Welcome to the Barclays Q1 2019 Results Analyst Investor Conference Call. I will now hand you over to Jes Staley, Group Chief Executive, and Tushar Morzaria, Group Finance Director.
Good morning, everyone. My opening comments will be short today given that it was a pretty straightforward quarter. Today we have announced that Barclays earned GBP 1 billion of attributable profit in the first three months of 2019. We earned GBP 0.063 per share. Profit before tax was GBP 1.5 billion, with positive Jaws driven by a 3% reduction in cost versus a 2% reduction in revenues. Our group cost-to-income ratio was 62%, a modest improvement over last year. We will continue to target a ratio of 60% or better over time. From a revenue perspective, the U.K. produced another solid quarter. Within the CIB, investment banking fees were weak. For the sixth consecutive quarter, we outperformed our U.S. peers on average in the markets business, which like Q1 last year, generated a double-digit return on tangible equity.
Turning to capital, our CET1 ratio was 13%, with group risk-weighted assets broadly flat year-over-year. Though we did have the typical seasonal increase in the first quarter versus Q4 of 2018, which is what you would expect. Within that total, there were actually significant increases in the risk-weighted assets allocated to our consumer franchises versus Q1 of 2018, both in Barclays U.K. and in international cards and payments. While the risk-weighted assets allocated to our CIB declined year-over-year. The positive effect of that change in mix may be seen most clearly in our international cards and payments business, where a stack of 20% increase in capital allocation year-over-year contributed to an increase in profitability of over 20%, whilst delivering a return on tangible equity of 15.4%.
Our tangible net asset value was GBP 2.66, which represents the fourth quarter in a row where we have grown Barclays book value. Our total operating expenses in the first quarter were GBP 3.3 billion. In 2016, we took a charge of just under GBP 400 million to allow us to better align variable compensation accruals with the firm's revenues. What you see in the first quarter is Barclays using its discretion around variable compensation to manage our costs and help deliver expected profitability. I would add, if we have continued weakness in our revenues like we saw in the first quarter in the investment bank's fee income, we will seek to further manage costs. Now let me turn to the leadership changes I announced earlier this month. The reorganization had two goals.
First, to put under Ashok Vaswani oversight of the execution of plans in our global Consumer Banking & Payments businesses. As technology sweeps the financial industry, particularly in payments, we need to harness the unique platform that we have at Barclays. The payment space may be the biggest opportunity and challenge the bank will face over the next decade. It is also great to have Matt Hammerstein, representing Barclays UK, join the Group Executive Committee, reporting directly to me. The second goal was to have a more granular execution focus and oversight on the businesses within the Corporate and Investment Bank, and accordingly, to bring the CIB closer to me as the Group CEO. I welcome Alistair Currie, Stephen Dainton, and Joe McGrath to the Group Executive Committee.
This portfolio of businesses in our transatlantic consumer and wholesale bank gives us the best opportunity to put the recent past of Barclays behind us and simply execute towards the returns that our shareholders expect. That said, let me be clear, management is very aware of the execution challenges we must still meet in order to deliver acceptable returns on a consistent basis, particularly in the Corporate and Investment Bank. We are confident, however, that this management team can meet the challenge given the enormity of what we faced three years ago. Barclays then was without strategic direction. The operational and control issues were acute. The bank was undercapitalized and only occasionally profitable, and we faced enormous litigation and conduct issues, all of which we have addressed.
A 9.6% Return on Tangible Equity in the first quarter of this year is a good step towards our objective of delivering greater than 9% in 2019. Now let me hand it over to Tushar to walk you through the numbers in detail.
Thanks, Jes. I'll begin with the group results and then give some brief comments on each of the businesses. As Jes mentioned, Profit Before Tax was GBP 1.5 billion compared to the statutory loss of GBP 0.2 billion last year. I'm pleased to note that litigation and conduct was not material in this quarter, but it was GBP 2 billion last year, with a profit excluding this decreased 10%. I'll exclude litigation and conduct charges in my commentary as usual. Group RoTE was 9.6% with a double-digit return in both the U.K. and CIB. Income was down 2%, but we reduced costs by 3%, delivering positive JAWs. The income environment has been challenging in Q1, particularly for the CIB. Regardless of conditions, cost control will remain a critical focus throughout the year as we pursue our 2019 RoTE target of greater than 9%.
Impairment was up GBP 116 million year-on-year, but down GBP 195 million on the Q4 impairment figure, which included a specific charge of GBP 150 million to reflect economic uncertainty in the U.K. Importantly, delinquencies remain stable. We can't predict macroeconomic changes with precision, but the credit environment remains benign. The effective tax rate was a little under 17%, and attributable profit was GBP 1 billion. TNAB of GBP 2.66 was up GBP 0.04 in the quarter, driven by earnings per share of 6.3, despite currency and pension headwinds, and TNAB is up GBP 0.15 across the last four quarters. The CET1 ratio is in line with our target of around 13%, down slightly on year end, reflecting the seasonal increase in RWAs. Looking now at the businesses in more detail, starting with the U.K.
The U.K. reported an RoTE of 16.4% for Q1, up slightly from 15.7% on an increased equity allocation. Both incoming costs were broadly stable. Overall income was down seasonally on Q4, with NII reflecting Q1's lower day count. Year-on-year growth in deposit balances and mortgages was offset by continued NIM erosion, affecting both product mix and competitive pressures. We mentioned that in Q4, we had pulled back from some of the more aggressively priced product categories. This affected our completions in Q4 and Q1 with net mortgage additions of just GBP 0.6 billion in Q4 and GBP 0.3 billion in Q1. However, mortgage pricing has improved slightly in Q1, and we are handling application volumes at significantly higher levels than in Q4. Our increased focus on secured lending continues to have a mixed effect, with NIM of 318 basis points in Q1, down from 320 basis points in Q4.
