Barclays PLC (BCS) 2008 Q2 法說會逐字稿

Good morning and welcome. I think we're ready to start. I'm joined this morning by Group Chairman, Marcus Agius, who's in the front row and then on stage by my Exco colleagues, Bob Diamond the Group President; Frits Seegers, Chief Executive of Global Retail and Commercial Banking; and Chris Lucas, the Group Finance Director.

We're going to do things just slightly differently this morning. We will start with a presentation by Chris on the numbers in the usual way. But then we're going to have Frits and Bob talk about their business areas, giving you the context, giving you the performance details and giving you the outlook. And then I will wrap up.

Now, the effect of that will be that we'll take a bit longer in our presentations than we usually do, but I hope you'll feel that that's in a good cause. We want to make sure that we cover the ground properly for you. But we will leave plenty of time for Q&A at the end, I assure you. And our intention is that we'll be finished by no later than 11 o'clock.

Our theme as we present to you this morning is a theme of seeking to execute consistently in a difficult environment. So with that, can I ask you please to make sure that your Blackberries and mobile telephones are switched off? And I'm then going to hand over to Chris.

Good morning and thank you John.

We've delivered profits of GBP2.75 billion during the first half, after absorbing significant write downs in challenging market conditions. Income of GBP11.8 billion was at a similar level to the first half of 2007. We've controlled costs well, which has resulted in a 3% improvement leading to a cost income ratio of 56%.

Impairment charges were GBP2.4 billion, almost half of which is accounted for by US sub-prime and other credit market exposures. We've delivered a return on equity of 15%, and maintained a cash dividend at 11.5 pence, the same level as this time last year.

Turning to the divisional performance I'll start with the headlines before giving you more detail on each of the businesses. In Global Retail and Commercial Banking, UK Retail has performed well. There was excellent profit growth at Barclaycard driven by growth in international cards. And we've continued to build for the future with selective expansion of International Retail and Commercial Banking.

Our Investment Banking and Investment Management businesses have managed well in difficult conditions. Barclays Capital has significantly reduced costs and balance sheet exposures, while maintaining strong client facing income.

Barclays Global Investors and Barclays Wealth have generated good net new asset inflows during the period. All the businesses were profitable.

Going now into more detail; in UK Retail Banking profits increased 7% with income growth of 3%, reflecting strong performances in savings and local business. You will recall that income in 2007 was reduced by GBP87 million in settlements on overdraft fees. Average customer deposits grew 7% with broadly stable margins.

Our share of net new mortgage flows for the first half was 26%. The average loan to value on business written this year was 51%. And on our stock of mortgages was 35%. Only 7% of the book has a loan to value over [80%].

Mortgage impairment remained very low. Overall UK retail impairment charges increased GBP11 million on an aggregate loan book of GBP89 billion. Costs were flat with the reduction in property credits of GBP48 million and the cost income ratio improved 2 percentage points.

At Barclays Commercial Bank profit before tax was broadly flat, with underlying income growth of 4% driven by higher sales of Treasury products, such as foreign exchange and interest rate derivatives. Impairment charges increased GBP24 million to GBP148 million. As a percentage of assets this represents a 3 basis point increase to 44 basis points.

Cost growth of 17% reflected additional sales capacity and product specialists, as well as ongoing investment in global payments infrastructure.

Barclaycard profits grew 30% to GBP388 million. Driven by Barclaycard International and continued improvement in UK impairment. The International businesses delivered over a quarter of these profits with a 64% increase to GBP100 million, including a significant contribution from Barclaycard US.

Income increased 13% with strong growth in international cards, as well as GBP56 million from Goldfish, which was including from the beginning of April. The International business in Goldfish also contributed to impairment growth of 10%. There was a continued reduction in impairment in the UK. Costs grew 6% driven by the growth in international cards, they also reflect the negative goodwill of GBP89 million from the acquisition of Goldfish, partially offset by restructuring charges of GBP54 million.

International Retail and Commercial Banking is reported for the first time today as three separate segments; Western Europe, Emerging Markets and Absa. This gives increased visibility and reflects the way the business is managed.

In Western Europe profits grew 10% to GBP115 million. Income rose 46% and costs grew 38% as we opened 191 new distribution outlets.

Impairment increased GBP71 million to just over GBP100 million, mainly due to growth in the loan book and charges against real estate lending in Spain. I'll talk in more detail about impairment across the Group later.

We're transforming the scale of the business in Emerging Markets. We added 321 new branches and sales centers during the first half. This investment has impacted profits, which were 13% lower at GBP52 million. Income almost doubled as we expanded the business, and impairment increased to GBP66 million in line with risk tendency. Break even times on new distribution outlets are relatively short, so we'd expect to see a flow of investment return from the end of this year.

In GRCB Absa which now excludes both Absa Capital and Absa Cards, sterling profits grew 10%. This reflects both a GBP46 million gain from the Visa IPO and a 7% decline in the average value of the rand. Impairment charges increased significantly in challenging trading conditions, which I'll cover in more detail shortly.

Moving to Investment Banking and Investment Management, Barclays Capital reported profits of GBP524 million, down from GBP1.7 billion last year. There was strong income growth in interest rates, commodities, emerging markets and private equity. We've continued to tightly control costs as you would expect, which were down 32%.

You'll have seen the detailed disclosure on credit market exposures in our announcement this morning. There were net write downs on these exposures of GBP2 billion for the first half, of which GBP1.1 billion are impairment charges. This is net of GBP850 million of gains from the widening of credit spreads. This slide gives you a breakdown of the net write downs and gains on our own credit quarter by quarter.

In May we announced net write downs of GBP1 billion for the first quarter. There were additional net write downs in the second quarter of GBP973 million. Gains on own credits in the first quarter were GBP700 million. Further gains were taken by -- or driven by changes in credit spreads at the end of June. This also impacted the values of our credit market exposures.

We've continued to actively manage down these exposures, which have declined by GBP8.3 billion. This includes sales of GBP3.1 billion, which were completed in the second half. Our exposure to monoline insurers is GBP2.6 billion, 86% of which is to investment grade counter parties. Only 9% of the underlying assets are residential mortgage backed securities in the US.

We've reflected cumulative write downs of over GBP430 million against these positions. And our marks are based on internal ratings that are consistent with or more conservative than those of the agencies.

Our leveraged finance exposure reduced by GBP2.4 billion to GBP5 billion largely reflecting the repayment of Ortel, which is expected to complete later this year. We've held our leverage finance assets as originated loans since the adoption of IFRS. Their credit performance remains satisfactory.

There's more to do, but we're pleased with the overall level of disposals and also that sales have been made at or close to carrying values.

At Barclays Global Investors income grew 5% to GBP987 million, reflecting increased securities lending and management fees, partly offset by reduced incentive fees.

Costs grew GBP167 million as we set aside reserves of GBP196 million, to support some of our liquidity products. We did this to give additional assurance to our clients and these charges may be realized or reversed as the assets mature over the next couple of years. Their impact was to reduce profits by 32%.

Assets under management at the end of June were just under $2 trillion, including net new assets of $25 billion, which were more than offset by negative movements in the equity markets.

At Barclays Wealth both profits and the income grew 5%. Income growth reflected an increase in customer deposits. Total client assets were GBP133 billion with net new inflows of [GBP3.5] billion offsetting negative market movements.

You'll have seen that we've just announced the sale of our closed Life Assurance book for GBP753 million realizing a gain of GBP330 million. The closed Life book contributed about GBP110 million of profits in 2007.

Excluding charges on US sub-prime and other credit market exposures, impairment for the Group totaled GBP1.3 billion. The largest percentage increases were in Retail and Commercial Banking outside the UK. As you know, risk tendency gives a full year forward view of impairment trends in our performing assets. The risk tendency we reported at the end of December has, in general, been a good guide for impairment charges in the first half.

In Western Europe we've taken higher charges than anticipated, due to increased default levels in property and construction in Spain.

