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Operator
Welcome to Barclays Half Year 2023 Results Fixed Income Conference Call. (Operator Instructions) I will now hand over to Anna Cross, Group Finance Director; and Daniel Fairclough, Group Treasurer.
Angela Anna Cross - Group Finance Director & Executive Director
Good afternoon, everyone, and welcome to the Fixed Income investor call for our half year 2023 results. I'm joined today by Daniel Fairclough, our Group Treasurer. Let me begin with a brief overview of our performance over the half year before speaking to a few slides on the careful positioning of risk across our portfolios. I'll then hand over to Dan for his overview of our balance sheet.
Our return on tangible equity for the quarter was 11.4%, resulting in a 13.2% return for the first half. This is in line with our expectations. And looking ahead, we are very confident of achieving our RoTE target of above 10% for the year. The cost-to-income ratio was 63% for the quarter and 60% for the half, and we continue to guide to low 60s for the full year. Although we are still guiding to a loan loss rate of 50 to 60 bps for the full year, we continue to see limited signs of stress across our portfolios. And this quarter, the loan loss rate was 37 bps.
Let me take you to Slide 4 to provide further detail on this. We have maintained our long-standing prudent approach to provisioning and continue to hold strong coverage levels. Our total impairment allowance at the quarter end was GBP 6.1 billion, a slight decrease from GBP 6.3 billion at Q1. We updated the baseline macroeconomic variables for modeled impairment from the full year, notably with some reduction in forecast unemployment in both the U.K. and U.S. However, these remain more severe than the forecast used at Q2 last year. And at the end of the quarter, we retained post model adjustments for economic uncertainty of GBP 0.3 billion.
Our guidance for a loan loss rate in the 50 to 60 bps range allows for some potential credit deterioration and seasonal effect. The GBP 372 million charge translated into a loan loss rate of 37 bps. As expected, the majority of the charge is again in Consumer Cards and Payments and U.S. Cards in particular. This reflects the normalization of delinquencies with a seasoning effect as balances grow post pandemic, and this includes the GAAP acquisition, which is performing as we expected.
The next 3 slides illustrate why we are confident in our provisioning and our prudent approach to risk. On Slide 6, we've shown key coverage and delinquency metrics for our 2 largest unsecured books, U.K. and U.S. Cards. Repayment rates in U.K. Cards remain high across the credit spectrum and arrears rates remained stable and very low by historical standards. Overall, we are confident that the credit quality of our U.K. card book has improved since 2019. We continue to grow U.S. Cards in an appropriate and controlled way that is consistent with the opportunities we see there.
As we expected, delinquencies at all FICO levels have been increasing, but our risk mix has improved with our average FICO for the book strengthening slightly since the end of 2019 to over 750, and this includes GAAP. In addition, the proportion of the book better than 660 FICO is now 89% compared to 86% at the end of 2019. As we grow, we maintained strong coverage levels across both U.K. and U.S. Cards, notably Stage 2 coverage of around 18% and 33%, respectively.
Moving on to the mortgage book on Slide 7. There are a number of factors that contribute to our comfort in a higher rate environment. First, we have applied strict affordability test since 2013 using rates above current levels. Second, looking at the profile for refinancing maturities, the proportion of the book on 5 years and over initial fixed rates has increased materially since 2019 from 33% to 51%. This shift delays a potential increase in rates for many borrowers, allowing them more time to mitigate the impact.
Fixed rate maturities in half 2 are GBP 17 billion and as you can see from the chart, a significant proportion of these have already locked in rates ahead of the end of their fixed rate term. So our mortgage customers are taking thoughtful and appropriate actions. Third, and as a credit backstop, the book is conservatively positioned from a collateral point of view with balanced weighted loan-to-value of 52.8%. Only 2% of mortgages, which are refinancing this year and next have LTVs in excess of 85%.
Given the market-wide focus on commercial real estate, we also wanted to share some more detail on the portfolio to highlight our own position. As we have followed a prudent lending policy here for over 30 years, this is not an area of concern for Barclays. As you can see on Slide 8, commercial real estate as a proportion of our loan book is modest at just under 5%, which is below the industry average. It is diversified across segments and the weighted LTV of 49% provides significant headroom for a potential stress in prices. No individual segment has an LTV of higher than 58%.
