat on your return for the year and your 9% return target? So that's the first question, guilt gains and the outlook for those. Do you want the second question on the UK margin as well? Yes. Do you want to get both Jonathan and we'll answer them in one shot. Yes. So on the UK margin, just trying to interpret this comment on the impact of refinancing. Are you sort of suggesting actually that it's a bit more complicated than it looks in the sense that there's a sort of EIR, one off EIR assumption change in the half because customers are refinancing away more quickly. Is that what you're trying to tell us here? Or is it purely just there's a lot more new business coming on at lower spreads? Okay. Yes. Thanks, Jonathan. Why don't I take both of them? In terms of guilt gains, I'm not sure how far you've got through our disclosures yet, but you'll see in the notes that we split out how much of the like the revaluation of our AFS reserve has been recycled to P and L in the sort of normal course of business as we recycle our liquidity pool position. It's actually slightly lower H1 twenty nineteen than H1 twenty eighteen on an after tax basis, I think a little less than £100,000,000 this half and a little over £100,000,000 last up. I think your question about future looking, of course, as bonds have rallied very substantially, there are a lot of gains there. The way we think about it is we're not really trying to do anything too clever here. Of course, if we're recycling those gains into income, obviously, that will lower net interest income into next year unless yields back up. So I'm not sure there's anything that we're doing that's anything beyond we would have normally done. So I wouldn't give any sort of different guidance. It will be regular way disposals as we would have done anyway and recycling of the pool. UK NIM, yes, the refinancing activity is essentially translates itself through an EIR adjustment. Essentially, what we've been seeing is customers, the behavioral life of those customers has just shortened their and I guess it's a function possibly of just the ease in which you can switch products. There's a lot of digitization going on through the industry and probably aided and abetted by some incentives that brokers have as well. So as people come off, for example, a typical fixed rate, 2 year fixed rate product, they tend to stay on a follow on rate for less time than they used to historically and will sort of refinance into a new fixed rate, for example. So when you look at the reduction in our NIM sort of in the quarter, about a third of it was probably from that EIR adjustment, a third of it was just on having lower unsecured card balances, just some sort of very deliberate action that we've taken and about a third of it just from the mix in secured lending versus unsecured lending, but obviously growing our mortgage book. I think where we look at it from here, obviously, the EIR adjustment is really just an adjustment to the stock. It doesn't really change the NIM from this point on, assuming we've calibrated customer behavior appropriately, which we believe we have. I think we're done with the specific actions we took in reducing interest earning card balances. So that will be broadly stable from here and we'd expect our mortgage book to continue to grow. So I guess a few things I'd just remind people of. One is, we do expect our NIM to be about at these levels for the remainder of the year and we expect our mortgage book to grow. And I guess what does that all mean? It means we'd expect our income in Barclays UK in the second half actually to be higher than the first half. And sitting here in the beginning of August, we have reasonable visibility of that. So comfortable giving that guidance. So hopefully that's helpful. So that yes, it is. And sorry, just to follow-up quickly. So that onethree of the margin drop was the EIR, and that's a one off adjustment. So presumably, that's, I don't know, dollars 25,000,000, dollars 30,000,000 hit to net interest income in the quarter that won't repeat going forwards? That's right. Probably a little bit lower than that, but yes, in that sort of zip code. The next question on the line, gentlemen, comes from Joseph Dickerson of Jefferies. Joseph, your line is now open. Hi, thanks for taking my question. Tushar, you already answered one of them. So the other one is just on the liquidity pool. That's a very high LCR ratio and it looks like you've got $83,000,000,000 of surplus against what's a quite overfunded balance sheet. So I guess thinking about this, you mentioned the Brexit uncertainty. Has there been any, either in direct terms or indirect terms, a drag to net interest margin from this? And would you be willing to quantify it? Number 2, certainly there's an opportunity cost here from not lending these funds out. So if loan demand picks up, presumably that would provide quite a tailwind. I'm not saying in the second half of this year, but in the future to your net interest margins irrespective of what's happening with rates? Yes. Thanks, Joe. A couple of comments on that. You've seen our deposit balances continue to tick up quite nicely both in commercial banking, corporate banking as well as in our UK bank. In our UK bank, for example, I think we hit £200,000,000,000 of deposits and that may be the first time in, well, it may be the first time, I haven't gone back to check records, but certainly it's been quite strong deposit growth. And it's good business for us because we're not paying off for those deposits. If