We published new risk tendency numbers at the end of June. The combination of good growth and current market conditions has driven an increase of 19%.

To give you some perspective on evolving trends in our portfolio here's some data with the most relevant assets starting with Spain. The substantial majority of our retail assets in Spain are residential mortgages, with a book of GBP12.6 billion. The current estimated loan to value is 45% and we have insurance for mortgages with loan to values of over 85% at origination. Three months' arrears have increased, but remain at low levels.

Commercial property and construction lending totaled GBP4 billion at the end of June.

In South Africa on a mortgage book of GBP13.3 billion, three months arrears have gone up from 2.3% to 3.4%, with a similar trend in other consumer lending. We've taken steps to reduce the lending in South Africa with lower loan to values on mortgages, and vehicle finance and tighter limits on cards.

Looking now at our UK assets, three months arrears in our total mortgage book show a small increase to 97 basis points; arrears to buy to let at slightly higher at 111 basis points. And to put that in context, about 7% of our GBP77 billion book is buy to let.

In FirstPlus, our book is GBP4.4 billion and the arrears performance is similar to that of our buy to let assets. Three months arrears in our unsecured portfolio have shown a slight increase to 5.7%.

In our corporate book, property and construction represents 13% of the portfolio. And as I've said earlier, our corporate loan loss rate has increased, but remains low by historical standards.

You can see from these numbers that our lending has been conservative relative to the industry, with low loan to values in our mortgage book, a selective approach to unsecured lending and a low proportion of property and construction in our corporate portfolio.

Looking at the balance sheet, total assets have increased from GBP1.2 trillion at the end of 2007 to GBP1.4 trillion at the end of June. Derivative assets account for all of this increase, which reflects an accounting requirement to gross up assets and liabilities, rather than the higher consumption of capital, risk or cash.

Loans and advances have increased from GBP386 billion to GBP450 billion. Other assets have decreased 13%, with a reduction in trading assets of GBP16 billion and in reverse repo balances of GBP43 billion.

Our overall balance sheet management is reflected in the level of risk weighted assets, which is flat relative to the end of December.

We had a Tier 1 ratio of 7.9% and an equity ratio of 5% at the end of June, relative to our targets of 7.25% and 5.25%. Following our capital raising last month, these ratios would have been 9.1% and 6.3% on a pro forma basis. We said then that just over half the new equity will be retained and contribute to ratios and the rest will be invested in the business.

As you know, we've announced an interim dividend of 11.5p and we expect to maintain future dividends per share at the level declared in 2007 until dividends are again twice covered by earnings.

So, in conclusion, we've delivered profits of GBP2.75 billion after absorbing significant write downs in challenging market conditions. Income of GBP11.8 billion was at a similar level to the first half of 2007. We've controlled costs well, which has resulted in a 3% improvement, leading to a cost income ratio of 56%.

Impairment charges were GBP2.4 billion, almost half of which is accounted for by US sub prime and other credit market exposures.

We've delivered a return on equity of 15% and maintained a cash dividend at 11.5p; the same level as this time last year.

I'm going to hand over now to Frits, to talk about GRCB.

Thank you, Chris. As you know, our first half performance has been generated against a backdrop of extremely challenging market conditions. And we expect the United Kingdom, Spain, South Africa and the United States to remain difficult for at least the remainder of 2008.

We do not claim to be fully sheltered from the current downturn in the economic cycle. However, what today's results demonstrate is the benefit that we're now reaping from the mitigating actions we began in 2006.

As our view of the world's prospects became more cautious, we took action. We expanded our risk and collections capabilities. We raised our underwriting criteria across the board. We cut credit lines, particularly in Barclaycard and sought to reduce our most cyclical exposures.

In tandem, we accelerated our plans to diversify into faster growing international markets, offering the prospects of higher risk adjusted returns.

These decisions have been key to the performance, which we announced today. It's worth dwelling on a few statistics.

GRCB as a whole generated nearly GBP800 million of incremental income in the first half of 2008, a year on year increase of 13%. This is more than twice the increase in our cost base. Our overall impairment remains under 100 basis points, notwithstanding the impact of economic conditions and a maturing international loan book.

Our profit before tax increased by 8% year on year; so, you can see that we're delivering the rapid, controlled growth that we promised, whilst maintaining our cautious approach to risk.

We're building a strong growth engine for Barclays. We are transforming our UK franchise. You can already see the benefit in the results of UK Retail Banking, Barclays Commercial Bank and Barclaycard.

GRCB's growth rate is accelerating as we diversify into higher growth markets. We're carefully deepening our presence in existing markets across both Retail and Commercial. And we're systematically entering new markets. We believe that this focused and deep approach differentiates us from some of our competitors, and it will yield superior risk adjusted long term returns to Barclays' shareholders.

Let me share a few examples of the progress we have made in the first half of the year. The performance of our UK businesses is hugely important to GRCB, so let's have a look at UK Retail Banking.

Transformation program of this business has been underway for more than two years now. We have fine tuned the customer proposition and significantly improved our operating efficiency. Across all products, we have adopted a simple and transparent positioning; responding to what customers told us they wanted most.

And the results, well, they have followed out. Today's numbers have been generated on the back of a leading share of new flows across major product categories. Most importantly, this strong performance has been achieved while maintaining a conservative and profitable underwriting stance.

In mortgages, for example, our 26% share of net new lending has been achieved at enhanced margins, with the conservative loan to values that Chris has already shared with you.

We've also focused on growing our savings business. In the first half of the year, savings balances increased by 8% year on year on the back of successful ISA campaign and market share gains.

Barclaycard provides an example of our strategy at work both inside the United Kingdom and outside the United Kingdom.

One of the first decisions I made when I joined Barclays was to upgrade our collections capacity and to tighten our lending criteria. We're now reaping the benefit of that decision in terms of controlled impairment and higher profitability.

And with the first half acquisition of Goldfish, we have added a high quality book at less than [that] as a value and created significant economies of scale. In times of turmoil, there are opportunities to add excellent assets at highly attractive prices.

We've also maintained an equally focused and disciplined approach to credit card lending outside the United Kingdom. In the United States, for example, we started tightening our lending policies in the first half of 2007 when the United States economy was still going strong. As a result, Barclaycard US remains on track to deliver the $150 million of profit we promised for 2008. This is despite the deterioration in market conditions since we made that commitment.

Turning now to our other businesses outside the United Kingdom; our international footprint is growing fast. We added more distribution outlets in the first half of this year than all of 2007. 64% of our total network is now situated outside the United Kingdom.

As Chris told you, the breakeven point on new branches is relatively short. And we will open a further 250 international distribution points in the second half. We added four million customers in the first half of the year and we will add a further four million by the end of the year. That is more than in 2006 and 2007 combined together. So, we're making good progress and diversifying our business. This is creating a strong profitable base for the future.

The build up of the distribution outlets drives the increase in customer numbers. This then feeds through to income and, ultimately, into high quality sustainable profit.

Today, close to 50% of our customers come from outside the United Kingdom. The non-United Kingdom businesses represent 36% of income. This proportion is growing fast. Over 75% of GRCB's first half income growth came from non-United Kingdom markets. We are alert to the risks of rapid growth. We're control -- we're growing in a controlled way and we have a good balance between risk and controls.

Non-United Kingdom profits now represent 25% of the total. Notwithstanding further growth in the United Kingdom, the non-United Kingdom share will increase as the returns from our international investments flow to the bottom line.

Let's now look at another example, this one from Western Europe. Our business in Western Europe is growing rapidly. We saw income growth in the first half of the year of 46%. We have exported best practice from the United Kingdom and implemented the same conservative stance on risk.

The figures on this slide provide an overview of our position in Spain, where the housing and real estate sector is going through a difficult period. As Chris pointed out, the average estimated current loan to value of our GBP12.6 billion residential mortgage book is 45%. Our exposure to real estate developers and construction firms is 16% of our total Spanish book, significantly lower than the 25% average for the Spanish banking sector as a whole. These statistics provide some reassurance at a time of economic stress.

