Barclays PLC (BCS) 2018 Q2 法說會逐字稿

Welcome to the Barclays Half Year 2018 Results Fixed Income Conference Call.

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

Good afternoon, everyone, and welcome to the fixed income investor call for our half year 2018 results.

I'm joined today by Kathryn McLeland, our Group Treasurer; as well as Miray Muminoglu, our Head of Capital Markets Execution.

Let me start with Slide 3 and make a few comments before handing over to Kathryn.

Our Q2 results clearly demonstrate the progress we are making towards our objective, greater than 9% and greater than 10% group returns in 2019 and 2020, respectively.

We reported a 12.3% group RoTE, excluding litigation and conduct, and effectively RoTE only slightly lower at 11.8%.

This was driven by year-on-year increase in PBT of 44% in the quarter to GBP 2 billion, excluding litigation and conduct.

Both Barclay's U.K. and Barclays international reported double-digit returns for the quarter at 18.8% and 12.2%, respectively.

Income was up 10% year-on-year, while costs were down 3%, excluding litigation and conduct, resulting in positive jaws of 13% and the group reporting a cost/income ratio for the quarter of 59%, in line with our target of less than 60%.

As in Q1, we reported lower impairment, down 46% year-on-year, reflecting further single name recoveries in corporate lending and higher-than-expected seasonal repayments on certain U.S. car balances.

In terms of underlying credit conditions, the U.K. economic environment continued its benign trend as arrears rates remained at low levels in U.K. cards, while arrears rates in U.S. cards improved slightly on Q1, as you can see on Slide 4.

Before I hand over to Kathryn, I want to touch briefly on our approach to credit risk as I know it's an ongoing area of interest for our debtholders, in particular with the advent of Brexit and its potential impact on our U.K. portfolios.

As we have said previously, given the further uncertain economic outlook in the U.K., I'm biased to grow the secured credit lending book over unsecured lending in the U.K. This is evidenced by the U.K. mortgage growth we have achieved over the last 12 months, an increase of GBP 5.5 billion.

This growth has been achieved within our risk appetite.

Our stock and flow LTVs are stable at below 50% and 65%, respectively.

And we have successfully balanced this with achieving a NIM of 324 basis points for H1 in Barclays U.K., within our guidance range of 320 to 330 basis points for the full year.

Buy-to-let lending also remains a modest proportion of our portfolio at 12%.

In our U.K. unsecured books, balances have remained stable and we have tightened our lending criteria.

For example in U.K. Cards, while we have maintained our market-leading position, we have reduced duration and proportion of long-dated balance transfers in line with our strategy.

By contrast, in the U.S., our market share is more modest, being the ninth-largest credit card issuer by receivables.

And so we feel the 10% CAGR balance growth we seek is realistic.

Believe we can grow balances around this rate within our risk appetite as we continue to build out our partnerships model with brands that attract customers at the more prime end of the credit spectrum.

In summary, the growth aspirations we have for our businesses and our returns targets are achievable within our conservative risk appetite.

With that, I'll hand you over to Kathryn, who'll provide a comprehensive update on our capital, funding and liquidity position as well as other areas of particular interest to our creditors.

Thank you, Tushar, and to everyone for joining the call today.

The first half of 2018 included a number of key achievements for Barclays.

We successfully executed our ring-fencing plans from the 1st of April, the first U.K. bank to do so, 9 months ahead of the regulatory deadline.

We were particularly pleased with the CCAR stress test outcomes for the U.S. IHC at end of June, passing on both the quantitative and qualitative basis, which was testament to the careful capital planning for this entity since its establishment in 2016.

With the restructuring of the bank now complete, management is fully focused on achieving the group's targets.

The Q2 results which Tushar ran through earlier are evidence that this focus is resulting in increased profitability.

We've also made meaningful progress in resolving legacy litigation and conduct issues in the first half, including the RMBS settlement with the DOJ for $2 billion, which puts a significant headwind to the group capital position behind us.

This should also put this in a better position for stress tests.

With that in mind, I will begin by looking at the group capital and leverage progress in more detail, which you can see on Slide 6. Since our strategy update announced with the full year 2015 results, the CET1 ratio has accreted strongly from 11.4% to 13% as at the end of June, which has been achieved while still also completing a restructuring of the group.

We accelerated the non-core rundown in a capital-accretive way and sold down our stake in BAGL, achieving 80 basis points of CET1 ratio accretion through regulatory deconsolidation, including an additional 11 basis points on full regulatory deconsolidation in the quarter.