you do just a straight comparison, you'll see us with probably one of the lower rates in the UK market. So having that sort of liquidity that will just be in our liquidity pool given it's recent cash has arrived is a profitable activity for us. The other point though is also fair, which is we do have a relatively conservative loan to deposit ratio. The group is in the low 80s. In the UK bank, for example, it's in the sort of mid-90s. And that compares quite favorably with some of our peers. So I think that potentially gives us an opportunity into the future when things perhaps are settled down. At the moment, we're seeing a reasonable amount of customer caution. So a lot of cash being left with us and less demand, if you like, for borrowing. And to the extent that changes as we go through this sort of period of somewhat uncertainty, I think that's a pretty interesting opportunity for us of how we really recalibrate our liquidity pool and liquidity pool and by sort of inference our loan to deposit ratio. Great. That's helpful. Thank you. Thanks, Drew. Can we have the next question please, operator? The next question on the line today comes from Chris Can't of Autonomous. Good morning. Thank you for taking my questions. 2, if I may, completely unrelated. The first, you've given us some incremental disclosure around your structural hedge. Thank you for that. I was just going to invite you, if you could, to quantify the potential drag from the structural hedge into 2020 in the same manner that one of your large peers did this week? And also, where does that net income from the hedge get assigned divisionally? Is that primarily in the UK division? That would be the first one. The second, on your $13,600,000 or sub $13,600,000 cost guidance, you said that was based on a 1.27 dollars FX rate. I mean, we're 4.5% below that level at present. Does that 13.6 percent still hold on current FX? Or if this FX rate persists, would you expect to be above that? And really, as a broader point, it would be really helpful if you could give us a sense of how much of your revenues are in dollars and how much of your costs are in dollars to enable us to better understand how that dynamic might play out through a further hard Brexit hit to sterling rates? Thank you. Yes. Thanks, Chris. So why don't I I'll talk on the hedge contribution. I'll just make a couple of comments on costs and then I think Jes will want to add to that. On the hedge contribution, yes, I know you've been asking for a while, so glad you appreciate the disclosure. Sorry, it's taken us a bit of while to get it across to you, Chris. But in terms of the direct question, if yield curve stay literally where they are today and our intention would be just to roll our hedge, we don't actively manage it in the way some others may choose to. It would only really reduce net interest income by about $50,000,000 into next year. Now, there's a combination of product hedge and equity structural hedges. So actually, it's across the bank as a whole. Obviously, the equity position is for the whole company and the product component is just a component of it. So I think the gist of your question is how much of that would be in the UK bank specifically, Obviously, just a proportion of it by no means the majority of it would go to the UK Bank, but only sort of $50,000,000 there or thereabouts. In terms of costs, I think a couple of points I'll make and then I think just I want to add. Firstly, we've taken some meaningful actions, I think, in the second quarter that ought to give us a much lower run rate going into the remainder of the year. We've talked about headcount reductions that happened in the second quarter. We've made other changes to our physical footprint. We've deferred some investment spend that we don't think really makes a difference in terms of medium to short term opportunity set. And so we have good visibility into our costs. Your point around currency sense 50 is a good one though, of course, a fairly meaningful move and it looks like it's moved again this morning with sterling weakening, it is only PBT enhancing for us. As you've probably seen, I think on Slide 19, about half our revenues of the group are non sterling generated. I take your point that we haven't given you the equivalent cost mix. And so that's something we should think about, but we're obviously prompted to gear towards weakening sterling. But Jess, do you want to any other comments you want to make on the cost side? Just as we've seen what we've as we saw in the second quarter some of the weaknesses and our decisions remain conservative in the credit card side. We did take action on the headcount side and we're now down in headcount by over 3,000 FTEs. And that does have an expense to it, which you will feel the benefits of in the second half of the year. And going back into the strategy of being diversified geographically is to try to minimize the impact of a falling sterling to us. And as Tushar said, it has a greater impact on revenues than costs. So whilst it may challenge us at the below 13.6 percent in terms of the overall jaws of the bank, it will be quite positive. Okay. Thank you. Thanks, Chris. Could we have the next question please, operator? The next question on the line comes from Martin Leitgeb of Goldman Sachs. Martin, your line is now open. Yes, good morning. I have two questions, please. And the first one is just on Brexit and the kind of the broader impact Brexit might have on your franchise and what you're seeing at this stage in your