We know that the office component has received particular attention and for Barclays, this is just GBP 1.9 billion. Hopefully, that has given you helpful color on the portfolios in focus. As Venkat and I mentioned this morning, we have positioned our balance sheet prudently, and we believe our risk management discipline will limit credit risk downside for us if the global economy slows.
And with that, I'll hand over to Dan for the balance sheet highlights.
Daniel Fairclough - Treasurer of Barclays International
Thanks, Anna. We ended June with a strong balance sheet as evidenced by the metrics on the slide. The CET1 ratio of 13.8% places us firmly at the upper end of the target range. The MREL ratio of 32.9% provides circa GBP 12 billion of headroom above our requirements and our liquidity and funding position continues to be robust.
Let me begin with capital. Our reported CET1 position improved by 20 basis points to 13.8% over the quarter. Our capital generation from profits was again strong, contributing 39 basis points in the quarter and 92 basis points over the half. RWAs reduced by GBP 1.5 billion over the quarter, driven by the appreciation in sterling, partially offset by underlying growth of credit risk RWAs. Our MDA level at June was 11.4%, an increase to 11.8% this month, driven by the increase in the U.K. countercyclical buffer. We continue to believe that our target range of 13% to 14% gives ample headroom given our CET1 accretion and business flexibility on RWAs.
Our June CET1 ratio provides a 200 basis points buffer to the new updated MDA level. Our capital position was supported by the results of the Bank of Bank of England stress test earlier this month. On Basel 3.1, we continue to plan for a day 1 impact at the lower end of the 5% to 10% RWA range. As we've mentioned before, we expect to refine our view as we receive more guidance from the PRA, most notably when their policy paper is published. We also continue to monitor international developments, which may shape the final outcome.
Turning to the next slide, which illustrates the structure of our total capital stack. Our total capital position of 20.5% provides 370 basis points of headroom above the regulatory minimum. We ran a prudent buffer above our requirements at all tiers to manage FX and RWA movements. The 180 basis points we hold as excess in AT1s more than makes up for the modest Tier 2 volume we currently have. This preference for AT1 over Tier 2 to date reflects Tier 1 eligibility across multiple regulatory metrics and our ability to deploy the capital into high-returning and liquid leveraged balance sheet opportunities such as financing.
The deployment into liquid activities affords us flexibility in the way we manage this layer of capital, and we continually assess the commercial opportunity. Today, we announced our decision to call our USD 7.75% AT1 instrument, and the AT1 ratio would reduce to 3.5% of RWAs, all else equal. As always, we made the decision to call based on our long-standing framework that considers the direct earnings implications of our refinancing, the potential impact on our broader wholesale funding stack and the FX impact on redemption of non-sterling equity accounted instruments.
On legacy capital, we continue to make good progress in managing what is a very small element of our capital stack. In June, we announced our intention to redeem our 3 discounted perpetual instruments when they come up for call this year. These instruments are no longer counted in our capital base.
Moving on to the total MREL stack, where we hold a prudent headroom above the 29.2% requirement. We made good progress against our funding plan for the year, having issued GBP 7 billion in MREL eligible debt across all tiers of capital versus the GBP 11 billion plan we communicated at the beginning of the year. As always, we continue to evaluate our needs and should we find ourselves with a completed issuance plan versus our initial target, we may look at some further opportunistic funding if market conditions are conducive.
Moving on to deposits. We've grown deposit balances substantially ahead of loan volumes for many years and have a low loan-to-deposit ratio of 72%. As shown on the slide, we have seen a stable level of deposits overall this quarter of GBP 555 billion with a modest shift in the mix between consumer and corporate. This is a trend consistent with a persistent inflationary environment, where consumer cash migrates to corporates and our diversified deposit franchise reflects this.
