Barclays PLC (BCS) 2003 Q2 法說會逐字稿

Good morning. My presentation this morning will provide an overview of the group results, and comment on the financial performance of our businesses during the first half of 2003, followed by the usual update on margins, costs, risk and capital, and performance versus financial goals.

Let me run through the performance highlights before getting to the detail. We've had a good start for 2003, with the financial performance of the first quarter accelerating during the second quarter. The results confirm our conviction that the business models we have built are fit for purpose, and well-positioned to capture market opportunities. We have seen good income momentum during the first half, on both a topline and risk-adjusted basis. The broad distribution of income growth is an important attribute of these results. Costs continue to be actively managed, with a strong emphasis on improving efficiency and also on investing for the future. Risk has been well-controlled. Although we have grown income, it's not, as I will explain, at the expense of dropping our guard on risk quality. We have maintained our risk disciplines, and applied to all of our activities during the first half in the way that you would expect of us. We have been quite active in the last 12 months in acquisitions. The integrations have been quick and efficient. We remain well-capitalized, with a strengthening tier-one ratio, despite acquisitions and our share buyback activity.

So, first, to the results at group level. Operating profit rose by 11 percent, and PBT rose by 12 percent. This is after absorbing the year-on-year impact of two significant factors, one internal and one external. And these are, of course, the pension charge --we expect the full year-over-year impact to be about 220 million pounds -- and the consequences of the competition commission inquiry. To remind you, the 220 million pension impact is derived from a full-year expected charge in 2003 of roughly 150 million versus a credit in 2002 of roughly 70 million.

Group income grew 5 percent. The growth was well distributed, as I've said. We saw income increases half on half of 50 million pounds or more -- in some cases a lot more -- from each of PFS, Barclaycard, Business Banking and Barclays Capital. There is a similar distribution by income category. Growth in net interest income, fees and commissions and other income is broadly spread, with a small growth contribution from dealing profits.

Costs rose 4 percent. The underlying increase, as I will explain when I get to the cost section of my presentation later, was a lot lower than this. Provisions fell 9 percent. Statutory return on equity was 18 percent, or 20 percent on a cash basis. Earnings per share rose by 14 percent. The increase versus the increase in profits after-tax was influenced by the impact of the share buybacks. We have grown the dividend by 11 percent. Because you have in your presentation packs the data point schedules for each business that we introduced at the full-year results, I will restrict my comments to the headline financial performance and key messages, business by business.

So, first of all, to PFS. In spring 2002, we shared with your our strategy for transforming this business, and we explained in February of this year that we had had our eyes open during 2002, and had made informed decisions about growth in customer numbers and in customer balances, and also about the management of margin. These results give us early confidence in those decisions. PFS's operating profit rose 12 percent half on half. Income was up 6 percent. As I will explain in a minute, income in PFS advanced on a broad front, and the 6 percent number itself is strong, given the impact of the environment on the IFA business. Costs rose 5 percent, but only by 1 percent if you exclude the impact of the pension charge. We are likely to see some skewing of costs toward the second half, as the rate of strategic investment expenditure rises here. Provisions in PFS fell 6 percent. This is no accident. We have been monotonous these last two years in telling you about the opportunity we saw to improve risk-adjusted returns by being very clear about where on the risk curve we wanted to play, particularly in mortgages and consumer lending. Notwithstanding the reduction in provisions, coverage ratios have been maintained at the same levels as in December.

For the record, the Woolwich integration program continues to make good progress, and we remain on track to meet the targeted synergies. The potential for income growth from our existing Barclays and Woolwich customers is high. Openplan is proving to be a potent weapon in broadening customer relationships. Openplan from Barclays celebrated its first anniversary in April of this year, and has attracted total balances of 16 billion pounds. The annualized income per customer is 380 pounds, relative to 212 outside Openplan. Its older sibling, Openplan from Woolwich, continued to make good progress, with income per customer in the first half at 307 pounds annualized, compared with 146 pounds outside Openplan. Openplan is proving to be a good way of capturing new savings flow -- balances of over 2 billion pounds in the first half of this year.

In mortgages, our emphasis this year, as last, has been on value, not volume -- a position we think we can afford to adopt, given that by virtue of the Woolwich acquisition, we have critical mass and credibility with customers in this important part of the business. Our net share of flow is well down on 2002. You don't need reminding by me that anyone can put on market share at the wrong price or at the wrong point in the risk curve. We've avoided the gallop into the buy-to-let market, we've avoided income multiples and loan-to-value ratios that will bring blushes to maiden cheeks in time. If commission rates in the IFA channel assume seven years' average duration for a mortgage, and the reality is less than five, we will say thank you, but no. We grew income in mortgages, first half versus first half, by 12 percent. Our mortgage book is up 7 percent year on year. The opportunity to sell Woolwich-branded mortgages to Barclays customers remains massive. The fastest-growing income line in PFS is general insurance, where income rose 21 percent. Income and consumer lending grew 14 percent; adding current accounts and savings, it grew by 5 percent. Overall, therefore, good progress in PFS. You wanted to see it. I said to you in February that I believed you would, and I think we are showing it.

Next are Barclays Private Clients where, after three years in a bear market, 2003 has so far offered little respite for the wealth management industry, even though our emphasis on banking, in addition to investment services, has shielded us somewhat from the full impact of the shattering of investor confidence that the industry saw in the period to end March.

The slide shows the main P&L lines for the ongoing businesses within BPC. The figures here exclude the impact of the closed life assurance business, which I will come to in a minute. Please note that in reviewing the numbers, there are changes that make a like-for-like comparison difficult. For example, we created First Caribbean during 2002, and we acquired Charles Schwab Europe in January of this year. The combination of these items does not have a significant impact on the trend of the profit-before-tax level, but the Caribbean transaction tends to exaggerate the reported decline in both income and cost. Operating profit in BPC was 28 percent lower. This reflected the pressure on income, which was down 18 percent. We have mitigated the impact of lower income on profits by managing costs aggressively. They were 11 percent lower half on half. Strategic investment amounted to 8 percent of total costs, a percentage comparable with the first half of 2002. Provisions fell, reflecting the impact of the Caribbean transaction.

