BARCLAYS PLC (BCS) Q2 2020 Earnings Call Transcript

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BARCLAYS PLC (BCS 0.65%)
Q2 2020 Earnings Call
Jul 29, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Barclays Half Year 2020 Results Analyst and Investor Conference Call.

I will now hand you over to Jes Staley, Group Chief Executive; and Tushar Morzaria, Group Finance Director.

Jes Staley -- Group Chief Executive

Good morning, everyone, and thank you for joining us today. First of all, let me say that I hope you and your loved ones have been keeping safe and well as we continue to navigate the COVID-19 pandemic. These remain extraordinary circumstances for all of us, and the impact of this crisis weighs heavily on our professional and personal lives.

To me, this past quarter for Barclays been a story of two things. The first is the resilience of the bank underpinned by the diversification of our strategy and evidenced in our performance. And then second, made possible by that underlying soundness and strength has been Barclays' continued support for our customers, our clients, our colleagues in the communities where we live and work around the world. As I said before, the key difference between the financial crisis of '08 and '09 and now is that in, '08, the banks in '08 and '09 were the catalysts for the crisis, while this time we can be a firewall helping to mitigate the impacts of this crisis. I do believe this is in large part driven by regulatory and central bank policies of the past 10 years, which have aimed at moving the economy from an over-dependence on bank balance sheets to much greater reliance on the capital markets to fund economic growth.

You can see the evidence of that approach in central bank actions since the beginning of the crisis, particularly in the unprecedented injections of liquidity and huge purchases of corporate debt to bolster the capital markets globally. That strategy has proven to be a very positive shift in terms of the ability for corporate and governments to remain well funded and liquid as this helped prices move toward an economic one and as we contemplate how to support a sustainable recovery. I welcome the opportunity and obligation for Barclays to help alleviate the social and economic impacts of COVID-19, and that effort remains a core priority for Barclays. I've been especially proud of the way our colleagues across the bank have risen to the challenge.

Our business touches half the households in the UK. Five months into the crisis, we provided an enormous amount of reassurance and support to million of customers facing financial challenges and with understandable concerns about the future. In practical help, so far, we've granted repayment holidays on 121,000 mortgages and on 76,000 personal loans. We're providing an interest-free buffer on overdrafts for 5.4 million UK customers, and beyond that, we've reduced and capped banking charges. We've waived late payment fees and cash advance fees for 8 million Barclaycard customers and granted some 157,000 payment holidays. And we've exercised similar forbearance across both our businesses in the US and in Europe. 817 branches are opened across the UK, providing critical frontline banking services, especially to our most vulnerable customers. We've also trained thousands of branch colleagues to help ease the burden on our call centers. These colleagues are helping handle some 200,000 customer calls a week, representing a whole new engagement with customers from our branches.

As the economic consequences of COVID-19 began to bite, it's more important than ever to help businesses get through this period intact and to do what we can to protect and preserve jobs. That's clearly a top government priority and equally a priority for Barclays. We have all seen the unprecedented effort from the Treasury and from the Bank of England to back businesses in the UK, and we've been playing our part to help get that support to companies that need it. As of the beginning of this week, Barclays has now approved nearly 9,000 loans to mid-sized corporates in the UK, with a total value of GBP2.5 billion. Perhaps even more importantly, Barclays has delivered bounce-back loans to nearly 0.25 million small businesses across the United Kingdom, with a value of some GBP7.75 billion, helping to preserve hundreds of thousands of jobs. To give you some sense of the relative scale of that: We would historically make that number of loans and of that size over around a three-year period. We delivered the majority of this support in just 12 weeks.

