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Barclays PLC (NYSE:BCS)
Q2 2019 Earnings Call
Aug. 1, 2019, 5:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Barclays half year 2019 analyst, investor conference call. I'll now turn you over to Jes Staley, Group Chief Executive, and Tushar Morzaria, Group Finance Director.

Jes Staley -- Group Chief Executive

Good morning, everyone. This was another resilient quarter of performance for Barclays. We balanced some headwinds in our UK consumer business with good performance coming from the corporate and investment bank. For the second quarter in a row, Barclays has generated a profit of over 1 billion pounds. And the bank delivered earnings per share of 12.6 pence for the first half of 2019.

Excluding litigation and conduct, profits before tax was 1.6 billion pounds in the quarter and 3.1 pounds billion for the first half of the year. Our group return on tangible equity of 9.3% for the quarter is a further step towards meeting our 2019 RoTE target of greater than 9%. It's worth noting that we have now produced a group RoTE of over 9% in five of the last six quarters we have reported.

Turning to capital, our CET1 ratio increased by 40 basis points to 13.4%, demonstrating the strong capital generation achievable by the bank. Point of fact, if our operational risk weighted assets were accounted for more like our UK peers, then our CET1 ratio would have actually stood at roughly 14% today. Tangible net asset value grew to 275 pence, representing the fifth quarter in a row of accretion in Barclays' book value. Our cost-income ratio rose a touch in the quarter to 63%, reflecting our commitment to invest in the growth of the bank.

Management focus on cost control remains a high priority however. And we expect to see positive jaws across the group in the second half of the year and for the full year. Accordingly, we have this morning affirmed that we now expect to reduce expense to below 13.6 billion pounds for 2019, which was the bottom end of our guidance range for this year. Barclays UK produced an RoTE of 13.9% in the quarter, despite margin pressure.

We continue to grew our mortgage and deposit balances with stable credit metrics. That said, we had a reduction in NIM from increased levels of consumers refinancing mortgages and lower interest earnings from reduced UK card balances. We continue to invest in our digital capability. Online engagement with our UK customers is at an all-time high, with just under 8 million consumers now digitally active on the Barclays app.

The corporate investment bank produced a 0.3% RoTE in the quarter. Excluding the Tradeweb IPO gain, market income overall was down 9% year-on-year on a dollar basis, which was broadly in line with our US peers. Within that, equities had a challenging quarter compared to a very strong comparable last year. However, we did see market outperformance in fixed income, currencies, and credit.

Banking fees were down a little, reflecting a reduced fee pool in debt underwriting, which was partially offset by strong performance in advisory. Overall, though, in the half, we gained share in investment banking fees. And our global rank also improved, placing Barclays as the sixth highest earner in investment banking fees globally and fifth highest in the US.

Our corporate banking franchise had a decent quarter with income up on the prior period as well as on Q2 of 2018. We are maintaining a strong focus on improving returns in the corporate bank with focused client-by-client plans to grow profitability. One market progress on this front is that the return on risk-weighted assets in our corporate bank has improved meaningfully in the first half of 2019, with transaction revenue up some 15% year-over-year.

Consumer cards and payments continues to progress well, producing an RoTE of 18% for the quarter and 16.7% for the half year. We're happy with the prospects with this business, and we're pleased that in this quarter we renewed a key US card partnership with Wyndham Hotels and Resorts.

Market performance over the course of this year reinforces the confidence, which the board and management feel in the capacity of this bank generate sustained earnings. The key indicator of that confidence is in our announcement this morning regarding the ordinary dividend. As you will have seen, we have declared a half-year dividend of 3 pence per share. In normal circumstances, this would account for around a third of what we expect to pay in total in a given year. As such, this represents a significant increase in distributions over last year, which I hope will be welcomed by our shareholders.

As I've said before, we want to continue to return a greater proportion of the excess capital that we generate to our investors. Consequently, Barclays' capital return policy of a progressive dividend and intention to supplement the ordinary dividend with additional cash return, including share buybacks when appropriate, remains unchanged.

Now, let me hand it over to Tushar, who will walk you through the numbers in detail.

Tushar Morzaria -- Group Finance Director

Thanks, Jes. As usual, at half year, I'll begin with the slide on results for the first six months and then focus my comments on Q2 performance and the half year balance sheet. We reported a profit before tax of 3.1 billion pounds for the first half, generating 12.6 pence of earnings per share, excluding litigation and conduct.

I'll exclude litigation and conduct charges in my commentary as usual, but the statutory profitability was limited with a statutory EPS of 12.1 pence. We'll be paying a half-year dividend of 3 pence per share in September. And we've indicated that our half-year dividends expected to be around one-third of the full year total under normal circumstances.

Group RoTE for the half was 9.4%, a double-digit return for both the UK and BI. But the drag from head office does take us to below 10%. As Jes mentioned, we continue to target an RoTE for the full year of over 9% based on 13% CET1 ratio. The first half represents a good base for this, but there is work to be done in the second half.

Income environment was challenging and reported income down 1% for the half. Costs were up 1% year-on-year, but we expect positive jaws in H2 and for the year as a whole. Given income environment, cost control will remain a major focus through the second half. And we've reduced our cost guidance based on the 30th June exchange rate to below 13.6 billion pounds, which was the lower end of the guidance range we had previously given. I'll comment further on cost as I go through the businesses.

Focusing now on the second quarter, income decreased 1%, reflecting the challenging environment, which affected both CIB and BUK. The cost rate of 3.5 billion pounds reflects investment in a number of areas. As you can infer from our guidance, we would expect a lower cost run rate in the second half, excluding the Q4 bank levy. And payment with 480 million pounds, up 197 million pounds year-on-year due to the non-reoccurrence of favorable year after macroeconomic update and single name recovery.

