Barclays PLC (BCS) 2017 Q2 法說會逐字稿

Welcome to the Barclays Half Year 2017 Results Fixed Income Conference Call.

I will now hand you over to Tushar Morzaria, Group Finance Director.

Good afternoon, everyone, and welcome to our half 1 2017 results fixed income call.

I'm joined today by Dan Hodge, our group Treasurer.

Let me start with Slide 3 and make a few comments on our strategic progress and Q2 results.

This morning, Jes Staley, our group CEO, outlined our strategic progress in Q2 and our plans for the business as we move on to the next stage of our development.

I'll briefly summarize the key points and also provide an overview of our business performance before handing over to Dan.

Firstly, we disposed of 33.7% of Barclays Africa, effectively reducing our stake to 14.9%.

This enabled us to achieve proportional regulatory consolidation to a level of 23.4% and equate to around 47 basis points to our CET1 ratio.

Alongside other capital accretion, this resulted in a ratio of 13.1% at half 1 at our end-state target of around 13%.

We expect further CET1 ratio accretion from Barclays Africa of around 26 basis points, taking the total to around 73 basis points as guided.

We expect approximately half of this further accretion to be achieved in the second half of this year on proportional regulatory consolidation and will align to our 14.9% stake, and the remainder when we achieve full regulatory deconsolidation at some point in 2018.

Secondly, we completed the accelerated rundown of Non-Core, closing the unit with GBP 23 billion of RWAs below our GBP 25 billion guidance.

This will now be reintegrated into core for their continued rundown, and we show in the appendix where these remaining RWAs are being allocated.

These actions represent significant milestones in the restructuring of Barclays.

We maintained our focus on cost, achieving an underlying Q2 group cost income ratio of 67% and underlying RoTE of 7.2% excluding the impacts of the Africa sell-down and a GBP 700 million provision for PPI taken in the quarter.

Turning now to the Core business performance in Q2.

Core delivered an underlying RoTE of 9.7%, and underlying cost income ratio of 60%.

For Barclays U.K., underlying RoTE was 19.1% and NIM improved to 370 basis points.

We maintained our conservative risk appetite and have continued to monitor all leading indicators for signs of deterioration.

Impairments remain stable at GBP 220 million this quarter with improved delinquency rates in our U.K. cards business versus Q2 2016.

For Barclays International, RoTE was 12.4%, with an encouraging performance in banking and continued growth in U.S. Cards.

Turning now to Slide 4. Looking forward, management's focus for the next phase of Barclays' evolution is on proving returns, and we have shared 3 financial targets for the group.

To deliver an RoTE of greater than 10%.

As Jes outlined this morning, eliminating restructuring costs, improving CIB returns and driving cost efficiency through our ServCo will be important drivers towards this target.

To maintain a CET1 ratio of 150 to 200 basis points above regulatory minimum levels, and to achieve a cost income ratio of below 60% through strategic cost savings and the elimination of around GBP 1 billion of restructuring-related costs that fall away by the end of 2019, creating capacity for reinvestment.

In summary, Q2 has been a significant quarter of progress for Barclays.

We've completed the sell-down of Barclays Africa, closed Non-Core and achieved a CET1 ratio at our end-state target of around 13%, remain encouraged by the resilience of our Core business and focused on the important objective of improving return to the group.

With that, I'll hand over to Dan, who will talk about the progress we have made on our balance sheet and structural reform this year.

Thank you, Tushar.

In half 1, we further strengthened our balance sheet, ending the period in a robust position with improved capital funding and liquidity.

Our CET1 ratio grew by 70 basis points to 13.1%.

On an RWA base, GBP 327 billion, GBP 39 billion lower than at year-end, driven by Barclays Africa, proportional consolidation and continued rundown of Non-Core.

On the funding side, we continued our progress on the HoldCo transition, with strong market appetite for our HoldCo paper, which we issue GBP 7.6 billion equivalent whilst redeeming USD 1.375 billion dollar preference shares.

