Barclays PLC (BCS) 2016 Q2 法說會逐字稿

Welcome to the Barclays interim 2016 results fixed- income Conference Call. I will now hand you over to Tushar Morzaria, Group Finance Director.

Good afternoon, everyone. Good morning for those of you in the US, and welcome to our half-year 2016 results fixed income call.

I'm joined today by Dan Hodge, our Group Treasurer, and Steven Penketh, our Group Head of Structural Reform. Let me start with Slide 3.

This morning, Jes Staley, our Group Chief Executive Officer, reiterated our commitment to the strategy that we laid out on March 1, positioning Barclays as a transatlantic consumer, corporate and investment bank. Jes also noted the continued progress we made in executing his strategy during quarter. Now I'll briefly recap on the key points.

First, our core business continues to perform strongly, generating an underlying return on tangible equity of 11% in the quarter. Secondly, progress on the rundown of non-core continued steadily as we exited businesses and achieved reductions in derivatives and securities and loans. As you note, driving the continued strong returns of our core businesses while closing non-core remain key priorities for the Group.

We also initiated a sell down of the holding in Barclays Africa, and made further significant progress on our structural reform plans, notably standing up the US Intermediate Holding Company. We maintain our focus on cost reduction, and we are on track to meet our GBP12.8 billion 2016 core cost target, subject to FX.

Going forward, we expect to significantly reduce the drag from non-core, and we are now guiding to non-core costs of between GBP400 million and GBP500 million in 2017, excluding notable items, and we significantly improved negative income. We remain on track to close this unit by the end of 2017, with around GBP20 billion of RWAs. Overall, we continue to measure our success against the three financial targets we set out for the Group in March, targeting the convergence of the Group ROTE with the core ROTE, driving our cost-to-income ratio to below 60%, and managing our end-state capital to a ratio of 100 to 150 basis points above regulatory levels.

Turning to Slide 4, let's look at the Q2 results in more detail. Barclays UK delivered an underlying ROTE of 18.4%. Underlying income was broadly stable, despite the European interchange fee relations coming into full effect, and margins remain solid at 356 basis points.

Barclays Corporate and International delivered an underlying ROTE of 11.9%. The Corporate and Investment Bank was resilient, delivering an underlying ROTE of 9.5%, an increase on the 7.3% return reported in Q1, although we have much more to achieve on costs to drive further improvements.

Consumer Cards and Payments had another outstanding quarter, achieving an underlying ROTE of 26.3%, driven by US and German COGS growth and the benefits of a stronger US dollar and euro.

While such outstanding performance may not prove typical, we remain excited about the opportunities to continue growing the payments business, and building on our innovative digital offering to corporates. We also made further progress in improving our CET1 ratio to a robust 11.6%, supported by Q2 profit generation in the core of GBP1.5 billion. RWAs in non-core reduced by GBP4 billion in the quarter to GBP47 billion.

We announced a number of business sales, including southern European cards, Asia wealth, and exclusive discussions on the French business and expected closures in H2 will drive further RWA reductions. The Q2 loss before tax in non-core approached GBP1.1 billion, including a GBP372 million impairment on assets related to the French businesses, which are held for sale, and GBP182 million one-off charge resulting from the results restructuring of the so-called lobo loans, representing half of the ESHLA portfolio. The ESHLA restructuring was, however, net capital accretive, and should result in significantly lower fair value volatility from ESHLA in the future, while so far significantly reducing our Level 3 assets.

We have a strong pipeline of announced deals, announced disposals, and remain confident in our trajectory and are focused on reducing costs and preserving capital as we proceed. Turning to Slide 5, and before I hand it over to Dan, just a few words on the strong position of the Group. As we enter a period of increased macro uncertainty and the consequences of the referendum unfold, we operate from a position of considerable strength. We benefit from the inherent diversification and earnings power of our core businesses for our mix of customers and clients, the nature of the products we offer, as well as the countries in which we operate. And once there are a number of questions outstanding around passporting, we are confident that its required solutions can be found as I discussed this morning.