I expect slight downward pressure to continue. However, we expect volume growth to contribute to a higher income run rate in the remaining quarters of the year. Cost reflected our continued investment in the digital transformation of the business. I mentioned at full year that we expected the 2019 investment spend to be weighted towards the first half of the year, and we would expect negative jaws in Q2, but positive jaws in the second half and for the year as a whole. Impairment was just under GBP 200 million run rate we've referenced in the past, and delinquencies are stable. Turning now to Barclays International. BI delivered an ROE of 10.6% for the quarter on an income of GBP 3.6 billion.
The main drivers of the year-on-year decline were a decrease of 6% on income, reflecting the challenging income environment faced by the CIB, and an increase of GBP 152 million in impairment due to largely the non-recurrence of favorable macro forecast updates in Q1 last year. Looking now in more detail at CIB. Overall income was down 11%. We reduced costs by 9% as we cut compensation across, reflecting the income environment, and continued to implement cost efficiency programs. With the income decline, we saw a resilient performance, particularly from the FICC businesses. Markets overall was down 6% in GBP or 12% in USD, but FICC was up 4% comparing favorably with U.S. peers through intrinsically high rates, which delivered significantly improved performance. This reflects previous management changes and investment in technology. As usual, the FICC performance reflected CVA and DVA, both of which were headwinds year-on-year.
Equities was down 21% year-on-year, with weakness in derivatives in common with U.S. peers. Banking decreased 17% year-on-year, with fees down particularly in acquisition financing. However, our market share of global banking fees, based on Dealogic data, was up slightly on full year 2018. The banking franchise remains in good shape with a strong pipeline. As we've said in previous quarters, the timing of fees can be lumpy. The corporate income line was down 13%, reflecting steady performance in transaction banking, the decline in corporate lending income due to both the reduction in lending in 2018 and a significant negative mark-to-market on hedges in Q1. The underlying corporate lending income for the quarter was around GBP 200 million, which excludes the mark-to-market. The figure does include the running cost of credit protection.
The mark-to-market losses on hedges were high due to our policy of taking a conservative approach to hedging exposure, particularly in leveraged finance, and credit spread tightening and other market moves through Q1. The negative other income line, which included the CIB share of net treasury result in Q4 and in prior quarters, is now allocated out to the other business lines. There was an impairment charge of GBP 52 million compared to a net release of GBP 159 million, with no recurrence of the favorable macroeconomic forecast updates we saw last year. RWAs increased by GBP 5.7 billion from the seasonally lower year-end level, but allocated tangible equity was down slightly year-on-year, with RWAs reduced by more than GBP 4 billion over the same period. The RoTE was 9.5%, excluding litigation and conduct, or 9.3% on a statutory basis.
Whatever the income environment through this year, we will remain very focused on cost control, and you can see the Q1 number as a statement of intent in this regard. Turning now to Consumer, Cards and Payments. We continue to generate attractive returns in CCP while growing the business. RoTE was 15.4% on an increased equity allocation, and income grew 6%, driven by U.S. cards. Currency was favorable with a 6% year-on-year sterling dollar move, but we also saw U.S. card receivables increase by 6% in dollars, adjusting for the airline portfolio, which we sold in Q2 last year. As we highlighted at full year, a share of the BI net treasury result is reflected in the income line. This was a smaller negative than Q4, but still a headwind year-on-year.
Again, the airline portfolios, notably JetBlue and American, saw double-digit growth. The balance decline from Q4 was in line with the normal Q1 seasonality. Cost increase, as we continue to invest in the growth of the international cards and payments businesses. Impairment was down GBP 59 million, year-on-year at GBP 193 million, and well down on the seasonally high Q4 level of GBP 319 million. Absent significant macroeconomic development, we would expect Q4 to be the seasonally highest quarter for impairment this year, with Q1 the lowest. Turning now to head office. Head office was relatively simple this quarter, with negative income of GBP 95 million, reflecting the excess legacy funding costs we put through head office.
This year, we've accounted for the absent final dividend in Q1, in line with the dividend declaration date. This offset the hedge accounting drag that we have flagged in the past, which will continue through the rest of the year. I'd also expect around GBP 100 million negative treasury items through the head office income line spread across 2019. We've announced that we will call the 14% RCIs at the end of Q2, which will benefit the income in head office by about GBP 65 million per quarter from Q3. Cost of GBP 52 million, excluding litigation and conduct, were broadly in line with the usual run rate. Below the PBT line, the preference share redemption has reduced the non-controlling interest charge. Group costs were down 3%, GBP 3.3 billion for Q1. We're leaving our cost guidance of GBP 13.6 billion-GBP 13.9 billion for 2019 unchanged.
I want to stress that should the challenging income environment of the first quarter continue, we expect to reduce 2019 costs below GBP 13.6 billion. Key cost levers we will review throughout the year are further flexibility in compensation costs, particularly in the CIB, depending on the income performance, and prioritization and adjusting the pace of investment spend. CX has improved cost efficiency, driving operating leverage and enabling capacity to invest, with flexibility in the phasing of this spend. Cost control is important in achieving our returns targets. We will balance this with the group's longer term interests and opportunities. TNAB increased in the quarter by GBP 0.04 to GBP 2.66. Earnings per share of GBP 0.063 were partially offset by net reserve movements, including the U.S. dollar currency headwind and pension surplus re-measurement.