We also continued to deliver on structural reform.

In April, we received our conditional banking license for the U.K. ring-fenced bank.

We are on track in preparing our service company to deliver our operational continuity obligations and drive group cost efficiencies.

In anticipation of the starting up of our ring-fenced bank next year, we returned to the covered bond market in a successful GBP 1 billion 3-year issuance in May.

We also completed the triennial review for our U.K. pension fund, agreeing a revised contribution schedule with the trustees and updating the covenant arrangements to reflect ring-fencing.

I'll talk more about the medium-term capital benefits of this agreement later.

Turning now to look at capital leverage in more detail on Slide 6. Our CET1 ratio improved by 70 basis points from full year to 13.1% to half 1. This was driven by underlying profit generation of 65 basis points, 47 basis points from the sell-down of Barclays Africa and other RWA reductions of 30 basis points.

These items more than offset 70 basis points of impacts, including the Q1 preference share redemptions, the Q2 PPI provision and pension contributions.

Turning to leverage.

Our sole consolidated leverage requirement is to comply with the U.K. regime, which we disclosed on both the 3-month average and spot basis, and which exempts cash with central banks.

In June, the Bank of England published a new consultation paper regarding the U.K. leverage ratios.

It envisages a 3% minimum ratio plus a 25 basis points recalibration to neutralize the exemption for eligible Central Bank cash balances.

When added to the assumed GSIB and countercyclical buffers, this would represent a requirement of 4% for Barclays, applicable from 1st January, 2019.

The half 1 average U.K. ratio of 4.8% was 30 basis points higher than the full year, driven by reduction in average U.K. leverage exposure and a modest increase in average Tier 1 capital.

As you can see, we therefore remain comfortably above the expected 4% minimum requirement applicable from 2019.

Turning now to Slide 7 and our future CET1 ratio expectation.

As a reminder of our approach to capital planning, we continue to manage our group CET1 ratio as a function of expected future minimum levels and CRD IV buffers plus a prudent management buffer designed to maintain a ratio comfortably above our mandatory distribution hurdle and to reflect stress tests.

Absent a U.K. countercyclical buffer, our mandatory distribution restriction hurdle would have been 10.8%.

There is a likely increase to the U.K. countercyclical buffer to 1% from November 2018, following the announced introduction of a 50 basis points buffer from June 2018.

The November increase to 1% would translate to around 45 basis points for the group based on our U.K. exposures, which will increase our end-state hurdle to around 11.3% if introduced as announced.

Taking into account our stated management buffer of 1.5% to 2%, this results in an expected end-state CET1 range of 12.8% to 13.3%, and thus, we continue to guide to an expected end-state target for the group of around 13%.

Our half 1 CET1 ratio is now within our expected end-state range.

We have material organic earnings capability as the underlying 65 basis points of profit generation in the half 1 demonstrates.

On capital ratios, we continue to expect the ratios of Barclays U.K. and Barclays Bank PLC post ring-fencing to be broadly similar to each other and to the group.

Our strong cash position provides protection against potential headwinds whilst also affording options for deployment.

Looking forward, there are 4 material capital items I'd like to comment on briefly here: IFRS9, CRR II/CRD V package, Basel IV RWA reforms and pensions.

Regarding IFRS9, we expect to be in a position to provide an estimate of the CET1 ratio impact later this year.

It looks likely that implementation of this new accounting standard will be transitioned into regulatory capital calculations over a 5-year period from 1 January, 2018.

We would expect the impact to be manageable.

There remain 2 phases of our regulatory reform which are now expected to be implemented over a longer-time horizon than previously indicated.

First, the CRR II/CRD V package, which includes new rules, CVA, the standardized approach to measuring counterparty credit risk and the fundamental review of the training book.

We do not anticipate these coming into effect until 2021 at the earliest.

Second, the Basel IV RWA reforms expected to include a standardized aggregate output flow and changes to credit risk and operational risk RWAs, amongst others, albeit negotiations at the [Basel] level are currently stalled.

