Barclays PLC (BCS) 2010 Q2 法說會逐字稿

Welcome to this presentation of the 2010 interim results for Barclays.

The running order this morning will follow a familiar pattern. We're going to start off with a presentation from Chris Lucas, our Group Finance Director, who's going to take us through the numbers. He is going to be followed by Robert Le Blanc, our Chief risk Officer, who's going to dig behind those numbers from a risk perspective. And then thirdly, we've got John Varley, our Group Chief Executive, who's going to put the whole thing into a strategic context.

That's going to come in, I hope, at just under an hour, and after that, of course, we'll have time for questions and answers. And in that respect, you'll see on the platform we've got Bob Diamond, the Barclay's President, who will add up to the number of people who will be there to answer questions.

So I know you're all very busy. I know this has been a tough week for all of you, and so we'll try and get the whole thing done by 11 o'clock.

Before I sit down, can I do what I should do at this stage, which is to please ask you to check that your mobile phones are switched off?

Thank you very much.

Good morning, and thank you, Marcus.

We're reporting strong profit growth year-on-year, resulting from a substantial improvement in impairment combined with a resilient income growth despite relatively subdued market conditions. We're also generating higher returns both on an increased equity base and on risk weighted assets.

We've managed capital tightly, leverage was stable, and we further strengthened our liquidity position, while continuing to support customers as we extended GBP19 billion (sic - see presentation) of gross new lending in the UK.

In general, my comments compare the first half of 2010 with that of 2009. I'll also refer to the second half last year and first quarter this year, where that gives you a better understanding of the trend. I'll start with the headlines at Group level.

Profit before tax was GBP3.9 billion, up 44% on the first half last year. Taking into account the impact of own credit, gains on acquisitions and disposals, and gains on debt buybacks, adjusted profit before tax was GBP3 billion, an increase of 22%.

Income was 8% higher at GBP16.6 billion. Adjusting for own credit and debt buybacks, to give a sense of the underlying performance, income increased 5% year-on-year, and 7% relative to the second half.

Impairment of GBP3.1 billion improved by 32% year-on-year, or 12% compared to the second half. We're maintaining our guidance for the full year of a 15% to 20% reduction in impairment relative to 2009.

Looking at the movements, there was an increase of GBP433 million in Spain in Barclays Corporate, shown here in yellow; a very significant reduction at Barclays Capital, which is in blue; as well as a slower overall improvement in the rest of the business.

Improved impairment resulted in strong growth in net income of 25% to GBP13.5 billion. Costs grew to GBP9.7 billion, reflecting the continued build-out of our business, and the cost to income ratio was 59%. I'll talk more about this later.

Return on equity was 9.8%; on tangible equity it was 12%; and return on risk weighted assets was 1.5%.

Earnings per share grew 27% to 20.9p, and we're announcing a second interim dividend of 1p for the quarter, bringing the dividend for the first half to 2p.

Turning now to Global Retail Banking; while income of GBP5.1 billion was broadly stable, profits increased 7% to GBP901 million.

Looking at the individual businesses, profits for the UK Retail Banking grew 61% to GBP504 million. This includes the net gain of GBP85 million on the acquisition of Standard Life Bank, and a GBP72 million net pension benefit. Excluding these, profits grew by 19%.

Income increased 1% as we continued to be impacted by margin compression. Impairment charges reduced by 14% year-on-year and by 12% in the second half to GBP447 million, driven by continued improvements in unsecured lending and the quality of new business. Net income after impairment grew 6% to GBP1.7 billion, and costs were flat at GBP1.3 billion.

Loans to customers were up 11% to just under GBP114 billion, driven by growth in the UK mortgage book, including Standard Life Bank. Gross new mortgage lending amounted to GBP8.5 billion, resulting in net new lending of GBP3.3 billion.

The average loan to value on the existing mortgage book was 42% on a current valuation basis. On new lending, the average loan to value was 51%. So we're continuing to grow market share with a conservative risk profile.

Customer deposits grew 10% to GBP106 billion. Two thirds of this increase was Standard Life Bank.

Our loan to deposit ratio in UK Retail Banking at the end of June was 107%.

At Barclaycard, income was down 3% to GBP1.96 billion. Most of this reduction was the impact of the US Credit Card Act, which had a significant effect on all US card issuers. We've made adjustments to our business in order to mitigate the impact of this.

Impairment charges decreased by 3% year-on-year and were broadly flat on the second half. Delinquency trends in our largest books, UK and US consumer cards, have improved compared to the second half.

Expenses grew 6%, reflecting an increase in staff-related costs and an investment in marketing, including the launch of Barclaycard Freedom.

Taken together, this resulted in profits decreasing by 15% to GBP317 million.

In challenging market conditions, Western Europe Retail Banking delivered profits of GBP10 million. This included a gain of GBP29 million from the acquisition of an Italian cards business from Citigroup.

Income decreased 12%, reflecting our higher costs of deposits. Impairment improved 10% year-on-year, and 30% since the second half.

Just to remind you, our retail mortgage book in Spain has an average loan to value of 56% on current valuations.

Costs increased 12% to GBP495 million. This was largely due to the acquisition of two new credit card businesses in Italy and Portugal, as well as the addition of 60 new distribution points as we continue to build scale in these markets.

Our loan to deposit ratio has improved as deposits grew 35% year-on-year compared to asset growth of 11%. We're working to improve profitability and achieve a more balanced funding profile in Western Europe.

At Barclays Africa profits increased 8% to GBP70 million, driven by strong income growth of 10%, and a 24% improvement in impairment. Expenses grew 12% to GBP285 million as a result of increased investment in the infrastructure and higher staff costs.

Moving on now to Corporate and Investment Banking and Wealth Management, I'll start with Barclays Capital where profit before tax, excluding the impact of own credit, grew 31% to GBP2.5 billion.

Top line income before write-downs and own credit was GBP7.1 billion, which is 32% down year-on-year, reflecting the extraordinary market conditions during the first half of last year.

On a quarterly basis, top line income was only 15% lower in the second quarter this year than the first.

Total income increased 30% to GBP7.9 billion. Taking into account a reduction in credit market losses of GBP3.4 billion, gains on own credit of GBP851 million, and a GBP1.6 billion decrease in credit market and other impairment, net income grew 80% to GBP7.6 billion.

This slide shows income trends on a quarterly basis. You can see a healthy progression in total and net income across the last four quarters, giving an indication of the real operating leverage in the business as credit market write-downs and impairment levels reduce.

Looking at top line income by business line, the reduction in fixed income, currency and commodities in the second quarter was a good performance, given lower levels of our activity across the industry. Investment Banking was also impacted by lower levels of advisory activity.

Equities and prime service saw top line income growth in the second quarter, even though the environment was subdued, reflecting the build-out of our cash equities business.

We're pleased with this overall performance and the trends relative to the market, which reflect the strength of our client franchise. This has enabled us to take leading positions in many client-driven league tables. The slide shows you some of our currently league table positions in debt and equity markets, as well as some industry and client awards we've received in recent months.

Cost growth at Barclays Capital was significantly less than growth in net income. It included investment in infrastructure, the continued build-out of equities and Investment Banking, and increased compensation costs reflecting a 16% growth in headcount, increased profitability, and higher deferrals from prior years in line with regulatory requirements.

Headcount increased to 25,500 during the first half, though we expect this to decline slightly in the second half.

We've largely completed our build-out of equities in Investment Banking in Europe and, as you know, our philosophy on investment across the Group is pay as you go. So we'll calibrate the pace at which we invest in these businesses in Asia in line with economic conditions.

On a headline basis, the cost to net income ratio reduced from 73% to 55%. Excluding own credit, it was 62%, well within our target range of 60% to 65%.

The compensation to income ratio was 37%, and excluding own credit, it was 42%. As you know, decisions on compensation are made early next year based on full-year performance.

Barclays Corporate reported a loss before tax of GBP377 million. Profit growth of 3% to GBP379 million in the UK and Ireland was more than offset by losses which were driven mainly by higher impairment in Continental Europe and restructuring charges in new markets.

Income decreased 14% to GBP1.4 billion due to the non-recurrence of an GBP83 million gain on debt buybacks in the first half last year, increased funding costs, and reduced risk appetite outside the UK.

Operating costs grew 8% or GBP61 million, which was more than accounted for by restructuring costs of GBP93 million in new markets.

Impairment charges increased 32% to GBP949 million. There was an increase in Spain of GBP433 million, largely driven by increased severity assumptions for the property and construction sector. Robert will talk more about this later.