We've demonstrated a track record of prudent risk management and appetite since well before the 2008 financial crisis. This conservatism served us well during that period, notably through our limited exposure to UK commercial real estate and low LTVs on mortgage lending. We believe that the quality of our assets positions us well should economic stresses materialize.

As you can see, we have the lowest drawdown among UK-listed peers in both the 2014 and 2015 Bank of England Stress Test, post management actions. We feel confident in our strategy and our ability to execute, and we are optimistic about the opportunities which lay ahead.

With that, Dan, over to you.

Thank you, Tushar.

Barclays made further progress on its balance sheet in Q2, and we ended the quarter in a robust position with strong and stable capital and liquidity ratios. This was facilitated by the extensive plans we made and the actions we took to prepare for possible Brexit votes. Whilst the immediate equity and credit market reactions to Brexit was meaningful, Markets have since improved significantly, supported by the timely response of Bank of England and the Financial Policy Committee.

Our day-to-day Treasury operations continued uninterrupted as clients and customers undertook their usual business across retail, mortgage, credit card, lending, and wholesale activities. Whilst the medium-term impact of Brexit are less clear, immediate impacts have so far been very modest for Barclays. We estimate that market reactions from Brexit resulted in a negligible impact on our Q2 CET1 ratio. The geographical composition of our balance sheet, as well as our existing euro and US dollar currency hedging strategy created an effective CET1 ratio hedge, mitigating the GBP3 billion quarterly RWA increase to GBP366 billion at 30 June.

Immediate funding and liquidity impacts were also negligible, with no observable change in behavior in our short-term wholesale market investors, or our retail and corporate depositor base. Our capital funding and liquidity position has continued to remain strong through July. Whilst the Brexit vote increases the likelihood of a lower for longer rate environment, we maintain structural hedges against various product balances, notably non-maturity customer deposits and equity balances to protect net interest income against falling rates.

Should the 25 basis-point interest rate cost occur in August as was anticipated, we would expect to be able to broadly offset that cut through further liability repricing, meaning that the full-year NIM for Barclays UK, around Q2 levels, is appropriate; however, further base rate cuts would likely put modest downward pressure on NIM. Moving then to the solid progress we've made on our balance sheet, HoldCo transition and structure reform during the quarter, starting with capital leverage.

Slide 7 shows that our Q2 CET2 ratio improved by 30 basis points over quarter to 11.6%, as profit generation by businesses and the sell down of part of our share in Barclays Africa more than offset conduct and mitigation charges in the quarter. Our leverage ratio decreased by 10 basis points from Q1 to 4.2% due to increase in average exposure, offsetting the GBP1.6 billion increase in Tier 1 capital.

The leverage exposure increase reflects a number of factors, including increase in the cash components of our liquidity pool for the referendum, as well as FX and other market movements. We expect to grow the leverage ratio over time.

Turning now to Slide 8 and our future CET1 ratio expectation. Our approach to capital planning remains unchanged. We continue to manage our CET1 ratio as a function of expected future minimum requirements and CRD4 buffers, plus accrued management buffer, currently sized at 100 to 150 basis points rather than a fixed target.

Due to these financial policy committee decisions, through both the planned introduction of the counter cyclical buffer, at least until June 2017, we reduced our expected minimum levels by approximately 25 basis points in 2017, and approximately 50 basis points in both 2018 and 2019, compared with Q1 expectations. The fully phased and regulatory CET1 requirements as we know them today, plus our expected management buffer would currently place us around 12.5% in end-states.

We continue to be optimistic that our G-SIB buffer will fall to 1.5% given our further deleveraging and simplification since December 2014, which is the date used to calibrate our current 2% buffer. However, if this is still uncertain, we continue to illustrate the end-state buffer at 2%.

In terms of future RWAs, we would note that the impacts of our RWA recalibration and their timing remain unclear, and we continue to engage actively with our regulators on numerous constitutive impact studies. Before any barred RWA recalibration, combining regulatory deconsolidation of Barclays Africa, further rundown of non-core toward our target, and some modest growth in select core businesses would imply RWAs in the low-GBP300 billions. This is very supportive of our ability to build our CET1 ratio towards our end-state expectations.