A few words about the closed life assurance activities. In our results pack, the closed life assurance performance is still reported within BPC, but now, as I indicated at the pre-close, as a separate line. The contribution from the closed life business this half was -46 million pounds, compared with -26 million in the first half of last year. I mentioned at the pre-close that there were several moving parts within the aggregate figure for the life fund, and that the costs of redress relating to the sale of endowment mortgages would rise significantly this year. In the first half, we took 50 million pounds of this against income, compared with zero during the first half of 2002 and 19 million for the full year 2002. This 50 million pound figure is included in the -46 million that I have just mentioned.

Next to Barclaycard, which continues to grow strongly, building on the success of the last several years. In the first half of 2003, operating profit increased by 22 percent, pushed along briskly by income growth of 17 percent. Costs rose 14 percent, reflecting the acquisition of Providian UK and a strong appetite for continued investment. Provisions increased 13 percent, with the increase driven by growth in balances, by the Providian UK acquisition and by the record customer recruitment of the last two years. The quality of the existing loan portfolio in Barclaycard remains stable. Momentum in new customer recruitment accelerated during the first half of 2003, up 21 percent to 651,000. Barclaycard International continued to perform well, with income up 45 percent and average extended balances up 41 percent. We're proud to report a profit in Barclaycard International for the first half of 2003, but don't just yet uncork the Bollinger. We are reinvesting hard in the second half, as part of our heightened ambitions in international cards. Matt will talk about this.

At our seminar on Business Banking last autumn, we shared with you the growth characteristics of this business, and the distinctive features of its business model. It's the business that is central to the future fortunes of the whole group, so it's important that it does well. Having delivered a best-in-class performance in 2002, Business Banking entered 2003 knowing that it needed to absorb a hit to income as a consequence of the competition commission inquiry. So how is Business Banking fairing so far this year? Operating profit rose 5 percent, income was up 5 percent, costs were up 1 percent -- but down 6 percent, if you adjust for the pension swing. So an excellent jaws (ph) profile and risks well-controlled. The average loan book has grown 11 percent over the last year, and the base of loan growth in 2003 is noticeably broader than in 2002. Provisions rose by 38 percent, a big number on the face of it, but not something that worries me. It was substantially attributable to provisions in respect of a small number of larger specific situations, with no particular industry concentration. I am losing no sleep about these. The underlying picture is calm, and even including a small number of lumps, provisions are well within risk tendency. As I will explain in a moment when we get to risks, provisions as a percentage of average lending in Business Banking fell during the half. Coverage ratios are strong, and the quality of the portfolio by risk grade remains stable. 85 percent of the book is in risk grades 1 to 4, which are the best grades, exactly in line with the position 12 months ago. You should expect us to continue to be focused on topline growth -- that is, selective and profitable -- while simultaneously keeping pressure on capturing the efficiency opportunities in the middle and back office that we identified at the seminar last year. As in the case of PFS, I expect to see some pickup in the rate of strategic investment spend in Business Banking during the second half.

Next to Africa. Barclays Africa has had a strong start to the year. Operating profit was up 31 percent half on half, generated from strong income growth of 18 percent. Costs rose 10 percent. BNP's business in Mauritius, which we acquired in November 2002, has now been fully integrated.

We held a seminar on Barclays Capital and BGI very recently, and I know that you are familiar with these businesses. Both have delivered strong results that demonstrate that their distinctive business models are working well, for both clients and shareholders. In February, we told you that this might be a promising year for Barclays Capital, because some of the demand that had backed up in 2002 was likely to be released. Barclays Capital captured a good slice of this market flow during the first half of 2003, particularly during the second quarter. And as you can see from the figures, Barclays Capital is having another very good year, the best six months in its history. Operating profit was 14 percent higher, achieved from a record income performance, up 7 percent to over 1.3 billion pounds in the first half, not a lot different to full-year income in 1999. Net revenue, which is income less provisions, increased by 10 percent. Costs rose by 8 percent. The cost-income ratio, at 58 percent, is consistent with the ratio for 2002. Provisions fell 14 percent. These results, please note, were achieved with a broadly flat daily value-at-risk. It's striking to me to observe, and important for you to know, that at a time when our activity and origination continues to increase, our risk management disciplines are consistent; they dictate what, to whom, and when we lend, and they dictate syndication and pricing policy. Syndication skills, of course, remain as important as ever, their ability evidenced by the fact that the size of the loan book continued to reduce to 9 billion pounds at the end of June versus 10 billion pounds at the end of December, notwithstanding higher activity levels.

Now, to BGI. 2002 was a sparkling year for BGI. And as you can see, 2003 is continuing that trend. Bear in mind that these financials are in Sterling, and because much of BGI's activity is in the U.S., the exchange rate impact is meaningful. By consequence, the Sterling results understate the strength of the performance in dollars, and the Sterling results are, by any standards, very strong. Operating profit was up 52 percent in the first half, demonstrating the operating leverage in the business. Income grew 8 percent. This includes a half-on-half increase of 31 percent from our global iShares business. We couldn't ask for much more than this, given the average market index levels were some 11 percent below the equivalent for the first half of 2002. We saw good flows of new business across all product groups. Costs fell 4 percent. BGI has assets under management of 543 billion pounds at the end of June, and our active business now accounts for 55 percent of income.