This was partly offset by a significant improved performance in the UK and Ireland and new markets, where the impairment charge reduced by GBP212 million as default rates and insolvencies decreased.

Deposits grew 18% in the first half to more than GBP68 billion, with most of the growth in the UK. Lending fell, reflecting general market trends. This resulted in a loan to deposit ratio of 119%, which is a very significant improvement from 150% a year ago.

We are focusing on these businesses on the most attractive customer segments, product areas and locations in order to deliver a return to profitability.

At Barclays Wealth, profit before tax increased 27% to GBP95 million. Income grew 22% and costs 20%. Cost growth included GBP33 million as we started our strategic investment program. We expect to invest a further GBP80 million in the second half.

Moving to Investment Management, as you know we hold a19.9% stake in BlackRock which contributed profits of GBP31 million, mainly through dividends.

Absa Group has announced an 18% increase in profits to ZAR5.6 billion. Absa Capital, Absa Cards and Absa Wealth are reported within their respective segments in the Barclays Group. At Absa, profits increased 23% in sterling, helped in part by the strengthening of the rand in the first half. Income and costs increased 14% and 19% respectively, and impairment charges improved by 4% to GBP282 million.

I said earlier that I'd talk in more detail about operating expenses. The slide shows a breakdown of cost growth across the Group.

About two thirds of investment cost growth relates to the build-out in Barclays Capital and Barclays Wealth. The balance includes restructuring costs in Barclays Corporate, as well as acquisitions in GRB.

Performance cost growth reflects levels of profitability and a GBP270 million increase in deferrals of prior year compensation. It also includes long term incentive plans which are subject to performance hurdles.

The growth in regulatory costs includes a one-off provision of just underGBP200 million in relation to a review of compliance with US economic sanctions, as well as GBP51 million of bank payroll tax.

Looking at the Group's cost to income ratio, this increased from 58% to 59% during the first half, and from 53% year-on-year. Half of this was accounted for by head office, which reported a loss before tax of GBP421 million compared to a profit of GBP330 million for the first half last year. This includes the one-off provision that I've just mentioned, as well as non-repetition of net gains on debt buybacks of GBP1.1 billion in the first half last year.

Moving on to look at margins, the overall net interest margin declined from 214 basis points to 198 basis points year-on-year.

As you can see on the slide, around 19 basis points of this decline was due to liability margin compression. A further 9 basis points resulted from a reduction in treasury income and changes in the asset liability mix. These reductions were partly offset by an average increase in customer asset margins of 12 basis points. The net interest margin for the second half last year was 208 basis points.

When you look at the trend in asset and liability margins by business, you should be aware that these have been impacted by changes to our new funds transfer pricing mechanism introduced in the fourth quarter last year to incentivize the gathering of deposits with long term behavioral characteristics. These changes have had a negative impact of 40 basis points on published asset margins and a positive impact of 60 basis points on published liability margins.

Reported aggregate Group net interest income is unaffected by these changes.

We continue to benefit from our hedge, which helps protect margins, and we've extended its duration to cover the possibility that interest rates remain low for some time. The hedge, which includes both product and equity hedges, contributed GBP1.4 billion to Group income for the first half, which is up from GBP1.2 billion in the first half last year.

Moving on to capital. At the end of June our core Tier 1 ratio was 10% and our Tier 1 ratio was 13.2%. This slide shows the development of core Tier 1 capital during the first half, with positive movements resulting from our profitability and the exercise of warrants, offset by negative movements, including a fall in the BlackRock share price.

Turning to the balance sheet, adjusted gross leverage was stable at 20 times. We've been operating in a range of 20 times to 24 times over the last six months, with some ebb and flow, depending on overall activity levels. We intend to run leverage within this range going forward.

We've achieved this at the same time as increasing the size of our liquidity pool to GBP160 billion, which is more than 15% of our adjusted tangible assets.

We believe this is sufficient, pending the outcome of new regulation.

Before I close, I'd like to make some comments about our liquidity and funding. Firstly, our model is self-funding in Retail and Commercial Banking, and Wealth Management has stood us in good stead. We've increased average deposit balances by 16% year-on-year compared to 5% growth in average assets. And our Group loan to deposit ratio improved from 130% to 124%.

Secondly, we've continued to benefit from strong name recognition in the Wholesale markets, which is evident in our relative cost of funding.

Thirdly, we've raised GBP15 billion of Wholesale funding during the first half, which is more than enough to address financing maturing in the whole of 2010. Our maturities for the next two years are well within our recent funding capability.

So to close, while the economic and regulatory outlook remains uncertain, we continue to manage the Group with a focus on our customers. This has enabled us to generate higher returns, despite increased shareholders' funds, whilst maintaining strong levels of capital and liquidity, which positions us very well in the current environment.

Thank you very much. I'd now like to hand over to Robert to discuss risk management in more detail.

Thanks, Chris. Good morning. Today I want to review impairment and will cover Wholesale and Retail credit, with a quick review of some Eurozone exposures, and a deep dive on impairment in Spain. I'll then look briefly at market risk and will share with you our views on the outlook.

Let's start with impairments, by looking back at our loan loss rate, which has averaged about 90 basis points over the last 20 years.

This includes a period of very high impairments from the property slump in the UK in '92. That was followed by a recovery period of about five years, with low losses as the loan book was rebuilt.

And then a longer period, with more normalized impairments, including restructuring in the international telecoms industry, which occurred mostly in 2002.

Finally, in the last three years, we've been rapidly increasing and now reducing loss rate during the financial crisis. We reported a loan loss rate of 118 basis points in the first half of this year, down from 156 basis points for last year.

And it's reassuring to me that through the positioning of our portfolios and their diversification, the move in our loan loss rate was relatively moderate and we remained profitable throughout the last three years. From here, we expect the loss rate to move towards the long term normalized range.

Today, I want to explain how Wholesale and Retail have moved differently and to give you a sense of the trends that shape our outlook. Let's review how recent trends in loan impairments reflect our business model.

A benefit of universal banking is that impairment is diversified by product and by geography; and in practice, it's also diversified in different phases across time periods.

Let's look at some examples of that.

In both BarCap credit market exposures and US cards, impairments increased earlier as those markets were affected by the early slowdown in the US.

For other areas, including the general loan book for BarCap, the larger Corporate business in the UK and the retail books in Spain, impairments increased more during the middle part of the recession.

And for others, such as UK unsecured lending and the Corporate business in Spain, impairment has increased later in the cycle, reflecting the timing of changes in the credit environment for those areas.

Impairment is now moving down from the recent high levels at different points in time and at different speeds. In some areas, like the credit market exposures and BarCap loans, reductions have been earlier and faster. Other reductions, including most retail areas, began later, and the reductions will be more gradual.

This phasing provides a diversification benefit through our business model across product and also across periods of time. These trends are important because they help form our impairment outlook.

Let's look at total impairment, which is down 32% on the first half of last year. A good part of that comes from the reduction in available for sale and reverse repo impairment. I'm going to focus today mostly on loan impairment, which reflect the performance of our core portfolios.

Let's examine loan impairment by business, not including available for sale and reverse repo.

Loan balances have increased, mostly from higher settlement balances in BarCap and from continued growth in retail lending. Impairment has been steady across Barclaycard, Barclays Corporate and the UK Retail Bank taken together.UK Retail Bank impairment is lower from the end of the year as delinquencies have declined and house prices have stabilized.

BarCorp has also been steady, with a drop in UK impairment and an increase in Spain Corporate loan impairment, which I will cover later.

At BarCap, there's been a significant reduction over the last year, across credit market exposures and the traditional loan portfolio.

Other portfolios were broadly steady last year, but have improved in the first half of this year.

And so across the Group, we've seen a 24% reduction in loan impairment since the first half of last year.

Let's review the Wholesale impairment charge by business.

Impairments on the loan book at BarCap declined again in the first half of this year, as charges on some assets were offset by releases on other assets, which have been restructured or sold. This dropped impairment for the first half below the expected loss level for this part of the cycle.

Impairments on credit market exposures has dropped significantly over the last year, and with the relative stability in those markets, we don't expect to see a significant increase in this area.

After an increase in impairment in Barclays Corporate in the UK last year, impairment has declined considerably this year, as many UK companies have been recapitalized and refinanced, and as fewer companies have entered administration.