From the 1st of January 2018, we adopted IFRS9, which resulted in a day 1 reduction in the CET1 ratio of 34 basis points.

As guided by the PRA, we've adopted transitional capital relief for IFRS9 over the first 5 years of implementation, and the transitional ratio remains the key capital metric for us from a capital planning perspective.

Turning now to leverage.

We're comfortable with the group's strong leverage position being well above the regulatory minimum levels.

We continue to view leverage as a backstop capital measure, with the risk-based measure being the binding constraint for the group.

As a reminder, for consolidated leverage requirements, we currently need to comply only with the U.K. regime, which exempts cash held with central banks.

From Q1 of this year, our disclosure obligations changed and we now report U.K. leverage on both a spot and daily average basis.

We need to be in excess of our leverage requirement every day of the year, however, the year-end spot ratio remains the starting point for stress tests.

At H1 '18, the U.K. spot leverage ratio was 4.9%, comfortably above the 3.7% minimum U.K. requirement today and the expected 4% requirement applicable from 2019.

The year-end 2017 spot ratio of 5.1% represents a surplus of at least 130 basis points to the maximum stress test hurdle rate this year.

Consistent with CET1, the leverage hurdle may be reduced to the extent of the 0.525% G-SII buffer to mitigate the incremental impact of IFRS9.

We would also expect that the resolution of certain litigation and conduct matters should benefit the leverage stress test drawdown, where it was a material component in previous years, as was the risk-weighted capital drawdown.

Turning now to Slide 7 and the movement in the CET1 ratio in the quarter.

The CET1 ratio accreted by 30 basis points in Q2 to 13%, evidencing in the underlying capital-generative capacity of the group.

The increase was driven by 44 basis points of profit generation in the quarter, 11 basis points from the Barclays Africa regulatory deconsolidation, and 10 basis points from other net favorable movements.

This was offset by 3 impacts.

The first of these was driven by market movements, namely, 16 basis points from adverse movements in the fair value through other comprehensive income reserves primarily related to our residual stake in Barclays Africa, which was impacted by a weaker BAGL share price and rand versus sterling.

The other 2 impacts in the ratio in the quarter were 13 basis points from the dividend accruals and 5 basis points from planned pension scheme contributions, both of which will recur in Q3.

At 13%, we are back to our end-state CET1 ratio target.

Turning now to Slide 8 and a reminder of the components of this end-state target.

Our expectation of an end-state group CET1 ratio of around 13% is consistent with a 160 basis point management buffer above our current expected end state fully loaded CRD IV MDR hurdle of 11.4%.

It also provides a stress test capacity in excess of 460 basis points.

We calibrate the management buffer periodically with reference to our regulatory requirements, including the PRA buffer as well as stress tests.

The resolution of legacy litigation and conduct issues should be helpful in this regard, and we expect to periodically revisit the management buffer.

It is worth spending a brief moment on IFRS9, which will be incorporated into the Bank of England stress test for the first time this year.

Based on guidance from the Bank of England, we expect the hurdle rate to be reduced by up to the quantum of a 1.5% G-SII buffer to mitigate the incremental impact of IFRS9 under stress.

We also expect the Pillar 2A component of the stress test hurdle rate to reduce, as its fixed components represent a lower proportion of the typically larger RWAs under stress.

Moving on now to our MREL position, which you can see on Slide 9. We remained active in the debt capital markets in the first half of this year, issuing GBP 6.2 billion equivalent from the HoldCo, all in senior debt, with maturities ranging from 6 to 15 years.

The currency mix included GBP 1.5 billion, EUR 1 billion and USD 4.5 billion.

We were also pleased to diversify our currency mix by issuing Australian dollars and Swiss francs.

We are still intending to issue around GBP 10 billion in total from our HoldCo this year.

For the remaining issuance this year, our current preference is for senior debt and AT1 with tier 2 a lower priority.

However, as always, our issuance plan will be subject to market conditions and investor appetite.

As you know, we are incentivized to hold at least 2.3% of RWAs in AT1 format in our capital stack, reflecting the current group's Pillar 1 and Pillar 2A capital requirements permissible in this form, for which we currently hold 2.8%.

We're planning to maintain a surplus to the 2.3% to provide optionality to manage our core profile and to accommodate variability in both RWAs and FX.

AT1 capital also has a secondary benefit in contributing to our leverage ratio.

Our current expectation of at least 3.1% of RWAs in tier 2 format is unchanged, again reflecting group Pillar 1 and Pillar 2A components.

We are comfortably above that ratio at 3.9% on a transitional basis, and we will continue to manage our HoldCo tier 2 stack as OpCo tier 2 capital reduces over time.