I will turn, now, to margins. It's an encouraging story. The group interest margin, at 266 basis points, was flat relative to the second half of 2002. It was 18 basis points lower than the first half of 2002, and 9 lower than the full year 2002. The margin movements reflect choices that we have made in terms of business mix, pricing and the operation of the hedge. The group margin fall since H1 2002 is attributable to the international margin. Two specific points on mix that caused the international margin to decline -- first, the proportion of international to domestic assets increased, and within international, there was a reduction in the high-yielding assets as a result of the working out of the transition businesses file. Second, balance sheet growth attributable to international assets in Barclays Capital was largely driven by low-risk, lower-margin assets. Significantly, the domestic margin improved, relative to year end 2002 by 11 basis points. This reflected improving asset margins in PFS and broadly flat asset margins in Business Banking and Barclaycard. In mortgages, for example, we have maintained the stance adopted in the second half of 2002, the result of which is that margins on both stock and flow were higher in the first half of 2003, just as they were in the fourth quarter of 2002, versus the first half of 2002. Finally, in the declining interest-rate environment of 2003, we have been well-served by our hedges, which contributed 21 basis points to the group interest margin during the first half.

Managing the cost base remains a key priority for us, particularly this year, when we have had to absorb the impact of a 220 million pound swing in pension costs year on year that I referred to earlier. This item alone accounts for 109 million of the 120 million aggregate increase in total costs half on half. I'm pleased that we have been able to show a 1 percent margin between income growth and cost growth during the first half, improving to 4 percent if you adjust for the pension swing. You will see from our figures pack that headcount has continued to fall during the half by 1,100 since December, contributing to a fall of about 5,000 since last June. So costs have been well controlled, with over 1 billion of cumulative cost savings already captured since the start of 2000, we have hit our 1 billion pound cost challenge ahead of schedule. But you should not conclude from this that the corset will now come off, enabling us to relax fatly in the paddock. We still have good opportunities in the cost line.

You know that we track our performance on a business-by-business basis relative to top-quartile benchmarks. And here is our usual slide on comparative productivity performance. It shows for each business the cost-income ratio for the top-quartile benchmark -- pink bars -- relative to the ratios for our businesses in 2002 -- green bars -- and half-year 2003 -- yellow bars. The cost opportunity implied by this slide still amounts to between 200 and 300 million pounds per annum. This is partly to be delivered through getting businesses that lag top quartile to top quartile, partly by businesses meeting our minimum annual productivity improvement requirement of 1 percent, and partly by certain businesses which are already at top quartile, Business Banking being the best example of this, creating cost efficiencies that are likely to drive it into the top decile.

Tight cost management has not been at the expense of investment. Cost savings are being reinvested to support growth, and we have spent 145 million of strategic investment expenditure during the half; that is the expenditure that will drive income growth and productivity in the future. Our strategic investment expenditure of 550 million pounds in 2001, and of 381 million pounds in 2002, defines quite well our expected range for this type of spend. I expect this year to be within that range.

Now, let's turn to risk. Where the environment is thankfully less rebarbative (ph) than in 2002, provisions were 9 percent lower than in the first half of 2002, and the provisions charge as a percentage of the banking book improved from 84 basis points in 2002 to 71 basis points on an annualized basis in the first half of 2003. If you adjust provisions for the impact of South American corporate banking, provisions increased 6 percent half on half, somewhat better than would be implied by the 10 percent growth in WRAs since June 2002. In the wholesale file, predominantly Barclays Capital and Business Banking, provisions as a percentage of lending fell from 71 basis points in 2002 to 60 basis points on an annualized basis for the first half of this year.

The first-half experience in Barclays Capital has been consistent with what we foresaw at the full-year results in February. The credit experience with large corporates has been improving. And although provisions were higher, for the reasons that I mentioned, half on half and Business Banking, provisions to loans here were 45 basis points, compared with 50 basis points in 2002. A common theme in both Barclays Capital and Business Banking has been the ability to achieve topline growth without increasing risk appetite, demonstrating that growth and prudence need not be mutually exclusive. Within the retail file -- broadly PFS, Barclaycard and BPC combined -- provisions increased 3 percent relative to WRA growth of 13 percent.

Provisions as a percentage of loans fell here, too, from 84 basis points to 80 basis points. In Barclaycard, the loan book is dominated by the better risk rates, and the 60-day delinquency levels, as a percentage of outstandings, are at one of the lowest levels we have witnessed for the last five years. In the PFS file, delinquencies in mortgages and consumer lending are lower than at any time during the last 18 months, and are trending downwards. Based on current valuations, the loan-to-value ratio for the buy-to-let book is 52 percent. The group risk tendency, our way of showing you an insight into the quality of the good book, is 1,390 million pounds, relative to 1,375 million at the end of December, a 1 percent increase since year end versus 5 percent growth in WRA since year end, which confirms the improving quality of the good book. Overall, therefore, our risk metrics are looking pretty healthy.

A few words on PCRLs and coverage ratios. The downward slope on this graph speaks for itself. PCRLs have fallen, driven by a low level of NPLs. NPLs have fallen 2.5 percent since year end, and by 7 percent since the end of June last year. As you can see, PPLs are pretty flat versus year end. Coverage ratios have strengthened relative to both half-year 2002 and year end. In the appendices on page 33, we have included the chart for the connoisseurs, which shows severity in coverage ratios by segment.

We retain one of the strongest and most favorable credit ratings among the top 10 banks in Europe. Our policy is to maintain this rating with good ratios and a sensible capital mix. Our capital strength enables us to fund growth comfortably; we are not capital constrained. The ratios strengthened during the first half of 2003, enabling us to increase the dividend and to buy back stock. The impact of the Zaragozano acquisition, which was an all-cash deal, will be to reduce by about 40 basis points the equity in tier-one ratios. Despite this, our ratios remain strong, and buybacks remain on the agenda. We are hard at work preparing for the new capital regime of Basel II, which will be introduced, we assume, in 2006. The implications of Pillar Two remain wreathed in fog, but on Pillar One, we expect to be a gainer. For G10 banks, the capital reduction under the advanced IRB standard was assessed as 2 percent in the recent QIS survey. For Barclays, the reduction was estimated at 19 percent.