We also continue to take into account stress testing by fighting our management buffer with the objective of clearly passing both internal and the relevant Bank of England hurdle rates. Based on the drawdowns in the 2014 and 2015 stress tests, the approximate 4% buffer shown on this slide proved more than adequate. Importantly, we expect that the resilience of the Group under stress should improve further, as we continue to run down Barclays non-core and resolve outstanding conduct and litigation issues.

Before addressing MREL and TLAC in the next section, let me briefly update you on our current total capital stack on Slide 9, on both the PRA transitional and fully-loaded basis. Throughout 2016, we continue to execute our transition towards a HoldCo capital and funding model.

In Q2, our outstanding consolidated total capital ratio increased by 50 basis points to 18.7% on a transitional basis. The increase was 40 basis points to 17.6% on a fully-loaded basis. These increases were driven mainly by CET1 accretion.

In terms of MREL/TLAC stack proposition, we continue to expect to build approximately 80 basis points of additional AT1 to reach 2.2% in end-state through measured issuance over time. For tier 2, we remain incentivized to hold at least 3% of RWAs. We maintain our view that the appropriate balance between tier 2 and senior debt in our future stack will be informed by TLAC and MREL rules, as well as investor appetite from relative pricing.

Transitioning to a HoldCo model for the purposes of satisfying our MREL/TLAC requirement is our primary focus, and we have sufficient time to achieve this, as we currently expect OpCo capital instruments to qualify as MREL and TLAC until 1 January, 2022. In the meantime, most of our legacy OpCo capital instruments remain eligible CRB4 capital during and to the extent outstanding after the grand fathering period.

Turning now to the evolving MREL/TLAC requirements from Slide 10, we currently expect the MREL requirements as of 1 January, 2022, to be our binding constraint, given this OpCo legacy capital is not expected to qualify from that time. Excluding OpCo capital from our Q2 2016 position would reduce the spot ratio to around 17%.

During H1, we issued GBP5.7 billion sterling equivalent in wholesales markets across public and private senior and capital transactions, including our $1.25 billion tier 2 in early May. Of the H1 total, GBP600 million is being raised in private transactions, and we closed a further private transaction in July as fixed income markets stabilize quickly. We've also completed a number of liability and capital management exercises this year across a range of securities and currencies, totaling GBP6.1 billion sterling equivalent.

As future annual refinements remain uncertain, we continue to illustrate on this slide the aggregate HoldCo, AT1, tier 2 and senior issuance needed of the coming five and a half years to sell for requirement to 24%. This is derived from the pillar on TLAC minimum requirements of 18%, plus CRB4 buffers of 4.5%, an illustrative 1.5% internal management buffer. Based on spot RWAs of GBP366 billion, this issuance had equated GBP33 billion in aggregate, or around GBP6 billion of issuance turnaround over the coming five and a half years.

Whilst in practice we recognize MREL requirements may be higher than 24%, we anticipate lower RWAs as described earlier, through the regulatory deconsolidation of Barclays Africa and further rundown on [our core]. We also intend to continue accreting CET1 capital. These factors will help to mitigate against the clear risk of higher MREL ratio requirements.

This illustration does not represent our actual issuance plan or guidance, and given uncertainty around final MREL requirements we will continue to be an active issuer with the intention of undertaking further issuance this year, subject to market conditions and investor appetite. In terms of profit impact of our migration to HoldCo funding, we do not expect our future funding needs to translate into materially high cost of funding for the Group at current spreads, taking into account the maturity profile and roll off of expensive legacy debt, most of which was issued shortly after the financial crisis.

Moving now to our strong liquidity and funding position on Slide 11, we continue to maintain a very robust and well-balanced liquidity and funding profile, supported by our extensive preparations for Brexit and a very moderate impact thereafter. At Q2, our liquidity pool stood at GBP149 billion and the pillow on LCR at 124%, a [status] of GBP29 billion to 100%. The NSFR remains stable at 106%, above future minimum requirements and well ahead of implementation timeliness.