We therefore envisage the implementation time frames for these changes will commence in 2021 at the very earliest and will incorporate an extended phase-in period.

As these proposals are at various stages of development, there remains uncertainty around their impacts.

As you would expect, we monitor development very closely and have a strong record of managing our businesses through regulatory change to mitigate adverse impacts should they arise.

In terms of RWA trajectory, our group RWAs at the half 1 were GBP 327 billion.

Given the protection and options afforded by our strengthened cash position and our strong organic earnings capability, we've not guided to a specific end-state RWA target for the group.

We focus instead on managing our CET1 ratio.

Looking forward, group RWAs would depend on our assessment of business opportunities and the management decisions we are now able to take to optimally deploy capital.

It's also worth mentioning here the capital implications arising from the conclusion of the triennial pension review.

A new agreement has been reached, which encompasses an updated contribution plan to meet the increased funding deficit over a 10-year period and new arrangements to secure the deficit in contributions.

On the new agreement, the U.K. retirement fund remains in Barclays Bank PLC.

Compared to the 2013 review, the revised contribution schedule results in a reduction in the cumulative funding contributions for the next 4 years of around GBP 1.2 billion and increased contribution in subsequent years.

These revisions reduce the CET1 impact to pension contributions by around 25 basis points through to 2020.

Turning now to Slide 8. At half year, our total capital ratio was 20.7% on a transitional basis and 19.8% on a fully-loaded basis, representing an increase of 110 basis points and 130 basis points from full year, respectively.

These increases were driven by CET1 ratio accretion and AT1 and Tier 2 issuance.

In terms of the composition of our total capital stack, we remain incentivized to hold at least 2.3% of RWAs and AT1, reflecting the current group Pillar 1 and Pillar 2A capital requirements permissible in this form.

As previously mentioned, we expect to hold a surplus of 2.3% to allow optionality to manage our core profile and to accommodate variability in RWAs over time.

We therefore continue to expect to be a regular issuer of AT1.

We also continue to expect to hold at least 3% of RWAs in Tier 2 format, again reflecting group Pillar 1 and Pillar 2A requirements, with the balance between senior and Tier 2 based on relative pricing and investor appetite.

Turning now to our MREL position on Slide 9. We have been very active so far this year in a strong market, issuing a total of GBP 7.6 billion equivalent from the HoldCo.

This GBP 7.6 billion comprise senior debt of GBP 4.8 billion, GBP 1.5 billion Tier 2, GBP 1.3 billion AT1.

We also redeemed our Series III USD 1.375 billion preference shares on 15th March.

We retain our previously stated guidance for approximately GBP 10 billion equivalent of new HoldCo issuance in total this year, and we expect the balance to be met through a combination of senior, Tier 2 and AT1.

As usual, we'll maintain flexibility in our issuance plan.

And thus, we will not rule out some prefunding for 2018.

We show on this slide our current HoldCo MREL position compared to expected end-state requirements.

We continue to expect the MREL requirements as of 1 January 2022, to be a binding constraint, given that OpCo legacy capital is not expected to qualify from that time.

For half 1, our HoldCo MREL ratio is 23.2% compared to 26.8% on a transitional basis.

We now expect the group end-state requirement around 28.5% of RWAs, taking into account the expected introduction of the countercyclical buffer and prior to an MREL management buffer.

Beyond 2017, we currently envisage average issuance of around GBP 8 billion equivalent per annum to enable us to accommodate some RWA growth over time and to allow for prudent MREL management buffer.

This future issuance remains largely a matter of refinancing legacy OpCo debt, which will remain in Barclays Bank PLC post ring-fencing, given that GBP 26 billion of outstanding OpCo capital and debt matures or is poolable by 1 January 2022.

The CRR II/CRD V MREL package is in draw form.

And as you would expect, we fully support the industry's efforts to work with regulators to achieve permanent grandfathering for all HoldCo issuance undertaken prior to legislation being finalized.