various bits of the business? And I'm just particularly interested if you have seen any change in customer behavior, whether that means either in terms of sentiment loan demand or either in terms of potential deposit or asset quality within the wider book? And the second question is more a general strategic question. Over recent weeks, we have had the announcement of one of your main competitors reassessing its strategy within the equities franchise. And then out of memory, revenues in that segment were broadly similar to Barclays revenues in equities over the years. And I was just wondering how whether this had led you to reevaluate the strategy of your franchise or how you see the opportunities for your franchise in that regard? Thank you. Yes, I'll take that Martin. So to the first question on Brexit, first visavis the bank's position, we began working right after the referendum vote to get the bank structured in such a way that we could deal with any possible outcome of Brexit. And what that really meant for us was changing the scope and scale of our bank subsidiary in Dublin, most likely become by the end of this year the largest bank in Ireland. They went through the process of every branch of the bank across Europe from Frankfurt to Madrid to Paris to re license those branches as branches of the bank in Ireland. We built all the control systems necessarily. We moved the necessary people. And then over the last couple of months, we've gone through the client migration process and we've sort of left it up to clients that they wanted to migrate from one platform to another. That's gone quite well. So from a bank operational point of view, even if we had a very hard Brexit at the end of October, the bank is totally prepared for it and it would be really business as usual. In terms of what we're seeing over the last couple of months visavis clients and customers, as Tushar alluded to, I think people are modestly being more conservative. Our cash levels are up. Demand for credit on the margin is lighter. Then on the institutional side or the major corporate side, I think it's fair to say that some of the big decisions, whether they're M and A decisions or investment decisions, have been lighter than one might expect. But the big thing is as we get closer to October 31, and it's a possibility of a really no deal hard Brexit. We want to be very mindful. 1, we want to be very constructive in terms of helping small businesses in particular to think about cash flow levels, etcetera. But I want to be obviously committed to being a partner to get in the UK economy through that event. But I think we are prepared and going back to the opening comment that 2 years ago, we looked at our unsecured credit card portfolio and really tightened our underwriting conditions since then. And I think hopefully that has put the bank in a pretty prudent position as we go into the latter part of this year. Vis a vis the equities business, we do believe it's important to look at the profitability of the markets business overall. There will be some aspects of your markets business, which are less profitable than others, but there is a connectivity between the 2 of them. We are committed to our position in the U. S. And in the European Capital Markets across the equities platform. We have a very strong business, obviously, in equity prime financing. We have a strong business in equity flow derivatives. So we're going to stay committed both on the research side and on the execution side to equity. Thanks, Martin. Thank you very much. Yes. Can we have the next question please, operator? The next question on the line today comes from Guy Stebbings of Exane BNP Paribas. Guy, your line is now open. Good morning, Jess. Good morning, Tushar. Thanks for taking my question. Most of my questions are being asked. Just a couple of points of clarification. Firstly, on risk weighted assets. Thanks for the new guidance on the regulatory changes. Can I just confirm that was low single digits for each rather than in aggregate, I presume? And then to follow-up on RWAs, as you mentioned again in the introductory remarks, the slightly harsh treatment, at least in Pillar 1 terms and operational risk. I mean, should we take another reference there as suggesting that you're getting closer to a change and that being moved more into Pillar 2? And if so, when is your next ICAP when that could perhaps be signed off? And then just a final great point, quick point of clarification. In head office, I saw quite a big jump in the period end tangible equity. Could you explain what's going on there? Thanks. Yes. No problem, Guy. Why don't I take the couple of clarifications on RWAs and head office and just can talk about where we are on operational risk weighted assets. Yes, single digit billions for each of those impacts. So for single digit billions for mortgage risk weights and additional single digit billions securitization, etcetera. And obviously a benefit on counterparty credit risk as a leverage matter. And head office tangible equity, at the end of the day, I mean that's we capitalized our businesses at our target 13% ratio. So to the extent we've got excess capital at 13.4%, we leave that in head office pending distribution investment, etcetera. So not much more than that. And Jeff, you want to talk about OpEx for WN? On the OpEx side, we're obviously in dialogue with our regulators. Recognize that in many ways this is optics as we as it would result in a move from Pillar 1 to Pillar 2. Roughly 60 basis points in our