Our group of wholesale funding increased by GBP12 billion from year end to GBP154 billion at Q2. This was driven by an increase in short-term funding as we prudently increased our liquidity position ahead of the referendum, which more than offset the modest reduction in longer-term funding.

Turning now to Slide 12 and structure reform, we continued to make good progress on the execution of our structure reform plans in Q2. On 1 July, our US PIPC became operational, one of the first major deliverables of our structure reform program.

This Company holds under one legal entity, Barclays existing US subsidiaries, including Barclays Bank Delaware, our payments and credit card banks supporting Barclay Card, and Barclays Capital Inc, our US broker dealer supporting our Markets business. As a bank holding Company, US PIPC is subject to the same consolidated capital, leverage, liquidity and federal reserves supervisory requirements as domestic US bank holding companies. While we're currently not permitted to disclose details on its financials, we are compliant with all the MREL requirements, and continue to prepare extensively for our first private CCAR in 2017, our first public CCAR in 2018.

As you can imagine, escutchment of our US PIPC was a large and complex project to mobilize the efforts of over 1000 Barclays employees over a two-year time frame. It's worth highlighting this point and it evidences is what we consider to be a key strength of Barclays execution. Affecting the necessary changes to our US business with minimum disruptions, customers and counterparts was extremely important to us, and we're pleased with the delivery.

Our preparation work to establish Barclays UK continues to progress well. We submitted a draft banking license in June and an active follow-up with our regulators in anticipation of securing the license in good time for legal separation of Barclays UK from Barclays Bank PLC, as expected in 2018. Stakeholders, including our fixed income investors, should take comfort from the various checks and balances that form part of the ringfencing regime.

Critical to this regime is the role of a court-approved independent expert in considering the impact of our plans on all stakeholders. The independent expert is required to test that stakeholders are not impacted beyond what is reasonably necessary to achieve a purchase of ringfencing. In addition, the respective regulators both of PRN and FCA, as well as the court, must be satisfied that this is indeed the case before sanctioning a separation.

Another cornerstone of the UK structure reform agenda is to ensure operational continuity of our bank's critical services in times of stress. This is ultimately designed to preserve enterprise value as required, and as such, to provide universal benefit. As Barclays has many shared services across Barclays UK, and Barclays Corporate and International, our expectation is that the majority of our critical services will be provided to Barclays UK and BCNI [barring] enterprise-wide service company constructs.

This construct will deliver controlled and consistent services with Senior Management accountability, which would enable us to deliver operational synergies. Other than the delivery of streamline services, and consequential operational synergies, we view the establishment of the service company construct as largely stakeholder agnostic. In order to insure appropriate testing and operational readiness, we are likely to establish it beneath Barclays PLC, and the head of the establishment of Barclays UK.

We recognize that a number of market participants are keen to understand the prudential requirements of the future legal entities, how we're currently positioned against these future requirements, and where we expect to be positioned upon implementation. Both these requirements are not yet finalized, and we expect to communicate them in a timely way to the extent permitted by regulators. We also add that as we approach legal separation, certain investors and creditors will keen to understand the expected rating profiles of Barclays UK, and Barclays Bank PLC as the structure reform.

Our objective is to maintain solid investment grade ratings, further, we intend to create as much stability in the ratings of Barclays PLC and Barclays Bank PLC, as we can, both before and after structure reform. Over time, we aim to further strengthen our credit proposition through the successful delivery of our strategy and continued issuance from our HoldCo. Finally, our structure reform as a point of diversification of two strong online banking entities that deliver greater transparency and accountability, Barclays PLC, the parent entity, should remain an attractive proposition for our fixed income investors.

To conclude now on Slide 13, in Q2, we continued to deliver on our strategy, achieving strong underlying returns in our core businesses and further reducing non-core. We made solid progress on our balance sheet, simplifying our liability stack and continuing our transition towards the HoldCo model, accreting the CET1 ratio and maintaining robust liquidity and funding diversification.