Finally, a few words on our economic profit and total shareholder return goals. Maximizing economic profit remains an important part of driving performance within Barclays. As you know, our goal, so at the end of 1999, was to achieve 6.1 billion pounds, cumulative, of economic profit for the period 2000 to 2003 inclusive. At the end of June 2003, we had achieve 4.6 billion cumulative, relative to a time-weighted goal of 5.1 billion, which means that we are below the target with six months to go. I said in February, and I'll say again today, that the business will be managed prudently. There will be no reckless taking of risks, no sales of East Anglian family silver. The economic profit goal has helped us in our quest for total shareholder return. We continue to be in the top quartile at the end of June 2003, just as we were at the end of 2002. We are well ahead of both the average for the peer group and the Footsie 100 (ph).

So that concludes my comments. Before I hand over to Matt, I will put back on screen my first slide, which summarizes the first half. It's what the consultants would call a good balanced scorecard. Thank you.

Good morning, ladies and gentlemen. I think the numbers show that we delivered a good first-half performance, and they demonstrate that the transformation programs which we've unveiled to you over recent years for each business and for the group as a whole are on track, and gathering momentum. Good returns are coming from an unwavering focus on the key strategic priorities of the group, which remain unchanged. To remind you, the portfolio priorities that flow from our strategy are -- defending and strengthening our UK retail and commercial financial services businesses; expanding businesses and product lines with regional or global reach; building on existing, defendable platforms in retail and commercial banking in selected European countries; building a robust wealth management business centered on the UK and continental Europe; repositioning our historic, lower-growth businesses in Africa and the Caribbean - employing very different strategies in each case -- to take account of the economic environment in these areas; and managing an orderly exit from certain legacy operations that are no longer consistent with our strategy.

This morning, I will give you a brief report on execution, a few words on the environment and some pointers of what to expect from Barclays in the months ahead.

Let me begin with UK Retail & Commercial Banking priority. At home, our UK businesses of Personal Financial Services, Barclaycard UK, Business Banking and Barclays Private Clients are, individually and collectively, developing focused business models aimed at broadening and deepening relationships with customers. Now, Business Banking and Barclaycard UK have virtually completed the transformation journey and the major change programs are now behind them. Personal Financial Services is about halfway through -- it's on track, and it has good momentum. And the strengthening financial performances coming through are a result of all these efforts. And I will address Barclays Private Clients under the wealth label.

Personal Financial Services is developing propositions that give our customers incentive to do more business with us, while making it easy for them to access the full range of our offerings at the time and the place of their choosing. As John pointed out, we are achieving strong growth in a whole range of areas as a result. Openplan is a good example of the integrated banking proposition that will characterize the future. Openplan from Barclays celebrated its first anniversary in April, and we now have 2.4 million Openplan customers in total. This is translating into better value for those customers and higher revenue for us. Business Banking is bringing increased specialization and expertise to its client base, helping small and large businesses grow and thrive through the full life cycle of their business. This is translating into impressive results for customers and for our shareholders. This achievement has come on the back of a massive change program, which has been underpinned by a complete rethink of how we serve the customer. In the most recent independent surveys, Business Banking ranks first for customer satisfaction in the large and medium business market, and second in small business.

Barclaycard responded to the onslaught of increasing competition several years ago, investing heavily in new technology, developing new propositions and entering new markets, through both selective acquisitions and internal growth. It is building on its leading brand and sophisticated customer information capabilities to extend its reach into new businesses and geographies, while developing a product range matched to the individual needs of customers. This has led to its best three years ever financially, and the first half of 2003 is continuing that trend.

Regional & Global Businesses. While the Barclays brand travels well, and this is translating into topline growth, Barclaycard International operates in over 60 countries. As an issuer, it has 1.32 million cardholders outside the UK, and is the leading branded credit card business in Europe, with operations in Spain, Italy, Greece, France, and Germany. The expansion of Barclaycard outside the UK is working, and we are investing heavily for future international growth as a result. We aspire to create, during the next decade, a card business outside the UK that is as important as the domestic business.

Barclays Capital began its transformation nearly six years ago, adopting a unique debt-focused model. Its approach is to deliver integrated solutions to the financing and risk management requirements of its clients, while building a reputation for superb execution and very distinctive client service. The pipeline of business we expected is coming through, and we continue to move up the all-debt league table, currently ranking number four in the world. Once a Sterling house, we are now a leader in Euros and a growing force in US dollars. It is noteworthy that revenue growth is broadly spread, and not dependent on dealing profits alone. This reflects the diversified earnings base that Barclays Capital has built. And also noteworthy is that strong performance is not coming from increasing risk-taking, or indeed from warehousing more corporate loans.

In Barclays Global Investors, we have one of the giants of the global fund management business. It continues to diversify its activities beyond its core index business into areas such as advanced active, securities lending, cash management, and exchange traded funds. The market power they have is translating into better returns for our shareholders. In the first half, BGI attracted 34 billion pounds in new funds flow, and that's more than the total stock of business managed by most asset managers. Their active business now accounts for the majority of revenues. The returns BGI is now generating justify the investments we made in prior years.

UK and European Wealth. Barclays Private Clients has struggled under the twin burdens of market downturn and the legacy of the closed life assurance activities. Nonetheless, our performance here is not yet up to our standards. The wealth management business is a key growth opportunity and an important priority. And it is also a business where the Barclays brand resonates, at home and internationally. So we intend to step up our efforts here. Our strategy for BPC is to develop a unique, joined-up proposition for our clients, spanning banking and investments. We have made good improvements in productivity, and we've extended its reach through deals like the purchase of the UK operations of Charles Schwab Europe. But, I expect a lot more from BPC going forward. I have asked the new, and significantly strengthened, management team, led by Naguib Kheraj, to subject this business to a strenuous workout -- to speed up delivery, to deploy our resources in the right places, and to strike the right balance between investment and banking propositions.