There has been much discussion on legacy OpCo Tier 1 and tier 2 capital eligibility and the comment from the Bank of England regarding impediments to resolution (inaudible) policy statement on internal MREL.

Helpfully, our legacy capital tail says 2022 is modest and short-dated, the vast majority of that tail maturing within 2022, as shown on this slide.

We therefore remain comfortable with our plans.

We're also following the BRRD CRR II title process closely with regards to future capital eligibility of our OpCo legacy stack.

On this slide, you can also see our current HoldCo MREL position compared to the expected end-state requirement.

At June 2018, our HoldCo MREL ratio is 26.5% compared to 29.2% on a transitional basis.

We expect the group end state 2022 requirement of 29.1% of RWAs to be our binding constraint.

And we already meet interim requirements as OpCo legacy capital continues to qualify until 2022.

This is prior to any MREL management buffer, which we would expect to hold above this minimum requirement.

With ring-fencing now complete, it is worth spending a few moments on how we are funding the legal entities, which we have outlined on Slide 10.

As you can see, the funding sources of both Barclays Bank U.K. PLC and Barclays Bank PLC are well-diversified, including strong and stable deposit funding in each legal entity.

Whilst deposit funding is expected to remain the mainstay of Barclays Bank U.K. funding base, modest secured funding and short-term issuance, such as CD, CP and MTNs are expected to complete this funding profile along with internal MREL.

Upon ring-fencing, covered bonds are transferred to Barclays Bank U.K, including the GBP 1.25 billion 5-year deal issued in January.

We have also relaunched the Gracechurch card securitization program, issuing USD 650 million in July, the first public trade from this program for 4 years.

Similarly, Barclays Bank PLC funding base also comprises a diverse mix of deposits, secured funding and residual outstanding Barclays Bank PLC-issued senior debt and capital.

This is supplemented by shorter-dated senior public transactions up to 3 years: MTNs, structured notes alongside CP, CD and also internal MREL.

As we complete our MREL build, we expect to remain a HoldCo issuer for public unsecured funding with maturities of 3 years or more.

We welcomed the June policy statement from the Bank of England on internal MREL, which enables us to update the documentation associated with our internal funding arrangement in order to be compliant by the 1st of January 2019.

Once documentation changes are completed, senior debt from the HoldCo will be downstreamed, as appropriate, on a subordinated basis for the legal entities.

Turning now to Slide 11 and our legal entity capital positions, which we are disclosing for the first time.

As I mentioned, we continue to guide to an end-state CET1 ratio of around 13% for the group, which accommodates the capital requirements of all our legal entities.

As at H1, BBUKPLC and BBPLC printed transitional CET1 ratios of 14.1% and 13%, respectively.

While BBUKPLC and BBPLC are not currently subject to leverage requirements, we do have CRR leverage ratio disclosure obligations, and we note that PRA's CP 14/18, which proposes to implement the U.K. leverage requirement for ring-fenced banks next year.

The CRR leverage ratios were 5.1% and 4.1%, respectively, at H1, also transitional for both CRR and IFRS9.

It's worth spending a moment of the different regulatory approaches across the Barclays group and its key subsidiaries.

The group continues to be regulated on a consolidated basis.

For Barclays Bank U.K., the minimum capital requirements will need to be met on both solus and consolidated bases, which we expect to be materially the same.

For Barclays Bank PLC, capital will continue to be regulated under the existing solo regime, with BBPLC considered as a stand-alone legal entity together with certain relatively small U.K. subsidiaries, but not consolidated with all its major subsidiaries, such as the U.S. intermediate holding company.

Consistent with the group, we view the risk-based RWA measures as a binding constraint for both entities.

For the U.S. IHC, capital continues to be regulated on a stand-alone basis by the Fed, and the required levels of capital are largely driven by the CCAR stress test outcomes.

Management of legal entity regulatory requirements have been fully embedded in our capital and leverage planning for some time.

Subject to appropriate governance, we expect any excess capital in the respective legal entities to be upstreamed to the holding company, where the group will just have to decide how and where best to deploy it.

Given management's focus on continuing to drive higher returns, the management of capital to optimally meet internal and regulatory requirements, whilst, of course, taking consideration of credit rating, will remain a key focus.

Turning now to our liquidity and funding position, which you can see on Slide 12.

The group liquidity pool continues to be large and conservatively positioned, ending Q2 at GBP 214 billion.

The Pillar 1 LCR was 154%, a surplus of GBP 73 billion to the end-state 100% requirement.

We continue to hold a large proportion of cash and deposits with central banks in the liquidity pools.