The shifts in the U.K. deposits reflects the broader trends that we've observed in the industry aggregated data about 1/3 of our overall consumer deposit decline is attributable to the international business, where the moves here are due to the strengthening of sterling. Macro and market conditions, together with the quantitative tapering program suggests deposit headwinds ahead, which are diversified franchise is well positioned to manage.
Our average LCR at 157% provided GBP 116 billion in excess of the regulatory requirements, and our liquidity position has remained robust throughout the extraordinary events we witnessed in March. We have run the LCR at an elevated level over successive years, supported by excess deposit. On this slide, you can see that we show the LCR both on a spot and a 12-month trailing average basis. We note the industry's approach has shifted in recent years to lead with the latter, and it's our intention to align with this in the future.
Given recent events, liquidity metrics have naturally come under more scrutiny whilst the Pillar 1 LCR is the main externally disclosed short-term metric, we run an extensive and rigorous framework, which proactively monitors our liquidity position under multiple stress scenarios, as you can see on the slide. These liquidity stress tests are run on a daily basis and across multiple time frames and with assumptions that are tailored to our portfolio. This framework is constantly evolved and calibration is tailored to emerging conditions.
We also apply periodic macroeconomic stress tests, both internal and the Bank of England scenario to our forecast liquidity metrics to ensure that we remain above minimum levels on these metrics at all times, even during severe stress. This ensures our strategy and business plan can be safely supported from a liquidity standpoint. We continue to work with the regulators on their assessment of the events in March and any changes they may seek to make to industry standards. And we believe our internal framework will position us well for this.
Slide 17 illustrates the importance of the structural hedge to the level and visibility of our future net interest income. Swap rates increased sharply during Q2 to around 5% and reinvestment rates are materially above the yield of 1% on hedges maturing this year. As a result, gross hedge income is increasing and over 90% of the GBP 3.6 billion expected for this year was already locked in by the first half. We have a further GBP 50 million to GBP 60 billion maturing in each of 2024 and 2025 at yields between 1% and 2%. Precise level of reinvestment will depend to some extent on consumer behavior, but the building effect of the hedge role gives us confidence that gross income from the hedge will grow strongly in 2024 and 2025.
Turning finally to credit ratings. Improving our credit ratings has been a key strategic priority and we've been heavily engaged in articulating the strength of our financial profile with the rating agencies. We were therefore pleased to have secured 2 upgrades in the first half of the year. The Moody's upgrade came in March, citing improved earnings whilst maintaining a stable risk profile. The action marked the second upgrade in just over 3 years.
S&P's upgrade in May also cited solid earnings, as well as a strong funding and liquidity position that we run. Their upgrade means that now all our Tier 2 debt ratings are investment grade. The Moody's and S&P actions means that our Barclays PLC senior unsecured debt qualifies as single A composite debt under some indices. Our aim over the medium term is for Barclays PLC senior to qualify a single A composite across all indices.
Let me conclude before handing back to Anna. We've demonstrated the strength and resilience of our diversified business model and balance sheet over a challenging period of volatility for the sector. We continue to be well positioned to navigate the uncertainties ahead with our measures of capital, liquidity and funding, all continuing to operate on a firm footing.
And with that, I'll hand back to Anna.
Angela Anna Cross - Group Finance Director & Executive Director
Thank you, Dan. We would now like to open the call for questions, and I hope you have found this call helpful. Operator, please go ahead.
Operator
(Operator Instructions) Our first question today comes from Lee Street from Citigroup.
Lee Street - Head of IG CSS
Firstly, of a broader one. Now obviously, your actual valuation is now a bit low, and I do think that weighs on your credit spread. So in my mind, I think you had a really good performance in 2020, which should really be indicated to diversified business model. So I guess that's not really been reflected in credit spreads or actual valuations. So my question is, when you speak together as a management team, what do you include the region for that is, and why you trade a discount versus your peers? And then a couple of quick ones just on RWAs. Are you able to give us a sense of your investment banking RWAs? What are those being more volatile business lines? And what are those have been less volatile, a rough split?
Secondly, on the call this morning, you spoke about targeting more fee-based businesses. And -- but at the same time, you're going to be looking to shrink some of the more capital-intensive ones in the context of that. And then just finally, excluding Basel 3.1, what's the generic trend and trajectory for RWAs as we look ahead sort of for this year and the following year end? They are my questions.