And this is 32 million pounds higher than Q1. Delinquencies remain stable. And the net write offs in the quarter were just below the impairment charge of 465 million pounds. The effective tax rate was 19.4%, just below our full year guidance of around 20%. And attributable profit was above 1 billion pounds as in Q1. And delivered an RoTE of 9.3%, excluding litigation and conduct.

TNAV of 2.75 pounds was up 9 pence in the quarter, driven by earnings per share of 6.3 pence and the tailwind from reserve movements due to currency and interest rate moves. And expired the payment of the full-year dividend of 4 pence in the quarter. We reported an increase in the CET1 ratio from 13% to 13.4%. And we are now above our target ratio and continue to be confident in our ability to generate capital. We are now in a position to increase our dividend payout as Jes mentioned.

Looking now at the businesses in more detail, starting with BUK -- BUK reported an RoTE of 13.9% for Q2, despite the challenging income environment with income down 4%. In personal banking, we saw volume correcting mortgage balances of 1.5 billion pounds net, more than offset by margin pressure, including the effect of increased refinancing by customers, in part because balances are broadly flat, but interest earning balances reduced, reflecting our reduced risk appetite in customer behavior, including the impact of current economic uncertainty.

Margin pressure and the continuing growth in secured lending resulted in a lower net interest margin of 305 basis points for Q2. So, we're expecting them to stabilize around this level for the second half of the year, despite further growth in secured lending. Plus, we're up year-on-year as we continue with the first half investment [inaudible] in Q1. That includes a range of offerings through our Barclays app and digital offering more broadly.

We no longer expect to report year-on-year income growth for full year, but we are expecting higher income in H2 compared to H1 and positive jaws for H2 as cost reductions come through. Deposit balances continue to go strongly to reach 200 billion. With the impairment of 230 million pounds, we were just a little above the run rate of around 200 million pounds we've referenced in the past. The UK card delinquencies remain stable. And I think this remains a sensible average run rate to think of for the year as a whole.

Heading now to Barclays International -- BI delivered an RoTE of 10.8% for the quarter on income of 3.9 million pounds. The BI cost-income ratio was flat at 62%. The main driver of the year-on-year declining PBT was the increase in impairment from the low charge of 68 million pounds to Q2 last year. The latter was driven by macroeconomic updates single name recovery.

Although we are keeping a close eye on the economic outlook in the UK and US particularly, we don't see signs of reconciling the current credit metrics. As we've said before, we have positioned ourselves conservatively for this uncertain and macro environment.

Looking now at more detail at CIB -- CIB reported an RoTE of 9.3% for the quarter, up from 9.1% last year. Overall income was up 8%. This included a gain of 166 million pounds on stake in Tradeweb in our markets business. Excluding this, income still grew by 2%. We saw a resilient performance particularly from FICC, which was up 25%, or 2% excluding Tradeweb. And that would be down 2% in dollars. This compared favorably with peers and reflected strong performance in credit and growth in securitized products.

Equities was down 14% on the record Q2 last year, resulting in overall markets revenues up 7%, or down 5% excluding Tradeweb. Banking decreased 1% year-on-year, or 5% in dollars, reflecting a reduced industry fee pool, particularly in debt underwriting.

Corporate income alone was up 13%, reflecting growth particularly in treasuries and transaction banking. The significant negative mark-to-market on hedges we highlighted in corporate lending in Q1 did not reoccur. Cost increased by 5% resulted in positive jaws of 3%. We also have positive jaws for the first half overall and expect positive jaws for the second half.

We retained significant flexibility on cost, including in performance cost should the income environment in the second half disappoint with an impairment charge of 44 million pounds compared to net release of 23 million pounds last year, but falling in line with the average run rate we've discussed before.

The only significant movement in CIB assets in the quarter was the result of flattening of interest rate curves, which led to similar increases in derivative assets and liabilities. RWAs were broadly flat at 175.9 billion pounds and down around 5 billion pounds year-on-year. The franchise is in good shape and remains focused on delivering improved and sustainable returns, despite periodic fluctuations and market conditions.

Heading now to consumer, cards, and payments -- we continue to generate attractive returns in CCP while growing the business. RoTE was 18%, down year-on-year due to the unusually low impairment in Q2 last year, but up on the 15.4% reported in Q1. Income decreased by 19 million pounds year-on-year, reflecting the non-recurrence of the gain of 53 million pounds on the sale of the L.L. Bean card portfolio. We grew US card receivables by 6% in dollars. Again, the airline portfolio, notably JetBlue and American, reported strong balance growth.

Cards increased year-on-year as we continue to invest in the growth of international cards, payments, and the private bank, but were down on the Q1 level. Again, we expect positive jaws in H2. Impairment of the 203 million pounds was only slightly higher than the 193 million pounds reported for Q1. So, we would expect Q3 and Q4 to be higher, as we have said before, reflecting seasonality and portfolio growth. However, credit metrics remain well controlled, with 30 and 90-day arrears down slightly in the quarter.

Heading now to head office -- as usual, the head office result was driven by the level of income expense, which was 136 million pounds, as compared to last year's positive income of 33 million pounds, which reflected the Lehman gain of 155 million pounds. And in Q1 there was a 90 million-pound impact from legacy funding cost Q2, which we'll reduce to under 30 million pounds from Q3 onwards, following the redemption of the 14% RCI in June.

The hedge accounting expenses and residual treasury charges will continue through Q3 and Q4, while Q3 income will have a positive contribution from the half-year dividend. Those elements are relatively predictable, while the head office cost base is being truncated around 50 million pounds a quarter. There will always be a few lumpy items in head office, but over time I would expect the lumps to decrease.