And this has been achieved without a corresponding increase in U.K. leverage due to the treatment of eligible deposits.

As I have said before, the quality and quantum of our liquidity are inexpensive credit strengths.

This group pool has now been split, and both BBUK and BBPLC group have liquidity pools of GBP 43 billion and GBP 171 billion, respectively.

These liquidity pools contribute to an LCR for BBUKPLC of 144% and a domestic liquidity group LCR for BBPLC of 145%, which is the regulated liquidity basis for the BBPLC legal entity.

Our group NSFR continues to exceed 100%, well ahead of implementation time lines.

You can also see on this slide that the proportion of customer deposits within our overall group funding profile and the resulting loan to deposit ratio of 83% has remained very stable.

We have also reduced our reliance on short-term wholesale funding, with the proportion maturing in less than 1 year now only 27%.

As a result, the group liquidity pool is 5.4x wholesale funding maturing in less than 1 year.

I would now like to give you a brief update on our Brexit planning, including the expansion of Barclays Bank Ireland and to outline some illustrative pro forma financials, which you can see on Slide 13.

Our Brexit plans are well advanced, incorporating an expanded Barclays Bank Ireland to provide passported activities to EEA-domiciled clients post-Brexit.

We are planning for the expanded BBI to be operational by March of 2019, in line with the anticipated EU withdrawal date, with new business-facing EEA-domiciled clients being conducted from BBI by this date.

We are assuming grandfathering of preexisting activity, although many clients may wish to move this activity to BBI as part of the transfer process.

The client migration will be executed over time, using a combination of conceptual negotiations and a Part 7 court process.

We currently expect that the majority of existing EU branches and divisions will transfer during 2019.

Although, of course, the announcement of a political agreement on a transition period until the 31st of December 2020, may, if ratified, allow further time for our clients and the industry to restructure their operations.

It is important to note that our plans do depend on regulatory authorization for the extension of activities undertaken by BBI and discussions with our clients.

So we will continue to review and refine our planning in light of external developments.

So the indications I'm giving now remains subject to change as we progress.

BBI is a wholly owned subsidiary of BBPLC, which will consist principally of the client corporate, investment and private banking activity across Europe and the Barclaycard Consumer business in Germany.

To give you a sense of size, the pro forma financial information, using December 2017 numbers, taking EEA-domiciled clients and assumed migrated business would have resulted in a external balance sheet of around GBP 170 billion, about 15% of the group total assets.

On revenues, pro forma BBI revenues for 2017 would have been less than 10% of the group.

BBI shareholders' equity would have been around GBP 5 billion, and we anticipate that BBI's capital ratios would be broadly in line with those of BBPLC and the Barclays Group.

The funded balance sheet would have been GBP 43 billion.

We intend to fund the balance sheet with an appropriate mix of diversified corporate, international wealth and Barclaycard customer deposits, a mix of short and long-term sources of wholesale funds and MREL and equity provided from within the group.

And this will ensure the entity has strong liquidity ratios.

The entity will continue to be regulated by the Central Bank of Ireland, and in its expanded form, the ECB.

We're pleased that the credit ratings of BBI are aligned to BBPLC at single-A stable with S&P and single-A rating watch positive with Fitch.

Before I conclude, I will quickly summarize the other key ratings of the group on Slide 14.

The review of Barclays' ratings was completed at the start of Q2 following the execution of our ring-fencing plans, including new ratings for our ring-fenced bank, BBUKPLC.

Standard & Poor's assigned a long-term rating of single-A to BBUKPLC, the same as that of BBPLC, which reflects the core status of both entities under S&P's methodology.

Barclays PLC continues to be rated BBB, and each of these entities have stable outlooks.

Fitch assigned long-term ratings of single-A to BBUKPLC, the same as that of BBPLC, with both entities on ratings watch positive, due to the expectation that there will be sufficient preplaced MREL within the entities to receive one notch of qualifying junior debt by year-end, and hence, expect them to be rated A+.

Barclays PLC remains A with a stable outlook.

Moody's assigned a long-term rating of A1 to BBUKPLC.

BBPLC and Barclays PLC were both downgraded by one notch to A2 and baa3, respectively, in April.

All ratings are now on stable outlook.

As we've said before, ratings are strategically important to us, and we continue to focus on the successful execution of our strategy to strengthen our credit proposition and therefore support our ratings profile over time.

So to summarize on Slide 15, the strong earnings performance and capital position of the group show the completion of our restructuring.

We are pleased to have reported another strong quarterly double-digit return to the group in Q2.