European Retail & Commercial Banking. The acquisition of Banco Zaragozano, just completed, extends our retail and commercial banking platform in Spain. Their half-year results were as we expected, and rather better than what the market expected. We are confident that we will realize the synergies of the in-market merger with Barclays Spain. By disposing of some non-core components of its portfolio, we've recovered 10 percent of the purchase price within three weeks of completion, and we should have further positive progress to report on that front in the very near future. This acquisition triples our distribution channels in Spain, where we already perform well in an attractive economy. In the first half, Barclays Spain business delivered a 27 percent increase in income half on half, and grew customer loans by 1 billion pounds, reflecting the continued growth of Openplan, which we exported to the Spanish market. The nationwide distribution and a larger customer base now allows us to expand our products and services further in areas ranging from Openplan, credit cards, the SME business and the capital markets areas.

Organization Fitness. While optimizing the portfolio shape, as I have discussed, we have also focused on a number of priorities, common to all the businesses, to improve our overall organizational fitness. These include -- making further advances in the deployment of value-based management right down to the coal face; maintaining risk management and policies and practices at the cutting edge; enhancing productivity; upgrading customer relationship management; and better managing our people. Results show the benefits flowing through into each business, and for the group as a whole. We are seeing good revenue growth, tight cost discipline and prudent risk management. At the same time, we are continuing to fund investment in the future.

At the start of 2003, we did not believe that the climate was about to become materially easier. However, there has been some progress in several areas - the war with Iraq is over, and fears of a double-dip recession in the US have abated. On the other hand, economic growth prospects across Europe remain subdued and, if anything, have deteriorated somewhat. In the UK, growth in consumer spending and the housing market are slowing down, but there is support from growth in government spending. So overall, GDP should be similar to last year, with growth just a touch under 2 percent.

Whatever the outturn, we will continue to pursue our transformation programs. Our first-half performance demonstrated the benefits of a diverse portfolio, with most businesses firing on all cylinders and of greater organization fitness. So we feel good about our ability to sustain momentum. This is tempered somewhat by the remaining uncertainties in the external environment, as well as the traditionally slower second half. Looking ahead, you can expect us to continue to allocate resources to those businesses where we have competitive business models; to create more joined-up propositions for our domestic retail and commercial banking customers; to make further progress in upgrading and extending our distribution capabilities, to deliver a better experience and easier access for customers; to build on the momentum within PFS and increase the pace of its transformation; to extend our reach outside the home market, with particular emphasis on Barclaycard, Barclays Capital, Barclays Global Investors and Barclays Private Clients; to move rapidly to integrate Banco Zaragozano; and to accelerate the turnaround of Barclays Private Clients.

In conclusion, the transformation agenda continues to bear fruit, and we have lots more to do. As always, I want to give a tip of the hat to the tens of thousands of employees who are doing a great job of not just coping with massive change, but in fact, of leading it. They see their efforts paying off in improved performance, and that encourages us all to not let up.

William DeWinter (ph), Morgan Stanley. I have two questions. The first one is for John. John, I'm going to take you back to eight weeks ago, when you presented the pre-close on the Q1 numbers. And you know these numbers better than me, but basically, the business was flat at that stage -- flat from a revenues, cost and provision perspective. I think most of us, doing our sort of back-of-envelope calculations, could probably assume that the earnings per share -- the operating earnings per share would have been flattish. You did, however, say that momentum was building.

My question to you is really whether the implied second-quarter performance, which to me looks like underlying revenue growth of 10, and earnings even sharper than that against Q1, is really realistic. And while I am not asking you to give us a forecast for the full year, it is very important, I think, that some numeric guidance is offered here, because it seems as if the business has picked up very dramatically in Q2, and I am here not just referring to dealing profits but across the whole business. What's the truth?

The question as to whether the numbers are realistic and what the truth is is one that I have struggled with a bit, William, even though I got one slide wrong. And that is that we're showing you the numbers as they are, and I think -- I will comment in particular on the first part of your question in a minute. But I think one of the things that really strikes me about the numbers is that you can see -- there is 260 million pounds of income growth during the half of the year, and that is broadly distributed by business cluster, and it's also broadly distributed by income type. So within that 260, for example, you have got about a 100 million increase in NII, you have got about a 70 million increase in fees and commissions, you have got about a 70 million increase in other income and you have got about a 20 million increase in dealing profits. So this is broad distribution.

Now, to the first part of your question. What I said at the pre-close trading statement in early June was two things. One was that we were pleased in the first quarter of this year to have achieved the same sort of performance as we had achieved in the first quarter of last year, because the first quarter of last year was our best quarter, and things were quite difficult, particularly in the second half. So it was reassuring to me, and I wanted to communicate that to our owners. It was reassuring to me as I observed the numbers that we had got back to the heights of the first quarter of last year. And the second point I made, and you were kind enough to acknowledge it, is I said that as I look at performance during the first quarter, if I extrapolate that into the rest of the year, I expect to see building momentum. Now, you can see from the numbers that I have just put up there on the screen that we did see an acceleration in the second quarter. Are the numbers real? Well, yes, of course they are real. Are they based on some particular spike, for example, in dealing profits? No, they are not. I think my attestation about the breadth of the advance was very clear. And if you look just at dealing profits, dealing profits are up in Barclays Capital, are up 4 percent half on half. They are sharply higher relative to the second half of last year; I acknowledge that. But this is not something that has been born of a spike in dealing profits. And as you can see, our DIVA (ph) has been very flat.

So I think how I would sum up is that we have got good distribution of income growth, we have got good distribution of profit growth. The numbers look very clean to me. We are confident about our own performance; but that confidence is, of course, tempered by the things that Matt has been referring to. The signals in the macroeconomic environment are ambiguous. And traditionally, just because we have August and December in the second half of the year, we tend to have a rather slower second half than first half.

Can I ask a less controversial question?

That wasn't controversial.

To Bob Diamond (ph). Bob's old boss, John Mack (ph), was commenting on the CS conference call the other day that the effect of the backup in bond yields had an effect on July fixed-income trading -- unsurprisingly, perhaps. But at any rate, my question here is, can Bob, as he usually does, give us some feel about what is happening in the debt trading business?