And the international Corporate book saw an increase over the last year, mostly from corporate exposure in Spain. Across the other books, impairment has been broadly steady.

So in total, over the year, Wholesale impairment reduced by 37%,and our loan loss rate declined from 141 basis points to 86 basis points. And after this period of rapid improvement in Wholesale impairments, further reductions will be at a slower rate.

Let's move to Retail now, where delinquency rates have generally been declining across businesses.

In the UK portfolios, we've seen a reduction in 90-day plus delinquency from credit actions we've taken since 2008. And in UK mortgages, with our average loan to value of 42%, delinquency is lower, and I would add that the loan loss rate in the first half was 3 basis points.

In the international portfolios, delinquencies have generally declined even after the rises in unemployment in these markets last year, although in Absa, delinquency has increased slightly in mortgages as the effects of the recent economic slowdown continue to be felt.

In Spain, mortgage delinquency has declined so that balances and collections are lower, although balances in the legal recovery book in Spain and Absa will remain elevated for some time.

Let's review retail impairment by business. There has been steady overall impairment at Barclaycard, which reflects currency moves, some regional moves in the loan loss rate, and steady balances across the business. The UK Retail Bank had lower impairment in the first half, and the international portfolios have had improving delinquency and, again, a reduction in impairment in the first half.

The other portfolios have been broadly steady, so that overall, we've seen impairment decline by 11% from the first half of last year, while the retail loan loss rate dropped from 198 basis points to 157.

The impaired asset coverage ratio is important, because it shows how impairment allowances relate to overall credit risk loans. Let me remind you that credit risk loans are those assets for which we have taken identified impairment, mostly consisting of non-performing loans.

Retail CRLs have more than doubled since the middle of 2008, while Wholesale CRLs have also increased significantly. As a result, overall CRLs have increased by about 90% since the middle of '08.

In the last two quarters, total CRL balances have stabilized, and this is a critical turning point for our portfolio. Up to this point in the cycle, increases in non-performing loans brought higher impairment. Now, as CRLs have stabilized, impairment will gradually improve as collections and recoveries continue.

Returning to coverage, we've increased our impairment allowances by about 140% since the middle of '08, and this significant growth in impairment allowances moves our coverage ratio from 42% to 52%, which is appropriate for our business mix.

Let's look at the business mix that delivers the overall coverage ratio. When we review the coverage ratio by business type, coverage in the UK and international mortgages increased last year, and has been steady this year. That reflects steadier property prices for our largest market in the UK and the conservative LTVs of that portfolio.

The Wholesale book has shown an increased coverage ratio as impairment allowances have grown. Retail unsecured has moved up to a 78% coverage rate, which is very solid unsecured coverage at this point in the cycle. And together, these have produced an increase in the Group ratio from 44% to 52%.

Now let's review our Eurozone exposure in select countries. We have some limited exposure to Eurozone sovereigns, primarily held at fair value. However, I'm going to focus on our lending books, which form our principle activities.

Our lending on the Continent is centered around mortgages, and the two largest portfolios for us are in Spain and Italy. Spain is our largest business, and it is mostly a mortgage book, with an average current loan to value of 56%, and where only 9% of our lending is on secondary homes; while our Wholesale exposure in Spain is predominately in Barclays Corporate, and I'll look at that in more detail.

To give some perspective, our diversified global book of loans and advances is GBP506 billion. Spain, as part of that, represents about 5% of our total global portfolio. Within Spain, our retail business is mostly mortgages, and our Wholesale loan exposure is mostly in Barclays Corporate.

I will now look at our Corporate impairment performance in Spain. There have been three continuing developments in that market. First, the recession has been prolonged. After the drop in GDP and the rise in unemployment last year, there were some expectations that conditions would have stabilized more this year. However, the economy remains weak and this has affected the corporate credit environment.

Secondly, there's been further substantial decline in commercial property values as that market remains under pressure. And finally, there's a much weaker refinancing environment as the Spanish banking industry faces capital and liquidity constraints.

Non-performing loans are therefore increasing, and recovery rates are declining. Taken together, these are causing higher losses in property lending. Our exposure in the Corporate Bank in Spain is consistent with the industry, with about a third in property, and with construction, this is about half of the portfolio.

The total impairment charge of GBP553 million in the first half includes a single charge of GBP125 million on an equity position we obtained from the restructuring of a property company that was completed last year. And the remainder arises from increased CRLs, reductions in collateral valuations generally, and higher related charges on SME lending.

For these first half impairment results, we have assumed a 50% drop in commercial property valuations from levels of two years ago, including a 30% drop in commercial property values over the last 12 months. The coverage ratio has increased to 41%.

Most of the non-performing book in Spain is secured property lending, and non-performing commercial property loans in general typically have loss levels of 20% to 30%, so the 41% coverage can be compared to those general levels.

Let me just summarize our impairment performance. Overall, impairment is down 32% from the first half of last year, and most business areas have had reductions in impairment. Wholesale has dropped sharply and retail is declining more gradually. There's been a significant reduction in impairment at BarCap, while BarCorp International is the only area to have seen an increase.

Let's move to market risk now where we'll focus on BarCap. Daily value at risk is a measurement of market risk that is based on volatility ranges. Looking back, VaR increased significantly during the second half of '08 as volatility increased in the market after the Lehman bankruptcy.

During the first half of '09, clients were very active, and the inventory levels we maintained during this period resulted in higher VaR numbers. In the second half of '09 and this year, BarCap has actively managed risk to lower levels in line with the reduced inventory needed for client flows. We expect VaR to remain in this range in the short term, although we have the capacity to increase risk as market conditions change.

The pattern of daily trading revenue at BarCap is another important market risk indicator. Recently, in the second half of last year, we had a right handed distribution of profit days where the vast majority of business days were positive and with only a few loss days.

The first half of this year has been very similar, with a slightly flatter distribution, but a continued high concentration of profitable days and very few unprofitable days. This shows again the benefit of the client-driven strategy for trading activities in Barclays Capital.

I also review performance at BarCap through the perspective of risk and return. This is the average daily trading revenue at BarCap, which has trended lower as client activity has been reduced. At the same time, the VaR level shows that BarCap has actively managed risk levels lower in line with the lower client activity.

Looking at the average daily trading revenue over the average daily VaR creates a ratio. This ratio shows that consistently through this period, BarCap's average daily trading revenue has been inside the range of 75% to 115% of the average daily VaR. This trend demonstrates the strong risk adjusted performance at BarCap across very different market conditions.

Let's leave market risk and look at the broader conditions ahead which are critical to our general outlook. We expect the major economies to continue with slow growth, interest rates to remain low, and unemployment to persist at or near recent high levels. The Spanish environment will remain weak. However, in other areas, we expect asset values to be stable.

In the current credit environment, non-performing assets will remain at higher levels as CRLs have stabilized. And now, at this point in the cycle, loss severity risk will be very important in the recovery books. So late cycle default risk and refinancing risk, especially in areas like commercial property, will remain important.

For our impairment outlook, we need to keep in mind that trends are moving at different rates. The retail impairment charge has declined over the last 12 months, and I expect the trend to continue. And whilst we have seen very significant reductions in Wholesale impairment, I recognize that Wholesale will have a slower reduction than previously.

Those two different trends are fundamental in forming our outlook, and let me close with that now.

On the market side, we expect risk to continue tracking client activity levels, but with a capacity to increase risk as conditions change. For impairment, we believe Retail will continue to show steady reductions. And Wholesale impairment will continue to decline, but at a slower rate than previously. And as I mentioned, the recovery risk relating to non-performing assets will be very important at this point in the cycle.

These trends make me confident that we will achieve the better end of the 15% to 20% range of impairment reduction we have given as guidance for this full year. Our current portfolio trends suggest that we will meet or may exceed that range. However, in these uncertain markets I know it's better to allow for some level of unforeseen events, and to maintain our guidance.

Thank you. I'll hand over to John.

Thank you, Robert. Good morning. You've heard from Chris on our financial performance in the first half, and from Robert on how we've managed our credit and market risk over that period. My intention is to start my remarks with a brief point of perspective, then show you how we've done against the scorecard of input goals that I set out in February, but spend most of my time reviewing our progress on the three objectives against which we've been managing Barclays since the start of the crisis, which are staying close to customers and clients, managing our risks, and maintaining strategic momentum.