And this positions us well to deliver on our 2019 and 2020 RoTE targets.

We saw healthy accretion of our capital ratio in the quarter, returning to our end-state target of around 13%.

Tushar, with that, I'll hand back to you.

Thank you, Kathryn.

I hope you found this call helpful.

We would now like to open the call up to questions.

Please go ahead,.

(Operator Instructions) Your first telephone question today comes from Paul Fenner of Societe Generale.

I've got -- I think I've got 4 quick questions, 2 of which are on the Ireland thing.

Can you please just remind us what it was that Ireland has done until recently, i.e.

before the whole Brexit thing?

Just to understand what its activities where.

And allied to that, what -- is -- at the solo level, I mean, I guess at the Barclays international, nothing really changes on a consolidated basis, but at the solo level, does that mean that certain businesses are going to be taken out of Barclays Bank PLC?

I'm thinking, particularly non-U.

K. investment banking, so that the risk profile of Barclays Bank PLC solo is going to change, possibly even improve, with potential rating implications.

Just kind of a little bit of flavor of what's going on there would be very helpful.

And also on Ireland, it's obviously going to get bigger.

I guess it doesn't have much of a deposit base.

Is it going to start funding?

And if so, what sort of funding might we expect?

The third question is on ratings.

You say it's a priority.

I'm just trying to understand what it is that you can do besides make more money than last quarter and try to be as sustainable as possible, just to give us an understanding of what it is, the conversations that you're having with the rating agencies and what it is that you can do.

And then the very last question is on calls.

Obviously in AT1, you got 4 sizable calls coming over the next 18 months.

I know you're ahead in terms of your AT1 bucket by, I think, about some EUR 2.75 billion, something like that.

but you've got worth EUR 6 billion worth of calls coming up.

I guess the question I have is do you need to prefund in order to call?

Or would you be able to get away with calling without prefunding the calls over the next 18 months?

Thanks, Paul.

why don't I cover the first of your questions around what activity did Ireland do up till now and sort of migration of businesses into Ireland.

I'll ask Kathryn to talk about the funding profile of Ireland and your question around strategic opportunity we have to improve ratings, what we can do.

And Miray will touch on our sort of thoughts around calls that are due in prefunding.

So Ireland, up to now, was a licensed bank, local bank very much focused on corporate banking activity within Ireland itself.

And that eventually was licensed to carry on actually a quite broad range of activities, though it's a relatively small entity.

It did operate with -- in some ways, in a ring-fenced world already, had an independent -- well, still have an independent auditing, then an audit committee, an independent chairperson, et cetera, et cetera.

So for us, it's really more taking something that existed with the right sort of governance and infrastructure, but really operationalize it for a broader set of businesses.

And that's working through quite well.

In terms of the businesses that will migrate, really, any business, that, as a consequence of the U.K. leaving the European Union, as a licensing matter needs to be done through an onshore licensed bank in Europe.

That will entail some corporate activity, some trading activity, as well as some investment banking activity and the private deck activity.

As Kathryn mentioned, depending on sort of how you look at it, but in terms of the revenue base of Ireland, it's going to be a little less than 10% of the group; and in terms of balance sheet, just a little over 10%, and that will ebb and flow.

In terms of the risk profile of what's left in Barclays Bank PLC, if you like, I - for Barclay's Bank Ireland, its parent, I don't think the risk profile will change that significantly.

So I don't know if there's anything in particular I would call out there.

Kathryn, do you want to just touch on the funding profile and...

Yes, of course.

And in terms, I might want to just start.

I think your point around the solo position, I think the rating agencies when they look at Barclays Bank PLC, will look at the consolidated financial profile of Barclays Bank PLC, which -- and not at the solo regulated entity.

So I guess your question around how do we think our execution of the strategy will improve the ratings, and is that all we can do?

I think that is a very important part of improving our ratings.

We were very pleased with the Fitch developments in particular for the 2 legal entities, which I mentioned in my comments earlier.

And I think for Moody's, a real focus for them is just for us to continue to execute on the strategy.

I think this closer, with a very clean quarter, no one-offs to the numbers and strong profitability, is really good progress.

We clearly need to continue that.

So we do engage with them very regularly.

And certainly just continuing to execute on the strategy will be beneficial for the ratings.

Now, so touching on funding of Ireland.

I mentioned in my comments that, given the funded balance sheet, we plan to support that with a mix in diversified sources of funding.

There will be some downstreamed MREL, which it will receive from its parent.

It also will have high-quality deposits.

There are some deposits sitting within Barclaycard Germany.