Behind those numbers are stories of businesses and jobs surviving this crisis, which is what these programs are all about. Take Karas Plating in Greater Manchester for example. Karas is a 75-year-old company specializing in electroplating, surface coating and metal finishing. A GBP250,000 CBILS loan has enabled them to adjust their manufacturing process to plate urgently needed parts for ventilators, provide electrical connectors for the Nightingale hospitals as well as continue to supply critical components to the food and power sectors or take UK's leading Thai restaurant group, Giggling Squid. Our support in delivering a GBP5 million CBIL loan has helped safeguard 920 jobs of 235 restaurants across the Midlands and Southern England. And nearly 0.25 million bounce-back loans to small businesses like jeweler Anais Rose in London or the caterer Papadeli in Bristol have been a difference between survival and failure for companies up and down the UK and we're proud to be playing our part in that. With our investment banking entities, we've also been a leader in helping large businesses to access the Bank of England and treasury's commercial paper program. So far, we've arranged over GBP11.7 billion of funding for UK corporates, representing some 48% of the total funding accessed through the CCFF scheme. To date, across all the government-backed programs, Barclays has delivered some GBP22 billion in COVID-related support to businesses. In the round, these programs represent an extraordinary effort by the government to preserve jobs, and we are proud to support them in that effort.

In addition to our backing for those government schemes, we've also been able to provide significant help of our own to business clients. For example, we waived everyday banking fees and overdraft interests for 650,000 of our small business customers. And we've put in place 12-month capital repayment holidays for most SMEs with loans of over GBP25,000. We're continuing to extend credit to companies, and Barclays has maintained billions of pounds in credit facilities for clients around the world to draw upon. We're also steadfastly supporting clients globally in advisory and the equity and debt capital markets.

For the second quarter, we advised some 580 capital market transactions and collectively raised a total of over $0.75 trillion in funding. Of note in the U.K., we helped listed companies raise almost GBP6 billion in the equity capital markets, including household names such as William Hill, Aston Martin and the conference group. There is perhaps no better stabilizing effect for a company during a time of stress than the injection of new equity, and Barclays is the number one underwriter of equities for British companies year-to-date. In the U.S., we served as lead left bookrunner on a $1.5 billion term loan and a $3.5 billion secured bond offering for Delta Air Lines. The term loan represented the first broadly syndicated institutional term loan to clear the market since the start of the COVID-19 crisis. On the advisory side, we were pleased to act as the lead financial advisor to Dominion Energy in the company's $9.7 billion divestiture of its midstream business to Berkshire Hathaway. It was announced earlier this month. We'll continue to evolve our approach and offering to clients, big and small, to help them through this crisis. It is crucial that we preserve as many businesses and jobs as we can to aid the recovery.

Barclays has deep roots in the communities where we live and work, and I'm proud of everything our colleagues do year round to support their local areas. We are delivering on our core finishing programs in communities such as LifeSkills, Unreasonable Impact and Connect with Work, with a particular focus on helping mitigate the impacts of COVID-19. We're delighted that, so far, we have allocated GBP45 million of our GBP100 million community aid package to charities in the UK, US and India to support the people hardest hit by the crisis, from providing food to vulnerable families, to purchasing protective equipment for NHS staff. We understand that our fortunes are intertwined with those of the communities and economies we serve. At times like this, more than ever, our obligation is to support them, and we're going to continue to do that.

Before I hand over to Tushar to take you through the numbers in details, I want to provide some overall thoughts on our financial performance in the first half and the second quarter. As I said at the top of these remarks, the first half has clearly demonstrated the resilience of this bank underpinned by the diversification of our universal banking model. That diversification has enabled Barclays to deliver a robust operating performance in an extremely challenging macro environment.

In the first half, income increased 8% to GBP11.6 billion, with costs down 4% to GBP6.6 billion, resulting in positive jaws of 12% and an improved cost-to-income ratio of 57%. Pre-provision profits were strong, up 27% to GBP5 billion for the half. Notwithstanding the impairment reserve of GBP3.7 billion in the first half of this year, including a further GBP1.6 billion in the second quarter, that operating performance, led by our Investment Bank, meant we remained profitable in both quarters. Tushar will talk more about the assumptions we have made about the macroeconomic outlook, which are a big part of our impairment build, but we certainly feel that Barclays is appropriately positioned. For instance, taking the unemployment rate, a key driver of consumer credit risk, we have assumed a prolonged period of heightened unemployment in both the U.K. and U.S. that is some way above current levels. Yet despite the GBP3.7 billion impairment number, Barclays still ended June with a CET1 ratio of 14.2%. That's the highest capital ratio in the bank's history.