First though my point of perspective. There remains much debate about what is expected of banks, given the events of the last three years. The objective of a bank which is owned by institutional and private shareholders must be to generate returns for its owners. But banks must also in ways consistent with that objective contribute to the wellbeing of society by conducting their business responsibly, and by performing well their core functions of payments and money transmission, safe storage of deposits and the investment of savings, maturity transformation and lending, and the provision of advice and execution in underwriting and trading.

These activities lie at the heart of every modern economy, and if economies are to grow with all the beneficial consequences that flow from that, then banks must undertake those core functions and help their customers take appropriate risk. As I think about the areas that I'll review with you this morning, that nexus, the conducting of core functions leading to risk-taking by banks facilitating risk-taking by customers, leading to economic growth of jobs, leading to returns to shareholders, that nexus is at the front of my mind.

So to the scorecard which is on the screen now. In an environment that, whilst not as severe as it was this time last year, remains quite volatile and unpredictable, I am pleased with our performance against the criteria that I've listed here. We've been able to maintain our leverage ratio at the bottom of our range, notwithstanding the significant growth in our liquidity pool. Similarly, despite a small increase in the volume of risk weighted assets, driven by a combination of currency and risk weightings, and the decline in the value of our BlackRock stake, we've maintained our Core Tier 1 capital ratio at 10%. We achieved that principally because of our ability to create equity through profit generation, which we've been able to do consistently through the crisis.

One continued consequence of holding high levels of capital is that our return on equity is not where it needs to be. I said in February that in the medium term, we'll seek to generate a return on equity that exceeds our cost of equity over the cycle; and whilst I don't pretend that that will be simple in the short term, in particular because the cost of equity for banks is likely to remain quite high for some time, we are intensely focused on improving our returns, and as a consequence, we're driven by the pursuit of returns before growth.

On funding and liquidity, as you've heard, our liquidity pool has now grown to 15% of our adjusted tangible assets, and it's very substantially higher than the level of three years ago. We have pre-funded in the first half all of our 2010 Wholesale term refinancing requirements. We believe that the current tiering of names in the Wholesale market will persist for some time, and that as a result, funding costs are likely to be an important area of differentiation in the future. We have lowered our loans deposit ratio in the first half. Improving that ratio remains another important area of focus.

On jaws, Chris has described the picture to you. There are two important variables here, first the ability of our cost base to respond to changes in the income environment. We calculate that just short of 30% of our total cost base is discretionary or variable, and that gives us flexibility.

Second, the investment that we have underway across the businesses, I'll cover the specifics of that investment a little later, but subject of course to our impairment performance continuing to improve in the way that we've indicated, we think that it's right to continue to invest in areas of strategic importance to the future of the Group.

And lastly on the scorecard, we've declared a second interim dividend of 1p, bringing our year-to-date total to 2p per share. These payments reflect the policy that we announced in February, which is that subject to maintaining an appropriately conservative stance because of regulatory uncertainty, we would pay an annual dividend in the future progressive relative to an annualized run rate in 2009 of 4.5p per share.

So let me turn now to our three objectives which are listed on the screen now. During the crisis of the last three years, at the heart of our ability to generate profit, and therefore equity, has been our income performance. Income is a proxy for the strength of customer and client relationships, or the strength of the franchise, if you will. Furthermore, our income levels benefit from running a broadly based bank at Barclays. So against a backdrop of subdued economic activity and some fragility of sentiment triggered by the Eurozone sovereign debt crisis, we began posting solid income growth in the first half. If the economic cycle continues to improve, the impairment line will also improve, with good prospects for the conversion of income into future profits.

Let me put my franchise point into perspective by talking about income at the business unit level. The income generated by Barclays Capital in the first half of 2010 reflects the continuing benefits of the Lehman transaction. That income was also broadly based. You can see that in the next slide which shows you the usual profile of income by asset class, the strong growth in equities and prime services, and resilient performances in Investment Banking, which are areas where we've been investing over the last 18 months, as well as good relative performance in areas of historical strength, fixed income, currencies, and commodities.

I know that you follow closely Barclays Capital's quarter-by-quarter income performance, and Chris has described that sequence. What it illustrates is the strength of our flow business. Like any investment bank, Barclays Capital is not immune from the economic cycle or its impact on client activity, but I hope you agree that we've shown some evidence over the last five years that the business that we have build in Barclays Capital has become less sensitive to gyrations in the economic cycle, because of its asset class diversity and client centricity.

In Barclays Wealth, our income performance in the first half is starting to show the benefit of the investment that we've made in our UK business over the past years, as well as the growing impact of the Lehman originating American Wealth business. We now have a broader investment program underway, which we refer to as the Gamma Plan. Across Barclays Corporate, UK Retail Banking, Barclaycard, and Absa, the income performance has been fairly resilient, despite where we are in interest rate and economic cycles in the UK and South Africa, and in the many other markets in which we do business.

Just on Africa for a moment, Absa and the African businesses of Barclays on a combined basis serve about 14 million customers on a continent that holds much promise for the future. It's a unique footprint, and I want us to create customer advantage for the fact that these businesses coexist in the same group.

Finally here a comment on lending. One of the most tangible ways in which we can demonstrate our commitment to customers and clients is our support of them through increased lending. In 2009, we committed to making an additional GBP11 billion of credit available to the UK economy, and in fact, as you'll recall, that year, we lent an additional GBP35 billion. We've continued that strong trend in the first half of 2010, lending an additional GBP18 billion to UK households and businesses.

There's much comment to the effect that banks are not lending. The facts that I see paint a different picture. Here's a slide that shows monthly trends, this is Barclays data, in approval rates on loan applications from business customers; that's signified by the yellow line; and credit application volumes signified by the blue line.

You can see that application volumes have fallen steadily, whilst approval rates have gone higher from a high base. And this next slide shows you monthly trends in the utilization of committed overdrafts by Barclays business customers in the UK of different sizes. We see no evidence of a widespread unmet need for credit across these segments.

2009 was our busiest year for business start-ups since 2003, and start-ups in 2010 are running at 14% ahead of those of 2009. But what about the price of credit? Well, let's look at two examples comparing 2010 versus 2007.

On the left, the cost of a commercial mortgage, arguably the toughest area to find credit in the UK; and on the right, the cost of a UK residential mortgage. The bars show averages, I acknowledge that, but the trend for most customers is very clear, their costs of credit are down. And remember that from the point of view of the lender, the cost of capital, the cost of funding and the cost of risk, have all risen over this period.

I'll turn now to our second objective, managing our risks. A key differentiating factor in the performance of banks throughout the crisis has been their ability to understand and manage risk, and that remains very relevant. Although there is light at the end of this tunnel, I think it's pretty clear that for the time being at least we remain in the tunnel, so we must be vigilant. Robert's taken you through the detail of first half risk management, as well as our forward expectations. I want to step back and look at risk from a strategy perspective.

The business of banking is the business of risk; economic growth has a high dependency on banks helping their customers take appropriate risk. If banking were to become risk free then for sure, it would become socially useless. Strong risk management, therefore, sits at the heart of a bank's ability both to deliver its core objectives of generating return for shareholders, and of contributing to the wellbeing of society by facilitating growth.

Now the recent crisis highlighted many faults in the risk management systems across the banking industry, and because the consequences of those have been so severe, the financial system needs better buffers for the future.

Making the system safer will, as we know, require a lot of change relative to where we all were in 2007. This next slide shows you the Barclays of today compared with the Barclays of three years ago in the areas of core Tier 1 capital, leverage, and liquidity. And as you can see from the comparison of 2010 with 2007, those who say that there's not been any change in the industry are ignoring the facts. The G20 reform agenda is focused on changes relative to pre-crisis positions in these and other areas, and we support the direction of that change whilst reinforcing the need to apply two principles.

First, the changes must be made consistently across the globe to create a level playing field. I'm not looking for homogeneity, that would be unrealistic, but as the needs of customers and clients have increasingly globalized, so have the services which they need from their bank. That means that risk is globalizing too. The evidence of that fact has been clear during the crisis. The risks that hurt the world paid no respect to geographical borders because of increased interconnectedness.

Second, the changes must be sequenced and phased in a way that allows banks to support economic recovery and job creation. If the changes are introduced too quickly, they will limit the ability of banks to lend. I've seen the recent changes to the Basel III proposals described as some sort of victory for the banks. I don't think they're that at all. The final decision makers here will be the governments and regulatory authorities. Ultimately a resilient banking system is the servant of the economy. It's the economy that demands that reforms are calibrated and sequenced. As they make their decisions, responsible governments and regulators are rightly taking these things into account.