Q1 showed the usual seasonality in our capital ratio, with the increase in RWAs of GBP 7.8 billion offsetting the 39 basis points contribution from profits. There was also the regular Q1 headwind of eight basis points from vesting share awards, which we do not neutralize through new share issuance. As a result, the CET1 ratio finished the quarter at 13%. The RWA increase reflected higher activity levels at the end of the quarter in CIB and GBP 1.6 billion from the implementation of IFRS 16 for operating leases. We continue to feel confident in our ability to generate capital and remain comfortable with a capital ratio of around 13%. As you know, we paid a dividend of GBP 0.065 for 2018 and have indicated some progression in 2019. We remain confident that going forward, our capital generation will fund both our investment plans and increase distribution to shareholders.
We also have a strong leverage position. At Q1, the average U.K. leverage ratio was 4.6%, slightly up on 4.5% at Q4, and flat year-on-year. The spot leverage ratio was 4.9%, comfortably above the 4% minimum U.K. requirement. We monitor leverage daily. We continue to view it as a backstop capital measure with the risk-based measure being the primary management ratio for the group. Our funding and liquidity position remains strong. Our loan to deposit ratio of 80%, down from 83% at year-end, reflected conservatism in light of the Brexit uncertainty at the end of the quarter. We have diverse trade funding sources, including roughly two-thirds coming from both consumer and wholesale deposits, which are not directly ratings dependent. We aren't overly reliant on wholesale funding markets, either at a group level or in the respective businesses.
We are well on track to meet our future MREL requirements, currently at 27.7%, compared to an expected requirement of around 30%. We issued GBP 2.2 billion in the year to date, in line with our current plan to issue around GBP 8 billion in 2019, compared to the GBP 12 billion we issued in 2018. The Q1 issuance included $2 billion of AT1, which we continue to view as a valuable and cost-effective element of our capital stack and funding structure. As most of you will be aware, we issue MREL out of our Holdco in line with the Bank of England's preferred structure, and MREL represents just 8% of our overall funding. The liquidity coverage ratio was 160% at the end of the quarter, with a liquidity pool of GBP 232 billion, which represents just under 20% of our balance sheet, positioning us conservatively in light of the continuing Brexit uncertainties.
To recap, we remain on track in the execution of our strategy. We reported an RoTE of 9.6%, excluding litigation and conduct, or 9.2% on a statutory basis, and continue to target RoTE of greater than 9% and 10% for 2019 and 2020 respectively, based on a CET1 ratio of around 13%. We remain very focused on cost control and will continue to monitor the income environment closely throughout the year. We reported four consecutive quarters of TNAB accretion, and we are at our CET1 target of around 13%. Thank you. I will now take your questions, and as usual, I would ask you limit yourself to two per person.
If you wish to ask a question, please press star followed by one on your telephone keypad. If you change your mind and wish to remove the question, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. To confirm, press star followed by one to ask your question. First question today comes from Joseph Dickerson of Jefferies. Joseph, your line is now open.
Hey, Joseph. Joe, you may be on mute.
No, I'm not on mute. Can you hear me?
Oh, there we go.
Yeah, we can hear you now.
Yeah. Hi. Sorry. Good cost performance from the investment bank. I guess the question that I have, and I only have one this time, is the 11% increase in cost in the Consumer, Cards and Payments business. Presumably, you're making some investments here. Is this to expand into new channels in the U.S.? Is it merchant acquiring in Europe? Some color there would be helpful. I also would just have a suggestion that at some point it would be very useful to hear what the new management's plans are for the overall payments strategy. Some sort of investor seminar there would be very, very welcome, I think, by the investment community.
Thanks, Joe. Yeah, we'll certainly take that feedback on board. We're very excited to have Ashok looking across the full spectrum of consumer banking and payments. Yeah, we'll certainly take that on board. In terms of the cost increase in CC&P. Yeah. CC&P is an important business for us in terms of continue to invest in and drive our profits. You'll have seen over the last 12 months attributable profits up, I think, close to 20% on a 20% higher capital base. The returns are compounding at about 15%. It's a business we like the characteristics of. We continue to grow the cards business there. We continue to grow in the U.S., that is, and we've talked quite a bit about the airline portfolios particularly, and we are probably growing them quicker than other parts of the portfolio.
That has obviously costs associated with it, account acquisition costs, which are upfront before the revenues come in. As we continue that sort of steep growth, you would expect to see that. The other thing we like about the airlines portfolio is the FICO scores are actually relatively high for that customer cohort. I know there's some sort of concerns about how quickly you would like to grow an unsecured credit book this late on in the cycle. I think that sort of fits risk characteristics quite well, where we like the income growth there, and we like the risk characteristics that brings as well. We are continuing to invest in our payments business as well. I think as Ashok speaks more publicly about this, he'll talk about some of the things that we're very focused on there.
The other thing, Joe, I would just remind you, there is a little bit of an FX component in there as well. The 11% probably overstates the expense growth. There was, I think, a 7% move or so in foreign exchange. Probably more mid-single digits is probably where the real underlying growth is. Still, it costs better that we like and would continue to want to invest in that business just to see profits continue to drive up.
It's most likely you will see us do something in terms of investor presentation around the global payments platform later this year.
Great. That'd be very helpful. Thanks, guys.
Okay. Yeah. The next question, please, operator.