Overall, we're pleased with the strong track record of HoldCo issuance we've established, and we'd like to acknowledge the work undertaken by investors to enable them to participate in this [debt] class.

Turning now to our liquidity and funding profile on Slide 10.

We further strengthened our liquidity position in half 1. Our liquidity pool is GBP 201 billion, an increase of GBP 36 billion from full year.

The Pillar 1 LCR was 149%, a surplus of GBP 65 billion to 100%.

Our NSFR also continues to exceed 100% while ahead of implementation timelines.

The increase in liquidity pool this year is mainly being driven by a net increase in MREL issuance, drawdown from the Bank of England term funding scheme, higher money market balances and deposit growth.

The composition of the pool remains high quality, being cash with central banks and highly rated government bonds.

As we said before, we view the quality and quantum of our liquidity as an expense to credit strength.

We've been able to further improve our liquidity position as we finalize the restructuring of the group and navigate geopolitical and economic uncertainty using cost-efficient sources of funding and without consuming U.K. leverage due to the cash exemption.

In terms of future wholesale funding costs, if credit spreads remain at current levels, our weighted average cost in new wholesale funding will be lower than the cost of maturing securities, many of which we issued at widespread post the crisis.

Our overall wholesale funding cost will therefore fall over time.

Turning now to Slide 11 and structural reform.

We continue to make significant progress on structural reform this year and remain on track to deliver against our regulatory objectives well ahead of the January 2019 deadline.

For full year, we outlined 2 key operational deliverables to meet the necessary legislative and regulatory requirements of ring-fencing.

Firstly, the build-out of Barclays Services Limited to become the group service company, or ServCo, to meet operational continuity requirements.

And secondly, the transfer of the Barclays U.K. businesses into new ring-fenced bank legal entity, which we now have our conditional U.K. banking license.

We have successfully commenced our ServCo migration process to allocate customers' HoldCo between entities and remain confident in our ability to complete the remaining migrations.

We intend to stand up with ServCo in September this year, at which point the necessary service agreements and internal infrastructure to do so will be in place, and we will migrate assets, contracts and employees at that time.

We remain firmly on track for the transfer of Barclays U.K. into the new legal entity in half 1 of next year.

The ring-fencing transfer scheme court hearing and the associated objection process will be initiated in November this year and represents an important milestone to achieving separation.

The management structure of Barclays U.K. and Barclays International has been in place for some time now.

And we feel pleased with the progress we've achieved to date and confident in our ability to complete our plans in line with our stated objectives.

Turning now to Slide 12.

We continue to target solid investment-grade ratings for our continuing entities and for our new ring-fenced bank.

And we expect that the credit rating agencies will be in a position to provide further clarity on ratings of both existing entities and the new ring-fenced bank later this year.

Summarizing in turn what the 3 main rating agencies have said so far.

Fitch have communicated their view that they expect the creation of a separately catalyzed and ring-fenced legal entity could result in rating differentiation, but I expect this to be small, if any.

S&P already incorporates the currently expected implications of structural reform into its senior credit ratings of Barclays Bank PLC.

This includes the classification of Barclays Bank PLC as highly strategic to the group.

They have also stated to expect the ring-fenced bank to be classified as score and rated 1 notch higher than Barclays Bank PLC.

However, their views remain subject to finalization in the coming months.

Moody's had not yet publicly indicated ratings expectations for individual ring-fenced or nonring-fenced banks.

However, they have stated that they expect standalone credit profiles of ring-fenced banks to be in line with or stronger than those existing banks.

Whereas for nonring-fenced banks, they expect these to be in line with or weaker.

As we've said before, rating is strategically important to us.

We continue to focus on execution of our strategy, which we view as supportive of our fundamental credit proposition to support our ratings over time.

So to summarize on Slide 13.

In half 1 2017, we continue to deliver on the group strategy, selling down Barclays Africa, closing Non-Core 6 months early and delivering strong performance in our businesses.

At 13.1%, we are at our end-state CET1 target.

Our MREL build has continued very successfully.