Angela Anna Cross - Group Finance Director & Executive Director
Thank you, Lee. I'm Anna. So it's a very long question. So I'll try and keep up with it. Obviously, we share the frustration that you articulate with where the equity is valued. And as you might expect, it does occupy a degree of both executive committee and indeed Board's (inaudible) very thoughtful about. We believe that we have delivered improved earnings. Our job is to ensure that we do that consistently and consistently across all of the divisions. And again, we feel like we are building up a track record on that, Lee, but it's a track record that we'll have to keep continuing with, and we are extremely focused on that.
We also feel that not least given the over issuance last year, we must run the bank in an excellent way without the stakes every day. And again, we're very, very focused on that investing in the resilience of the bank and just really focused on being excellent in delivery in each one of our businesses for each one of our clients and customers each day.
At the heart of this, what we really believe is, is about consistency of AP of attributable profit rather, and then delivered back to our shareholders in a compelling way. Now they will want to understand how we're allocating capital, both within the firm and to them. And that's clearly something that we are working on. But we're pleased with what we've been able to distribute today given the dividend is up 20%, and we've announced a GBP 750 million buyback. That's a shareholder return today of GBP 1.2 billion, which is 5% of our share price, our total valuation. So we just need to keep repeating that. It's how we feel about it.
Now we are much more reflective, which gets me into the second part of your question really around how we allocate capital around the bank. We don't quite see it as simply as COD or investment bank versus the consumer side. I think it's a lot more complex than that. There are parts of the CIB, which are actually quite capital-light and less volatile. And there are parts of the CIB that actually are extremely strong client franchises like our corporate business, which again are capital light, not volatile at all. So this is not a CIB versus normal CIB question for us.
And really, it's not capital in isolation that we're looking at. It's the return on that capital. So Venkat today, you might have heard him on the equity call talking about a business, which has a lot of opportunities for growth, but in fact, it's quite capital intensive, our U.S. Cards business, so our focus there is not to exit that business or not to not grow it, but actually to find ways of making it more capital efficient, and that's what we're really focused on.
The last thing I would say is that having volatile businesses is okay, provided we manage the risk well, which we feel we have done consistently through a range of macro environments, and actually having RWAs associated with those businesses is also fine, provided we are disciplined in driving the right returns. Those are the most liquid RWAs that we have, and they allow us to manage our capital position in a very flexible way that allows us to optimize the return for the bank.
So I think just stepping back, I would say we're focused on returns at a very granular level in the bank. We'll talk to you more about that in the future. And we'll communicate that through disclosure through time. Next question, please.
Operator
The next question comes from Aabid Hanif from NatWest.
Aabid Hanif
Actually, yes, just following on from some of the comments from this morning on the earnings call and also from the previous question around some of the growth in CIB. I know in the last call, you mentioned around AT1, using dollar AT1 issuance to finance and investment bank. So just a few words on those areas of growth and whether we can potentially see, I guess, further dollar AT1 issuance as part of that growth plan? Does that make sense?
Angela Anna Cross - Group Finance Director & Executive Director
Okay. Why don't I take that one and Dan may want to add. I mean what you're really talking about here, I think, is the growth in our financing business within the CIB, which is the business I was talking to before, which is employed within markets, but is actually capital-light, it does leverage, and therefore our ability to raise AT1 is important for that business. We do see opportunities to grow there. It's a business -- on the fixed income financing side, it's a business that we've been very, very strong in for many, many years. And actually, what we've done is we've grown Prime alongside it.
And we're operating that for our clients from a single platform and a single leadership team. And the reason that's important is that it allows us to see and manage risk across our clients' entire holdings, whether they be in fixed income or on the equity side in Prime. We also think that, that speaks to the strategy that many of our clients are following. So as -- so our client tends to be the large global, very well capitalized, very diversified participants in the market. And this sort of unified approach by the way we pursue the business suits them because they are increasingly diversified themselves and increasingly multi-strat. So we think our strategy and this fits well together. We're seeing that in increased balances over time, and it's a business that we continue to invest in, both in technology and talent. And Dan, you might want to comment on the funding side of it.