I'm including this cost summary again to emphasize our continuing focus on cost efficiency to fund investment spend and to deliver absolute cost reduction. So, the income environment requires it. As I've mentioned earlier, we have taken the current environment into account in moving our guidance to below 13.6 billion pounds. That's based on June FX rates, notably $1.27 to the pound.

We are confident we can deliver this while still pursuing key investment opportunities that we believe are in the best interest of the group. Key cost levers we are using as we go through the year include flexibility and compensation costs, particularly in the CIB, which depend on the income performance and within prioritizing and adjusting the pace of our investment spend of the program.

TNAV increased in the quarter by 9 pence to 275 pence. Earnings per share of 6 pence was partially offset by the payment of the full-year dividend, that 4 pence. Net reserve movements were positive, reflecting strengthening of the dollar and rate movements which benefited both the fair value and cash flow hedge reserve. I'd also call out the increase in the net pension surplus to 1.6 billion pounds.

On capital, we reported an increase in the CET1 ratio from 13% to 13.4%, with an increase in capital on broadly flat RWA. And that was a 70-basis point increase before taking the deduction for foreseeable dividend, including AT1 coupons. Profit contributed 38 basis points and reserve movements more than offset the Q2 deficit reduction contribution of 250 million pounds. And I'd remind you that the pension contribution reoccurs in Q3.

The foreseeable dividend deduction of 22 basis points reflected the increased dividend expectation we indicated earlier. A capital ratio won't increase every quarter, but we are now above our target ratio. And our confidence in our ability to continue to generate further capital is reflected in the capital returns policy, which we have reiterated, combining a progressive dividend and buybacks as and when appropriate.

To remind you, with our current regulatory minimum at 11.7%, we remain comfortable with a capital ratio of around 13%. Our reported ratio is based on the current treatment of our RWAs. As I mentioned in Q1, we are exploring with the PRA the possibility of removing the floor that was introduced in our operational mix with RWAs. This would have the effect of reducing Pillar 1 RWAs, but would be expected leave with an increase in Pillar 2 requirement. Our reported CET1 ratio would thus increase, as Jes mentioned, as with our regulatory minimum. In assessing the adequacy of our capital, we do factor in future headwinds from regulatory changes in RWAs.

Over the next couple of years, we have the PRAs proposed changes to mortgage risk weights in BUK from the end of 2020, and CIB changes to securitization risk weighting with in early 2020, and changes to standardized counterparty credit risk from mid-2021. We currently expect each of these three changes to result in RWA increases of low single-digit billion. This is based on our current balance sheet, and business mix, and doesn't take into account any further mitigating actions. We're confident these changes are manageable, and they are factored into the way we look at capital distribution.

Regarding leverage, there is an expected leverage benefit from SA-CCR, change with a modest reduction in leverage exposure. We already have a strong leverage position. For Q2, the average UK leverage exposure was 4.7%, slightly up on 4.6% for Q1. The spot leverage ratio was 5.1%, both comfortably above the minimum UK requirement of around 4%.

Our funding and liquidity position remains strong. In Q2, we issued 1 billion pounds of AT1 to add to the $2 billion we issued in Q1. And we've announced today that calling three outstanding AT1s on the 15th of September, totaling 2.3 billion sterling equivalent. I'll remind you that these calls will result in a headwind for our Q3 capital ratio of around 13 basis points.

Looking at MREL overall, we have issued 7.1 billion pounds equivalent in the year-to-date against that current plan to issue 8 billion pounds this year. And our MREL is currently at 30.2%, around our expected own requirement. Liquidity coverage ratio was 156% at the end of the quarter with a liquidity pool of 238 billion pounds. And our loan-to-deposit ratio was 82%, positioned conservatively in light of the continuing Brexit uncertainty.

So, to recap, We remain on track in the execution of our strategy. We reported an RoTE or 9.3%, excluding litigation and conduct, or 9% on a statutory basis and continue to target an RoTE of greater than 9% and 10% for 2019 and 2020, respectively, based on our CET1 ratio of around 13%.

We remain very focused on cost control. And given the challenging income environment, we have reduced our guidance for the year to below 13.6 billion pounds. We reported another quarter of TNAV accretion. We are above our CET1 target of around 13% and are reiterating our capital returns policy and paid an increased half-year dividend of 3 pence per share, indicating our confidence in future of the group.

Thank you. I will now take you questions. As usual, I would ask yourself to limit yourself to two questions per person so we get a chance to get around to everyone.

Questions and Answers:

Operator

If you wish to ask a question, please press * followed by 1 on your telephone keypad. If you change your mind and wish to remove the question, please press * followed by 2. When preparing to ask you question, please ensure that your phone is unmuted locally. To confirm, that's * followed by 1 to ask your question.

Our first question today, gentlemen, comes from Alvaro Serrano of Morgan Stanley. Alvaro, your line is now open.

Alvaro Serrano -- Morgan Stanley -- Analyst

Hi. Good morning. Thanks for taking my question -- two questions. First of all, there was a press article earlier this month talking about -- earlier last month talking about Barclays talking 20 billion pounds of assets from Deutsche. Just wondering if you can make any comments about how you think the restructuring there is going to benefit you. What kind of good market share can you take? And is that going to be profitable? And just generally, is there any change to your RWA commitment to the division or leverage commitment given the opportunity there? Just commentary on that.