We further improved our very strong liquidity and funding metrics.

Our preparations for structural reform remain firmly on track, and we remain confident in our ability to execute.

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

Thank you.

I hope you found this call helpful.

Dan and I would now like to open the call to questions.

Please go ahead.

(Operator Instructions) Our first question today comes from the line of Lee Street of Citigroup.

I have 3 questions for you, please.

On Slide #8, I think you referenced in your comments that you refer to the appropriate balance of Tier 2 will be informed by the relative pricing to senior and Tier 2 and investor appetite.

And I'm just wondering if you can give us any indication of what you might see as the pricing differential, where you'd look to do Tier 2 over and above HoldCo senior?

Secondly, you mentioned the either permanent grandfathering of some of the older holding company's senior issuances.

What is the -- what do you think the likelihood of getting that permanent grandfathering is and what might be the timing on that?

And finally, in your report in the notes on litigation, there's the comment about the potential for the year SFO to bring a charge against Barclays Bank PLC.

Obviously, a hypothetical question.

But if that were to happen in Barclays Bank PLC to be found guilty, are you able to comment on what might be the potential ramifications, given that that's obviously the regulated bank entity?

That would be my 3 questions.

Thanks, Lee.

Tushar here.

Why don't I take the third one on litigation and I'll let Dan to cover the first 2 on Tier 2 and grandfathering.

There's not much, obviously, we'll be able to comment given the live and fluid situation.

Of course, in terms of whether there's any impact to the bank, were it to be found guilty, which is I think is all very hypothetical, we haven't even been charged at the bank level yet.

I think, really, what it boils down to is given the specifics of this particular case to do with a capital raising that was a point in time done some time ago rather than ongoing sort of products or services or interaction with ongoing clients.

I think regulators would probably take that into case when assessing whether there's any change to our licenses or anything like that.

I probably really can't say much more than that given it's a live situation, and just refer you to our disclosures.

Dan, do you want to cover the other 2?

Yes, sure.

Thanks, Lee.

In terms of sort of the Tier 2 and the, call it, relative issuance there of senior versus Tier 2, I mean, it's -- and I guess, you can tell from our behavior in the past the rates which we've been happy to issue Tier 2 and senior.

We're obviously happy where the spreads are today, they've come in quite a bit, even if they widened out and expect us to continue be a regular issuer in both those particular asset classes.

In terms of the -- when we might expect to see some permanency or grandfathering, it obviously very much depends on when CRD V and CRR II themselves become finalized.

We don't have the kind of inside knowledge on that one, so it's not clear at this stage.

So in meantime, when we sort of put terms in our instruments, we very much reflect what it is that the Bank of England require of us.

And -- but certainly, the mood music in Europe seem to be moving towards a permanent grandfathering as opposed having some sort of sunset date.

And therefore, I think that the other probability of some of the existing securities being [offside] on a retrospective basis is kind of fading.

The next question comes from the line of Greg Case of Morgan Stanley.

I'll follow Lee as well with 3 questions if you don't mind.

So firstly, last year, you guys did a lot of liability management exercises.

We haven't seen I don't think anything this year.

Is it that spreads have gone up too far?

Are things just like tired out in terms of how many time you've hit them?

Just any color around that would be helpful.

Also Dan, I think you mentioned on -- I may have only been half listening at that point, so apologies.

But the -- on the OpCo capital side, you mentioned around derecognition.

Were you just talking about the legacy instruments just being derecognized through Basel III?

Or is this more about potentially looking through into the future CRD and CRR, and whether or not they may actually not count at all in the future as MREL?

And then finally, just quickly, your liquidity metrics keep improving, and you took down some TFS.

I was wondering to what extent that might be temporary or a buildup of capital for something?

Or whether or not you expect it to kind of hold at this kind of 149% LCR type level?

Okay, so let me take each of those in turn.

In terms of the first one, I mean, obviously, spread is one of the factors that one considers in liability management exercises.

And obviously, the tighter they go, all other things being equal, when it's attractive, they've come from our perspective.