We maintained a strong cost discipline, whilst continuing to focus on driving Group returns to those of the core. We made further progress on structure reform, starting up our USIC and further progressing our plans to ringfencing in the UK. Whilst Brexit brings increased macro uncertainty, we remain committed to the strategy we set out and confident in our ability to deliver.

Tushar, with that, I'd like to hand back to you.

Thank you. I hope you found this call helpful. We would now like to open the call to questions, and as a reminder, I'm joined here today by Dan Hodge, our Group Treasurer, and Stephen Penketh, our Group Head of Structural reform.

Let me have the first question please, Operator.

(Operator Instructions)

Your first question is from Lee Street of Citigroup.

Hello, good afternoon, and thank you very much for taking my questions. Three quick ones for me, please.

Firstly, you mentioned the potential for the G-SIB buffer to be reduced, if that were to happen, I was just wondering how you'd see that impacting the management buffer. Would you see the management buffer increasing or would you just take your target capital ratios lower?

And secondly, I think you just mentioned some private placements, and I was just wondering if you could give any indication of what volume you might expect to have to do in private placements ETA, relative to your indicated GBP6 billion issuance. And finally, on the ringfencing, you mentioned the court approvals and the PRN/FCA approvals that are required to do the split.

I was just wondering what plan B would be if for whatever reason they didn't approve it and you couldn't move bond holders? That would be my three questions, thank you.

Thanks, Lee, I'm going to ask Dan to take your first two on G-SIB and private placement volumes, and Steve can address your plan-B, so to speak, question.

Thanks, Lee.

So, in terms of G-SIBs, so, we're fairly consistent in our guidance here that our overall for the capital ratio will be a function of the sum of all of the various and regulatory requirements and regulatory buffers, plus prudential management buffer, which we're still slating between 100 and 150 basis points. So, in a situation whereby we had a fall in the G-SIB, if it did fall from 2% to 1.5%, then we would still look to retain that management buffer between 1% and 1.5%, so you would in that situation see the overall instinct on capital ratio come down.

So, said, we are pretty confident that our deleveraging actions should drive a reduction. We will find out later this year, probably around November, the November base will be based on the calibration of our size versus peer banks, as of the end of last year, the ex 2015, and so we'll wait and see what happens there.

In terms of the private placements, I'm afraid it's not a similar number that we'll put out there in terms of how much we think we will get done. It still would be clearly in a minority of the total senior issuance that we would get done as our holding company, I think I just want to reiterate one point as well, and I know I've sort of said it in the script, but I'll say it again, Lee. It is the GBP6 billion number that we have in there, what looks like total deleverage from, that is purely iterative, so don't read too much into that particular number.

With respect to your question about plan B, put simply, there isn't one, because this is a legal regulatory requirement which we are going to hit. On the journey we also intend to make sure that it's one that actually enhances delivery of our strategy, too. For the moment, in the core businesses, we have two very strong stable BUK and BCNI brands, which will still become two very strong stable BUK and BCNI entities for lack of being a BBPLC.

Okay, so, should I take it from that that is an immensely remote possibility that you wouldn't get those approvals, is that a fair takeaway from that?

That's fair, actually, yes.

Thank you very much.

The next question is from Robert Smalley of UBS.

Hi, good afternoon. Thanks for doing the call and thanks for doing the call in US time business hours as well, appreciate it. Just a couple of questions.

Going back to the slide, looking at evolving CRD IV capital structure transitioning to HoldCo over time, and I'm going off a different presentation, so that's my Slide 50. So I apologize. As we're phasing out the legacy tier 1s, there's a certain number of them that will count as tier 2s, so when we look at the 3% tier 2 number, how much of that is going to be essentially new issue and how much is going to be legacy Tier 1?

Rob, did you say you had a couple of questions, surely you want to give us both of them and we can answer them both in one shot. Or do you just have the one question?

I'm sorry?