Stress testing is one important way in which to judge the quality of a bank's understanding of its risk, and its ability to manage it. Barclays has now been subject to a number of external stress tests since the crisis began three years ago, including the recent one by CEBS. And in any event, we run weekly internal stress tests in our key portfolios, and we regularly assemble a top down view of the resilience of our capital and liquidity positions to different stress scenarios.

The recent crisis has introduced a new risk to the market's vernacular, resolution risk. Because of the too big to fail issue which confronted many governments during the crisis, we understand entirely why the authorities are focused on ensuring that such situations never arise again.

Resolution regimes are important because if bankable they will answer many topical questions about the shape and size and risk mix of banks. We support these efforts, and we're playing an active role with the authorities in trying to devise appropriate resolution tools, but the bigger strategic risk that we face remains regulatory uncertainty.

The shape of the final regulatory structure is starting to emerge. I'm referring to the Financial Services Act of 2009 and the bank levy in the UK, CRD3 across the EU, the Dodd-Frank legislation in the United States, and the revised Basel Committee proposals. But the precise impact of these measures, and of the wider G20 Reform agenda, both on the industry and on the competitive landscape within it, remains unclear.

We think it's important not to be fatalistic about the risk of this uncertainty. We must engage as best we can through active management of the issues and through engagement with the relative authorities.

One important area of engagement over the next year will be with the Independent Banking Commission here in the UK, which is looking at structure and competition.

We recognize that some commentators hold a view that a successful reform package requires the deconstruction of universal banks. And resolving that question is an important part of the Commission's terms of reference. There needs to be an appropriate public debate, but it's important that, that debate is empirical, unemotional and thorough enough to avoid unintended consequences.

As you know, we believe that the merits of the universal banking business model are grounded in fact. In looking at the issue of the merits or demerits of broadly based banks, there are three principal issues to address.

First, do clients benefit from the services that broadly based, multinational banks provide? Our view is that banks like Barclays have become what they have become, in response to client need. A simple example; almost all of the companies in the FTSE 100, let alone thousands of other UK companies, have material businesses outside the UK. Their needs include the cross border requirements of trade finance, foreign exchange, and interest rate currency and commodity hedging. These are services which narrow banks are typically ill-equipped to deliver, and export-led recovery and UK economic growth will require the presence of banks which can deliver these services.

Second, are broad banks more susceptible to failure? The empirical evidence suggests that there's no correlation at all between narrow banks and resilience to failure. Indeed, the observable correlation is the reverse. You need only look at the results of the [SEB] stress test for direct evidence of that. The banks that needed pre-test surgery, or which failed the tests, were typically narrow banks.

So the evidence of the SEB stress test and of the last 100 years is clear. By converting broad banks into narrow banks, we will make the system less safe, not more safe. What correlates mostly with bank failure, of course, is inadequate risk management.

The third issue; is the impact of the failure of a broadly based multinational bank likely to create risks beyond its own failure? Here, reform is clearly needed. The reform agenda I noted earlier is oriented precisely at materially reducing such knock-on risks.

The stronger buffers provided by higher capital ratios, higher quality capital, larger pools of liquidity and lower leverage; improvements in derivatives market infrastructure; and the migration of more derivatives into standardized forms that can be traded via exchanges; as well as more radical by current standards; developments in infrastructure and equipment, such as bail-ins and contingent capital; these are all being designed, both to help reduce the likelihood and impact of bank failure, and to protect depositors and taxpayers.

Better consistency in these regimes and tools, as well as in cross border crisis management, will materially increase resilience in the system. The banks need to step up to this work, irrespective of their views about the probability of their own failure.

A number of UK banks, including Barclays, are actively engaged with the FSA on their important work on recovery and resolution plans. These should become as important a part of the supervisory dialog as stress testing.

I'm going to turn, lastly, to our third objective; maintaining strategic momentum.

Despite the regulatory uncertainty that I just highlighted, our strategic flight path is very clear. We remain focused on continuing to increase the growth prospects of the Barclays of the future, by diversifying our business and geographical footprint.

In the first half of this year, about two thirds of both the income, and of the profit of the Group, came from outside the UK. Although it's not got a lot of attention amidst all the events of the last three years, our ambition to diversify geographically has been significantly advanced since 2007.

Increasing the future growth potential of Barclays for the medium term, whilst pushing hard to raise returns in the short term, those things create a number of present day priorities.

We want to capitalize on the position of Barclays Capital in the post-crisis Investment Banking industry by building out our equities and M&A platforms and by maintaining cost flexibility. We're executing our Gamma Plan in Barclays Wealth with a view to transforming the scale of this business. Our governing principle is pay as you go, but the Barclays world of five years hence will be contributing a much bigger profit to this Group.

We're in the middle of developing the international arm of Barclays Corporate, and building stronger lists with Barclays Capital to support international expansion. We'll lay out the progress and plans for Barclays Corporate at an investor seminar in the first half of 2011.

We seek to deliver against our four objectives for Global Retail Banking; strong profit growth and improved loan to deposit ratio; depth not breadth by business line; and the generation of net equity. You had the opportunity six weeks back, to hear from Anthony Jenkins and his leadership team on how they intend to do that.

Although the climate has remained difficult in 2010, our results have been resilient, and our continuing profit performance is I hope a source of pride to the people of Barclays. Their focus, and the focus of my executive committee colleagues, is on making sure that we look after the interests of customers and clients, for whom the credit crunch and the recession have created significant threats and opportunities.

We also know that our shareholders expect us to deliver another year of solid profitability, and we intend to do just that.

Thank you very much. We're happy now to take your questions. If you could say, kindly, when you get the microphone, and there are mics --

(Operator Instructions).

First of all here, a mic coming across to you.

Good morning, everyone. It's Chris Manners from Morgan Stanley.

Hello, Chris.

Hi. So the question I had was just on the deposit growth. It looked you were able to gather GBP39 million of deposits, or raise the balance by around 12% in the half. That's a pretty impressive performance considering what we've seen at some of the other banks. And obviously, there's some associated liability margin compression there with that.

Just trying to work out how much you're paying up for these deposits, how you think about where you need to take your loan to deposit ratio to as well. Obviously, you've brought that down nicely.

Thanks.

Yes. I'll ask Chris to add, but I think what you observe is the consequence of a conscious effort. So if you look at asset growth; as Chris said, asset growth over the last 12 months, 5%; deposit growth, 16%. There's cause and effect there.

But I think that what we've done is, we have to be competitive of course in the deposit market. I would describe our position as averagely competitive. But there has been a very deliberate effort in each of the areas where we are natural deposit gatherers to try to ensure that at the very least, and more, as you can see, as we put on asset growth we put on deposit growth plus.

And as a result of that, the loan to deposit ratio at the Group level has improved from 130% to 124%; and you can also see an improvement in the combination of deposits and long term debt, where the ratio has improved from 81% to 78%.

So you should expect to continue to drive in that direction, because I think it's an important feature, an important source of resilience for the Group in the future.

Chris, do you want to talk about the margins and the hedge, perhaps?

The only thing I would add is the funds transfer pricing changes that we've made are part of what John has described as a conscious effort to go forward. And what we're doing is increasing the reward to the gatherers of long term liabilities; and we've increased that, we reckon, by on average about 60 basis points.

And at the same time, we've reduced the compensation that -- we've increased the charge that people take for asset gathering, and that has had the impact of reducing the asset margin by about 40 basis points.

At a net interest margin, that makes no impact at all, but it's clearly an important step towards incentivizing the behaviors we've looked for.

Thanks, Chris. There was a question -- yes, just in front of you, JP. Microphone coming.

Morning. JP here from UBS. Two questions, if I may; one on costs and one on BarCap, if I can come back to you afterwards.

On costs, John, I hear what you say, clearly, about investing in the business, and that's very clear. I guess I want to take a step back and, actually, when you look at this, or the shape of some of the businesses, you've got -- in most businesses, revenue growth down in numbers and obviously costs up. And so I'm just thinking about in terms of how you've previously talked about pay as you go and earn as you go in terms of the costs. And you used to talk very much about business as usual costs, costs for investment and performance management. And the idea used to be that you'd be very aggressive on BAU, or reduce BAUs, so you could actually measure the business.

That doesn't really seem to be playing through as far as I can see in the numbers currently. So I guess the question is, when we see that delta, revenues down, costs up, shouldn't you be thinking more aggressively about taking day-to-day costs out of the business to actually pay for that investment, rather than just seeing the cost income ratio move up?