We know these are a useful tool for investors, we obviously don't rule them out completely in the future.

We don't comment on sort of individual securities, but we did consider a number of items in pursuing these.

We include soft of MREL eligibility, total capital eligibility.

So the upfront and ongoing profits and capital impacts, prevailing market conditions are important.

Obviously, don't forget that we need a regulatory approval as well if it's a capital.

In terms of the OpCo capital derecognition, so we're refer generally to -- we're aware of drafts, CRR II/CRD V proposals, relating to terms needed and instruments to qualify as MREL and, in some cases, capital.

It's possible that some of the existing OpCo debt capital ceases to qualify such from 2022, but that very much depends on what the final rules say.

And when there's -- whether those grandfathering, as I answered just before in Lee's question, and it's pretty premature to include on that one in there.

In the meantime, what I would sort of just draw everyone's attention to is we do have a short tail of OpCo debt capital.

And we've -- I think of about GBP 8 billion or so maturing off to 1 Jan '22, most of that maturing shortly thereafter.

So any securities -- so there'll be a risk among qualifying, fairly low and notional.

Lastly, on the LCR side, yes, obviously, we have continued to increase our liquidity pool and the ratio themselves have gone up.

We're very happy with that, this has been very deliberate.

We strengthened our position further in preparation for the tail end of regulatory structural reform, uncertain geopolitical macro outlooks.

And it's been achieved at a low cost.

We've drawn down almost our entire entitlement to term-funding scheme at GBP 10 billion in the first half.

We've obviously got lots of additional money market funding as well.

And given the exemptions, the cash and the U.K. leverage ratio, this is kind of neutral for a regulatory leverage requirement.

In terms of where we go in the future, we are happy at this level.

We wouldn't expect it to change materially from here.

(Operator Instructions) Our next question comes from the line of Paul Fenner of Societe Generale.

Very briefly, I just wanted to get a sense.

You guys, I guess, are pretty close to the conversations or representing U.K. banks in the Brexit negotiations.

I just wanted to get a sense of what the mood music is at the moment and whether we're any closer to knowing whether or not we're going to shoot for regulatory equivalent and what that means for your kind of planning and whether that's something that you support.

And I guess the second question is I don't want to flog a dead horse, but on the issuance front, I think you've done pretty well relative to what, I understand, your plans were for the full year so far in the first half.

You say you're going to be regular issuer.

I just want to get a sense, does that mean that we would -- it wouldn't be surprising to see you back in the market, given where spreads are today in the markets in the second half of the year in Tier 2 and/or AT1?

Thanks, Paul.

Why don't I cover the question around Brexit, and I'll hand over to Dan to talk about your question on issuance levels.

So yes, with regards to Brexit, it's obviously a super-complicated situation.

And the forums that we've been invited to with the British government and other government officials, financial services is just one of the complexities that need to be dealt with.

But in some ways, while we're obviously very tuned in to complexities of financial services, and when I sit in some of these forums, it sometimes even more intrigued to see how even more complicated the situation is for other industries.

In terms of likely output and where we go from here, it's very, very difficult to say.

I think from our perspective, we will assume, if you like, the only thing we can assume, which is some form of a cliff exit in April 2019 and be fully prepared for that in terms of ensuring operational connectivity to -- with our clients and continuing to service them in all regard.

And I actually feel pretty good about doing that.

As you know, we already have an Irish bank that is operational and licensed.

And we would look to further develop that to make sure we're ready.

Having said that, we do sense a very pragmatic tone from the U.K. government to try and come to a reasonable transitional period.

But unfortunately, I suspect, we won't know how successful they are until too late into negotiations for us to handle it any differently.

Dan, do you want to cover the second part of Paul's question?

Sure, yes, absolutely.

Just by the way, a reminder.

So we've done, we'll say, sort of about 75% of our kind of annual target for our TLAC, so it leaves about GBP 2 billion, GBP 2.4 billion.