I have said to you before on a couple of occasions that we were not concerned about backup in yields, because rates were getting to quite a low level. We continue to believe that that yield pickup is positive for our business, so what we have seen in July and August, our sense is that that has had a pretty dramatic effect on firms who have been very big in the mortgage business, particularly the U.S. mortgage business. That is not an area that we have been playing in, so we haven't benefited in the first half by some of the dealing profit pickup of the U.S. firms, who have begun been very big in mortgages. It would be equally fair to say that, to the extent that the market imploded a bit in July, it would not effect us on the negative side, either.

I just want to come back to Bob again, and perhaps on dealing profits. (indiscernible) this time last year, but I guess relative to some of your peers, not nearly as much. I guess it's a damned if you do, damned if you don't type question. But I guess (indiscernible) should we actually look at the dealing profit as being more resilient and sustainable at this level, or is there a sort of volatility which you benefited from, from the market conditions in that?

I think you should look at it as a good thing, not necessarily a bad thing. I think there has been some consistency in that. I think what really pleases me about these results is it wasn't "got a hunch, buy a bunch." And I've consistently said that we are building a client-driven business. I think you're seeing that come through in the numbers, and going to the second half, the same caution I give you every year, which is that we definitely see an August/December impact in our business, but we have the strongest pipeline going into the second half that we have ever had, and we're seeing some real momentum, particularly in the U.S. We got Europe right first, which is what we said we would do. And the pickup over the last two years and the progress in our U.S. business, we are now finished the first half, number five in syndicated lending in the U.S. We had never been in the top 10 before, although we had been number one in Europe. We finished the first half in the top 10 in investment-grade debt in the U.S. I think the number one foreign bank in investment grade debt in the U.S. -- this is a pretty substantial pickup, in terms of client traction. And I think we feel very good that the business results were broadly based up, and not due to dealing profits.

Simon Samuels (ph), Smith Barney. I think what I'm actually interested in is the implied Q2 trends in the cost line, actually. You indicated in the trading update that costs were flat in the first quarter. And very roughly, although you don't give quarterly numbers, it looks like your cost growth in the second quarter must have been somewhere around about 8 percent, Q on Q, so second quarter of this year versus prior year. Is that right? Is there something funny that helped the cost line in the second quarter of last year, or should we be looking at that as some kind of cost-base number going forward?

I think are there just two effects, really, Simon, to refer to in the cost line. One is the fact that the revenue-related cost growth was obviously accelerating during the second quarter and driven along by performance. And the second thing I would say is that there was a noticeable increase in strategic investment expenditure in the second quarter versus the first quarter, and I have signaled to you what range you should expect for the full year.

I'd like to ask a question about PFS, if I may, because the growth in the revenue there was really a surprising feature to me. And I would like to explore the trade-off between volume and margin in PFS. You have given average volumes, which are compared with the first half of last year. I wondered if you could give us the net flows on products in the first half of this year. You have given us mortgages, but not for the other products. And I'm trying to explore whether the pickup in revenue is due to repricing up and widening the margin on the backbook, and whether that has had an impact on volume. If you can then comment on how you see the trade-off between volume and margin in generating revenue at PFS?

I have to say I was rather expecting that question -- is this a miracle? I think what we have seen is that we have set out very clearly a strategy, and made some choices last year about volume growth participation in markets, particularly in terms of risk grade, but also in terms of risk-adjusted pricing, in terms of our position in the savings market, in terms of investment in Openplan, et cetera, et cetera. And quite rightly. At February, you were questioning. What I think we are seeing is the implication of that strategy coming through in the numbers. So it wasn't, perhaps, as much of a surprise to us as it was to a number of others. It's broadly based. The specifics of your question are around the first half. Consumer lending volumes are double-digit growth in the first half, so picking up compared to last year, with margins that are higher, not lower. Savings volumes continue their impressive trend, with margins that are flat half year 2002 to first half 2003.

Again, no accident. Thirdly, we are seeing in mortgages a very clear result from our view about the risk curve, and our view about some interesting pricing decisions by some of our competitors. And we are reasonably confident that those margins are sustainable, and those volume trends are sustainable. Why? Because sustainability comes from the talent that we have brought in, from the move from volume to value in the networks, from the sophistication of our pricing capabilities, which we invested heavily in last year, and in increasing confidence in the business. So we're quite comfortable that we have got choices that we can make that make the volume trade-off work versus price and risk. What you also will expect to see us do is what we have done in mortgages. There will be times in mortgages where parts of the market are very attractive and we will go into it, and there are times when they are not and we will come out of it. So I think the key that I would point you to is our ability to make well-informed choices based on clear value-creating decisions, not I just at the center, but also now increasingly in the day-to-day activities of our people, who are incentivized on value, not volume.

Ales Sennett (ph), Goldman Sachs. My questions are actually related to the one we have just had. Looking at the domestic spread on page 17, your spread went up by 13 basis points, which we honestly did not forecast. Thank you for breaking out the contribution of the hedge of 21 basis points within your headline margin of 266. I wonder if you could discuss for us what would be the margin evolution in your domestic business without the contribution of the hedge? And separately, you have talked to us in the past about your information-based client management systems. I was wondering if you could talk to us a little bit about what your pricing points are doing to your overall margins? Of course, it is laudable that your pricing points are generating double-digit volumes that you have clearly seen, but I wonder if you could talk to us about what you are seeing on an underlying basis as a result of IBCM?

Let me take the first question, and then Matt and Peter will decide who they want to take the second one. Because I was concentrating on the first one.