There will be some wealth deposit and some corporate banking deposits that will also transfer.

They will not be issuing public long-dated senior debt.

They will potentially be doing short-dated CP, CD and potentially MTN, but similar strategy for that legal entity versus BBPLC and BUK.

And I think, Miray, on -- I've done ratings.

Paul, thanks for that.

So as you have mentioned, we have been pointing out our AT1 surplus for some time.

And one of the reasons we pointed to was really to give us flexibility to manage our calls.

So we think that is a useful tool in our hands for the next 18 to 24 months.

In terms of refinancing ahead of a call or otherwise, it's hard to comment on conversations we have with our regulator.

But clearly, as you know, they look at these applications under the Articles 77 and 78 of CRR.

And what firms like us always do is really share our medium-term capital flight paths, and decisions are made in light of that.

So I don't think one would comment on the need to refinance one before the others.

And as you're aware and I will reiterate, for the past 5 years, we have been and will continue to be a regular issuer of AT1.

So you should expect us to be active with that instrument year in, year out going forward.

The next question is from Lee Street of Citigroup

I have 3 questions for you, please.

Firstly, obviously, a few comments there, helpful on the stress test and what's coming.

First of all, question to you is how do you view the stress test?

Is this essentially now just really a key exercise in helping you sort of determining what your shareholder capital return strategy will be?

I suppose that's my first question.

Secondly, thank you for the comments on the June paper on MREL from the Bank of England.

Now obviously in that paper, they suggested that, to the extent banks had non-CET1 owned fund instruments which are outstanding from the nonresolution entity after 2022, could lead to higher end-state and MREL requirement.

So my question is, is that just the Bank of England saying if you've got some outstandings, that obviously don't -- shouldn't really work for MREL, so we're going to sort of put an add-on on top of that to adjust for it?

Or do you take it to mean that the Bank of England is sort of trying to encourage banks with operating company debt outstanding beyond 2022 to take it out?

That would be -- actually, I've got 2 questions.

That would be my second question, that's all.

All right.

Yes.

Thanks, Lee.

Why don't I start first, your point on stress testing.

I'll hand over to Kathryn and ultimately Miray to just talk to you about the -- your comment on -- or question on MREL.

With stress testing, you're probably aware, there's a whole deeper stress testing that goes on in a company like ours.

We do our own internal stress testings as part of our annual planning exercises as well as more regular stress testing just to ensure we stay within our bounds of risk management and risk limits that we have for ourselves.

In terms of the Bank of England's annual stress test, I think we view this in 2 ways.

I think this one was a little bit unusual in the same way -- it's the same scenario as we had previously.

And in some ways, the Bank of England.

I think are trying to isolate the effect of IFRS9 and learn about how that accounting change would impact sort of a stress draw on banks.

So in some ways, it's the same scenario.

In other ways, it is quite different because the starting point is different as a macroeconomic matter.

Because of the way the Bank of England defined the stress is not so much, if you like, the distance to travel in terms of changing unemployment or GDP, but to an end point.

And we're starting off from, if you like, a better economic condition than we had last year.

That's probably a slightly more severe stress on a like-for-like basis.

And then, of course, you've got IFRS9 as sort of the different accounting framework added into there.

For us, of course, we're a different bank to last year's stress test as well.

We no longer hold Africa, we no longer have our Non-Core unit.

We have a higher capital position.

And in many ways, we're sort of a simpler, more focused bank.

So I think we're reasonably confident that we should do fine.

But of course, we won't prejudge that, that's with the regulators now.

And then they'll be looking at it closely.

But hopefully, that gives you some sense of sort of how we think about it.

It is, of course, also one of the inputs that the PRA would use for assessing its annual PRA buffer.

And that, of course, is informative to us, and indeed, the PRA in terms of the capital capacity we have for deploying capital to -- either back to shareholders or other uses that we may have of it.

With that, why don't I switch to MREL.

Yes.

So, Lee, in relation to your question on the paper from the Bank of England.

As you can imagine, we do engage with them regularly, and I think we'll find that there will be many discussions between now and early next year when we expect the rules around this and the finalization of CRR II to take place.

I think, for us, we mentioned in the comments that the key element in terms of our legacy OpCo stack is just the simple GBP 3 billion security that matures in 2022.

So we have a very small tail beyond that date.

So I think we will engage closely with the Bank of England, follow the discussions as they progress over the coming months, but we feel quite comfortable in our position at the moment.

Miray, do you have anything?

No, I think that's absolutely right.

And, Lee, to add to that, our understanding of that language is that it will be run by the bank on a case-by-case basis.