And the second question is around your capital distribution. You've increased the payout, which has been well received. But as you sort of debate internally -- I was just wondering when you decided to go for the dividend versus the buyback, is this payout the payout ratio we should think going forward? And from a financial perspective, is it not better to do buybacks? It also has a signaling effect. So, just wondering about your thoughts and, for us, what to expect going forward. Thank you.

Jes Staley -- Group Chief Executive

Alvaro, I'll take the first question and then, Tushar will take the second one. Vis-à-vis prime balances -- it is true that we gained some prime balance recently, roughly in that neighborhood. It's very good business for us. Obviously, it's net interest, earnings. It's part of the markets business where you earn revenue on Saturdays, and Sundays, and holidays. So, it's quite good business. It also reinforces the important relationships you have with principal actors in the capital markets. It is very profitable. And we'll continue to pursue that business.

I would say, overall, our commitment to the capital markets globally, but principally in New York and London and across Europe -- obviously will reflect when capacity is leaving the capital markets in terms of the intermediaries. So, we're committed to the strategy and the prime brokerage business is an important component to that.

Tushar Morzaria -- Group Finance Director

Yeah. Thanks, Alvaro. Just to come back to your question on capital distribution -- as we sort of said earlier, our capital distribution policy does remain unchanged. We would expect to have an appropriate mix of ordinary dividends, which we've talked about this morning, and at the right time, additional distributions possibly through buybacks.

I think the way we think about it is it's important to set the ordinary dividend distribution to the right level first. Obviously, as you think about it from both the board matter and the regulator matter, those are the higher hurdle. We think of these as perpetual distributions, not one-time in nature. So, we would have to have, not only conviction in our capital position now, but a conviction in the future capital position of the company and importantly earnings, both now and in the future.

And looking at sort of -- we obviously have slightly more optimistic outlook for this year in terms of earnings and consensus for the moment, given our returns target. But even on consensus earnings, we think that the dividend guidance that we provided will still get you to a pretty comfortable payout ratio. So, it's important that we get that right. And to the extent we generate further excess capital from here, we'll consider what we do but leaving our distribution policy unchanged. Well, I think that's probably it for now.

Thanks for your question, Alvaro.

Alvaro Serrano -- Morgan Stanley -- Analyst

Thanks. Thank you.

Tushar Morzaria -- Group Finance Director

Thanks, Alvaro. Can we have the next question please, Operator?

Operator

Of course. The next question from the line comes from Jonathan Pierce of Numis. Jonathan, please ask your question.

Jonathan Pierce -- Numis -- Analyst

Morning, chaps. Thanks for the questions. I've got two. The first one's on gilt gains and the second one on the UK margin, please. On the gilt gains, it was about 216 million pounds booked in the half, which is a big reversal on the 200 million pounds of loss that we saw in the second half of last year through the P&L. Could you just remind us where these get booked?

And on the assumption that as of today, there's probably a stock of these gains still at 500 pounds million or so order of magnitude. Is there an assumption that we're going to get more of these gilt gains in the second half? And is that a big part of the delta between where consensus has sat on your return for the year and your 9% return target? So, that's the first question, gilt gains and the outlook for those. Do you want the second question on the UK margin as well?

Tushar Morzaria -- Group Finance Director

Yeah. Do you want to give both Jonathan? We'll answer them in one shot.

Jonathan Pierce -- Numis -- Analyst

Yeah. So, on the UK margin, just trying to interpret this comment on the impact of refinancing. Are you sort of suggesting actually that it's a bit more complicated than it looks in the sense that there's a sort of EIR, one of EIR assumption change in the half because customers are refinancing away more quickly? Is that what you're trying to tell us here? Or is purely just there's a lot more new business coming on at lower spreads?

Tushar Morzaria -- Group Finance Director

Okay. Yeah. Thanks, Jonathan. Why don't I take both of them? In terms of gilt gains, I'm not sure how far you got through our disclosures yet, but you'll see in the notes that we split out how much of the revaluation of our AFS reserve has been recycled, the P&L, in the sort of normal course of business as we recycle our liquidity pool positions. It's actually slightly lower, H1 2019, than H1 2018 on an after-tax basis. So, I think you'll get less than 100 million pounds this half and a little over 100 million pounds last half.

I think your question about future looking -- of course, as bonds have rallied very substantially, there are a lot of gains there. The way we think about it is we're not really trying to do anything too clever here. Of course, if we're recycling those gains into income, obviously, that will lower our net interest income into next year, unless yields back off. So, I'm not sure there's anything that we're doing that's anything beyond we would have normally done. So, I wouldn't give any sort of different guidance. It'll be regular way disposal as we would've done anyway and recycling of the pool.

UK NIM, yeah, the refinancing activity, it essentially translates itself through an EIR adjustment. And, essentially, what we've been seeing is customers -- the behavioral life of those customers is just shortened. I guess it's a function possibly of just the ease in which you can switch products. There's a lot of digitization going on through the industry and probably aided and abetted by some incentives the brokers have as well. So, as people come off, for example, the typical fixed rate, two-year fixed rate product, they tend to stay on a follow-on rate for less time than they used to historically and will sort of refinance into a new fixed rate, for example.

So, when you look at the reduction in NIM for the quarter, about a third of it was probably from that EIR adjustment. A third of it was just on having lower unsecured card balances, such as some sort of very deliberate action that we've taken. And about third of it just from the mix in secured lending versus unsecured lending, but mostly growing our mortgage book.

I think where we look at it from here, obviously, the EIR adjustment is really just an adjustment to the stock, doesn't really change the NIM from this point on, assuming we've calibrated customer behavior appropriately, which we believe we have. I think we're done with the specific actions we took in reducing interest earning card balances. So, that'll be broadly stable from here. And we'd expect our mortgage book to continue to grow.