The next question on the line comes from Jonathan Pierce of Numis. Jonathan, please go ahead.
Morning. Got two on Well, one on capital with a few bits to it. Then just a quick one on the CIB. On capital risk-weighted assets, I was hoping, Tushar, you could give us a bit more color on some of the one-off RWA items that will come through in the next year. Obviously, we've seen IFRS 16 this morning. Thinking in particular about securitization, CCR changes next year, mortgage risk weights, those sorts of things. Maybe alongside that, if you can give us a quick comment on the story around this op risk. Obviously still up at GBP 57 billion. Is there anything you can do there? That would be my first question. Broad question on risk-weighted assets. Second question.
CIB, it's difficult to get to what's going on below the PBT line because you don't split out tax and coupons, but it looks like there was another tax credit in the first quarter helping the CIB ROT number. Is that correct? Maybe I could ask that you split out those below the line items moving forward, if possible.
Yeah. Thanks, Jonathan. Why don't I take them? Jes may want to add something at the end. In terms of RWAs, your first question, sort of any guidance you want to give in terms of inflation coming through the pipe. Nothing to call out at this stage. You mentioned mortgage risk weights. Again, nothing I'd call out here. We will guide it at the right time. In terms of contextualizing this, as you're probably aware, we run a through the cycle model and have a 180-day default definition. We'll be moving that to a 90-day default definition, but we're already through the cycle. When I look at mortgage risk weights for ourselves, I think we're towards the upper end of our peer set and probably couple that with slightly lower loan to values than the average peer set.
There will be an impact, and we will call that out near the time, but hopefully impacts us a little bit less than others. The other items you called out, securitization. Again, nothing to call out at this stage, but we will keep you posted as the year goes through. Op risk is an interesting question. It's a bit of a bugbear of mine, as some of you may already be aware. We've had our operational risk-weighted assets since Pillar 1 stubbornly stuck at GBP 56 billion, GBP 57 billion actually ever since I've been here, even though we've fairly materially reduced risk-weighted assets and the composition of businesses over that time. I think the other thing that's a slight bugbear of mine is that, of course. It's a very high level of Pillar 1 operational risk weighted assets. Of course, what does that do?
That means we probably have a commensurately, I imagine across the U.K. banking peer set, operational risk capital is no doubt appropriately sort of calibrated across the banks. I'd say it looks like we have a higher component in Pillar 1 versus Pillar 2, and you'll appreciate that all that does is means that your Pillar 1 reported capital ratio optically is reported at a lower level, even though your distance to MDA is consistent. On our numbers, if we were to have a Pillar 1 operational risk weighted asset level consistent with U.K. peers, then our capital ratio would probably be over 14%. Now, on the flip side, you'd probably increase Pillar 2, so I don't think our distance to MDA would ever change. I think our MDA level would increase, but that may look a little bit more similar to other U.K. peers.
A little bit of a bear in mind. Hopefully, we'll make some progress in getting that recalibrated over time. No, I don't think that'll happen in the near term.
I think, Jonathan, as you think strategically about the bank, if you go back a number of years ago, the operational Risk-Weighted Assets were sort of 14%, 15% of our total capital base. Now it's up to 20%. When you think about size and scale of the bank, if that op risk number is not going to move, shrinking the bank aggravates your problem because I'm sure you can calculate the return on operational Risk-Weighted Assets is zero.
Jonathan, the second question on the CIB, and I think really what you're driving at, is there anything unusual in the tax line? Nothing unusual. We did have a sort of 17% effective tax rate for the group. Now it's a little bit confusing because we're under a different accounting standard to this time last year. We've applied IAS 12. Doesn't make any difference to reported returns, but does affect the calculation of attributable profits because of the tax credits on AT1. In new money, if you like, on a post IAS 12 basis, I'd guide to an effective tax rate of somewhere around 20%. I think for the rest of the year, you'd expect it to tick up. I think that's just usual seasonality, but for your model, somewhere around 20% is probably a reasonable estimate. Sorry to come back on this.
It looks like though in the CIB, if we take out these, or rather add back these coupons and compare the number to the pre-tax, that the tax rate is sub 15%. Looks like it's sort of 10%-13% in the first quarter. You're suggesting that that's not the case.
No, I haven't. No. I'm not calling out the actual tax rate in the CIB. Obviously, you said that's not disclosed, so I won't sort of call it out on this call. Just to help you out in terms of the overall dynamics for the group, the Q1 tax rate of 17% is probably lower than you'd experience over the course of the full year, and obviously, that will affect both the CIBs, other divisions as well.
I think overall for the group, for the full year, around 20% are in a sort of post IAS 12 basis, is something that you should probably be thinking about.
Okay. Brilliant. Thanks a lot.
All right. Thanks, Jonathan. Can we have the next question please, operator?
The next question on the line comes from Robin Down on HSBC. Robin, please go ahead.
Hi. Yeah, good morning. Just a couple of questions from me. Just following up really on Jonathan's questions on RWAs. We've got this seasonal uplift again in CIB RWAs in the first quarter. I was kind of slightly surprised to see that given the sort of lower levels of activity we saw more broadly in Q1. I just wondered if the guidance for effectively a flat CIB RWA number for the full year, whether that kind of still stands, that you effectively expect this to unwind in Q2, Q3. The second question is a much broader question around consensus. You're still sticking with a target of 9% plus RoTE for this year. I think the published consensus was for 8.2%.