I will say, just like to repeat what I said in the call, that if conditions continue to remain pretty benign in the market and positive for issuance, we may end up prefunding summer 2018.

I like the way you put it actually.

Yes, absolutely, we'd expect some of that to be AT1 or Tier 2 and also some more senior.

We will absolutely be a regular issuer of all those different security types.

(Operator Instructions) We have a follow-up question from Lee Street of Citigroup.

So on Slide 12, you show your ratings.

And you made the case about S&P and how might they might approach the ring-fenced and non-ring-fenced bank.

Do you think they will end up with Barclays Bank PLC being -- remaining A- and the new ring-fenced bank be rated A?

Or do you think it will be the ring-fenced bank will start with A- and you'll see the remaining Barclays Bank PLC drop to BBB+?

Any thoughts on that would be wonderful.

Well, obviously, we certainly hope it would be at least the former, if not better.

I mean, the point about S&P, they've already taken structural reform into account with the rating of BB PLC and they have been maintained it at A-.

They've also said they would sort of expect the ring-fenced bank perhaps be a notch higher.

So I think we're sort of fairly confident about it being that.

At worse -- although, it's not funny that we control.

So we therefore focus absolutely on what we can control, given that they are independent, they form their own views.

So we think that our strategy is very credit-supportive, so we're in line with agency's view.

We really need to focus on getting our returns up above the 10% target over time and continue with our HoldCo issuance, which is helpful for -- to certain of our ratings and just to navigate the end of structural reform.

I think in terms of the BB PLC, the reason why it is where it is still is because it's a very robust entity.

The design of structural reform for us was very much making sure that both the ring-fenced bank and the nonring-fenced bank continues to be very strong, very robust, diversified by product and geography and funding sources.

Certainly, if the credit spreads are anything to go by, we're getting a bit of a thumbs up on that front so far for the market.

Our next question is from the line of Robert Smalley of UBS.

A few things.

One, I'm a little confused on the net interest margin going forward.

You talked about better funding cost.

I'm assuming that you'll have more favorable development versus -- with deposits as well.

But it seemed to be flagged that there would be a decline in the second half, I don't know why.

I'm not clear why.

That's my first.

Second, on card development.

I know here in the States we're starting to see problems tick up.

Not only that with the amount of -- the greater amount of consumer indebtedness, collections have become a little bit more difficult when borrowers start to go bad.

What experience have you had and what are you seeing and how you're planning for that further?

And then finally, 10% ROE target.

I'm assuming this is equal to your cost of capital.

Could you just address the question?

As a creditor, how do we feel comfortable around this kind of target if you're just making your cost of capital and that's your goal?

Thanks, Robert.

Why don't I take them.

In terms of your first question, net interest margin.

The comment there was really for the U.K. We guided originally to about a 360 basis point net interest margin in the U.K. in the second quarter, and net interest margin nudged up actually from -- above that level in Q1 to 370 basis points in Q2.

We do expect that to come down somewhat.

But we do expect on a like-for-like basis, our U.K. net interest margin to be greater than 360 basis points over the full year.

The reason for the slight decline on a like-for-like basis is we do expect our mortgage book to grow very modestly.

We are seeing very healthy inbound applications and we do like the low LTV product.

And margins there are quite competitive, but still very accretive to us.

So very modest increases in our overall mortgage book over the course of the remainder of the year would put modest downward pressure on net interest margin.

But I would say, like-for-like, still greater than 360 basis points.

The reason I stressed like-for-like is that you're probably also are aware that we've closed our Non-Core unit at the end of this second quarter.

As a result of that, the remaining assets are sort of tossed back into, if you like, the home businesses.

One of the assets that'll find its way back to the U.K. bank are super long-dated sterling loans, fixed-rate loans, what we call our ESHLA portfolio -- education, social housing and local authority lending.

Those have lower margins, and so there'll be a dilution simply because of those (inaudible) are going back into the U.K. bank.

And on an annualized basis, that's like about 20 basis points.

So you'll see our third quarter reported net interest margin in the U.K. bank obviously dip down.