We have, however, seen rising impairment in Spain in both the consumer and corporate books, and caution will be our watchword for the foreseeable future.

In the second half of this year, we'll continue executing to strategy. We know that economic conditions will continue to be extremely difficult and the outlook remains tough across many of our key markets. This will inevitably impact our performance. So, we will continue to focus on those things that we can best control. Here's what you can expect from us.

We will maintain our conservative and cautious stance to support high quality risk adjusted controlled growth. We will grow both the asset and liability sides of our balance sheet at attractive margins. We will expand our international network with the addition of a further 250 distribution outlets. And we will selectively add another four million new customers.

So in conclusion, we're building a strong growth engine for Barclays. Our UK businesses are being transformed. They are delivering strong results on the back of market leading positions and the benefit of our rapid, but controlled, diversification into international markets are beginning to flow to the bottom line.

With that, I'll conclude and hand over to Bob to share with you his thoughts on IBIM; Bob, please.

Thank you Frits. Good morning everyone.

I'm sure it's no surprise to anyone here that the environment over the last 12 months has probably been -- it has been the most difficult of any I have ever seen. We've clearly felt the pain in our businesses. We took a GBP1 billion of net write downs in the second quarter at Barclays Capital, in addition to the net GBP1 billion that we've talked about earlier this year in the first quarter.

As Chris mentioned, we provided GBP200 million in support for liquidity funds in BGI. So, it's been a very, very difficult period in which to manage our businesses. But we're doing that. We are managing our businesses. And I think in the circumstances and in the environment, we're doing it well.

Notwithstanding those write downs, the businesses in Investment Banking and Investment Management, Barclays Capital, Barclays Global Investors and Barclays Wealth, individually and collectively those businesses remain strong. Those businesses remain profitable. And those businesses are all increasing their market share.

In the next couple of minutes, I'd like to update you on three things. Our view of market condition as we look forward; what we're doing to steer through what will continue to be a difficult market environment; and a couple of the opportunities that we see looking forward.

The initial market dislocation which began just about a year ago was severely exacerbated by a lack of liquidity. To put it frankly, the plumbing in the money markets had stopped working. We've seen those problems gradually resolve. We've seen thoughtful interventions from the Bank of England, from the Federal Reserve, from the ECB. And the programs that were put in place following the collapse of Bear Stearns last March are bringing back liquidity to the money markets but they're also bringing back confidence to the money markets.

That improvement in liquidity, most importantly, has enabled the financial system to begin the process of deleveraging and liquidation. Risk transfer is beginning to work. Assets are moving, even troubled assets, even mortgage assets, to new buyers at new prices and in new structures.

Now, there'll still be pressure in the secondary market as this process is clearly ongoing. And continued fragility in the financial system will be there as this process plays out.

There are other challenges in terms of the markets as well. There's a weaker global economy and our feeling is that concern about that weaker global economy is looking for some support under US house prices. There will continue to be structural imbalances. There's a serious structural imbalance between supply and demand in many of the big and important commodity markets. Oil is the poster child for that.

So, we don't see a return to markets like '05 and '06. We'll see continued challenging financial markets for the balance of 2008 and through 2009.

So, let me turn to how we've been operating in these markets and how we've been managing in this environment. We've been working hard to drive performance. And in order to drive performance, we've been focusing on managing our risks, managing our costs and staying close to our clients.

Let me talk first about managing our risks. As we came into 2008, we had clear intentions. Intentions that we would like to maintain flat, risk weighted assets. Intentions that we would like to manage down our credit market exposures in Barclays Capital by at least GBP5 billion. And we had these intentions while we recognized that our clients needed to work with us and that would likely mean taking more of our clients' assets onto our books.

And we also recognized that we needed to be open for business and we were going to be extending more credit to our important clients. So, we recognized the need to do all this while staying open for business.

We saw the numbers from Chris earlier. In the first six months of 2008, we have reduced our risk weighted assets below the year end level of 2007, but we haven't stopped lending to our key corporate and institutional clients. We've booked GBP10 billion in new lending to those clients. And we have done that by entering into transactions that allowed us to exit GBP6.3 billion of our difficult and troubled assets. Our total credit market exposures are down almost a quarter from the year end 2007.

One of the ways that we've done this is by segregating our troubled assets from our ongoing business and we did this, quite frankly, for the benefit of both. Our client facing people can focus on our clients and our specialists, the staff that we put in to manage the troubled assets, can focus on how to hedge those assets, when to sell those assets, how to package those assets and which clients would look to buy.

We've hedged, where appropriate, with the underlying indices in the appropriate vintages. And as I've said, where there has been an opportunity, we have liquidated positions without selling at distressed prices.

We've also focused on managing cost and I know in Investment Banking that's always been a big issue. We have consistently said that we can manage costs and that we could flex costs. More importantly, we've consistently done it. We did it in 2002 with the dislocation in the credit market. We did it in the second half last year and we did it again in the first half of 2008.

Let's put this in context. In BarCap and BGI, you know well that these are businesses that we've been growing at 20% compound annually on the revenue line, the cost line and the PBT line.

In the first half of this year, if you exclude the support costs for liquidity funds, BGI grew while reducing costs 5%. In the first half of this year BarCap's costs were down 30%. We have been able to cut those costs while hiring selectively for future growth.

But most important of all, it's focusing on our clients. It's being close to our clients. And doing this in an environment where many of our clients are facing some of the same challenges we, in the financial sector, are facing, with difficult market conditions in difficult positions.

The obvious place that you can see this is in BGI, where we made the decision to step in and support select liquidity funds. We think it was the right thing to do for our clients. We think it was the right thing to do for our franchise.

In Barclays Capital, we've been staying close to our clients by continuing to lend to the right clients at the right prices. In Barclays Capital, we've done it also by continuing to make strong secondary prices, providing liquidity in the secondary markets for our clients, notwithstanding the difficult market conditions. The result was a strong increase in business, frankly. Our foreign exchange volumes in the first half of 2008 doubled from the first half of 2007.

In interest rate products our volumes were up over a third in the first half of this year, versus the strong first half of 2007.

Our clients are telling us consistently they appreciate that support. But it's more than them telling us that. They're telling us that by doing more business with us. Ultimately, that's what's allowing us to drive the underlying strong revenue performance.

Excluding the impact of write downs, each business in Investment Banking and Investment Management had stronger revenue performance in the first half of 2008 than they had in the first half of 2007. That is a real accomplishment and that is driving the underlying performance of the business.

Let's look in more detail at how that played out in Barclays Capital. Unsurprisingly, our write downs had a big impact on our mortgage and asset backed business and certainly put a dent in our credit revenues. But the strength of our revenue performance comes from the breadth, the strength and the diversity of the business.

Let me put this also in context for a second. When Barclays Capital was formed ten years ago, there wasn't a single business in Barclays Capital that was world leading. Even five years ago, there wasn't a single business in Barclays Capital that would have been considered top three on a global basis.

Well, today Barclays Capital has four businesses that are in the top three globally. Our Interest Rate businesses, both cash and derivatives, consistently perform in the top three on a global basis. Our Investment Grade Credit business, you've seen this in the international bond tables. We've been in the top three consistently for three years now.

Our Commodities business is now operating at level pegging with Goldman Sachs and Morgan Stanley as the three dominant firms on a global basis.

And our Currencies business, in foreign exchange we're the first new bank in many years to be -- to break their way into the top three in a Euro Money survey for foreign exchange dealers.

Looking forward, notwithstanding the difficult market conditions, we do see selective growth opportunities. In Barclays Capital there are areas where we're still not top three, where we believe we can continue to invest and grow and expand the franchise, so that we can be top three on a global basis. Our Emerging Markets business and our Prime Services business are two very good examples.