When you look at the sort of consensus P&L, is there anything that you look at and you think, "Well, that stands out, and that looks materially different to what you would expect." The cost number seems to be kind of broadly smack in the middle of a range. The impairment number, I think, feels like it's roughly where perhaps previous steering has been. The tax rate looks fairly reasonable. What's sticking out for you that the gap between consensus and where you think you'll turn out?
Thanks, Robin. I'll answer them both. Jes may want to add comments as I go along. In terms of the RWA seasonality, I think this year will probably feel like a typical year for us where we generally take a very deliberate small step back in capital in Q1, then we'll steadily accrete capital in Q2, three, and four. You can see we're pretty capital generative from organic profits, 39 basis points of organic profits in the first quarter alone. I think this year you'll see a similar picture. It's probably been the low point of capital for the year, and I'd expect to see steady accretion from this point on. In terms of the RWAs, we did deliberately increase the RWAs sequential quarters in the CIB. A little bit flattered by foreign exchange, don't forget, so probably overstates the move.
The capital allocated to CIB was probably a better measure because it takes sort of everything into account, currency rates and all the deductions and everything like that, was slightly down actually year-on-year, and actually even headline RWAs in the CIB was slightly down year-on-year. Quite atypical, but capital should progress upwards from this point on. In terms of consensus, look, I won't comment on any individual line items, but we feel pretty good with where our businesses are positioned. If I just go around the houses very briefly. If I look at our UK business, you probably picked up from my scripted comments that I would expect the UK business to have positive Jaws over the year, probably negative Jaws in the first half, negative Jaws in Q2, but positive Jaws over a full-year basis. We are growing the balance sheet.
Deposits have grown as well, even though we're growing the secured book as opposed to the unsecured book, so you've got a mixed effect in our net interest margin. That will fuel top line. I would expect top line to improve as well alongside those full-year positive Jaws. If I look at CC&P, probably steady growth there. We're growing in mid-single digits on a US dollar basis, and I think with relatively decent risk characteristics. We feel pretty good about the opportunities that are there. In CIB, obviously a little bit harder to have the crystal ball on the revenue environment for CIB, I do think our investment banking fee number for the first quarter was a little bit low. I think that's a calendar effect. We think we picked up market share, at least according to the Dealogic surveys.
I would expect Q2 fees to be certainly higher than Q1, and the pipeline looks pretty strong. In our sales and trading business, again, a little bit trickier to forecast. A lot of other commentators, we haven't given any guidance on Q2, and I certainly won't on this call, but other commentators have talked about the quarter finishing stronger than it started, and many people have referenced that. I look at the credit lending line. There was a syndicate hedge loss that we called out there. It was about GBP 50 million. That obviously wouldn't be recurring. It may come back, may stay where it is, but I won't annualize that. The final thing I'll say is on the impairment line item. Credit conditions look pretty benign at the moment.
I've been saying this for a little while yet, but as far out as we can see, it looks like pretty good credit conditions both in the U.S. and in the U.K. We look at our watch list, we look at our affordability metrics, we look at indebtedness, we look at delinquencies, we look at spend patterns. It looks reasonable at the moment. I think we're okay at the moment with that regard. Cost flex. We have talked about. We don't have the crystal ball on the income environment. Obviously harder to predict, and we will be able to flex our costs should the income environment not turn out in a way we would expect. Are now prepared to go below our GBP 13.6 billion guidance if necessary, and you've seen us take actions consistent with that in the first quarter.
Jes, anything else you want to add on that?
No. I would just echo that when you're facing restructuring, like creating a ring-fenced bank or adjusting your legal structure for Brexit, or writing a $2 billion check to the U.S. Department of Justice, your ability to correlate your expenses with your revenues is less than we have today as this bank is now normalized. I'd say the main difference between the 9% and the 8.2% is our belief that we can more align expenses with revenues. Obviously, we view the first quarter investment banking fee to be not a new normal. We'd expect a recovery there. We'll align expenses with revenues and are quite comfortable still with our 9% or better target.
Brilliant. Great. Thank you.
Thanks, Robin. Could we have the next question please, operator?
The next question on the line is from Guy Stebbings of Exane BNP Paribas. Guy, please go ahead.
Morning. The first question was coming back to Barclays UK. Loans advances in personal banking dropped for the first time, I think, in eight quarters in Q1. I appreciate the lower pipelines for the quarter, and the better flows in Q1 you mentioned. Equally, given the step up in new mortgage lending volumes around a couple of years ago, presumably the retention profile is starting to build. The market still feels pretty competitive. Should we expect the pace of growth to slow versus last year? If that's the case, I'm trying to understand where the top line revenue growth is going to come from in Barclays UK, given the spread pressure we're seeing across personal Barclaycard and business banking in the first quarter. Would you be comfortable with negligible top line growth if you delivered on positive Jaws? That was the first question.
Secondly, on cost flexibility. If you decide it's necessary to move to below a GBP 13.6 billion cost target, could you talk us through some of the specific actions that you'd be taking or to deliver that, and at what point you would need to make that decision? I think you've referenced compensation costs and the ability to prioritize or delay investment spend. Should we think about this as predominantly flexing the bonus pool in the IB, or could there be an impact on investment in payments, digital, things like that? Thanks.
Thanks, Guy. Why don't I take the first one, Jes can talk a little about how we're thinking about cost actions. In terms of the balance sheet for Barclays UK, we had a little bit of a slowdown in mortgage growth in the tail end of last year. Very deliberate. We felt our pricing was getting too tight, quite frankly, so we stepped away from some of the products where we saw that. That, therefore, did mute balance sheet growth in Q4, therefore again in Q1. It did grow, but very modestly. I would say application volumes are up considerably in Q1, we have seen pricing improve, at least for the areas that we're most interested in. Therefore, I would expect to see top line grow as a consequence of that as we go through the rest of the year.