Did you say you're going to have two questions, if you were, I'll take them.

Yes, oh, sorry. And the second one, just in terms of the Group legal structure in the tier 2s, how much of the tier 2 that you're planning on the 3% is going to be used in the Barclays UK or down somewhere in some other entities away from Barclays PLC?

Thanks for those questions, Robert. In terms of the first question, you're absolutely right, there are going to be some of the Tier 1s, which currently in BBPLC that will no longer qualify as a Tier 1 and will basically will feed through to become tier 2s. However, when we give our guidance around end-state capital structure, think about for the whole of our tier 2 eventually is being issued from a holding company, and so, you know, certainly all that prefer a short period of time as they will continue to, there continue to be some tier 2 existing within BBPLC, and, obviously will count for that time as tier 2 for our certain consolidated capital ratio. But as well, if you look at some of the other slides here, we could get some, hopefully, helpful kind of maturity for a call date profile, so that's that capital you see that shouldn't actually be that much left anyway by the time you get to the end-state.

In terms of the other question around how much the tier 2 is going down to Barclays UK, so, really, to answer this, we need to look at the overall capital structure of both the ringfence bank and BBPLC in [Normanton's] bank, and do them in a fairly similar way, I would, to the overall Group structure in that the source of percentages that we attribute to each tier at the Group level, you'd also expect to see in the ringfence and the no ringfence bank, and therefore, we would need to be downstreaming from a holding company equivalent levels of at least 3% of tier 2, down into Barclays UK, so hopefully that answers your question.

That's very helpful, thanks very much.

Thanks, Robert.

The next question is from Paul Cinalat of Societe Generale.

Good afternoon, everyone. I've got three very quick questions. The first is--

Paul you're a little bit hard to hear.

Oh, sorry, is that better?

Yes. That's so much better.

Sorry about that. Three quick questions.

How much do you think you need to issue at senior HoldCo level before the rating agencies, and I guess particularly Moody's will consider upgrading the holding company? You've done quite a lot, and I'm kind of thinking that that tranche is starting to look big enough for a reconsideration on the part of the rating agencies, so that's question number one.

Question number two is I guess directed at Tushar. Tushar, you've mentioned on the earlier call that most of the CIB was not sensitive to passporting, and I think that's probably lost on most people, it's certainly lost on me. I wonder if you can maybe give us a little bit of color about where the sensitivity around passporting is and where it isn't sensitive.

And then the third quick one was, in terms of Tier 1 and tier 2 issuance, just to lay it on the table. Is AT1 out of the question now, or if you get a massive rally next week because there's some sort of solution in Italy, will you do something?

It seems to me that you've always got some appetite to do another Tier 1 and another tier 2. Thank you.

Thanks, Paul. Why don't I take the passporting question and I'll hand it over to Dan, he can cover the two other questions.

On passporting, the point of my comments there was that the majority of our business isn't impacted by passporting within the investment bank. Remember, a lot of our business is US-centric, probably more than half of our business is US-centric, and then a lot of business that isn't US-centric isn't necessarily passport activities itself doesn't get, obviously, doing UK onshore business and non-european business is still meaningful, as well.

The other thing is, of course, passporting is one of the things where you've got to look at all of the various types of activities that we have to see what actually is sort of fully passported activities, rather than just counting revenues or profits in one particular currency, and the currency splits can sometimes be a little bit misleading, so I wouldn't underplay in the sense that it is negligible. It is there, it's important, but I don't want people to think it's some sort of overwhelming component of what we have at Barclays, where most of our business is non-passporting, the majority of our business is non-passporting activity. Dan, do you want to have the--

Yes, sure. Absolutely, I will answer both of those.

So, obviously, you'll be aware that we really have a very constantive loss, given the failure methodology, and that does mean that increased debt and that capital issuance will further put on the pressure on our HoldCo and OpCo ratings.