Daniel Fairclough - Treasurer of Barclays International
Yes. I mean we said in the scripted comments that we do find that the AT1 is useful, it's useful for total capital, our total capital ratio as well as for leverage ratio purposes. But we're a programmatic issuer. We're not focused on necessarily a call versus issuance. And it's an important part of our business, but it's a very flexible part of our business given the sort of short-dated nature of the average balance sheet.
Angela Anna Cross - Group Finance Director & Executive Director
Thank you very much for the question. Next question, please.
Operator
Our next question comes from Robert Smalley from UBS.
Robert Louis Smalley - MD, Head of Credit Desk Analyst Group and Strategist
Thanks for doing the call. I appreciate the detail on asset quality, particularly around cards, but also mortgages. A couple of follow-up questions. Looking at Page 26 and 27 of the release today, and I just want to make sure I have my numbers right. So we're looking from year-end point to middle (inaudible). It looks like the loss rate for Barclays International went from 191 basis points to 344. So I'm guessing that card -- when I look at that 344 number, is that -- when we talk about normalization, is that a normal number? Do you expect that to go up materially from here? Or is that kind of a run rate at this point. That's my first question.
Second, just on mortgages. In terms of affordability, comment was made on another call that once mortgage payments get to 40% of a client's net income, then that becomes problematic. Is that how you look at affordability as well? Do you stress for that or something like that around income?
And then finally, on deposits, and I appreciate the disclosure that you've had. But we have seen a pretty quick migration certainly over the last quarter. Do you expect this to continue? Is it slowing down? And are there any lessons learned in all of that?
Angela Anna Cross - Group Finance Director & Executive Director
Okay. Thank you, Rob. Why don't I start, and I'm sure Dan will add to deposits. So what we're seeing in that Barclays International retail number is exactly what you described it. It is normalization. What happened, obviously, during the pandemic is customers utilization of cards really slowed down their mass deposits. And what we're seeing as we come out of the pandemic, 2 years on, is that they're starting to use their cards in a more normal way. And particularly in the U.S., that recovery has been a bit faster than we see in the U.K.
So the way we look at things, Rob, is actually at a very granular level, we look at by FICO band, and we also look by clients who are looking at our individual partners. And what we see is that actually individual FICO scores, behavior is now back to what we would describe as a sort of prepandemic normal. What is leaving the charge quite as low as it is or the delinquency rate quite as low as it is, is that our mix has improved since pre-pandemic. And that includes having onboarded the GAAP portfolio. So what we've seen over time is that the average FICO in our book has sort of edged up.
Now one caveat to that would be the U.S. Card business in particular is quite seasonal in its balance build. We tend to see higher balances in the fourth quarter because of the holiday season. So I'd expect a bit of a pickup of impairment towards the second half. And then again, we'd expect it to fall after the first quarter next year. So a bit of seasonality in there, but we are nearing normal, I would say.
And in terms of U.K. mortgage affordability, we have very strict rules about testing affordability before we can extend a mortgage, and those rules have been in place since 2013. What that means is that we are required to test the affordability of the customer, whether or not they could afford the mortgage where it's to go on to what we would call the reversionary rate or the follow-on rate plus a margin. So what that means is that anybody that's on our book now has been stress tested at least at 6.7%, which is somewhat ahead of where rates are now.
So whilst there's definitely some affordability pressure in the U.K., we do feel good about the fact that we've robustly tested affordability on the way in. And we continue to do that. We actually did a piece of analysis recently where we retested affordability of all of our customers using an external party. And that allowed us to focus in on the part of the book where we expected affordability to be more constrained and actually, it was a very small and reassuring part. And I think that's playing out in our credit results actually. So if you look at our impairment, it remains low and very stable. And of course, the loan-to-value on this book is extremely low from a credit perspective.