CET1 ratio. But I think given that there has been optically questions about whether our CET1 ratio was sufficient or not or whether we sufficiently capitalized, if and when we do gather that 60 basis points and today it would land at 14% plus what we're doing on the dividend, hopefully we have finally arrested this question of whether we're sufficiently capitalized. Okay, thanks. Any sort of timing you're able to give on the operational risk or can't really comment given it's up to the regulator? Yes, we shouldn't give. We're in discussions with the PRA. We'll keep you posted on and we'll give a sort of a timeline on it yet. Okay. Thank you. Thanks. Bye. We have the next question please operator. The next question on the line comes from Andrew Coombs from Citi. Andrew, please go ahead. Good morning. Firstly, I apologize if I'm going to make you repeat yourself. The line just cut out as you would as Jess was talking there about the benefit. Was it 60 basis points gross or net adjusting for the Pillar 2? So we would quote a CET1 ratio today of roughly 14%. Yes. So And that's before the reg minimum goes up for the adjustment on Pillar 2? Correct. Right. Understood. Sorry about that. And then my two questions, based on the international bank. Firstly, I'd be interested in your thoughts on the implication of lower Fed rates on CCP NIMs, obviously, most specifically the U. S. Cards business. And secondly, the transaction banking number, there's quite a jump Q on Q from 415 to 444. You said that's due to deposit growth, but I'd be interested there because there's quite a big step change in that line. Thank you. Yes. Why don't I take them, Andrew? The Fed cut, yes, that does that will feed through into NIM in the U. S. Of course, it's pretty high NIM anyway. So I don't think it will make a huge difference to us in the outlook for that business. I would expect even with the new Fed rates income to continue to grow in the second half relative to the first half. And of course, a lot of that's just through the increase in balances that we've been generating over the course of the year. Transaction banking, yes, it's been really good for us. I mean, some of that obviously is as a consequence of the deposit levels that are increasing in our commercial banking business. So as Jess mentioned, the sort of general behavior we've seen from credit. We've seen that in commercial as well as the business banking. Whether that sort of continues, banking. Whether that sort of continues, those deposit rates continue to go up or not, I guess it remains to be seen. We'd like to be lending out that cash at some point, which should be good. I think what is interesting though for us is though some of those deposits have been coming in really through more products and services that we're offering to European corporates. That's something we've been working on for some time. 1 of the sort of positive byproducts of Brexit for us is that our European bank based in Dublin will be clearing euros and that sort of makes us quite attractive for European corporates that wish to do business in both the UK, Europe and the United States to be able to deal with all 3 of those currencies and we're seeing some benefit come through there and that's coming through to our results. So I'm optimistic about that. Yes, maybe a little more specificity there. We put a fairly substantial technology spend beginning in the end of 2017 to make sure we had all the payment pipes built across Europe so that we could expand our corporate bank platform from the U. K. To across Europe. And a lot of the deposit growth has come from as we turned on Germany and France and Spain, etcetera, a number of corporates, many of them connected obviously through our franchise here in the UK are running their transaction in cash management through our pipes. And that's been probably the biggest contributor to the growth in deposits, just driven the transactions revenue in the corporate bank. The other thing I would say is, we actually have been doing reasonably well in terms of growing our trade financing in the corporate bank as well as has helped there. And on your first question, clearly that the risk free rate would have an impact in the U. S, but I think all the European banks would love to have the same risk free curve in Europe. Yes, we sure would. Thanks for your question, Andrew. We have the next question please, operator. The next question, gentlemen, is from Robin Down from HSBC. Robin, please ask your question. Good morning, guys. Can I ask you a kind of variation on the question I asked you at 2019 Q1 about the consensus? I mean, we are in kind of 1st August now, and you're still repeating the 9% -plus RoTE target for this year. And I think as Tushar said earlier, even on consensus, consensus is obviously much lower than that. When I look at consensus, obviously, you have a very big marked revenue decline, H2 and H1, even allowing for seasonality within Barcap. If that sort of revenue decline came through, how much flex do you actually have on the cost line? Obviously, consensus costs now are slightly below the sort of 13.6 number already. But how much lower could you go? And if you could go much lower than that, would that come from the bonus pool? Or would that come from coming back investment? I just wonder if you could give us some color around that. And obviously, anything else you would pick out in consensus that you think that maybe we've missed something in terms of your outlook that hasn't yet been factored in? Okay. Okay, Bobby. So