So, I guess a few things I'd just remind people of, one is we do expect our NIM to be about at these levels for the remainder of the year and we expect our mortgage book to grow. And I guess what does that all mean? It means we'd expect our income in Barclays UK in the second half actually to be higher than first half. And, obviously, sitting here in the beginning of August, we have reasonable visibility of that, so we're comfortable giving that guidance. So, hopefully, that's helpful, Jonathan.

Jonathan Pierce -- Numis -- Analyst

And, sorry, just to follow up quickly, so that one-third of the margin drop was the EIR. And that's a one-off adjustment, so presumably that's an, I don't know, 25-30 million-pound hit to new interest income in the quarter that won't repeat going forward.

Tushar Morzaria -- Group Finance Director

That's right. Probably a little bit lower than that, but, yeah, in sort of zip code.

Jonathan Pierce -- Numis -- Analyst

Okay. Great. Thanks, Tushar.

Tushar Morzaria -- Group Finance Director

Thanks, Jonathan. Can we have the next question please, Operator.

Operator

The next question on the line, gentlemen, comes from Joseph Dickerson of Jefferies. Joseph, your line is now open.

Joseph Dickerson -- Jefferies -- Analyst

Hi. Thanks for taking my question, Tushar. You already answered one of them. So, the other one is just on the liquidity pool. That's a very high LTR ratio, and it looks like you've got 83 billion pounds of surplus with a quite overfunded balance sheet. So, I was thinking about this. You mentioned the Brexit uncertainty. Has there been any, either in direct terms or indirect terms, a drag to net interest margin from this and would you be willing to quantify it?

And number two, certainly, there's an opportunity cost here from not lending these funds out. So, if loan demand picks up, presumably, that would provide quite a tailwind -- I'm not saying in the second half of this year, but in the future to your net interest margin, irrespective of what's happening with rates.

Tushar Morzaria -- Group Finance Director

Yeah. Thanks, Joe. A couple of comments on that. You've seen our deposit balances continue to tick up quite nicely, both in commercial banking, corporate banking, as well as in UK bank. In our UK bank for example, I think we hit 200 billion pounds of deposits. And that may be the first time in -- well, it may be the first time. I haven't gone back and checked records. But, certainly, it's been quite strong deposit growth.

And it's good business for us because we're not paying up for those deposits. If you do just a straight comparison, you'll us with probably one of the lower rates in the UK market. So, having that sort of liquidity that will be just in our liquidity pool, given recent cash has arrived, is a possible activity for us.

The other point is also fair, which is we do have a relatively conservative loan-to-deposit ratio. As a group, it's in the low 80s. In the UK bank, for example, it's in the sort of mid 90s. And that compares quite favorably with some of our peers. So, I think that potentially gives us an opportunity into the future when things perhaps settle down.

At the moment, we're seeing a reasonable amount of customer caution. So, a lot of cash is being left with us and less demand, if you like for borrowing, to the extent that it changes as we go through this sort period of some uncertainty. I think that's a pretty interesting opportunity for us of how we really recalibrate our liquidity pool and, by sort of inference, our loan-to-deposit ratio.

Joseph Dickerson -- Jefferies -- Analyst

Great. That's helpful. Thank you.

Tushar Morzaria -- Group Finance Director

Thanks, Joe. Can we have the next question please, Operator?

Operator

The next question on the line today comes from Chris Cant of Autonomous. Chris, your line is now open.

Christopher Cant -- Autonomous Research -- Analyst

Good morning. Thank you for taking my questions, two, if I may, completely unrelated. First, you've given us some incremental disclosure around your structural hedge. Thank you for that. I was just going to invite you, if you could, to quantify the potential drag from the structure hedge into 2020 in the same manner that one of your large peers did this week. And also, where does that does that net income from hedge get assigned divisionally? Is that primarily in the UK division? That'll be the first one.

The second, on your 13.6% or sub-13.6% cost guidance, you said that was based on a $1.27 FX rate. We're 4.5% below that level at present. Does that 13.6% still hold on current FX? Or if this FX rate persists, which I expect to be above that -- and as a broader point, it would be really helpful if you could give us a sense of how much of you revenues are in dollars and how much of your costs are in dollars to enable us to better understand how that dynamic might play out through a sort of a hard Brexit hit to sterling rates. Thank you

Tushar Morzaria -- Group Finance Director

Yeah. Thanks, Chris. So, I'll talk on the hedge contribution. I'll just make a couple of comments on cost. And then, I think Jes will want to add to that. On the hedge contribution, I know you've been asking for while, so I'm glad you appreciate disclosure. Sorry, it's taken us a bit of a while to get it across to you, Chris. But in terms of the direct question, if yield curves stay literally where they are today, our intention would be just to roll our hedge. We don't actively manage it in the way some other's may choose to. It would only really reduce net interest income by about 50 million pounds into next year.

Now, that's a combination of product hedge and equity structural hedges. So, actually, it's across the bank as a whole. The equity position is for the whole company and the product component is just a component of it. So, I think the gist of your question is how much of that would be in the UK bank, specifically. Obviously, just a proper portion of it, by no means the majority of it, would go to the UK bank. But only sort of 50 million pounds or there or thereabout.

In terms of costs, I think -- a couple points I'll make, and then I think Jes will want to add. Firstly, we've taken some meaningful actions, I think, in the second quarter that ought to give us a much lower run rate going into the reminder of the year. We've talked about headcount reductions that happened in the second quarter. We've made other changes to our physical footprint. We've deferred some investment spend that we don't think really makes a difference in terms of medium to short-term opportunities.