As you're probably aware, the first quarter obviously has a lower number of just days in the quarter. The NII line's a little bit lower compared to the other three quarters. That's just a function of that. You asked the question, would we be comfortable with positive jaws with a negative top line? It's not what I expect to see. I would expect to see positive jaws with an increased top line given the pipeline of assets that we've got coming on and the net interest margins that we have there. Hopefully that's a bit helpful there. Jes, you want to talk about the cost side?
As I sort of alluded to, the new reality now that we've completed the reorganization and restructuring of the bank is we do have a higher component of discretionary investment in that 13.6-13.9 cost line. The Executive Committee got together in October of last year and approved what we call MGIs, or our material growth initiatives. These are investment spends mostly around technology from digitizing or further enhancing the mobile banking app to increasing the algorithms for electronic trading, et cetera. We approved a budget for those in October, began to execute it. We have the ability through the Executive Committee of pacing that level of spend. We're going to continue to invest in technology to allow the bank to grow. It's critically important. It's what was sort of not properly attended to a number of years ago.
There is the ability to seek more efficiencies as you make those investments and to pace the speed at which you are making that investment vis-a-vis the compensation line. As we said, we took a pretty substantial charge to net income in 2016 and 2017 in order that we could align variable compensation with the profitability coming out of the Investment Bank. Part of the answer to your question is let's see where the revenue shortfall comes from. If it's coming from the Investment Banking line, I think you would look at us to rely more on the variable compensation expense as a management of cost rather than the investment spend. We have both levers, and we're very comfortable in using them in order to deliver the profitability that we're looking for.
Okay. Thank you.
Thanks, Guy. Could we have the next question please, operator?
The next question on the line, gentlemen, comes from Ed Firth of KBW. Ed Firth, your line is now open.
Morning, everybody. I just wondered if you could help me with the capital or the tangible equity allocation to the CIB, because that seems to be going down in the quarter while risk-weighted assets are going up. I wonder if that is in some way related to the post pre-tax deductions. How does that actually work? Because I guess given the focus on this number, it is quite important that we understand the drivers.
Yeah. Is that your only question, Ed, or do you want to ask both?
Yeah, it is. Yeah, no, that's the only one.
Okay. Very good. Yeah, the tangible equity. You're actually right. We do it not just on a straight percentage of Risk-Weighted Assets. We take all of the deductions into account. For example, prudent valuations and various other things that you're aware of. That's why in some ways the Risk-Weighted Asset headline moves can sometimes be inflated or deflated by foreign exchange as well. Yeah, the equity allocations are a much better gauge of where we're allocating capital, and it's very much on a consistent basis. I would say if you look on a year-over-year, you get a sort of a trend view rather than just on an individual quarter view, you'll see an increase in Barclays UK Division allocated capital. You'll see an increase in our CC&P divisional allocated capital and flat to slightly down by some CIB.
That's kind of how you'd expect us to be operating probably for a period of time. We do want to grow the consumer businesses and the capital in them modestly over time. They're not very capital consumptive businesses. We won't be looking to increase the CIB. If anything, probably sort of flat to downward pressure.
In this quarter then, was it a PVA adjustment that changed it? I mean.
Yeah. There are a number of items that go through there, but it would have been a capital deductions line rather than the risk-weighted assets line. PVA would have been one of them, but there are other deductions as well. I haven't got the full list of them in front of me.
Okay. Thanks so much.
Thanks, Ed. 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. Just one question from my side as well. I was just wondering if you could provide a bit of color in terms of how you're thinking about capital distribution within the wider group and here specifically, Barclays Bank and Barclays Bank UK. So your ring-fence and non-ring-fence bank. I was just looking at the latest disclosed capital numbers here for, and it shows that the ring-fence bank is running at a somewhat higher capital level in terms of quarter one and leverage compared to non-ring-fence. Is that something you think is likely to continue? Would you be able to provide us with the kind of target capital levels you would have for those entities? Thank you.
Yeah. Okay. Both the Barclays Bank PLC and Barclays Bank UK PLC, the Barclays Bank PLC is a sort of diversified, integrated bank with consumer as well as wholesale businesses, and Barclays Bank UK is our sort of ring-fence bank. I think given the monoline nature of the U.K. bank, it will probably run at a capital ratio higher than the more diversified bank. Obviously, we set those capital levels, as we would for the whole group, whether it's through our internal stress draws, whether it's the individual buffers. You have the domestic systemic buffer as well that will obviously be higher than where you don't have a domestic buffer in Barclays Bank as a legal entity matter. It's only applied at the group level. All those sort of technical differences do feed in.
You'll get those disclosures, I think, on a semi-annual basis, and you're welcome to go through them at that time. I think probably the most important thing, though, to understand as a management matter where we'd want to put capital to work is the response, I guess, to Ed's question as well on allocated equity. You would expect to see on a trend basis the capital that's ascribed to the U.K. retail and business banking segment increase, and you would expect to see the capital allocated to Consumer, Cards and Payments increase on a trend basis, and Corporate and Investment Bank probably flat with a little bit of downward pressure. That will just make its way into the legal vehicles in which those businesses operate in.
Thank you.
Thanks, Martin. Can we have the next question please, operator?