And then, I'll ask the second one on BarCap after.

Fine. JP, let me give some comments, and Chris will probably want to add.

This is part of a conscious policy as well. What we are consciously doing is, we have been investing some of the benefit in the profit line, that [adjures] through the reduction and impairment into the business. And we think this is a good time to invest, at a time of quite an acute point in the cycle. It's perhaps a contrarian view to be investing, but our strong view is this is a great time to invest.

And if you look particularly at the build-out of Barclays Capital, the decision by Bob and his colleagues to go hard in early 2009 was a great piece of timing. It was a great piece of timing because we did a lot of the build-out that we had planned to do by the end of 2009. And I think the timing of that will be very -- will be seen over the years to be providential for Barclays.

So that would be our approach. I stress the point about having something close to 30% flexibility in the total cost base, because we want to be in a position where we can accommodate changes in the income line. And I think you're right to challenge us that we must maintain a clear view as to what a competitive cost income ratio looks like.

And what you see is varying headcount policies by business area. In some business areas, the very thing that you are advocating, a pushing down on business as usual costs to invest, for example, in technology; you can see that happening in headcount falls.

But in other areas, we have grown the headcount where we think that there is a good, long term opportunity of value creation. That's the policy framework. We know that when we look at our medium term planning, we have got to be in touch with the best players in the industry at large, from the point of view of productivity and efficiency. And that remains our point of view.

Chris?

What I would add is, and I showed you the data, JP. When you look at the reasons behind the underlying cost growth, very little of it is business as usual. Most of it is investment, performance related, and things that are inescapable, like the regulatory costs.

Yes? Did you have another one? Sorry, JP, you did, on Barclays Capital. I beg your pardon.

One for Bob. Clearly, it's very helpful; you give us the breakdown of the main revenue lines by main categories, and we can see the trends there. I wonder if you could just talk to a bit of granularity about what's happening in the newer businesses in terms of build-out, in terms of -- clearly, you've obviously had a lot of cost investment, but we can't see the revenue benefit, obviously, in the top level numbers. Just wonder if you could just give us some granularity about whether you are -- in terms of revenues, where you expect to be. Is it taking longer, less time? And how do you see that cycle progressing?

Broadly speaking, the mission, as John mentioned, in 2009 was to capitalize on the incredible US franchise that we acquired with Lehman Brothers, and the potential for a global franchise and cash equities and advisory.

So I would say we're virtually done across Europe. In cash equities, we began trading. In October last year, we went live. There's always little pieces here and there and up and down, but that's by and large done.

Numbers; I don't want to stick to specific numbers, but I would point to the fact that we're number three in volume on LSE less than a year after we began trading is the kind of thing that we challenge ourselves on. We're going to be top five in this business; that's always our ambition.

But in terms of the costs, you've seen most of them across Europe, and you're probably between 50% and 70% across Asia. Japan's done; cash and Hong Kong's done. We still have some things to do in some of the -- in the smaller markets.

In terms of what I'd call more broadly the IBD advisory business, expanding through Europe and through Asia, I would say that's closer to 70% or 75% done; probably a little bit ahead in Europe versus Asia, but we've made a lot of progress. I think it's over 50 managing directors and directors, and IBD and advisory in Asia since the first quarter of '09. And John mentioned about half of those in '09 and half of those this year.

And in terms of the results I think it's indicative, and I don't for a second point to these numbers as permanent, because things change and flows change. But I do think it's indicative that we finish the first six months, second in US M&A and fourth in global M&A, and in the top five in US IPOs.

Now it wasn't a standard first six months, I recognize that. Volumes were light. And I would hope, if we're correct, and we see a better tone in the market, particularly the equity market, because we've ticked off European stress tests, UK election, US financial reform, then we have quite a strong pipeline. And I'd rather have you see that in Europe and Asia rather than talk about a pipeline. I'd rather have you see the execution. But if we see a better equity market in the second half, we have quite a good pipeline.

Right. I apologize, by the way, for the crashing. Think of it as the restructuring taking place in Barclays Corporate.

Here we are. Microphone coming; yes, just straight in front of you. Just straight in front of you.

Robert Law of Nomura.

Hi, Robert.

Good morning. Could I follow up on that question on the cost line, please, because if I look at the numbers, and I think you're showing something like 21% year-on-year cost growth, and there were some items in that that flap about too like pensions, and I could push that number up a bit if I wanted to. And your revenue line is down year-on-year by about a similar amount, I think, if you just take gross top line.

So I take the point that you are investing, but can you give us some idea of the timescale you expect us to pay off; whether you'd regard this level of efficiency at the Group level as broadly right. Some kind of indication as to whether we think we'll reach the bottom; how long is this investment supposed to be going on; but those kinds of issues.

Fine. Robert, let me just make a comment about the buckets of cost. I'll ask Chris just to talk about the underlying income growth; and Bob may want to add about the extent to which although we put cost on in Barclays Capital, we're yet to see the income upside from that. So let's handle it in those three ways.

I do emphasize a chart that Chris raised in looking at costs where the delta is GBP1.7 billion roughly. That's costs first half 2010 versus first half 2009. And above GBP1.1 billion is in three particular buckets. One is GBP650 million of investment. Chris described that quite extensively and I won't add to that. There's then a foreign exchange hit of about GBP200 million, and then there are what I would broadly describe as regulatory costs of GBP250 million. And I think it would be unsafe as you think about the future to presume that those are in the run rate going forward, or that we can't vary the level of investment if we want to quite significantly to take account of the changes in the income line.

So I do emphasize that we have flexibility. If you ask me about what are the efficiency opportunities when the Group's running at a cost income ratio of 59%, I think there are efficiency opportunities for sure. I do believe that. And one of the ways in which you'll see that is as the benefit of the investment that we're making in the business starts to show itself in the income line.

So I'm going to ask Chris just to talk about underlying income run rate, and Bob to talk about the income momentum from the investment that we're making in Barclays Capital.

Robert, in the way I look at the income growth, the headline number is that 8% number we gave you, but we recognize in there there are a number of items that you should probably take out to get to an underlying income growth. And I take out owned credits. and I take out the gain we made on the debt buyback last year. If I strip those out I get to about a 5% growth rate half-on-half and about 7% against the second half of last year. And I think that's a better feel for the underlying income growth against which we are maturing the cost growth.

Bob.

Robert, you've followed very closely the build over the years on Barclays Capital, so let me talk about it in a little bit different perspective. And I almost hesitate to say this, but I think what Jerry and Rich and I would say is, relax, this is probably the smallest investment program that we've had in 13 years. Our BarCap has grown from 3,500 people to 16,000 people, and the revenue is the fastest rate of growth in the industry, the pay as you go, everything you've known for a long time prior to the Lehman acquisition.

We're now building out equity and M&A from an incredible strength. We have a client base in Europe that is saying to us, this is terrific, you're bringing us a first class equity business; we're not trying to find new clients. So we're adding a service in advisory, and adding a service in the Cash Equities business to an existing client base. This is not the most complex build that we've had. And I think what I would point to is the strong growth in PBT. I think I would point to Q2 where we feel terrific. Q2 was a tough environment, flows were down. I think we're leading the market with top line revenue and BarCap down 15%.

And that's what we said; number one, you should expect us to be able to monetize these investments; two, I would say this is not a complex build. This is -- we have done much bigger, more ambitious builds over the years and this is a natural extension of that, of an incredible business that we have acquired in the US. And lastly I would say that we do challenge ourselves in this and we say it publicly. We should outperform in tougher market environments, and I think Q2 showed that we did outperform in a tougher market environment.

Yes, just in front; that's it.

Hi, it's Manus Costello from Autonomous Research. You mentioned US regulatory reform a couple of times. I wondered, Bob, if you could give us some kind of quantification of how you think the Dodd-Frank Act might impact your business?

And, Chris, if you could give us some idea of how you think it might impact the Group structure, particularly the US bank holding company, which is somewhat under-capitalized relative to peers?

Bob, do you want to start?

I feel okay about the US financial reform. I think if I went back two years and you told me this was going to be a financial reform, I might have been shocked. But I think during the period there was some aspects of this, the Lincoln spin-out, for example, which I think would have had material adverse impacts on the US as a financial center, the US banks more than Barclays, and most of that is workable.

So I think we have a US financial reform package that at the end found a pretty good balance between making the financial system safer and sounder, but also allowing the banks to work with their private sector and corporates around risk management, around financing, so that the derivatives business can continue to be robust.