So, we have good visibility into our cost. Your point around currency sensitivity is good one. Though, of course, a fairly meaningfully move, and it looks like it just moved again this morning with sterling weakening. It's only PBT enhancing for us, as you've probably seen I think on slide 19 about half our revenue of the group are non-sterling-generated. I take your point that we haven't given you the equivalent cost mix. And so, that's something we should think about. But we're obviously positively geared towards a weakening sterling. But Jes, any other comments you want to make on the cost base?

Jes Staley -- Group Chief Executive

Just as we saw in the second quarter, some of the weaknesses and our decisions remain conservative in the credit card side. We did take action on the headcount side, and we're now down in headcount by over 3,000 FTE. And that does have an expense to it, which you will feel the benefits of in the second half of the year. And going back, the strategy of being diversified geographically is to try to minimize the impact of a falling sterling to us. And as Tushar said, it has a better impact on revenue than cost. So, whilst it may challenge us at the below 13.6%, in terms of the overall jobs of the bank, it'll quite positive.

Christopher Cant -- Autonomous Research -- Analyst

Okay. Thank you.

Tushar Morzaria -- Group Finance Director

Thanks, Chris. Could we have the next question please, Operator?

Operator

The next question on the line comes from Martin Leitgeb of Goldman Sachs. Martin, your line is now open.

Martin Leitgeb -- Goldman Sachs -- Analyst

Yes. Good morning. I have two questions, please. And the first one is just on Brexit and kind of the broader impact Brexit might have on your franchise and what you're seeing at this stage in your various bits of the business. I'd just very interested if you've seen any change in custom or behavior, whether that means either in terms of sentiment, loan demand, or either in terms of potential depositors or asset quality within the wider book.

And the second question is more a general, strategic question. Over recent weeks, we have heard the announcement of one of your main competitors reassessing its strategy within the equities franchise. And then, out of memory, revenues in that segment were broadly similar to Barclays' revenues and equities over the years. And I was just wondering whether this has led you to reevaluate the strategy of your franchise or how you see the opportunities for your franchise in that regard. Thank you.

Jes Staley -- Group Chief Executive

Yeah. I'll take that, Martin. So, to the first question on Brexit, first vis-à-vis the bank's position, we began working right after the referendum vote to get the bank structured in such a way that we could deal with any possible outcome of Brexit. And what that really meant for us was changing the scope and scale of our bank subsidiary in Dublin. It will most likely become by the end of this year the largest bank in Ireland.

Then we went through the process of every branch of the bank across Europe, from Frankfurt to Madrid, to Paris, to relicense those branches as branches of the bank in Ireland. We built all the control systems necessary. We moved the necessary people. And then, over the last couple of months we've gone through the client migration process. And we sort of left it up to clients if they wanted to migrate from one platform to the another. That's gone quite well. So, from a bank operational point of view, even if we had a very hard Brexit at the end of October, the bank's totally prepared for it and it would be really business as usual.

In terms of what we're seeing over the last couple of months vis-à-vis clients and customers, as Tushar alluded to, I think people are modestly being more conservative. Our cash levels are up. Demand for credit on the margin is wider. And then, on the institutional side or the major corporate side, I think it's fair to say that some of the big decisions, whether they're M&A decisions or investment decisions, have been lighter than one might expect.

But the big thing as we get closer to October 31st is this possibility of a really no-deal, hard Brexit, we want to be very mindful. One, we want to be very constructive in terms of helping small businesses in particular to think about cash flow levels, etc. and want to be obviously committed to being a partner, to getting the UK economy through that event.

But I think we are prepared. Going back to the opening comment that two years ago we looked at our unsecured credit card portfolio and really tightened our underwriting conditions since then, I think hopefully that does put the bank at a pretty prudent position as we go into the latter part of this year.

Vis-à-vis the equities business, we do believe it's important to look at the possibility of a markets business overall. There will be some aspects of your markets business which are less profitable than others. But there is a connectivity between the two of them. We are committed to our position in the US and in the European capital markets across the equities platform. We have a very strong business, obviously, in equity prime financing. We have a strong business in equity flow derivatives. So, we're going to stay committed both on the research side and on the execution side to equities.

Tushar Morzaria -- Group Finance Director

Thanks, Martin.

Martin Leitgeb -- Goldman Sachs -- Analyst

Thank you very much.

Tushar Morzaria -- Group Finance Director

Could we have the -- yeah. Could we have the next question please, Operator?

Operator

The next question on the line today comes from Guy Stebbings of Exane BNP Paribas. Guy, your line is now open.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Morning, Jes. Morning, Tushar. Thanks for taking my question. Most of my questions of been asked. Just a couple of points of clarification. Firstly, on risk-weighted assets, thanks to the new gains on the regulatory changes, can I just confirm that was low single-digits for each rather than an aggregate I presume?

And then, to follow up on RWAs, Jes, you mentioned again in the introductory marks that the slightly harsh treatment, at least in Pillar 1 terms, on operational risk. Should we be taking a reference there suggesting that you're getting closer to a change, and that being moved more into Pillar 2? And if so, when's you're next ICAP when that has to be signed off? And then, just a final quick point of clarification. In head office, I say quite a big jump in the period end tangible equity. Could you explain what's going on there? Thanks.

Tushar Morzaria -- Group Finance Director

Yeah. No problem, Guy. Why don't I take the couple of clarifications on RWAs and head office, and Jes can talk about where we are on operational risk-weighted assets. Yeah, single-digit billions for each of these impacts. So, for single-digit billions for mortgage risk weights and additional single-digit billions for securitization, etc. and obviously a benefit on counterparty credit risk as a leverage matter.