I think the question that you ask is a bit like saying to a batsman (indiscernible) how will you manage without a bat? We make a decision to take a bat onto the pitch, in the form of a hedge. It's a discretion that we can exercise one way or the other, and we exercise it to ensure that we subdue the impact on the group over time of interest rate volatility. So we give you the approximately 20 basis point number that I have referred to, and that's broadly similar with the contribution last year. The overall contribution of free capital to the interest margin is about 50 basis points. That includes the 20 basis points on the hedge. Beyond that, I think what we're seeing -- and you can see it in the numbers that you referred to on page 17 -- is stability at worst, in the overall margin picture. You have heard David talk about there being some noticeable margin improvement in consumer loans and in mortgages. You have heard about a stable picture on the liability side in PFS. You have got a very similar picture in Roger Davis's business in Business Banking, where the asset margins have been very resilient, and where the liability margins have also been very resilient. And I have explained in my presentation what is really driving the overall move of the group margin, which is the international, and what lies behind that. I think, therefore, in terms of granularity, we have gone about as far as we usually do, and I don't thin we are going to go much further than that.

I think for the second part of the question, it's a bit of a tussle between between Gary Hoffman and David Roberts. Who would like to go?

Let's make some comments by reference to Barclaycard on information-based customer management. And what is driving the Barclaycard momentum in the UK is, of course, a continuing great brand, and that helps us a lot. But it's increasingly our use of information-based customer management. We are very much value junkies, not volume junkies. And three years ago, you will know that we were one-size-fits-all -- indeed, one-price-fits-all, at 19.4 percent. We have go-to rates, long-term rates now at 9.9, 11.9, 14.9, 17.9, 21.9 and 24.9, and we have a mix of business and we manage those margins against individual risks very carefully. So, even though we have 10 percent of our balances at balance consolidation rates, our margin remains stable this half. So we are maximizing value from customers, and giving value back to customers in the way in which we use information-based customer management. We have some very competitive offers out there, but we are clear about the value that creates for the group, as well.

(inaudible) of the core sources of competitive advantages in banks. And it's an area that is much misunderstood and underutilized. And if you go right across the organization, from Gary's business, where we have learned a lot (ph), it's no surprise that Barclaycard did a great job. We looked at it and thought, well, that's interesting, and brought it over into PFS. We have also got great pricing capability in Business Banking, and the implication here I think you should look at is actually in terms of the sustainable advantage of the business, that our understanding not just of what the value we can achieve from customers is, but the value that we can give to customers and the marry of those is one of the reasons why you are seeing some of the returns that have been generated not just this year, but over the past few years across the business.

Michael Elspy (ph), ING. I'm just interested in your comments, John, on red faces in mortgage banks, given the lending there. I just wondered if you could square that, given the strong growth that you have seen in your card business and in your consumer lending businesses. Because it sort of doesn't square that if you are going to get a red face if you are mortgage banker, then you're going to get a lot more red things if you are in that business.

I think that way that we look at it -- I made some comments about risk rate, so let's look at the consumer loan book, in David's business. Risk grade by stock in consumer lending -- 87 percent is in risk grades 1 to 3, the best grades. If you look at flow, 85 percent, compared with 81 percent first half last year, is in risk grades 1 to 4, the best grades. So I think we can demonstrate by the numbers -- and you can certainly demonstrate by what is happening at the provisions line in PFS -- you can demonstrate a very prudent approach to risk, which is not holding income growth or profit growth back. I think, on Barclaycard, Gary has really made the point, which is that we have moved to a standard of microsegmentation. We have massively increased the number of pricing points. We are very clear about the risk characteristics of the new customer flow, and although we have had a record new recruitment half in 2003, remember that we have had very strong recruitment years over the course of the last three years, and you see the risk in Barclaycard very well-controlled. It's performing at expectation. So I do think that it's right for us, and not immodest of us, to draw attention to the risk starts that we have taken over the course of the last years, and say that our risk books are in good shape, whatever the macroeconomic outlet.

Mark Thomas (ph), Fox-Pitt. I have two very quick questions, and then a slightly more substantive one. Firstly, there has been a big increase in economic profit in PFS -- I'm sorry, economic capital at PFS -- and it refers to a switch from group. Was there any profit and loss impact of that? Secondly, I was delighted to read, just before I left, that Bob Diamond was saying equities is the way forward. Is that just a tactical statement, or this a strategic comment? And I'll come back to the substantial question, if I may.

Increase in economic capital in PFS is, as we looked at our mortgage business and understood the dynamics of that better, and compared it to external securitizations, we changed our model and improved our model. So that was a straight model improvement, more capital. And whilst it does not have a flowthrough into the operating profit, it does into the economic profit, which, as you will see, was at 23 percent, which was for the second year running, we had in excess of 20 percent economic profit growth.

Mark, the P&L impact of that economic capital growth on PFS is about 6 million pounds for the first half, so it's pretty inconsequential.

I have not read what was written this morning, but I did talk to Alaistair (ph) at Reuters -- I think it was this morning -- and one of the topics we covered was the equity business, and it was a small part of the conversation. We are very committed to the equities business. We exited the new-issue equity business, and have no intention to reenter that business. We still don't think that the business model works in the current environment, certainly not for Barclays. Equity derivatives, exchange linkups in futures and electronic trading, prime brokerage -- all very interesting to us. We are doing a lot of business in Europe and Italy, Spain, Germany, of packaging equity products for private banks that then distribute it within the network, so very interested in the equity products, but no change in strategy. It's really below the level of a large-scale cash, sales and trading business, focused on derivatives, prime brokerage and electronic trading.

Thank you. The more substantial question is related to the competition commission. We have seen with Lloyd's World Bank that the domestic benefit of fee funds has been falling 10 to 12 basis points, and in (indiscernible) stage has actually fallen 2. Now, I accept there can be changes of hedges. If you were paying your customers, or customers were getting the fee option, I'm rather surprised by the Business Banking fees actually still rising by 3 percent. The important question is, have you had the full impact of the competition commission in these numbers?