And there isn't really a one size fits all.

So we don't necessarily see a one-for-one read across of whatever tail you're left that might be added on top of your MREL requirement.

We understand this is, as Kathryn said, one of many things that the bank will take into account in the overall resolve-ability of the bank.

And that's why I think it's going to be a continuing debate.

The next question is from Arnold Kakuda from Bloomberg Intelligence.

Great.

Thanks a lot for having this call in U.S. time, really appreciate it.

So first question on capital.

On Slide 6, you detail the difference between the transitional and the fully loaded.

Are you guys kind of one of the earlier ones to disclose this type of reporting?

And I think your fully loaded is 12.6%.

And so can you give us a little bit more detail on, I guess, some of the changes that you see going forward?

And I think you mentioned we should be focused on the transitional, but oftentimes, I guess, the market focuses on the fully loaded.

So just want to confirm if your 13% CET1 target is still intact, and it really refers to the transitional and not the fully loaded.

And then also with that, I think you changed your language on the management buffer.

Now it's 1.6%.

You mentioned that you're going to review it as going forward, and potentially, the stress tests you see some tailwind there from before.

And that's a shift from kind of the 1.5% to 2% range that you had on that.

So just if you can explain, well, some of your change in thought there will be great.

So that's on CET1.

And then shifting over to Slide 9 on MREL.

On a HoldCo basis, Barclays is still short of its 29% MREL requirement, although you do have until 2022.

But given the uncertainty may rise with Brexit less than 8 months away, would it make sense to maybe try to increase that GBP 10 billion MREL plan ahead of Brexit?

Thanks, Arnold.

Why don't I just touch on capital ratios, and I'll ask Kathryn to talk about the management buffer and sort of MREL issuance plan for trajectory.

On the capital buffer, the 13% that we reported is a transitional ratio.

There is an obligation to disclose the fully loaded ratio, I imagine.

I haven't looked at every other bank that disclosed, but I would expect that, that's available.

Some may just disclose it in their Pillar 3 report.

We tend to put those out together with our earnings releases.

So there's nothing else between the 2 ratios.

it's just the transition framework for IFRS9.

We're very much focused on the transitional ratio and really taking our cue from our lead regulator.

It's the ratio that the Bank of England puts an emphasis on.

We obviously understand that we're under a transitional framework and are comfortable with that.

And of course, for stress testing purposes and any other form of sort of prudential oversight and monitoring, it's the transitional ratio that's being utilized.

So we're pretty comfortable with that, but there's just really no other changes to that.

The difference between fully loaded and transitional is they will converge over time.

It's somewhat back-loaded.

It's a 5-year transitional window, and the bulk of the convergence will take place in sort of years 4 and 5. And given our capital trajectory, that will be relatively straightforward for us.

Kathryn, you want to talk a bit about the management buffer?

Yes.

So in terms of the management buffer, as I think you heard from Tushar on the equity call this morning, we're very comfortable with our 13% target.

And at the moment are towards the bottom end of that 150 to 200 basis points range.

And you'll be aware that we've had the same capital framework in place for, I think, around 5 years.

And when we think about our capital requirements and our targets, we really think about 3 elements.

The first is clearly holding a prudent buffer to the MDA, which is currently 11.4%.

So we've got 160 basis points over that.

Secondly, the buffer the PRA buffer.

And thirdly, linked to that, to have enough stress capacity in our capital stack.

So I think on that, we feel pretty comfortable that in the last year, we've done a meaningful restructuring.

We've set up the 2 legal entities and are in place of setting up Ireland.

We've got our legal entities rated.

And importantly also, we've addressed meaningful conduct and litigation.

So I think that's why we're comfortable running towards the lower end of that 150 to 200 basis points range and currently comfortable with 13%.

And as we said also this morning, I think, on the equity call, we do review the management buffer periodically.

But at the moment, we're certainly comfortable at around the 13%.

Now in terms of the MREL requirement, you asked if we might be thinking potentially about doing more in light of Brexit and some uncertainty in the market.

I think we have already got quite prudent plans in terms of our MREL issuance.

We've done just over GBP 6 billion in the first half of the year.

We will be careful and cautious as we approach the market for the senior debt and AT1 that we indicated we'd be looking to do by the end of the year.

If of course there is the opportunity to prefund any of next year's requirement, we might choose to do so.

But I think for the moment, I'd probably encourage you all to think that GBP 10 billion will remain the right sort of number for this year.

(Operator Instructions) The next question is from Aditya Bhagat of HSBC

More follow-ups, really, given what's already been asked.