And head office tangible equity, at the end of the day, we capitalize our businesses that are target 13% ratio. So, to the extent we got excess capital at 13.4%, we leave that in head office pending distribution, investment, etc. So, not much more than that. And, Jes, you want to talk about op risk, RWA?

Jes Staley -- Group Chief Executive

On the operating side, we're obviously in dialogue with our regulators. Recognize that in many ways this is optics as it would result in a move from Pillar 1 to Pillar 2, roughly 60 basis points in our CET1 ratio. And given that there has been optically questions about whether a CET1 ratio was sufficient or not or whether we're sufficiently capitalized, if and when we do gather that 60 basis points -- and today it would land at 14% plus what we're doing on the dividend. Hopefully, we have finally arrested this question of whether we're sufficiently capitalized.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay. Thanks. Any sort of timing you're able to give on the operational risk? Or can't really comment given it's up to the regulator?

Tushar Morzaria -- Group Finance Director

Yeah. We shouldn't give -- we're in discussions with a PRA. We'll keep you posted. I don't want to give a sort of timeline on it yet.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay. Thank you.

Jes Staley -- Group Chief Executive

Thanks.

Tushar Morzaria -- Group Finance Director

Thank, Guy. Can we have the next question please, Operator.

Operator

The next question on the line comes from Andrew Coombs from Citi. Andrew, please go ahead.

Andrew Coombs -- Citi -- Analyst

Good morning. Firstly, I apologize, but I'm going to make you repeat yourself. The line just cut out as Jes was talking there about the benefit. Was it 60 basis points gross or net adjusting for the Pillar 2?

Jes Staley -- Group Chief Executive

We would quote a CET1 ratio today of roughly 14%.

Andrew Coombs -- Citi -- Analyst

Okay. And that's before the reg minimum goes up for the adjustment on Pillar 2?

Tushar Morzaria -- Group Finance Director

Correct.

Jes Staley -- Group Chief Executive

That's right.

Andrew Coombs -- Citi -- Analyst

Right. Understood. Sorry about that. And then, my two questions, both on the international bank. Firstly, I'd be interested in your thoughts and implication a lower Fed rate on CCP NIMs, obviously, most specifically the US cards business. And, secondly, the transaction banking number, it was quite a jump Q on Q form 415 pounds to 444 pounds. You've said that's due to deposit growth. But I'd be interested there because that's quite a big step change in that line. Thank you.

Tushar Morzaria -- Group Finance Director

Yeah. Why don't I take them, Andrew. The Fed cut that will feed through into NIM. In the US, of course, it's pretty high NIM anyway, so I don't it will make a huge difference to us in the outlook for that business. I would expect, even with a new Fed rate income to continue to grow in the second half relative to the first half. And, of course, that lets us through the increasing balances that we've been generating over the course of the year.

Transaction banking, yeah, it's been really good for us. Some of that, obviously, is a consequence of the deposit level. So, they're increasing in our commercial banking business. So, as Jes mentioned, the general behavior we've seen from customers is slightly more cautionary, in other words, leaving a lot of cash with us. And at the margin, less of a demand for credit, we've seen that in commercial as well as business banking. Whether that sort of continues and that deposit rates continue to go up or not, I guess it remains to be scene. We'd like to be lending out that cash at some point. We should be good.

I think what is interesting though for us is some of those deposits have been coming in really through more products and services that we're offering to European corporates. That's something that we've been working on for some time. One of the positive byproducts of Brexit for us is that European bank based in Dublin will be clearing euros and that makes us attractive for European corporates that wish to do business in both the UK, Europe, and the US, to be able to deal with all three of those currencies. And we're seeing some benefit come through that. And that's coming through to our results. So, it's quite optimistic by that.

Jes Staley -- Group Chief Executive

Yeah. Maybe a little more specificity there -- we put a fairly substantial technology spend beginning in the end of 2017 to make sure we had all the payment pipes built across Europe so that we could expand our corporate bank platform from the UK to across Europe. And a lot of the deposit growth has come from that.

As we turned on Germany, and France, and Spain, etc., a number of corporates, many of them connected obviously to our franchise here in the UK, are running their transactions and cash management through our pipes. And that's been probably the biggest contributor to the growth in deposits, which has driven the transactions revenue in the corporate bank.

Now, the only thing I would say is we actually have been doing reasonably well in terms of growing our trade financing in the corporate bank as well with its help there. And then, your first question, really the risk-free rate would have in impact in the US. But I think all the European banks would love to have the same risk-free curve in the Europe.

Tushar Morzaria -- Group Finance Director

Yeah. We sure would. Thanks for your question, Andrew. Could we have the next question please, Operator?

Operator

The next question, gentlemen, is from Robin Down from HSBC. Robin, please ask your question.

Robin Down -- HSBC -- Analyst

Good morning, guys. Can I ask you a kind of variation on the question I asked you at '19 Q1 about the consensus? We are in kind of 1st of August now. And you're still repeating a 9%-plus RoTE target for this year. And I don't think -- as Tushar said earlier, even on consensus, consensus is obviously much larger than that.

When I look at consensus, I have a very big mapped revenue decline, H2 and H1, even ran it for seasonality within BarCap. If that sort of revenue decline came through, how much flex do you actually have on the cost line? Obviously, consensus costs now are slightly below your 13.6 number already. But how much lower could you go?

And if you could go much lower than that, would that come from the bonus pool? Or would that come from coming back investment. I don't know if you could give us some color around that. And also, anything else you would pick out in terms what you think that maybe we've missed something in terms of your outlook that hasn't yet been factored in. Thanks.