I've talked to you all about the opportunity we see in the US. There is an unprecedented opportunity to hire talent in golden areas, where competitors have been weakened. A good example is the agency residential mortgage business. It's a very large part of the US fixed income business. Before 2008 we've never been ranked inside the top ten. We finished the first six months of this year inside the top three.

In BGI we are already the leading manager, the world's number one manager, of institutional assets with just under two trillion in assets under management. We're already the number one provider of exchange credit funds with our iShares business. We're already a top tier firm in scientific investing, with our active equity business and our global macro business.

But there are opportunities there as well for selective investing; think for a second what's happening to the underlying client base and the sophistication of the client base outside the Anglo Saxon countries, in continental Europe, in Asia, in the Middle East, in Africa and in Latin America.

Look also at the opportunity for us to build a -- to continue to build a fixed income business that would be level pegging with the top tier status of our equity management business in BGI.

In Barclays Wealth, John has told you many times that we see this as one of the engines for growth in the Barclays Group going forward.

High net worth assets are growing at 8% compound annually. They grew strongly in 2007 and 2008. Clients are increasingly sophisticated and London is increasingly the center to do high net worth business and family office business.

We have a real competitive advantage, because we're part of Barclays. It's the brand. It's the global reach. It's the universal banking model. It's the platforms and services that GRCB can provide us for our clients. And it's the institutional advice and products that we can deliver through BGI and Barclays Capital. It gives us a true competitive advantage in the wealth space.

I said at the outset that the markets would continue to be challenging and they will. I think in those types of conditions, the benefits of being a universal bank are even more obvious than they've been before. The integrated universal banking model offers the best way to diversify risk, to manage capital and to serve our clients.

So, our confidence going forward is born of knowing that we have the right model; the integrated universal banking model. It's not just the model, though. That confidence is also born of the strength and depth of the management team across Investment Banking and Investment Management in these difficult markets across the Wealth business, the Asset Management business and the Investment Banking business.

This management team has been together for over a decade. They've stuck together through the difficult times of 2007 and the first half of 2008. And I can promise you they're up for tackling the challenges going forward.

And last, but not least, it's born of the culture where people have been able to stay focused on execution.

So, in the difficult markets that we expect over the balance of this year and into next year, you can look for us to do the same thing as we've been doing over the last six or 12 months; continuing to manage the risks, continuing to manage the costs, continuing to stay close to our clients, continuing to drive revenue performance. And if we can do that, we continue to get a license to invest selectively in the kinds of opportunities that these markets are clearly presenting.

Thank you very much for listening and it's my pleasure to hand over to John to conclude our presentation this morning.

Thank you, Bob.

So, what we've been seeking to do this morning is concentrate on the short term and our theme, as I said at the beginning, is executing consistently in a difficult environment. In particular, we're looking at how we've done in the recent past and what shareholders can expect of us in the coming months.

Although I take some comfort from our relative performance this half in managing our risks and in generating income, the decline in our profit is very disappointing. And I add to that my disappointment at the decline in our share price over the 12 months. Our shareholders have had to endure a lot. We are, and we will be, working as hard as we can in the period ahead to create the conditions that enable a higher price to be placed on our shares over time.

If I have one message only for you today, it is the following. Our short term objective is very clear to us. We must manage the impact of the credit crunch, whilst maintaining strategic momentum.

I'll cover one other area in my presentation. I want to look at our four strategic priorities and, even though these are our long term objectives, talk about what's happened recently in each area, and then what we expect to happen in each area during the coming months.

With conditions as they are, you need to be very clear about strategic direction. Of course, the environment tests our strategy. We must be realistic about the state of the world, but not allow ourselves to be immobilized by it.

Our strategy is to achieve good growth through time by diversifying our business base and increasing our presence in markets and segments that are growing rapidly. And for all the many changes in the world over the past months, the drivers of growth in the financial services industry are substantially unchanged.

I'm referring to the privatization of welfare provision, wealth management and wealth transfer; the growth of retail banking in the developing world; the increasing use of capital markets for financing and risk management; the pursuit of yield; the demands that will be placed on the banking industry to finance infrastructure development and so on. Our strategy is designed to maximize the alignment between these sources of growth and what we have in Barclays.

Our strategic priorities have remained consistent for many years. They're set out on this slide and I'm now going to examine each priority and talk about what you can expect us to be doing over the course of the coming months in each area, including how we will be managing the impact of the credit crunch. Of course, that performance will be heavily influenced by the performance of the team sitting in front of you. I have a very good team. They know what they're doing.

Now, I'm pleased with the progress that we've made in our UK businesses. In UK Retail Banking over the last months we've secured, at good margins, the number one or number two flow position in current accounts, and savings, and mortgages. You know, as I do, just how far we've had to come since the end of 2005 to get to those positions.

As you look forward, you should expect us to deliver the promised improvement in the cost income ratio in UK Retail Banking from 57% in 2007 to 54% in 2010. Volumes in many areas of the UK Retail market will be lower, but we're better placed to manage the effect of this, because of our improved positions in market share.

Whilst we've seen good asset growth this year in Barclays Commercial Bank, we've sought, as you've been hearing from my colleagues, to be very careful with our sector exposure to ensure that we have appropriate diversification of our risk. Looking forward over the next year or two we expect loan loss rates in this part of the industry to trend higher.

In Barclaycard UK, where the turn around from the weak performance of 2005 and 2006 has been significant, we've made good progress this year, regaining the number one position in UK cards in issue.

But as you've been hearing from Frits, our risk stance in Barclaycard UK has remained conservative. We've maintained those rejection rates of 50% and we've been selective in our choice of risk. You should expect to see further diversification of the Card business in the future, driven by further internationalization.

Our second strategic priority is to develop our global businesses. We have in mind here Barclaycard International, which I'll come to in a moment, and Barclays Capital, Barclays Global Investors and Barclays Wealth.

In each business the competitive field is wide open. You've seen how, in the past, we've created patterns of investment in people, followed by surges in market share and income diversification. That's what we've been doing in recent years. And the fruits of that investment are helping us manage business risk today.

BarCap's first half performance is shown on this slide. As you've heard from Bob, our profit here has suffered from the write downs, but our income performance has remained strong and we have maintained high levels of cost flexibility in the business.

You've seen the same sort of thing in Barclays Global Investors over recent years, where we have progressively diversified our business by expanding our Alpha, Alternative Assets and ETF businesses.

This slide shows the income performance of BGI first half 2008 versus first half 2005. It illustrates a story of growth through diversification, which is helping us generate significant profitability today in difficult conditions.

The diversification of activity in both businesses has opened up new market share opportunities to us, meaning that there are opportunities for composite growth, even when volumes in some areas of activity are down. You can see the effect of that in the income performance of BarCap and BGI this year.

We continue to think that the global income pools available to those who participate in these parts of the industry will grow over time, at 10% per annum. And that top quartile performance will deliver a rate of growth well ahead of this, which is consistent with the 15% medium term growth rates of BarCap and BGI that we've talked about in the past.

First half profit in Barclays Wealth is well ahead of the full year profit in 2005 and we maintain our goal that the profits of Barclays Wealth, which I see as an important engine of future growth, should exceed GBP500 million in the medium term.

I should say, by the way, that we plan an IBIM seminar for mid-September and we'll be issuing invitations in due course.

The same forces of globalization that we expect to benefit BarCap, BGI and Barclays Wealth are generating opportunities also in our Retail and Commercial Banking businesses. So, I'll turn now to our third strategic priority, which is to grow Retail and Commercial Banking activity in selected markets outside the UK.

Frits has created a seismic shift in the performance and ambitions of these businesses over the last two years. That significantly increased the growth opportunity in this part of the Barclays Group and it's helping us to protect our financial performance today.

I believe that we've enhanced our strategic optionality here, because of our increased speed. What do I mean by that? Well, the best example would be to say that last year, when we were seeking to acquire ABN Amro, we were very interested in the seven million credit card customers that ABN Amro had.