We are currently subject to the one-off downgrade in HoldCo four for LGF. We're actually very close to moving to the next level, and that would obviously put a sort of pressure, upward pressure, on the rating and that would obviously hopefully we get a lot of our negative outlook first to stable, and the other point to make around that is actually, other than methodology, subordinated debt gets you there a bit more quickly in senior debt, because under the methodology, subordination is more important than volume.

What I would say is that this LGF is only one component of a broader ratings method. Obviously, all other things being equal, then you'd expect some of upward pressure. But they take another series of factors into account as well, and clearly, ratings are a key strategic priority for us and all of the execution of our strategy more broadly is also critical for helping our, obviously, our standalone, our standalone rating.

In terms of the AT1, yes, we still -- it's still in favor with us. We know that it's being very volatile in terms of its price performance in the secondary market during the course of this year, and there's definitely still a place for it in our capital stack. It is, despite the fact that spreads obviously still, while they may have been happening in the past cheaper than equity, we still get tax relief for it. So we definitely expect issuance from us in the future, I think we use the term measured in the script; that's absolutely still the case.

We can be patient, though. We've already got over GBP5 billion in issue on our holding company. We actually have less than GBP8 billion to do in total to reach 2.2%.

Thank you.

The next question is from Greg Case of Morgan Stanley.

Hello. Afternoon. Just one quick question from me.

I just wanted to ask if you could give us any color around AT1 calls, and appreciate you're very limited in what you can say here. But I'm just looking at your 2018-2019 call schedule around the AT1s that you've already got issued, suggest you probably need to do about a billion a year to pre-refund that, so I assume you're already thinking about whether or not these things may or may not get called.

I was just wondering if you could maybe give us a walk through of if there's like a gray area around what you think you might be able to print a new deal on in terms of what's class of economic and whether or not things like underwriting fees and things all go into that decision? How are you thinking about that? Because I'm assuming you're starting to work that through now.

Yes, thanks, Greg.

We always think about these things, and obviously, you see we've been very active so far this year with calls and liability management exercises, these are things that can be useful, but in terms of sort of the AT1, I think you're referencing the one there that we would issue as the HoldCo. We just can't comment on any plans around those, at the moment we don't comment on unusual security, so let's give you some general sense of the factors we consider in making calls on either calls or rather meaning more broadly.

Firstly, it's obviously eligibility for MREL/TLAC, so for capital eligibility we need to look at beyond fronts and ongoing PBT and CET1 impacts. We look at prevailing market conditions and we look at regulatory developments, also play for debt capital we need regulatory approvals. AT1, you'll be looking at what other placements of security would (inaudible) to refinance. So it's really the balance of all of these factors we would have to take into consideration, and it's obviously too early to say anything more specific than that.

Okay, and I obviously appreciate this is a conversation between you and the regulator ahead of a call, but I'm assuming your issuance plan assumes that you'll be bringing those back in on the first call date, unless kind of something changes. I.e., you'll be prefunded and then it will be whether or not at that point in time the decision is whether or not to call, and also whether or not the regulator wants that.

I'm not funding plans, and not being too specific to British securities [by securities]. We just have a certain level of AT1s that we know we need on a go-forward basis, and that's really what we're always hoping for in our plan. We don't have anything specific about exactly how that gets in there.

Okay. Appreciate that, thank you.

Thanks, Greg. Do we have any other questions Operator?

(Operator Instructions)

The next question is from Carlos Meirreilles of Mitsubishi UFJ Financial Group.

Yes, sorry for that. Good afternoon, everyone. My question is related to the RWAs.

I understand, of course, the plan for RWA reduction, but there is still a component probably of RWA inflation going forward, and I'd like to have a little bit of a view on that over the coming few years, at what extent that is predictable at this stage, and secondly, if there is also still scope, or is it to be ruled out that there is an exchange actually out of OpCo bonds into HoldCo bonds propose at some point, or if we have to just forget about that.

Thank you.

Thanks, Carlo. Dan? Do you want the RWA inflation?

Yes, absolutely.