The next question on the line comes from Chris Cant of Autonomous. Chris, your line is now open.
Good morning. Thank you for taking my questions. I had two, please. One's following up on an earlier question. I just wanted to come back to you on this commitment or conviction in the 9% RoTE and what that implies for consensus. Your TNAV at the end of the quarter is set at GBP 45.6 billion. That would imply net income for the year, ex litigation and conduct of GBP 4.1 billion. Consensus is at GBP 3.7 billion. Are you really telling us that consensus is 10% too low? That's the first question. The second question, I don't think I'm alone in having a couple of gripes around the international division of the construct.
In particular, the lack of a specific CIB consensus and the absence of certain disclosure items, including the bridge from PBT to the net income you use for RoTE, which we've had referenced a couple of times on the call already. Now that CC&P is being managed separately from the CIB, for reporting purposes, are you going to start treating CIB as a separate operating segment, please? I think that is what IFRS 8 suggests you should be doing going forwards. Thank you.
Thanks, Chris. Why don't I take both of them? We obviously have a conviction and a confidence that we can make a 9% return. I understand, obviously, consensus doesn't have the same conviction that we as a management team do, and that's okay. You'll have your own views on the various line items, the sort of question I took earlier, and we'll have our own view. I think the only thing I would say is that none of us will be able to perfectly predict the operating environment over the three quarters. It may be better, it may be worse than any of our predictions are. We feel we've got enough diversification and enough path that we should be able to navigate through, that we have a degree of confidence that we should be able to get to 9% returns, but we don't take anything for granted.
To call out, we are prepared to flex costs where appropriate. If things don't pan out in the way we would expect, we can deal with some of those outcomes through the cost flex that we have. I guess, yeah, we have that degree of confidence. We understand that consensus isn't there, and that's okay. We won't always have the same outlook. In terms of IFRS 8, this is a little bit more complicated, I guess. In the way IFRS 8 works, you're looking at segment managers, and we have two segment managers. We have my boss, Jes Staley, who's Segment Manager for Barclays International, which is sort of very equivalent to Barclays Bank PLC. And we have Matt Hammerstein, who's Chief Executive of Barclays UK, and that's the other segment. So that's our IFRS 8 disclosures. We do go beyond that, of course.
We do give out financial analysis beneath the Barclays UK segment and the Barclays International segment. Look, I take your point for more disclosure in Barclays International. We have had some consistent feedback on that, and I know I've been sort of nodding at people, but I continue to hear it loud and clear. Do leave it with us. I don't just listen to it and then ignore it. It is something that we're working on behind the scenes to try and be as helpful as we can. So please don't take it in the spirit of we're not ignoring all of your feedback. It's taken on board, and we will be doing something on that.
No, I want to add one more thing, Chris, which is, again, where Tushar and I sit, we've been living this progression of profitability over the last three years. The very valid question when we set the 9% target a little over two years ago was, how do you get from a 5.6% RoTE to a 9%? Last year we delivered 8.5%. I think the gap between the expectation and what we believe that we can deliver should be shrinking given the trend line of the last couple of years. The other point that I would make is, as managers we're responsible for the culture and conduct of the bank. Next, we're responsible for the risk level of the bank. Only finally, the profitability. With the targets in mind, we have been extremely prudent around taking risks.
We have basically flat-lined our receivables in the U.K. unsecured consumer credit portfolio, not allowing that to grow a single GBP since the referendum. We have been very disciplined in our loan to values around the mortgage book and what we do in the buy-to-let space. Very prudent on that. Our overall corporate loan book, we've actually decreased. I think if you look at how we have performed on the impairment line versus corporate credit, particularly in the U.K., I think we've done exceedingly well. Of the 100 largest bankruptcies in the U.K. last year, we only experienced seven, of which two were fully hedged. Given that we're roughly 25% of that market, we think that's an outstanding performance. People talk about the levered loan line. We haven't had a single levered loan in the last two years criticized by our regulators.
We feel very comfortable and have been quite conservative, and you see it in the corporate net interest line this year, the amount of hedges that we placed for the first quarter to keep that book very safe. The other part of this is I know an impairment is a very big number, and the beat last year was quite significant, and it's an important number this year. If you keep the credit markets really benign, you can ask yourself, given how we have managed risk, is there room there as well? You've got risk, you've got costs, and then obviously you've got what we're trying to do around revenues. I think given the progression of profitability that we've seen in the face of being very conservative as a bank on risk measures, again, that underscores our confidence for hitting 9%.
If I could just push you a little bit more on that, and again, to come back to this earlier question, what is it that you think is wrong in consensus? I think saying that you didn't want to talk about individual line items for 2019 was a bit more defensible in 2018. We are now one quarter into 2019. You're talking about a challenging revenue environment and flexing costs to offset that, yet your guidance would imply that consensus is 10% wrong, at least. That's based on the 9% number, not the more than 9% number you're targeting. Could I just encourage you to please give us a steer on what it is? Jes, you just referenced the provision line. Is that what you think you can beat on versus consensus in addition to managing costs to offset any revenue pressure? Is that where consensus is wrong?
Thanks.
Yeah, Chris, look, I'm not going to say more than perhaps I've already said. Hopefully, I've given you enough context on how we view the outlook for the businesses. We talked about the U.K. bank. I think net income will rise. We think we'll have positive Jaws. We think CC&P continues to grow. We think on the fee business in the investment bank, we think we'll do better than we did in Q1. I've given you plenty of context there. I think the credit environment does feel benign. I've given you some sort of seasonal view that CC&P impairment will be low point of probably in Q1, high point of it in Q4, and there'll be a trajectory in between. Delinquencies and various other forms of credit stress indicators look very well controlled. We have a range of outcomes that we could execute on our cost line.