But even during the pursuit of ABN Amro, we recruited in just one year 2.5 million new credit card customers into Barclays. We now have broadly the same number of credit cards outside the UK as in the UK at over 11 million each. And Barclaycard International has contributed over 25% of Barclaycard's profits this half.

You've heard from Frits about the growth in customer numbers over the last 24 months. The GRCB team is showing that we can enter new markets, as we have done in India and the Emirates, and as we're now doing in Pakistan, and that we can expect to achieve critical mass in segments or products that offer the right risk adjusted returns through rapid organic build out.

We don't rule out acquisition. We have acquired a business in Russia this year, because we think that's the right bridge head into an important market. But we have increased significantly our speed of organic growth. And, as Frits has said, we're reducing simultaneously the time to break even in our new branches and sales outlets. And that's created new options for us.

Over the coming months we will, as you've been hearing, open another 250 sales outlets outside the United Kingdom. And we expect the number of customers we serve in GRCB to rise to over 45 million by the end of this year.

Now all of this, coupled with the income diversification, which Bob is driving in IBIM, is helping create a very different Barclays from the Barclays at the beginning of the decade, which was dominated by sterling and by our core banking activities in the United Kingdom.

Not only has the recent increase in the footprint of these businesses changed the future growth opportunities of the Group, but it's also been important to helping us remain solidly profitable in the very difficult conditions of the last 12 months.

Our fourth strategic priority is enhancing operational excellence. And three things are top of mind here; the management of risk, of cost and of capital. With economies around the world decelerating, it's an inescapable fact that our credit and market risk management capability will be tested hard again over the course of the coming months.

So, how are we positioned as we go into the downturn? We think that our risk books are relatively conservative. We've strengthened significantly the back end processes. I'm referring particularly here to the collections activities.

In the UK the mix has shifted towards secured lending. We've taken, for some years now, a conservative stance in the UK residential mortgage risk. Our conservative approach to UK commercial property also dates back some years.

We've taken care with our loan to value ratios in Spain, as you've been hearing. We have very little exposure with an LTV of over 80%. Our commercial property book in Spain is quite small.

We've been cautious in our approach to growing the risk in our United States credit card business, where impairment in 2008 has performed in line with expectation.

We will, by having turned down volumes in South Africa, significantly reduced the future risk flow into our Retail businesses, so as to moderate the impact on Absa of higher interest rates and slower economic growth.

And you've heard from Chris and Bob that our risk exposures in Barclays Capital are significantly reduced versus the end of 2007. These are simple, but important, examples of developing over time our readiness for the downturn.

We're too big in these countries and in these markets to avoid the impact of slowdown. But we hope and believe that the steps that's we've taken over the last months, and in some cases over the last years, will help our relative performance.

In the area of cost management, we try to ensure that we have appropriate flexibility in the cost base to accommodate changes in the income and risk environment. There's good evidence of that flexibility in the first half numbers that Chris has reported to you. I'm referring in particular to the underlying [jaws] between income growth and cost growth in Barclays Capital, Barclays Global Investors, UK Retail Banking and Barclaycard.

Turning now to balance sheet and capital, in the area of funding and liquidity, we've directed a lot of attention at developing our deposit base, and customer deposits have risen by about GBP25 billion since the beginning of the year.

Meanwhile, at a time when the number of variables in the industry seems to exceed the number of givens, we've tried to create some anchor points for our shareholders, including our new shareholders whose presence on our register I welcome again today.

We've indicated what we expect our capital ratios to be and how we will use the new capital that we raise.

We've also indicated what our shareholders can expect for the interim dividend and of our dividend policy over the coming period.

We've said that we intend to run capital ratios ahead of target in the current conditions. So, as you've been hearing, about half of the new capital will be directed at higher ratios. That percentage and those ratios being determined by our assessment of what economic capital we need to run Barclays in this environment and about half in time at business growth.

But it's worth looking at Barclays during the 12 months before our recent capital raising to form a view about whether we were able to keep close to customers in the way in which you've been hearing from my colleagues, whilst making progress on the strategic priorities.

Although we were very focused on the risk that we were managing, we tried hard to keep executing on the strategy, whether that was by continued recruitment into IBIM, or buying a bank in Russia, or by opening a lot of new sales outlets in GRCM or, indeed, by continuing to lend. And that was with an equity ratio at the time of about 5%. Today's equity ratio is substantially higher.

I've attempted in my remarks to you this morning to give you some idea of what you should expect from us in the months ahead. The point I'd make is not what -- is not that the outlook is uncertain. What news to you is that? It's more important to say that the outlook was uncertain 12 months too, but we've kept executing.

I think the world in which we'll be doing business over the next 12 months will be a world of economic slowdown, but not a world of widespread recession. Nor a world, if I judge by our experience today, where our customers and clients will be inactive.

So, I finish by stressing our fixation with the safe management of the operations of the Barclays Group, whilst maintaining strategic momentum. That's where we'll be in the weeks and months ahead.

So, we'll stop now and we're very happy to take your questions. Could I ask you, in the usual way, when you ask a question if you could say your name and the organization that you represent? Thank you.

Yes, microphone coming.

Peter Toeman from HSBC. Could I just --

Morning Peter.

Morning. Just ask you about the mismatch between balance sheet and advances growth and WRA growth. I noticed that a change in Basal II models at Barclays Capital, push down risk weighted assets at BarCap.

But I wondered, in the future should we expect that advances growth and WRA growth should keep pace as opposed to moving in a different direction?

Thanks Peter. I'll ask Chris to answer.

They certainly will not diverge as much as they have in the first half. The first half we saw quite significant growth in loans and advances to customers particularly. And within that we saw growth in low RWA assets, things like settlement balances, collateral balances and lending to high quality and high rated customers.

That's no surprise. That's what we set out do. And similarly, what we saw was the reduction, as Bob's described, with some of the higher rated assets at GBP8.3 billion, we've talked about. So, that has led to a divergence in the first half. I don't see it following to the same extent as we go forward.

Next question? Over here on the left, microphone coming. Peter, would you mind passing it over. That would be great, thank you.

Thanks. It's Ian Smillie from ABN Amro.

Good morning Ian.

Morning. Two questions please; the first one on the loan to deposit ratio, which looks to have been (inaudible) sharply in the period to 124%. You mentioned in your speech John the increased focus on deposits.

Could you give us some sense of any [ceiling], which you run the book to, in terms of how high you're willing to allow the loan to deposit ratio to go? And if within that constraint, whether you'll be managing deposits faster or loan growth slower?

Can I take that question first of all Ian, and then come back to your second?

The way we look at this, as you know, is we look at the balance sheet of the Retail and Commercial Banking businesses and the Wealth business in aggregate. And we like to ensure that when we aggregate those businesses we are net long liabilities. And the reality of today is that we are net long liabilities in those businesses, so that we can export liabilities to the wholesale side of the balance sheet. That's the first thing to say.

The second is that although you have seen over the course of the last 12 months very significant emphasis in the GRCB business built on asset growth, it's important not to miss the kindred growth on the liability side. Frits has an ambition. And I state it is an ambition. But we are seeking to deliver it through time, that as we originate a pound of assets we should be originating a pound of liabilities.

We're very conscious of the need to focus on that balanced growth. And as I say, our attention to the liability side is what's generated the GBP25 million of deposit growth during the first half of the year. So, I hope that helps answer your point?

Could you help slightly more by giving some sort of [ceiling] about --

No, I've told you what our policy is and I've told you what our practice is. And I think you can see it pretty clearly in the numbers of the last two years actually, let alone the number for the last six months.

Okay thank you. The second question is on Barclays Capital headcount, which went up 100 I think in the half.

Yes.

Could you give us some sense of the moving parts behind that and perhaps whether there's going to be any benefit from [Equity First]? And taking from that any sense of how much you would like to build the headcount on a forward looking basis?

Very good. Bob.

It's always hard to predict exactly where we're going to be on headcount, because the markets -- how the markets report hiring are a big part of that. But you're seeing movements around. We've certainly reduced headcount in areas that we don't think are going to be as important and profitable going forward. I suppose the sup-prime space is a classic example, but it's not limited to that.