First off, though, I'll provide the concept for any sort of RWA inflation, so I'll just be repeating what I said on the call, because I think it's worth doing that the spot RWAs are running at around GBP365 billion. If you take off Africa post Reg deconsolidation, and take the non-core down to 20, and you are already into low 300s, and you stay until it's in the low 300s with some core growth, so that actually gives us a bit of prudential room, if you like for a bit of net operating inflation, and that said, it really is too early to quantify how much it's going to be.

We're still working through it, and you know, the papers themselves are still not final. We know that the BAL committee is sort of working through various situations trying to get those done Q1 next year. You'll be aware that the numbers coming out of the quantitative impact studies are clearly very high, I think that it's very unlikely that you'll see them coming through without some filter or reduction as you run through the CRD5 process, certainly from the UK banking systems perspective, the Bank of England has made it very, very clear that it has no desire to increase the overall net level of capital, and I think we can take a certain amount of comfort from that. One of the ways in which that can be assured is to obviously reduce the pillar 2a add-ons, provide some sort of offset.

And the last thing I'd say is that Reg changes nothing new for us. We've had waves of BAL 2.5 and BAL 3 the last two years, and we are very good at responding to it and mitigating it. I would say that it will take at least two or three years before we see some of the current slate of proposals around those standard risk floors, changes to standard risk rates, fundamental review of trading book, securitization rules, these kind of things I think you're referring to. I think is going to take quite a long time to go through the European legislative process, and then be adopted inside the UK, but to say we don't have our head in the sand over these things, we know there may be some net impact, and we've provided for that in our prudential four capital plan.

Talk about the exchange?

Thanks.

Yes, I mean, really, I suppose I'll repeat what I said earlier in terms of they are always on the look out for opportunity to do, and liability management exercises, they can be a very helpful tool. We're providing liquidity for the bond, we are hopefully providing access to the holding company for our investors, which I think is a great of you seeking diversification benefits the Barclays Group.

We have retired over GBP6 billion of BBPLC senior sub-debt in each one, including through our liability management exercises. So they're a very, very important tool for us as we move towards our end-state capital and MREL targets, and sort of the factors I listed earlier in the response to the AT1 question around the MREL/TLAC eligibility, up from PBT and CET1 will impact pervading market conditions. All these factors I applied earlier AT1 to play to our balance and considerations for, and I mean, for senior and sub-debt.

Okay, thank you very much.

Your final question today, Tushar, is a follow-up question from Lee Street of Citigroup.

Hello, thank you for taking (inaudible). Just on Slide 19, where you show the illustrative future MREL, just on the loss absorption that you've got the whole pillar 2, 3.9 I'm seeing there, and I appreciate on the recap you saying greater than 8%. But logically, wouldn't you need to be taking in some if not all of the pillar 2 into the recapitalization? The reason I ask is, obviously that could materially push up your ultimate MREL? So just any thoughts around that would be most welcome. Thank you.

Yes, thank you.

Well, that's absolutely right, clearly. Part of the consultation paper was contemplated that pillar 2a would be added onto that, effectively, you could have a situation where the loss absorption shown here on Page 19 of 8, plus the 3.9% pillar 2a, (inaudible) two, and then on top of that, you have the comply buffer. So that absolutely could get you to the high 20s or even 30%, as opposed to the 24% or so that we've illustrated, but that's exactly what I was getting at earlier, actually.

We do know that there is a risk of that. In terms of what that might translate to in terms of issuance, the GBP6 billion per anum that we quoted earlier is based on spot RWAs, and not accreting any more absolute CET1 capital, and in reality, as we said a couple of times, we would expect RWAs to be material, and I feel very confident that our RWAs will be materially low; also confident that we can continue to accrete absolute CET1 capital levels, and therefore, the lower RWAs move higher capital, but clearly mitigate the risk of the end-state MREL ratio being more akin to the right-hand side of Page 19 than the left-hand side.

Thank you very much. Thank you.

Thanks, Lee, and I think that was the final question. So, thank you, everybody for listening, and we welcome your feedback on this call and hope it's helpful, and we'll look to do this again at year end. Thank you, Operator.

Thank you. That concludes today's conference call.