I don't want to get into this one item in consensus is different or anything like that. I think you guys can take your own views based on all that commentary and have your own outlook, and that's okay. None of us have the perfect crystal ball on this.
The other thing I might just add is, again, we have gained market share four quarters in a row in one of the biggest revenue pools of the bank, which is our capital markets activities. I think there is, going on in the Street, a reallocation of capacity in the flow businesses around equities, credit rates, and currency that's going on in the industry, and I think we've benefited from it over the last year and a half.
Okay. Thank you.
Thanks, Chris. Could we have the next question please, operator?
The next question on the line is from Robert Noble of RBC Capital Markets. Robert, please open your line.
Morning. I was just wondering how low are you willing to push the cost income ratio in the investment bank if the revenues are weak? As you stand here looking at April as it's going now, is the environment sufficiently recovered to stay within 13.6%-13.9% at the group level? Or is it more likely you're going to come in below that? Thanks.
Well, I'll start with this one. Jes may want to add. Look, I'm not going to give guidance out for Q2. I won't talk specifically around April. I think, look, in the CIB, I think Jes has sort of covered it. It's essentially a pay for performance type environment, and we have the ability to reflect the decisions we make around variable compensation in the year in which those revenues are booked as well. Look, we'll only make those decisions as we get to the full year. I guess you're seeing this quarter a real conviction here that we will pay for performance. If performance is good, we'll pay for it as we did last year. If performance isn't good, we won't pay for it, which may have been in the first quarter.
I'm not sure there's much more to add to it than that.
Great. Thank you.
Thanks, Robert. Can we have the next question, please, operator?
Our final question today comes from Andrew Coombs of Citi. Andrew, your line is now open.
Good morning. If I could, 2 on international revenues, please.
Sure.
First on U.S. cards, second on the equities business. With respect to U.S. cards, you helpfully have given the disclosure again that 70% of the partnership is covered until 2022, which obviously on the flip side means that 30% is not. One would assume that the majority of that presumably relates to the former Apple contract. Obviously, Apple Card has recently launched, so interested if you think this is a potential headwind to your U.S. card growth. Is there a risk of your existing customer base switching onto the new Apple product? My second question would be with respect to the equities franchise, one of the areas of the bank which did see a lot of success last year. You took quite a bit of market share.
I don't like to judge too much from a single quarter, but if I look at Q1 2019, I think you're down 26% year-over-year. It's slightly worse, not a lot worse, but slightly worse than the U.S. peers and the Swiss peers have reported. Is that just a function of business mix? I know you draw out derivatives in particular as being softer. Just any comments you have there. Thanks.
Yeah, thanks, Andrew. I'll start with them, and Jes may want to add again. Yeah, the Apple portfolio, it's a different portfolio. The launch of the new Apple product is really the Apple Pay Card. It's got it embedded within the phone. That's a separate and distinct product offering than our business. Ours is much more of a point-of-sale finance business. They don't necessarily overlap at all. The Apple Pay product is all about encouraging you to use Apple Pay and getting cashback and a low APR and what have you. Ours is financing the purchase of Apple products in the stores and various other channels that you buy those Apple products in, both U.K. and the United States.
We do have a rewards card that we've had in the past, but that was again, linked to the point-of-finance selling business rather than the Apple Pay Card that's recently been launched. Again, don't conflate those two different things. We have a very good relationship with Apple, being a partner with them for a number of years. I think if you look at some of the interesting stats, if you look at I don't have these to hand, but something on the lines of one in five or something like that, iPhones that are purchased in the U.K. are financed through our point-of-sale finance business there. We'll get the exact stat, but it's something around that level. Just gives you a sense of how embedded that sort of financing channel is, as distinct and separate from the Apple Pay Card.
On equities, the only thing I would remind you, Andrew, is-
Just one thing on the credit card side. In the point-of-sale financing, Apple is very clear to keep that separate from Pay Card that they negotiated with Goldman because of the service that we provide there. The one headwind that we did face, which again, was a conscious decision because we didn't like the profitability profile and the risk profile, was L.L.Bean. That was one of our co-brand cards that we did not renew. What you've seen in our FICO scores, how high they're going, focus really has been on the airline co-brand cards, which led to the growth you saw and ultimately to the improvement of profitability year-over-year in the first quarter of 20% in the U.S. card, which I think is something that we should call out. We like the co-brand space.
We also, going back to one of the first questions on the call, we like what the co-brand space potentially means to us around payments in the global platform, but more on that later. Then I'm sure you want to go back to Tushar.
Yeah. More to come, I guess, on that. On the equities business, the only thing I'd remind you, Andrew, is that we probably had a slightly more difficult comparative period in Q1 2018. I think our revenues were up something like 40%, if you go back to the Q1 disclosures. I think I would characterize it as broadly in line with our U.S. peers on a dollar basis. Which actually feels okay to us given that it was equity derivatives that felt less buoyant this quarter than it did last quarter. All other, whether it's financing, cash, et cetera, I think we held our own quite well. We're actually quite pleased with that performance. Obviously, we did very well in FICC relatively, which is also pleasing. Nothing more than that, I'd say. Okay. I think that's it.
Thank you everybody for joining us, and hopefully we'll get to see some of you in person in between now and the interims. Thank you again.
Thank you. That concludes today's conference.