On the importance of ratings, I just wanted to understand, just looking at where Barclays PLC is rated versus similar capital structures in your peers and on the senior and sub, it looks like it would help if you had that one notch higher rating.

So is the route to better ratings earnings from here, if capital trajectory is going to be stable?

Are there other metrics that you're thinking of?

That's my first one.

My second one is on funding.

Just wanted to clarify that I heard that on Barclays Bank PLC for senior funding, it's going to be more short-dated and not really medium term?

I just wanted to check on that.

Yes.

Thanks, Aditya.

I'll just ask Kathryn to cover both of those points.

Yes.

So in terms of the ratings, we certainly would agree that we also would like to get improvements in our ratings and help some of the security ratings across senior, tier 2 and AT1.

So you probably are very familiar with the various rating agencies' methodologies and the drivers that will move their ratings metrics in a positive direction.

But I do think it was in response to one of the earlier questions, that profitability really will be the main focus for them and for us in terms of delivering that ratings uplift.

So certainly, the strong performance we had in Q2, and I think the good numbers, we also had the improvement from our CIB in Q4 and Q1, were also good signs.

Getting a clean quarter with no one-offs would also be a positive development for the rating agencies.

So I think just continuing to execute on the strategy and showing good numbers, consistent execution will be probably the most important element of getting that positive improvement in the credit rating.

Now in terms of your second question, so Barclays Bank PLC's funding, yes, you're correct.

In terms of their sources of funding, they do have downstreamed MREL.

They have legacy debt already issued at the OpCo level.

They do access the MTN market and they issue structured notes and also, clearly, short-dated CP and CDs.

They have valuable secured funding sources.

They've got a very high-quality U.S. credit card book and do ABS issuance from that platform as well.

But in the term public market, they will be focused on 3 years and in.

So you will remember they did a GBP 3 billion OpCo deal very early in the year.

But yes, it will be quite a simple funding model along those lines from BBPLC.

The next question is from Louise Pitt of Goldman Sachs.

I just have a follow-up to the equity call this morning, actually, where I know that you mentioned the U.S. pref that is outstanding.

So that's a decent amount of capital that is sitting at the bank entity, and it's currently callable and has been for a while.

I just wonder if you can comment on what regulatory treatment that's getting when that rolls off, and whether you value the currently callable status versus issuing a new AT1 with a noncall 5- or 10-year period, potentially, as being more valuable?

Yes, Louise, I'll start off on that, but then Kathryn may want to add.

It doesn't count for new form AT1, but it does, I think, count at the moment as nonconforming Tier 1. So it has -- they have some value in our capital stack.

But it's something, if you look at the other tranches, we have been redeeming quite regularly.

Kathryn, you want to add anything to that?

Yes.

No, I guess in terms of the value in the capital stack, it might have a limited amount, as Tushar said.

But really, this is still an 8 1/8% coupon security.

I think certainly, it's been callable every quarter for quite some time.

Senior management has certainly expressed a desire at some point to think about redeeming that.

We've not given any indication, we're clearly not able to.

But it is quite an expensive instrument at the moment.

So as we get into a very strong capital position and we look at the fewer headwinds in terms of our capital generation, we do have options to deploy that capital.

And one of them could be for this $2.65 billion retail preferred, which as you said, is issued by the operating company, BBPLC.

(Operator Instructions) We currently have no further questions.

Apologies.

We just had a question come up from Corinne Cunningham of Autonomous.

Just a very quick follow-up on that one.

On Slide 9, where you're showing the legacy capital call and maturity profile.

The pref, is that included in the 2022 tier 2 maturities?

No.

The pref...

The 8 1/4% -- sorry, 8 1/8%.

It -- they go by their first call dates, Corinne.

So that's actually in the 2018 bucket.

Okay.

That's more -- let me just check my -- sorry.

That looks larger though than the -- so the amount outstanding is GBP 2 billion, not GBP 1.3 billion?

Yes, but note that it's an equity-accounted security.

So we keep it at its original sterling equivalent, which is GBP 1.344 billion.

Okay.

I'll follow-up with the off-line then, because I can't quite reconcile what -- the bonds that I've got on my spreadsheet to the maturity profile you've got there.

I'll ping you a quick email.

No problem, Corinne.

Miray has a wonderfully large spreadsheet in front of him as well.

So I'm sure he'd enjoy talking spreadsheets.

I think that's probably the final call -- question on the call.

I hope you found it useful.

And I'm sure you'll get a chance to speak to Kathryn and others on the road over the next few days.

But thanks for joining us today.

Thank you.

That concludes today's conference call.

Have a lovely day.