But as I say, it's really on a like-for-like basis just a modest decline due to our mortgage production.

The second question on card impairment.

We've actually found out delinquency rates pretty stable both in the U.K. and the United States.

In the U.K., actually, probably delinquency levels ticked down a little bit.

So from very low levels, they've improved in that sense.

And when we look at our sort of credit metrics, it's hard to see signs of stress, unless you go right to the low end of the credit spectrum, which really isn't a meaningful part of our business.

In the U.S., it's sort of a slightly different story, but the trends in terms of stabilizing delinquencies and perhaps even slightly improving is the same, it's just that we've had a tick-up in U.S. delinquencies, which I think most U.S. banks sort of saw earlier on in the first quarter and then somewhat stabilizing.

We -- in the U.K., we have been pretty cautious on our outlook and are therefore really not changed our risk appetite for the last several years in terms of the kind of risks that we see.

So we haven't really looked for higher-margin products in the secured space, whether that's interest rate -- I mean, mortgages or first-time buyers or high LTVs, or even trying to materially increase our market share of buy-to-let lending.

It's not something that's been a huge priority for us.

In the U.S., it's slightly different because the lending that we do on the consumer side is mostly through the partnership business that we have in our card portfolio.

So the kind of customer [cardholder] is somewhat driven by the retailer or the partner that we're in.

Most of our partnerships tend to be towards the sort of the higher end of the credit spectrum.

The airlines, for example, typically they've been in a very strong customer FICO scores.

But we do have a mix of -- for example, our Apple portfolio.

We run the Apple Rewards card.

That has a sort of greater sort of spread of FICO scores.

We have been, in the U.K., increasing staffing in our collections department.

Somewhat not really anticipating a call on the economy or a macro slowdown.

But just sort of consistent with our prudent risk appetite, we do want to make sure that we can be as preemptive as we can in terms of any stress that we may or may not arise in the U.K. And then finally, your question on the 10% return.

I mean, a little bit nuanced.

We did say greater than 10%.

And our objective is absolutely to be generating a return that's above our cost of capital.

Hard to know what that is, our expectation is that as the bank becomes steady-state, as regulation becomes steady-state and sort of bank earnings become more predictable, we would expect there to be some downward pressure on the cost of capital.

What they will be will be, obviously, for others to decide, our investors rather than ourselves.

But we think that a greater than 10% return is realistic, but with the right ambition and is achievable.

That would -- a 10% return for us would require something like close to GBP 5 billion of attributable profit.

A sort of a simple bridge to see how close we could get there just on the current earnings is if you take out 2016 reported profits, statutory profits, they were GBP 1.6 billion.

Included in there was some legacy conduct items, they totaled GBP 1.4 billion, and I would add that back.

Also included in there was a loss -- attributable loss in our -- from our Non-Core business of GBP 1.9 billion, you could add back a reasonably material portion of that.

And then there was, of course, some various other restructuring charges, costs for building our ring-fenced bank, et cetera, you can add back GBP 200 million or GBP 300 million comfortably there.

That, on a very quick calculation, gets you to somewhere around GBP 4.5 billion of distributable profit just on 2016 sort of underlying performance, and that'll give you a greater than 9% return on shareholders' fund, tangible shareholders' fund.

So we -- that still requires some work to do obviously, but we don't think this is unrealistic.

And we obviously wouldn't stop there.

We'd like to ensure that the bank can operate at a greater than 10% at the right time.

I think that's -- is there any other questions on the line, operator?

We have no further questions on the telephone lines, so I hand back to you gentlemen to conclude.

Okay.

Well, thank you very much for joining us.

We do hope you found this call helpful.

Do please give us any feedback on anything else you'd like to hear or talk about either to Dan directly or to our Investor Relations.

Otherwise, I'm sure Dan and the team will see you on the road over the next few days.

Thank you.

Ladies and gentlemen, that does conclude today's conference call.

This call has come to a close, and you can now disconnect your lines.