I was rather hoping you might ask that. We took a decision, the only one of the Big Four to do so, that we would offer our customers a choice. And our offering at the end of last year, to come to effect at the start of this, was to say to customers we will either present you the interest as required by the government, or we will give you the option to go for free money transmission or discounted money transmission. And a far, far higher proportion of customers than even we anticipated decided to take the money transmission option. This has had a number of impacts in the first half. Certainly, it has caused us to review the amount of the Nedgar (ph) hedge that we had on, and we have made some adjustments. Secondly, it has placed us in extremely good regard, not only with our customers but with other people's customers, reflected not just in the customer satisfaction scores that Matt has referred to, but for example, in our medium business segment, which is the heartland of the CCI battle. We have seen new customers growing at 35 percent faster than they have ever done previously, and certainly 35 percent faster than last year, which in itself was a good year. At the time of the CCI, you were faced with two options. You could sit around and complain, or you could view it as an opportunity because of the market dislocation to create a competitive advantage, and I believe that these numbers demonstrate we have done exactly that.

Hugh Pike (ph), BMP Paraba (ph). Firstly, Barclaycard -- this was the star performer in growth terms, and it looks like what's happening is that cost growth is slowing, as the investment spending is reducing a little, and we are getting the benefits through in revenue growth, so the revenue cost draws are opening up. So my question is, can we see this sort of growth going forward? In other words, is it payback time for Barclaycard?

Two, the BBA have called this morning for Basel II to be delayed until 2010. What's your view?

Let me see. I will take the first of the questions was on -- which one? You lost me. Which one was the first one?

Cards.

You know, I expect the strategic investment to actually pick up in Barclaycard, because we have improved a global card strategy, so you can expect -- as I said in my talk, you can expect to hear of -- now that we're confident that the model we have got works outside of the UK, you can expect us to be investing and expanding that business. So there will be increased -- that's why John -- we admired international profitability for about 2 ns, because I'm about to tank it again by increasing the spending. But we'll get good return and good payback on it.

And then Basel II? I think the point that we would make is if Basel comes, when it comes, and we do expect it to come, then we will be advantaged. But we're not building our plans on the expectation of the receipt of that advantage. We're just saying that when it comes, it's going to suit Barclays because the economic capital standards that we have been operating in the group for some time are pretty convergent with the regulatory capital stance being taken by Basel II. Whether it's postponed or not -- I think in a sense, we are indifferent to that point. Our expectation actually is it will come earlier than you are reading in your newspaper today.

As long as the regulators don't blow it away in Pillar Two, I am a fan of Basel, because we have both the risk profile and portfolio and the measurement and risk management systems to qualify for the benefits John talked about. So in our self-interest, I would like to see it. I am a bit nervous about selective in-and-out in different countries, depending on the risk profile of their banks and balance sheets. But on balance, to me it will be good news, so long as the regulators don't turn around and take the advantage away by saying you have to hold more capital, anyway.

Steven Andrews (ph), Merrill Lynch. I have got one question on a subject that hasn't really been touched on too much today, and that's capital. At the end of the first half, you are sitting on a tier-one ratio around 8.3 to 8.4 percent, a large proportion of which is core equity. And on top of that, by my calculations, obviously, with a good performance in the business, you would be throwing off maybe 1 billion pounds of additional capital a year, in excess of what (indiscernible) dividend and balance sheet growth. What can we expect in terms of what you're going to do with that capital, going forward? Can we expect an increase in terms of the returns to shareholders by share buybacks, or -- I know your comments on approved global card strategy. Am I right in assuming that you are going to have a global card strategy? That has to have some stake involved with the biggest card market in the world, which is the U.S.

Yes, the U.S. would be very low on the totem pole of priority target markets; it's a supersaturated market, where the battle over there is share of wallet, not share of cards. Everyone has a deck of cards in their wallet, so that would be a tough market to go into organically. And therefore it's not -- for the next four or five years, it's not our primary. Our primary markets would be in the card business across all the European countries into Asia, into Africa. And so we have lots of areas to grow in before we go mano y mano with the quite cluttered market in the United States. On the capital question, I have said all along that capital tension is an important part, particularly if you are an organization that views itself through an economic profit lens. Certainly, putting out -- using capital to pump EPS, which is value-destroying when you apply the cost of equity; it is not our game.

We don't play that game. It is tempting, sometimes, but we don't. You are right that we are throwing off more cash than the sustainable growth rate requires in the business, if you take a view on WRAs going forward. So we are in a very healthy situation. We will continue. I have said before that when we can't find useful ways of employing the capital on behalf of shareholders, we will give it back. But having said that, I'd rather be finding ways to employ the capital than give it back. But we have demonstrated, I think, that as part of our toolkit, share buybacks and dividend growth are very much in the toolkit. So you can be sure that we have not and we won't sit on idle capital. Having said that, a part of our financial condition objectives is to maintain our AA rating. It's a major source of competitive advantage, particularly in Bob Diamond's business, in terms of counterparties, et cetera. And therefore, we want to keep a very robust, strong capital situation; we want to keep sufficient to take care of that. But in the event that we were not employing the capital, then you can assume that we would continue to participate in share buybacks, and in dividend increases.

Absolutely.

It's Michael Elspy (ph), R&J (ph). Just touching on your comments on the credit card global sort of reach-out, you mention Asia as a target market. Clearly, you have not got a presence at the moment. Would you be looking to do that organically, over acquisition?

Well, we look at everything organically. I start off that way, because I'd rather build value than buy it, as a general principle. But it's a very attractive opportunity. The brand runs -- I don't have specific plans; don't hold your breath that you are going to hear some big announcement on Asia tomorrow. And remember, the credit card business has opportunities beyond issuance on our own. Given the subscale nature of many financial services organizations around the world, we are quite happy for them to front their own card, and we will do it for them -- quite happy to do that.

So you could expect to see us, through a combination of organic growth of our own, strategic alliances with some other FIs who haven't got the Irish (ph) scale or competency to do it and/or, if the opportunity came for a value-creating acquisition, then I would look at that. But I would expect to see most of our -- sort of over the next year or two, expect the rest of Europe and Africa, expect those areas to see more activity by Barclaycard going forward. And the rest would be sort of tier-two waves and tier-three waves. But the waves over the next few years in the short- to medium-term will be leveraging, leaning into the successes we are having on the continent.

(CONFERENCE CALL CONCLUDED)