We've added headcount in areas, such as commodities, where we see strong growth in that business. We're still committed to bringing in talent from the campuses, so that we're building the culture as we go forward. And I think what I would say you should expect to see is a modest increase over the year. But it could vary a little bit either side of that.

Thank you.

Next question just in front, marvelous. Is the microphone moving steadily?

Thank you. Good morning Alastair Ryan at UBS.

Hello Alastair.

Probably to exhaust at this point, I know that's probably a challenge for the room to find more questions on it. But the increase in financial institutional lending, could you just give us the color on what that is? Is it ACA type financial institutions or is HSBC type financial institutions?

And then I've a second one relating --

Okay Alastair, we'll let Chris answer the first question.

If you look at the overall exposures between loans and advances to customers and to banks, you'll find that about GBP27 billion is settlement in collateral balances. And that is predominately within the financial institutions.

That bit that goes into banks. The banks and the piece in loans and advances to customers are the others, which is a range of asset managers through to hedge funds. The important thing though is the short term settlement and collateral deposit balances.

Alastair, you had a second one?

Yes thanks. Bob mentioned [oil]. It's been pretty consistent over the last several years, in terms of inviting us to think that BarCap has long customer volumes and underweight in terms of trending prop trading. Given that the oil trend is very condemned post the end of the half, could you comment on the commodity business?

Listen, we are -- we are just very thankful that we were early. It was nine years ago that we began building that business. It was virtually non-existent nine years ago. We're in a very strong position. And you're right. I have said that this isn't about the [whole] market end prices.

And our view of oil, which has been fairly public, is that we see a range of 150 into 140. There's going to be a fair amount of volatility in there.

What I said in my presentation I reiterate. There is a structural imbalance between supply and demand in many of the key commodity markets and the demand is real. It's going to be by how weak is the economy or how strong is the economy, and the supplier is going to take.

But what I can tell you for sure is we are doing a lot more client business every month than we have ever done before. Our presence in the market is bigger, more important and more respected. But there are more clients doing business, recognizing the risks in this business than there ever were before, both on the investor side and on the risk management side, the corporate site.

Next question. Microphone coming, yes there we. Simon, I think it's coming to you now. Tom, would you mind me giving it to Simon first and then --

No, no, that's fine. I'd rather keep it thanks.

No, no you give it to Simon please and then I'll come back to you I promise.

Great, I could steal all his questions. It's Simon Samuels from Citigroup. Just -- well, actually just two or three actually, but firstly just factually, could you give us the loan to value on your new flow of mortgages in Spain in the way you have in the UK?

The loan to value ratio on the new flow is about 60%, just less; averaging between 55% and 60%.

Thank you. The -- two questions. The first one I just wanted to see whether you might just talk around slide -- sorry, page 96. That's just showing your customer loans advances by industry group. The category I was just quite interested in was the construction and property portfolio that totaled about GBP25 billion globally.

But maybe more interestingly has grown, looks like about -- well, annualized about 25% in the first half of this year. I was wondering whether you could just talk about the trend you're seeing there, whether that's voluntary or involuntary draw down. So, that's the first question.

Right, well let me give a general comment and Chris may well want to add. I think the way that we look at this is on a numerator and denominator basis, Simon. I think that by the standards of the industry in any event, and remember that our loans to customers are something like GBP400 billion. Having property and construction at GBP25 globally out of GBP400 billion is subdued as to global exposure compared with the industry. And that's a very conscious decision.

If I look at our pattern of lending activity generally, and I'm going to allow Chris to comment further in a moment. But if I look generally what we have been doing in these markets, as you can imagine, is we have been very fixated with ensuring that where we are extending exposure into a sector that may be riskier than it has been, that we are extending to relationships that we know well.

And so, the lending activity that we've done in that sector is very much dominated by a long term view of relationships that we respect and know. Chris?

I was going to say. The predominant portfolios are in the UK and it has been a mix of draw downs of existing facilities -- substantially draw downs of existing facilities with existing customers, some new business and in Spain there is a small balance of about GBP4 billion, which has grown slowly but not more significantly than the overall book in Western Europe.

So, I think I would characterize it as mostly existing customer relationship draw downs rather than new business.

Thank you.

Simon, you had a second question?

Yes, one question really, just on -- on page 57, it's looking at your coverage ratio, which has basically drifted down about 10 percentage points in last year, from just over 60% to around 50%. Obviously, I guess that reflects the increasing proportion of non-performing loans that have got some collateral back into them. So, I understand the reasons for that move.

My question is, what would you -- it's an odd trend to see given what's going on in the world. Do you think there's some natural trough that that number hits, but then if you go back a long, long way in Barclays Group that coverage ratio would have been historically much higher. So, going forward from here, would you expect now a reconnection of NPL formation and essentially the formation of [new] P&L reserves?

No, it's actually not so significantly out of touch with the ten year average, if you look at the numbers over a long period of time. And so, what I would say and I'm going to allow Chris to comment further in just a moment. But what I would say, Simon is; is the coverage ratio is performing as we would expect at this point in the cycle? The answer to that is yes. But Chris would you like to emphasize?

I will. You're right in terms of the drivers behind this are twofold. Firstly, there is a mix change. And secondly, there is the impact of what we've been doing to early stage delinquencies. And in particular, Frits mentioned some of the back end processes, which have the impact of getting the numbers into the NLP and the PCRL numbers at a relatively low impairment rate. So, that's what we're seeing.

As you go through the cycle you expect to see that increase. I look at it against the range that we've seen. And I know it's impacted slightly by changes of accounting from UK GAAP to IFRS. But if you look at the range over about the last fifteen years, the numbers that are at 52 go somewhere between 37% at the low point and 75% at the top point. And that will depend on a number of the factors, including those I've just described.

Very good. Let's pass it to Tom in front of you; Tom?

Thank you very much John. It's Tom Rayner from Citigroup. Just wanted to test you out really on your level of comfort with your capital ratios now; on the equity Tier 1 ratio just reported at 5%, the way I calculate it it comes out at 4.6%. So, it's a bit lower, which would leave your pro forma a little bit below 6% I think.

And the reason I'm asking is not -- I'm not going to start asking about the structured credit mark downs, but rather the trends in the non performing loans, because ex. the structured credits, if my math are right, in the first half of this year the NPLs have increased by 54% annualized. And given the economic downturn is early stage in the UK. And we're seeing obviously property market problems in places like Spain. I just wondered if you could comment on those trends together, the capital strength versus what we're seeing on NPL.

Yes. Well, let me start and I should ask Chris to give more detail.

Tom, the way we look at this is, as I said in the remarks that I was making. We derive our view about the capital ratios that we have from an assessment of the economic capital requirements of Barclays at any given time. And we're taking a forward view, of course, when we come to that analysis.

So, we don't pluck out of the air a view about target ratios or whether we want to run actual ratios relative to target. We try to invest that decision with as much science as possible. And I should say that plenty of science goes into the calculation of the equity ratio at 5%. So, I hear you that you disagree with us on that number, but we're confident about the consistency of the number and the rigor with which the number is calculated.

So, that's how we come to our view. It's unsurprising to me that we should require in these markets more capital -- more economic capital to run Barclays. And that's one of the reasons why we have raised more capital. Chris?

All I would say really in addition to that is if you look at the economic capital, which we use as one of the tools that helps performances to the ratio level, you'll see quite significant growth in economic capital requirement at exactly the time we would expect, which is at the beginning of the downturn, rather than as we go through it. And it is that, which has helped inform us as to the ratios we wish to run.

Could I have a quick follow-up just on that very issue. Just on the economic capital. I noticed that the Barclays capital has actually doubled on the position or nearly doubled on the position a year ago. Is that simply reflecting what's happened post the credit crisis? Or is that reflecting some other factor?