why don't I start and Jess will add some comments. Look, I think we obviously have a the market sort of is closer to an 8 return and we still have a degree of confidence we'll get to 9% and better. We, I think, have a different shape on income outlook and I think the gist of your question, if the income outlook is closer to your or the market's view relative to our view, what leaders do we have. But just to touch on income, I would expect if I look at half on half, I would expect UK income to be better. I sort of guided to that. I would expect consumer card payments income to be better. I've guided to that. I would, of course, we've got the redemption of the 14% reserve capital instruments that you're aware of that will drop out of head office. So that's a tailwind as well. I also think if you look at the pipeline that we have in our Investment Banking fee business, capital markets look pretty good at the moment, quite constructive, and we've got a very good pipeline. So as you say, as Jess mentioned, I think we're in the top 5 in U. S. In terms of the Eologic fee share. That's a really nice position for us to be in. And our sales and trading business, we've continued to accrete market share steadily over the last sort of half a dozen or so quarters. So we probably do have a different income shape to you. The other thing I would say is that it goes back to the earlier question about sensitivity to currency rates. We're starting to remain weak. Of course, that is not necessarily accretive to returns because obviously our capital is held in dollars, but then you can see that in our tangible book value accreting, but certainly earnings per share, that's definitely a positive and it's been quite a reasonable move in cable and that can only be helpful for us. I think on the cost side, we've taken a bunch of actions already. And you kind of saw that in Q2 numbers because of the headcount reductions. Jess has talked about some changes to our fiscal footprint, deferral of some investments. Obviously, there's of sort of repositioning the pace of that investment as well. So I think we have good control of our ability to glide those costs. I think as you get later on in the year, of course, performance costs, principally in the investment bank become more and more important. Of course, that will be linked to income performance. But Jeff, do you want to add any more? I'll just add 2 things. 1, again, to underscore our commitment on the cost side and our focus on it, part of the cost numbers in the 2nd quarter that you've seen, we as an admin team early on in the quarter took decisions to drive down the cost in the second half of this year, so we could land below 18 13.6 percent. A lot of those cost decisions raise your costs in the second quarter, but that should be that should underscore our commitment to use cost as much as we can to deliver that 9% return on tangible equity. And you could also see in the financials that we published today that our variable comp number year over year was down 18% in the first half versus the first half of last year. So we are committed as best we can without putting the franchise at risk anywhere to use the cost number and manage cost to deliver a level of profitability that we've committed to our shareholders. Great. Thank you. Thanks, The final question today, gentlemen, is from Edward Firth from KBW. I just had a quick question on your Level 3 disclosures, which you very kindly enhanced on I think on Page 68. And then particularly just I just want to check that I understand them correctly. So if I look in your income statement, you've got around, what, EUR 700,000,000 of contribution from valuation of Level 3 assets. So firstly, is that correct? So it's obviously a marked change on what we've seen in the past. And secondly, what is driving that? And then I guess related to the table below, I guess we've talked a lot before about the asymmetry on your valuation of Level 3 assets. That seems to be expanding now even further. And again, just trying to get a sense of what are the key drivers in that? It looks like non asset backed loans is one part of that. Is that leverage loans or what are those in particular? Thanks very much. Yes. These disclosures, Ed, as you know, are quite tricky to work through. And the reason for that is Level 3 assets, of course, are just one sort of aspect of match position. So you'll have, for example, long dated fixed rate loans, for example. Now obviously, we've had a big move in interest rates. So those customer positions in of themselves revalue quite meaningfully. But of course, from our perspective, they're hedged through other interest rate products that won't necessarily be level 3, well actually won't be level 3, there wouldn't be other fee hedges that would revalue in the opposite direction. So it's really more a function of just the very large movement in interest rates to interest rate sensitive products. But are matched. So I think that's all I'd say on that. There's nothing else that other than that that's going on. Is it it's not possible to give us some idea of what the matched move is? The net move you mean? Yes. Yes. We don't sort of do things on an instrument by instrument basis. These are portfolio managed positions. So yes, that's not how sort of risk management tends to work for us. You have lots and lots of interest rate risks coming from lots of customer facing positions that are ahead with the portfolio of interest rate hedges. Okay. Thanks so much. All righty. Okay. Thanks, Ed. And