And then finally, on deposits. I would say we've seen some trends in Q2. They look like they're exactly in line with the industry on retail deposits actually. So we don't disclose the mix of our deposits. But from what we've seen from reported peers, that's split between current accounts and savings and that movement overall looks like it's a wider market phenomena. So we're not concerned about it at all. We expect this migration to happen and migration to higher rate accounts is happening as we thought it would actually.
What we're seeing is that customers are using their surplus deposits in order to deleverage. And as a credit matter, we are very happy with that balance. So they're overpaying on their mortgages, they're paying down their cards. And whilst that means that our net interest margin might be lower now, it also is feeding through a very, very strong impairment prints. Dan, what would you add?
Daniel Fairclough - Treasurer of Barclays International
Just I'd echo the point that it's very much a macro phenomenon. So we would -- we expect deposits to decline as money supply decline, and it's declining both because of quantitative tapering and also loan contraction. So it's part of that macro phenomenon. And it certainly, it feels like it's less than in the U.S., for example whether alternative deposit competing products. So we would expect it to continue, but kind of really driven by those macro trends and money supply in particular.
Angela Anna Cross - Group Finance Director & Executive Director
Okay. Thanks for the question, Rob. Next question, please.
Operator
(Operator Instructions) Our next question comes from Daniel David from Autonomous.
Daniel David
I've got 3 questions. The first one is just on Tier 1 headroom. So Dan, I just heard comments on being a programmatic issuer and not looking at it on a kind of a bond-by-bond basis. Just interested if you -- if the scope to run the Tier 1 headroom a bit smaller for kind of H2 or whether you're likely to build back up to the levels that we've seen in the past. Any comments on how we should think about that Tier 1 headroom would be interesting to hear.
Second, just issuance plans, and I see your comments on prefunding. If I look back what was in the H1 '22 slides, I see, you had a target of GBP 9 billion. I think you ended up printing 15, so that's GBP 6 billion extra, which is quite a big number. So I guess looking at the 4 that you've got remaining, should we be thinking about that potentially being 10? Just thinking about how your debt trades and whether that might be a factor or when we think about how spreads could progress in H2.
And then just thirdly, I'm sure you've seen a big French bank talked about debt accounted AT1s to get rid of the FX impact on redemption. Is this something that you consider something that could be -- could be something on the agenda, maybe a bit further down the line?
Daniel Fairclough - Treasurer of Barclays International
Yes. Dan, thanks very much for those. Let me start on the Tier 1 headroom point. So we've got a lot of flexibility in how we run that ratio, as we've discussed before. It's really a commercial choice that we make, the cost of AT1 versus the return on leverage balance sheet, which is liquid. So I won't make any sort of forward guidance on where that ratio will be, but it does allow us to be a kind of very cautious and considered issuer, particularly given the market volatility that we've experienced in AT1.
In terms of issuance, so yes, I understand your point about last year's issuance. If you go back to the call that we did at the full year, we did flag that there were some specific reasons for the volume of issuance that we did in 2022, particularly in relation to rates and the impact that, that had on the fair value of our MREL stock. So yes, GBP 6 billion was larger. It was an increase over what we said we would do. But that was due to quite specific circumstances in the second half.
In terms of prefunding for this year, we'll look at it. We'll be opportunistic given market conditions. But sometimes, it's prudent to do in the light of volatility.
Last question on debt AT1, yes, I mean, obviously, this -- we watch this with interest. Clearly, it's not a new development. There have been debt AT1 structures in the market before. And as you point out, there are some advantages from an FX perspective. But look, it's something we'll consider. And clearly, any issuance would need to be sort of fully agreed with the regulator that will be a fairly significant lift. But will watch it with interest now.
Angela Anna Cross - Group Finance Director & Executive Director
Thank you, Dan. And can I check, please, operator, there are no further questions?
Operator
We have no further questions on the line.
Angela Anna Cross - Group Finance Director & Executive Director
Okay. Well, thank you, everybody. We really do value your interest in Barclays and you giving us feedback and comments on these calls. So thank you for joining us. We hope that you have a great summer holiday when it comes, and we'll see some of you on the road over the next few weeks. Thanks all.
Operator
Thank you. That concludes today's conference call.