Again it's very much what we would expect. The -- you see the impact of the stressed environment. You see the impact of business growth. You see the impact of the diversification of -- by asset class. So, it doesn't surprise us at all that economic capital has grown, nor that there is a convergence at this point in the cycle between economic capital and regulatory capital, which convergence, of course, has been amplified by what's happened in Basal II.

Anything you want to add Chris?

I think you've said it.

Next question. On the aisle here, yes that's it. Morning Tim.

Good morning John and good morning everyone. It's Tim Sykes from Execution. Just on this point of capital, I've got two questions. They're slightly related. The first is just to clarify then that the target equity Tier 1 ratio remains 5.25%.

Yes.

And you would expect to drift back towards that level by say the end of next year?

Well, I know you would love us to forecast that, but I -- you said that I haven't.

Okay, well, that's my interpretation and so we'll take it from there.

Really, I want to relate that back to Barclays Capital, because Bob [did] a brilliant presentation and we're all charmed and persuaded that things might be getting better again. But the world is changing. And Barclays Capital is built on leverage and deleveraging is a feature of the discussion with regulators. And it's a discussion where the market is going to go. We have an article on the front page of the FT today.

And so, return on assets is becoming -- is going to become an important calculation. And the return on asset at Barclays Capital is very low. It's 0.05% on today's numbers and it was only 0.2% back in the first half of 2007. So, I wondered if you could comment on the regulator's desire to see leverage reduced and the impact that that will have on your requirement for capital and the relevance of economic capital within than environment, and where you would position your business within that new environment.

Bob.

All very good questions. There's no doubt that we have recognized for a year now that going forward banks, in general, and investment banks, in particular, are going to operate with more capital, as John just said, with less leverage and that's how we're building the business.

If you separate -- as I talked about, we moved our difficult assets, we'd prefer not to have those clearly, into a back book that we're managing and we're working down. But away from that you saw a significant decrease in the risk weighted assets.

And I think what we recognize going forward is that our business model is going to have to adjust, all business models will adjust, to the new environment of less leverage and more equity and we will. It means more client business. It means more the things that I'm talking about in the commodity business. It means more of the volumes that I'm talking about in the foreign exchange business.

So, I think the way I would think about is that thank goodness we have an integrated universal banking model in the new environment. Thank goodness we recognize that those things are going to be adjusted over time and thank goodness the underlying flows of our business.

That's why I'm -- I think it's so important in this difficult time to look at how strong the revenues were in those key product lines in Barclays Capital, which wasn't driven by risk. It was driven by our client business. We've doubled the foreign exchange volumes in the first half of the year. So, the stronger the franchise, the stronger the business model, the stronger the management team, the stronger the performance is going to be going forward.

Tim, you had a second question did you?

Well, no, I'm not quite sure that addresses it, maybe we could take it up off line. But I think it's a fundamental feature to move forward.

Question behind you.

Derek Chambers from Standard & Poor's Equity Research.

Good morning

I have two questions. One is on the gain on widening of spread on own liability. I think in the past [I've] been able to reconcile this for you and for others [who] do this by [moving] some of their own credit risk spreads. And that certainly worked in the first quarter when there was a widening. And then in April I think you indicated a narrowing. What I find difficult to interpret is why, although your overall credit spreads seem to have narrowed, your gain on liabilities has widened?

Shall we take that one, first of all? Chris.

If you look at the progression of it through the first half, yes, you're right. In the first quarter we had something in the order of GBP700 million of gain. That snapped back in April as a result of spreads narrowing.

But if you look at what happened to spreads in the last week of June, they opened out again and actually have gone to a higher level than we saw at any other time in the quarter. So in terms of progression there was about GBP700 million of own credit widening impact in the first quarter and about GBP150 million net in the second quarter getting to that GBP852.

You had a second question?

I'm still not sure if that ties in with what I've seen of the credit spread (inaudible).

Second question is on your outlook for the UK performance, because your risk tendency has increased slightly, but it [looks] like mainly in the Goldfish acquisition. You don't seem to have -- maybe it's because of your mortgage book, you're not [seeing] the trends of some of the other non-secured credits. So, you don't seem to be taking much account of the deteriorating UK economy. You do have some increase in potential problem loans (inaudible), but could you just share your thinking on the near term outlook for the UK credit?

Well, let me start and I'll ask Frits to add. As I said in my remarks, our presence in this economy means that we can't sidestep neatly the impact of economic slowdown. But I do think that if you look at the key bell weathers of risk in the United Kingdom, our exposure to commercial property, our exposure to secured residential property, our unsecured exposure, particularly in Barclaycard, you can see the trends are very encouraging.

So, if we look at impairment levels, if we look at delinquency the files have performed well in the United Kingdom over the course of the last 12 months and over the course of the last six months.

So, of course, GDP growth in the United Kingdom is going to be slower in 2008 and 2009 than it has been for some time. We acknowledge that. But we believe we've got ourselves in a position where we are in any event prepared. And what we like to see, of course, is the files responding to treatment.

So, we would have expected and, indeed, we forecast very clearly that we would see through 2007 an improvement in the impairment performance in Barclaycard UK. And we saw absolutely that. And as we've said in the announcement today there's an improvement underlying in Barclaycard UK in its impairment line of the GBP60 million first half versus first half. Frits, do you want to add?

Yes, thank you, John. What we did was Anthony and the team tightened up lending criteria already 18 to 24 months ago. So, if you look at the type of customer we're getting into Barclaycard, that's a profile of people. We turned down 50% to 55% of the applications and we intensified collections. So, if you add it all up, we've done a very good job in managing a more difficult UK environment.

To come back on the UK mortgage book, I'd like to add that our losses last year were zero and this year it's negligible till now.

Next question. Over here, yes please.

Robert Law of Lehman.

Morning Robert.

Can I have three questions please? Firstly, in terms of the impaired asset trend that you're showing, there has been something like a GBP2 billion rise in the PCRL and I think year to date. Can you give us some feeling of the timing of that during the period? Is that a representative (inaudible) [deterioration] during the first half as the slowdowns come on? Or is it all backend loaded towards the second quarter?

Chris, do you want to comment on that first question?

Yes it is -- as you would expect, as the economy has deteriorated, the level of growth has increased. But I don't think I would read into that that we expect that to be entirely economy related. Some of it is the direct result of the actions we've taken in collections and that backend collection process that Frits has talked about.

Robert, you had a second.

Secondly, within the Group as a whole, I think [Frits] comment on the effect of financing on asset sales? And so, what I'm thinking about here is loan sales providing financing, has that been a significant feature for you? And if it has, what impact has it had on risk assets?

Bob, do you want to answer?

It has not been a significant factor. We have done some financing from time to time with clients, but it's been a small portion of what we sold into the market.

Next question?

Could I have one more?

You can Robert, yes, of course.

I was just commenting on the rate of expense growth. If you back out BarCap, I think there's been a fairly significant deterioration in expenses versus revenues, which obviously reflects investment you're doing in the international businesses. Do you think that's likely to continue in the short run? Or do you see it more in line?

Well, if you look there are some areas where we have consciously invested. So, if I think about where we've got negative [jaws], I would refer to the Commercial Banking business here in the United Kingdom, where Chris has talked about the sort of investments that we've been making, as an example, in customer facing staff. And the other obvious area is GRCB Emerging Markets, where we have negative [jaws] for all the reasons that your refer to.

If you then look elsewhere, on an underlying basis, actually I think that the [jaws] performance is quite strong. You've got -- if you take it just at the GRCB level and the IBIM level, in each of GRCB and IBIM, you've got 3% positive [jaws].

So, I would say that the cost management is very much responding to treatment. Where we're choosing to invest, we have an eye, of course, on return on that, but where we're choosing to invest, we're prepared to give cost license in that particular business area. But generally, our attitude, as you would expect, given the environment, is one of real cost stringency.

Next question; microphone coming; yes, that's it. It's yours Michael.

Thank you. It's Michael Helsby from Morgan Stanley. I've got two questions, one on the credit exposures and then just a follow-up on capital.