Tushar Morzaria -- Group Finance Director

Okay, Robin. So, why don't I start, and just will add some comments. Look, I think the market sort of is closer to an 8% return, and we still have a degree of confidence we'll get to 9% and better. I think I have a different shape on income outlook, and I think that's the gist of your question. If I think outlook is closer to your or the market's view relative to our view, what moves do we have?

But just to touch on income, I would expect if I look at half on half, I would expect UK income to be better. I sort of guided to that. I would expect consumer, cards, payments income to be better. I've guided to that. Of course, we've got the redemption of the 14% reserve capital instrument that you're aware of. That will drop out of head office, so that's a tailwind as well.

I also think if you look at the pipeline that we have in our investment banking fee business, capital markets look pretty good at the moment, quite constructive. And we've got a very good pipeline. So, as Jes mentioned, I think we're in the top five in US in terms of [inaudible] fee share. That's a really nice position for us to be in. And our sales and trading business, we've continued to create market share steadily over the last sort of half a dozen or so quarters. So, we probably do have a different income shape to you.

The other thing I would say is that -- it goes back to the earlier question about our sensitivity to currency rates were starting to remain weak. Of course, that is not necessarily accretive to return because obviously our capital is held in dollars. And you can see that in our tangible book value accreting. But, certainly, earnings per share, that's definitely a positive. And it's been quite a reasonable move in cable. And that can only be helpful for us.

I think on the cost side, we've taken a bunch of action already. And you kind of saw that in Q2 numbers because of the headcount reduction as Jes has talked about from changes to our physical footprint, deferral of -- from investments. Obviously, this is a cost to sort of repositioning with the pace of that investment as well.

So, I think we have good control of our ability to glide those costs out. I think as you get later on in the year, of course, performance costs principally in the investment bank become more and more important. Of course, that'll be linked to income performance. But, Jes, you wanna add any more?

Jes Staley -- Group Chief Executive

I just have two things. One, again, to underscore our commitment on the cost side and our focus on it, part of the cost numbers in the second quarter that you've seen, we as an added team, early on in the quarter, took decisions to drive down the cost in the second half of this year so we could land below 18 -- 13.6%. A lot of those cost decisions raise your cost in the second quarter, but that should underscore our commitment to use cost as much as we can to deliver that 9% return on tangible equity.

And you could also see from the financials that we published today that our variable cost number year-over-year was down 18% in the first half versus the first half of last year. So, we are committed as best we can without putting the franchise at risk anywhere. To use the cost number and manage cost to deliver a level of profitability that we've committed to our shareholders.

Robin Down -- HSBC -- Analyst

Great. Thank you.

Tushar Morzaria -- Group Finance Director

Thanks, Robin. Thanks, Robin. Could we have one more question please, Operator? And I think we'll end the call after this.

Operator

The final question today, gentlemen, is from Edward Firth from KBW. Edward, please go ahead.

Edward Firth -- KBW -- Analyst

Thanks so much. Morning, everybody. I just had a quick question on your Level 3 disclosures, which you've enhanced on page 68. I just want check that I understand them correctly. So, if I look in your income statement, you've got around 700 million pounds of contribution from valuation of Level 3 assets. Firstly, is that correct? So, it's obviously a marked change in what we've seen in the past. And, secondly, what is driving that?

And then, I guess related to that, in the table below, I guess we've talked a lot before about the asymmetry on your valuation of Level 3 assets. That seems to be expending now even further. And, again, just trying to get a sense -- what are the key drivers in that? It looks like non-asset backed loans is one part of that. Is that leverage loans? Or what are those in particular? Thanks so much.

Tushar Morzaria -- Group Finance Director

Yeah. These disclosures, Ed, as you know are quite tricky to work through. And the reason for that is Level 3 assets, of course, are just one sort of aspect of match position. So, you'll have for example long-dated fixed rate loans for example. Now, obviously, we've had a big move in interest rates. So, those customer positions in of themselves revalue quite meaningfully.

But, of course, from our perspective, they're hedged through other interest rate products that won't necessarily be Level 3 -- well, actually, won't be Level 3 or they won't be able to be hedges. That would revalue in the opposite direction. So, it's really more a function of just the very large movement in interest rates to interest rate-sensitive products. So, I think that's all I'd say on that. There's nothing else other than that that's going on.

Edward Firth -- KBW -- Analyst

It's not possible to give us some idea of what the next move is?

Tushar Morzaria -- Group Finance Director

The next move you mean?

Edward Firth -- KBW -- Analyst

Yeah. Yeah.

Tushar Morzaria -- Group Finance Director

Yeah, we don't sort of do things on an instrument basis. These are portfolio-managed positions. So, yeah, that's not how sort of risk management tends to work for us. We have lots and lots of interest risk coming from lots of customer-facing positions that are had with a portfolio of interest rate hedges.

Edward Firth -- KBW -- Analyst

Okay. Thanks so much.

Jes Staley -- Group Chief Executive

All right.

Tushar Morzaria -- Group Finance Director

Okay. Thanks, Ed. And thank you, all, for your questions. And no doubt Jes and I get a chance to meet some of you soon after the next few days. Thanks again.

Duration: 57 minutes

Call participants:

Jes Staley -- Group Chief Executive

Tushar Morzaria -- Group Finance Director

Alvaro Serrano -- Morgan Stanley -- Analyst

Jonathan Pierce -- Numis -- Analyst

Joseph Dickerson -- Jefferies -- Analyst

Christopher Cant -- Autonomous Research -- Analyst

Martin Leitgeb -- Goldman Sachs -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Andrew Coombs -- Citi -- Analyst

Robin Down -- HSBC -- Analyst

Edward Firth -- KBW -- Analyst

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