Keep in mind that with Jerry's work we were the first of the big banks to create an electronic platform for derivatives trading, and we are strongly supportive of more transparency and more centralized clearing for standardized derivatives. And there's still an opportunity to work on structured derivatives with end user clients, wind farms, mining companies in the US.

So I wouldn't change our outlook for BarCap based on US financial regulation. I think the good news is it's done, it's behind us, it's workable. We're working on implementation now and it releases Secretary Geithner to work with his G20 colleagues on the Basel rules and implementation. So broadly, I think we're in a better place today than we were a couple of months ago.

It's amazing how we've become conditioned to changes in the regulatory environment. If you'd said to me three years ago there was going to be a bank levy on liabilities, I would have been hysterical. It gets introduced and I shrug my shoulders and say, well, that's the sort of thing that happens.

Chris.

And as you'd expect, we're still looking at the options. But currently what we have, as you know, is the US bank holding company that owns a bank, Barclays Bank at Delaware, and a broker dealer, Barclays Capital Inc. And it would be the combination of those that would put not only the capital into the Bank and the broker dealer, which we've already got, but into the holding company as well. One of the potential solution is to reorganize to take the Bank out of the Bank holding company and make it a direct subsidiary of the Group. So there are some things like that which are possibilities to change structurally which we're looking at.

Yes, a question here, fourth row from the front. There's a mic on its way to you.

Thanks. It's Alistair Ryan from UBS. It's a reasonably small part of the balance sheet, but it's clearly a large part of the P&L at present, so just on Spanish Corporate again. I think the average Spanish bank's reporting 4% NPL in its Corporate book, and according to Robert's numbers you're at 27% now. Just to the extent that it's possible for you to judge these things, how much of that is definitional, that your accounting is different to how the Spanish account, how much is whether your book is differential?

And Robert gave us very -- pretty comprehensive bad debt guidance on most of the parts of the business, but I couldn't really take away whether you were confident that you're over the hill in Spanish Corporate book now or whether it's still something that's an open issue. Obviously, it's a GBP7 billion or GBP8 billion book. Over time it fades away, but in the immediate future, it could still be meaningful?

Thanks.

I'll ask Robert to reply. Just remember that he made the point that we have decided to take in the first half the impact of the Bank of Spain adjustment on property valuation. So that mark-to-market that Robert described at 50% and at 30%, that is included in the numbers that we have reported to you this morning. Robert.

Just to be clear, because I didn't take the time in the presentation to address that. The Bank of Spain issued some guidance fairly recent -- towards the end of the second half on how it wanted Spanish banks to look at provisioning, and it included the 50/30 drop, and the target date for that is the end of the third quarter. We looked at it and felt it was good to do it in the first half. So it's hard for us to compare where the Spanish banks may be on that.

And to pick up your level of non-performing assets question, one of the things that has changed this year compared to last year is that last year banks in Spain were still doing a lot of debt for asset swaps. Different than debt for equity, but a debt for asset swap was where a company might have some properties and the bank has a loan and they -- and the bank accepts those assets, the title of those assets and forgives the loan. So there's no non-performing loan, and there's no coverage needed and there's no impairment needed. And about EUR80 billion I've heard is public estimates of debt for asset swaps have been completed, which adds about 4% to non-performing loans. So the 4% might look like 8% if you consider those non-performing.

The difficulty is for me I can't make those definite comparisons. We believe our portfolio is consistent with the Spanish industry, between property and construction about 50% of our portfolio, and we believe our lending standards are not worse, and we believe our concentrations in names are smaller than many of the Spanish banks as well as many of the large international banks have lent in Spain.

There are about 10 large property developers in Spain. We've been a lender to two of them and we've avoided eight of them. So our performance has been hurt, but we don't believe we are a relative worse performer than what we can see in the industry, but difficult to analyze more carefully.

Yes, a question here in the middle; microphone with you now.

Thanks, it's Ian Smillie from RBS.

Good morning.

If we look at Q2 versus Q1 cost to top line revenue in BarCap it increased to 66% from 54%, so I guess three sub-questions. The first one is, do you still stand on the previous guidance that the normal clean revenue quarterly expectation should be about GBP3.9 billion plus a minus 10%?

Secondly, could you give us some idea of the phasing of the 10% headcount growth that was put on during the first half so we can understand whether the full cost of that is layered into the Q2 cost base or not?

And thirdly, could you give us some sense as to what seasonal pick-up we should anticipate in BarCap costs with the year-end true up as bonuses come through in Q4?

Right, do you want to talk first of all about the quarterly income run rate?

Yes, I think what I had said in February, and a number of times in terms of guidance -- you can't give a guidance on this -- but what I said is something you should look at is '09 second half annualized not '09 first half annualized in terms of top line income. And I think we're broadly consistent with that in the first half with a slightly better first quarter than second quarter.

And I said you then want to adjust that for two things; how are flows overall? And I think the first quarter was normal and the second quarter I would say was below average. And you want to factor into that the growth in the businesses that we're building. So my guidance wouldn't change at all from that in terms of what you should look at.

Well, on the headcount, my recollection is that there was slightly higher headcount growth in the second quarter or higher headcount growth in the second quarter than in the first. Would that be right? Yes, Richard is nodding.

So the concentration, Ian, on that part of your question, there was a cost delta in the second quarter not experienced in the first quarter because of the headcount concentration in that quarter.

Chris will just make a couple of comments about cost income ratio if that's helpful.

As you know, in terms of our cost to net income ratio, we've set ourselves a target of 60% to 65%. If I back out own credit from this, and I do that because of the volatility of that number, I end up with a cost to net income ratio of 62% for the half, and then I think it's exactly where we wanted it to be.

Right, question here. Come to you in just a moment, Michael, promise. On the aisle side, yes.

Good morning it's Arturo De Frias from Evolution. I wanted to ask you about the return on equity. You are reporting a return on equity of 9.8%, but if we exclude the gains in own debt, the return on equity falls to somewhere in the region of 7.5%. I know you have mentioned that is not where you want it to be, but -- and I am sure we are going to see some improvements going forward in Spanish impairment, and probably better revenues in BarCap, etc. But given the regulatory pressure and given the economic situation in Europe and de-leverage and so on, I think it could be unrealistic to exceed the cost of equity for at least the next two or three years? And if not, where do you think my analysis is wrong?

Thank you?

Well, it's a very good question. You're tempting me into giving you more information than I ought to, so I will foreswear selective disclosure at the start of this. But I tried to be very candid in what I said, which is that because of the regulatory capital that we have to run today, and I think you require it as well as our regulators require it, that has had a depressing impact on return on equity, and the return on equity is not where it needs to be. And as you know, we've said that our first task it to get to parity with cost of capital, 12.5%.

There will come a time, by the way, when that number goes down, but I don't expect it just at the moment. And then we've got to be in a position where there is a positive delta between the two. And you can imagine that when the Board discusses this point, it is very clear that it wants to see in the medium term plan the capability of achieving that and better; very clear.

So we -- the reason why we've put the emphasis that we have on return, and you can see the return on assets moving, I think quite nicely over the period from 1% to 1.5%. The reason why we've put it on is because we fully understand that that is objective number one; we have to get the returns up.

Now I can't give you a precise answer, even if I was allowed to, so to speak. I can't give you a precise answer until such time as I know where Basel and the Financial Stability Board land on capital, but I -- what the regulators have said in the past in any event is that the market shouldn't assume, and indeed we the regulated shouldn't assume, that these high levels of regulatory capital will be perennial, but I think you have to assume that they will be quite sticky. And what that means is an intensive effort going on within Barclays, I assure you, an intensive effort going on to ensure that business-line-by-business-line, we are maximizing the direction of capital into those parts of the business that are driving the best return.

So that is furious contention within Bar -- a very positive thing, by the way; great contention for capital with our being single-minded in directing it to the areas of highest return.

Chris, do you want to --?

The only thing I would add is to support what John said in terms of the effort, and you will have heard from Anthony when we did GRB Investor Day that we were looking at, for his businesses, a 13% to 15% return on equity in terms of the hurdle rate. You've heard Bob say in the past that for BarCap, we're looking at a 15% to 20% return on equity, and those are very much the metrics that we are using for planning and capital allocation.

And those views are unchanged.

Yes, Michael? Good morning.

Morning. It's Michael from Bank of America Merrill Lynch. I've got a question on bad debt, one on leverage, and just a quick one on margin.