If I look at page 40 of the press release, I'm just honing in on your monoline exposure. Certainly, the level of the write downs you've taken on the A, BBB and the non-investment grade gross exposure looks very, very, very low relative to what other institutions have done. So, I was just wondering if you could comment on that. Why it is so low?

And then also, on your -- if we go back a couple of pages --

Michael, can we just take the first one first --

Yes, sure.

And then we'll be able to follow it better. Chris?

Michael, I think if you -- when I look at this, I think of two things. I say; what is the quality of the underlying assets that have been wrapped? And then, what is the quality of the monoline insurer that's doing the wrapping?

And if I look at page 40, I think the thing that stands out for me is if I look at the asset composition, you'll see that there's less than 9% of the total which is US RMBS and the vast majority of it, GBP14 billion odd is CLOs, which look and are performing extremely strong and are a very high quality.

I then look at the disposition of the monoline themselves and I look at out of that [2016] for the RMBS, only GBP63 million is being wrapped by non-investment grade insurers. So, I put both of those facts together. It makes me feel very comfortable with the level of exposure we've got, the type of exposure we've got and the marks we've taken.

Bob, could you just add?

Michael, I think it's just important to put the business model in context, because there's a number of different ones. We've seen some big write offs out there on monolines. Some of them because there's direct exposure, using them as insurance for difficult positions, and those have had to be written off. We had none of that.

The large majority of this position, as Chris said, I think it's 19 of the 21 is away from the mortgage related business. And when you're positioning a CLO high quality asset and as a last part of that you take some insurance as well, it's much different, and hoping and wishing with a poor position that you can go out and get some insurance.

At the end of the day, for us to have any losses here at all, we have to have defaults on both the underlying assets and the monoline. So, I would look at it in that context of how small the position is and what would be considered difficult assets. And then with those difficult assets, we haven't had any defaults either.

So, I think it's a much different position here from a business model point of view. And it's hard to do a read across unless you think about the business model and how the business was entered into.

Michael, you had a second question.

Yes. Just very quickly, as a point of detail, on page 36; there's been some concerns drifting in about the quality of the '05 vintage on high grade CDOs. So, I was wondering if you could give us a split of the [942]. What's AAA rated and what's -- and as I say, I've just got one more on capital?

Right. Well Michael, we've given you about ten pages of breakdown of these numbers. And to go to an 11 page is beyond our tolerance, I'm afraid.

Okay.

We'll try very hard to answer your appetite for detail.

Okay. It's quite important though, I believe, so.

That's why we've given the detail.

That last point, but the -- my follow-up point on capital --

Please, this is your last question is it?

It is yes.

47.

Yes. No, no, it's basically there's been a lot of chatter in the markets about US investment banks and the capital that they are going to need to hold in the new environment. And the 10% Tier 1 has been a ratio that's been banded around, with the inference that if you want to have a big investment bank in the US, which clearly you do, that Barclays will need to get to a 10% Tier 1 ratio.

So, it's just what would you say to that? Do you recognize that rumor?

Well, I'll ask Bob to comment. But the general point I would make is that the capitalization levels decided by regulators and supervisors around the world, are very much dictated by business risk and business model. That today is -- that hasn't changed at all.

So, I can understand -- I know the trend that you're referring to, of course. And we've heard that chatter as well. But would I expect that to be applied universally across the market? That's not what we would expect. Bob?

I have nothing to add (inaudible).

Question -- actually Simon, do you mind if I go to somebody who hasn't asked a question yet? Here we are. Could you come there, and then I'll come to you, and then we'll have one last question after Simon's and then we'll wrap it up. Yes.

Thank you. It's Manus Costello from Merrill Lynch. I had a couple of questions on your commercial real estate disclosures please. Firstly, in the US, you've disclosed a couple of very large loans, which are within that portfolio. I wondered if you could give us some more color on what those are and what your intentions are towards those assets.

Chris?

And secondly, in terms of the --

Can we take the first question first and then we'll come back to you.

I'm loathe to go much further, because it starts then getting down to specifically identifiable names, and we'd start talking to you about what we're working out with them on individual circumstances. So, I think, if you wouldn't mind, I'd rather keep the confidentiality of individual names to our selves.

Our hope is that you will find that we've given again quite a lot of disclosure by sector and by country. We've given the breakdown between big exposure in the United States and the distribution of risk beyond that. So, we're trying to get you into the ball park, if you see what I mean, without going into the territory that Chris has just said we can't go into.

Should we (inaudible) -- should we think that they are two fairly similar sized facilities or one?

Please bear with me. We've gone as far as we can properly can.

My second question is on the marks that you've taken on that commercial (inaudible). Relative to some of the peers who are around the 90% to 92% level, most of yours appear to be in the 97% to 98% area. And I wondered if you could talk us through how you actually value those (inaudible)?

I'll -- let me ask Bob to comment, but our starting point here is that -- and it's a point that we've tried to make often actually over the course of the last 12 months, is that a simple read across is a dangerous thing to do, because risk isn't generic. Risk management isn't generic.

But just taking a simple read across and applying it [in vaquo] across the whole book is quite misleading. And one of the things we've been trying to do with our disclosure today is put you into a position where you can see why we've held that view. But I'll ask Bob to comment.

Again, it's business model and quality of assets. And one of the reasons we sat back and said we're going to give even more disclosure than anyone's given is we are confident in our marks. We have been confident in our marks. And we want to give you more information.

Look at the geographic spread of our business that's outside the US, for example. It's not in the UK and it's not in Spain, it's predominantly in Germany. We have high quality assets. This is a core business. We're a bank. We're in the lending and in the commercial real estate business. And we have high quality assets being run in mark to market books. So, we are quite confident to say that some other institution is marked at 92% in the sector of commercial mortgages. If you looked at the quality of our book, which we're trying to give you a look into, you'd be as confident as we are on the marks.

I think I'd add --

Go on, Chris.

One, where we've got specific instances of names in the market that have marked levels that we're aware of, we've clearly taken that into account. And the second thing I would just point to is an important driver of the mark is the weighted average number of years to initial maturity. And you see we've given those by region. And the US specifically is very short term at 1.7 years.

Given where we are on time, I'm going to take one last question from Simon and then we'll wrap it up. And, of course, we're available to you hereafter offline. Simon.

Yes. Thanks for taking the second question as well. And, in fact, I should also start with saying thanks very much for the extra disclosure. I think it's really excellent, so pretty lucky you're all sitting down (inaudible). But well done.

The question actually I wanted to ask, which is going back to Tim's question and it's really for Bob is, I imagine this is the last time we'll see -- if you look at the first half of '07, BarCap made a 54% return on economic capital. I suspect it's going to be a while till we return to that number. And since then, you've obviously double the capital allocated to business and the earnings powers come down.

So, the question really is, in your view, when this has all shaken through, what do you think a sustainable return is for BarCap either on a [reg] basis or on your preferred economic basis?

Very fair question. It's probably I should have thought forward enough to have answered it that way and I didn't when the question was asked.

When we started BarCap, our commitment was 15% to 20% returns over the cycle. We believe -- John believes, Chris believes, Frits believes, I believe that we can do in this environment the 15% to 20%. I will [spot] you that the opportunity for 54% return on economic capital is not there. I agree with that. The conditions in the first half of 2007 were wonderful.

But I think that amplifies the revenue track record in the first half of '08 compared to that, but there was more capital attributed to the business.

So if I can simply state 15% to 20% is our expectation of risk-adjusted returns, whatever capital you want to use. We have a second goal, which is in good years we'd like it to be 20% maybe a little bit plus, and in bad years 10% to 15%. What we don't want to do is bad years are negative and good years are high.

So, it's the commitment we made earlier. And I think what you will see in the new environment, which will be more equity, less leverage, is the stronger franchises are operating at better margins and better market share.

Can I thank you all very much for giving us so much time this morning. We're now finished.