I hear you on the bad debt guidance, and if you're at the better end of the range, you're looking like GBP6.7 billion, it sounds like, for the full year. I'm just really struggling to square the circle, because you've put up a presentation where pretty much all the trends are improving on an underlying basis, and you tell us that you still expect them to improve. And yet your guidance has got after GBP3 billion in the first half, clearly, a step-up in bad debt in the second half. Is that Spain? Is that what you're telling us that Spain's going to be a lot worse in the second half? Or what am I missing?

So that's question one.

Can we take them one by one, Michael?

Perfect.

Just a general comment, and then Robert or Chris will add. I think Robert tried to be very in a sense straightforward with you. He said we're sticking to our guidance. He said he could envisage us breaking through the better end of the guidance; he could envisage that. But because he's a conservative soul, he thinks that it's right for us to stick where we are at the moment. And that's our point of view.

We've tried to be -- I hope you feel we've been conservative in our approach to this subject over the course of last year. I think it's been right to be on that side of the line as opposed to on the wrong side of the line. We will have the opportunity of course at the IMS of updating you on -- with a closer proximity by that stage for the year-end.

Robert, is there anything you want to add?

Just briefly, if I may.

Yes, sure.

I do the numbers, very round numbers, so if it was relatively GBP8 billion of impairment last year, 20% of that is GBP1.6 billion, and taking GBP1.6 billion gets you to GBP6.4 billion, so think of that as 20%. And as John said, there is some variability in there.

If your more specific question is are we trying to signal that Spain will get worse, no, we're not trying to signal. We are saying Spain, within BarCorp had a steady performance on loan impairment from the second half last year to the first half this year. So part of an overall business, the UK goes down, Spain goes up.

Within Wholesale, Wholesale goes down significantly. We're pleased with that. We're pleased with Retail, so we're very pleased with the progress. And I think about it as a portfolio and have given guidance on the portfolio.

Will Spain go up or down, and I recognize I didn't answer the question when Alistair asked it either, I'm sorry, is that we think it could very likely go down but we can't guarantee it. I think the thing that might drive that would be, with more corporate loans become non-performing, would be can more deals get refinanced and would be what happens to property valuations.

I mentioned to you that we've adopted more conservative valuations in the first half. I also mentioned in my presentation we took GBP125 million charge against an equity position, and that's our single largest charge across the whole Bank.

So these things do move in big blocks. That's the nature of corporate lending. It does move in big pieces, so we're not trying to signal a worsening in Spain, but we're subject to how the environment develops, and it's a very changing environment right now.

Sorry, I can't remember if you said to Alistair, how much did the move in the Bank of Spain provisioning cost you?

We didn't say specifically, but it is a good part of the GBP553 million.

That was a great try, Michael. You were going to go to leverage.

Yes, leverage. I hear what you said on regulation and clearly it's still very uncertain, but I think the Basel Committee's helped us quite a lot by giving us a bit more color on the Tier 1 leverage ratio that they're going to be looking for, and it's a 3% minimum. And when I look at your position at the end of the -- at the half, you're clearly running with a 5% leverage ratio. You're at the bottom end of your range. So I guess the question is, we're in an uncertain world. Do you feel comfortable allowing that to drift up? And if so, when will that start to come through?

Yes, we've been trying, Michael, over the years -- I'm talking about the years since summer 2007 -- to anticipate what may happen in the regulatory environment, as well as prove to ourselves and to you, I hope, that we can be appropriately nimble around the direction of regulatory travel. So I made the comment I did about where we'd moved from and to on leverage to show that we have variability and we can control it.

So I would say that without trying to pinpoint exactly where we will be, nor indeed where the Financial Stability Board will recommend to the heads of state at Seoul in November of this year, I think we've got appropriate confidence in our ability to move that number as we see fit.

Anything you want to add?

Just finally on margins, it's a bit of nightmare for us, because we try and follow the margin stats, and you've not restated the divisional numbers. I was wondering if you could give us a little bit of color on the underlying trends, particularly on the assets and the liability spread in the Retail UK particularly. That would be really helpful.

Yes, we'll have a go.

Let me do it in relation to the UK Retail Bank. It's not dissimilar to the picture you see at the Group level. If you look at the assets margins, you'll see that they went half-year-on-half-year from 151 basis points to 117 basis points. If you take the impact of the funds transfer pricing, that's about 61 basis points. So the underlying from the first half of 2009 was 151 basis points; at first half 2010 it was about 178 basis points.

If you look at the liabilities side, we have disclosed it came from 128 basis points to 161 basis points. If you look at it on an underlying basis, stripping out both the funds transfer pricing plus the margin compression, it's broadly flat at about 128 basis points period-on-period.

So we've got time -- we're over-running a bit, for which I apologize -- time for a couple more questions and then we've got to wrap up. Yes, question on the aisle. Microphone, I think, on its way.

Hi. Can I ask two questions; firstly, on the BarCap revenue. Sorry, it's Fiona Swaffield from Execution Noble.

Good morning.

Page 33, the Rates business; historically, BarCap outperformed in rates for a long period of time, and I'm quite surprised by the low level. I just wondered if you could talk about is that unusually low, or is that a normalization, and where do you see that going. That's on the Rates business.

Shall we take that first of all? Bob.

Jerry, do you want to take that one? Can you see the [chart]?

Jerry del Missier will help answer here. Here we are, at the front. Thank you very much. Oh, it's on the slide pack.

Jerry.

Jerry, we've got a slide pack here for you. There.

No, I don't know that there's any particular trend evident. We would look at the quarter as actually being a good quarter. One where we saw growth in market share, or sovereign franchise, actually performed extremely well, in particular in Europe where it was a quarter dominated by financing activities by sovereigns.

I think you're really looking at a comparison to a period that was really quite extraordinary in 2009. So it is (inaudible), probably a normalization of market conditions.

Thanks, Jerry. You had a second question?

Yes, it's on the Liquidity Buffer. That one, I think you talk about GBP160 billion liquidity.

Yes.

I wanted to know whether that could come down over time or how that ties in with what the FSA asks you to have, and also how much it's costing you.

I think, historically you may have said GBP650 million, but I think it's gone up.

A very good -- You've got a good memory. Yes. Chris.

It's at the sort of level we think it needs to be. For our own purposes, we run our own risk appetite models. It's slightly below where the FSA would be if they implemented the latest Bowel Proposals. But when I say slightly, a few tens of billions of pounds. So nothing that's not manageable within raising, say within a year or two. And the total cost we estimate, has gone from GBP650 million to about GBP1 billion.

Right, one last question. Microphone coming.

Thanks very much. Leigh Goodwin from Citi.

Hello Leigh.

Hi. I just wondered if I could invite you to elaborate on the comment on current trading actually in July made in the Relief Site. Thought it a little bit cautious given that markets have clearly improved a lot in July. I thought that we'd be seeing a bigger bounce-back in Barclays capital, than perhaps is implied by the wording here, but maybe I'm reading it wrong.

We're happy to comment. Chris, do you want to talk generally at the Group level, and Bob might want to talk about -- we've done something unusual actually for us which is to filet it down into two-week periods and we've talked about the first half of July and the second half of July. But anyway, Chris.

And you sort of break it into three parts. You break it into the Retail and Commercial Banking business, but the trends we see in July are very similar to the first half. You see the Investment Banking business where, as you've heard us say, the first two weeks of July were relatively slow, the second two weeks were much better, and the third thing we just caution about, is the volatility of own credit based on spread movements.

Bob.

I think we're all trying to read too much into it. Our best sense is that the slowdown we saw across the Industry in May and June, as I said earlier, there was kind of a cloud hanging over the markets. It was Europe and Greece, it was the stress test, it was the UK Election, it was financial regulation in the US I think was a very big part of it. And as we move beyond those, I think what we're encouraged by, but it's very early in the quarter, and the summer's always difficult to read, is we've really seen more client activity, more client risk-taking, in the last couple weeks of July.

Why is that important to us? In a tough market, we think we'll out perform on a relative basis, but what's exciting is if we do see a bounce-back, and clients willing to invest and take risk, and to bounce back into the equity market, we have a very, very strong pipeline of business to bring to the market. So it would be nice if we see that. That's certainly how it feels in the last couple weeks in July, but I wouldn't try and read too much into it.

Thank you very much, all of you, for being with us. We really appreciate the time you've given. I'm sorry that we've over run by a few minutes.