In our Corporate and Investment Bank, in the first half, income increased 31% to GBP6.9 billion, driven by a standout performance in our Markets business, particularly in FICC up 83% year-over-year and our Equities business up 26%. The majority of our Markets revenues derive from trading in securities and derivatives and earn in the bid-offer spreads intra-day. We also saw an 8% increase in banking fee income through continued momentum in both debt and equity underwriting. The share gains we have made across markets and our performance in banking over the past two years reflect client confidence in our capabilities, and we are pleased at how well the franchise has done in these volatile markets. While we don't expect these extreme levels of volatility to continue, the Markets business remains attractive.

In the first half, our CIB performance offset a much more challenging time for our consumer businesses. Income decreased by 11% for Barclays UK and 21% in Consumer, Cards and Payments in the first half of the year. This is as a result of low interest rates and fewer interest-earning balances, reduced payments activity and decisions to waive various fees and charges to support customers. This all translated to marginal profitability overall for Barclays UK in the period and a loss of some GBP500 million post-tax in Consumer, Cards and Payments. Dramatic falls in consumer spending in the second quarter have been well documented. We are now actually starting to see some encouraging signs of recovery, including strong demand in the mortgage market in the UK, in card spend trends on both sides of the Atlantic and in payment acquiring volumes. If that recovery continues further into the third quarter, this should lead to a better income and impairment environment with the resulting improvements in underlying profitability for both the UK and our international cards and payments business.

Finally, the investments we have made over the past five-plus years in our digital capabilities have enabled us to serve our customers seamlessly through this period, including via the UK's number one banking app. As you'd expect, one consequence of the pandemic lockdown has been the increased demand for our digital services.

So to conclude and in summary. My colleagues and I are today primarily focused on supporting our customers and clients, our communities and the wider economy to navigate the pandemic. The strength of our business and the resilience of our strategy means we can both run this bank safely and profitably and provide that support to our customers and clients until this crisis passes.

I'm going to hand over to Tushar to take you through the performance for the quarter with more detail.

Tushar Morzaria -- Group Finance Director

Thanks, Jes. As usual, I'll summarize the first half results then focus on the second quarter performance. As at Q1, we are facing a period of uncertainty, which makes it particularly difficult to give forward-looking guidance, but we can now see the initial effects of the COVID pandemic, and where possible, I will try to give pointers for the coming quarters. As Jes mentioned, the result of the first half showed the benefit of our diversified business model. Despite the impairment charge of GBP3.7 billion, we reported a statutory profit before tax of GBP1.3 billion, generating 4p of earnings per share. Litigation and conduct was immaterial, so on this call I'll reference the statutory numbers.

As per Q1, profits for the half overall were down on last year, reflecting the increase of GBP2.8 billion in the impairment charge, but income growth of 8% and a reduction of 4% in costs resulted in a profitable half and an RoTE of 2.9%. Given the uncertainty around the economic downturn and low interest rate environment, we do expect the environment in H2 to remain challenging. While we continue to believe that above 10% RoTE is the right target for Barclays over time, we need to see how the downturn plays out before giving any medium-term guidance. That income growth reflected a 31% increase in CIB, more than offsetting income headwinds in the consumer businesses. The cost reduction delivered positive jaws of 12% and an improved cost:income ratio of 57%. As a result, pre-provision profits were up 27% to GBP5 billion. Our capital position is strong with the CET1 ratio ending the half at 14.2%, up on the year-end level of 13.8% despite dipping to 13.1% at Q1. The strength of the balance sheet was reflected in the rise in TNAV from 262p to 284p.

Moving on to Q2 performance. Income decreased 4%. Continued strong performance by CIB, particularly in Markets, was offset by income headwinds in the UK and CCP. Costs decreased 6%, delivering positive jaws of 2% and a 62% cost:income ratio. As a result, pre-provision profits were broadly stable year-on-year at GBP2 billion. However, we provided a further GBP1.6 billion for impairment, up GBP1.1 billion, to add to the GBP2.1 billion we provided at Q1. This charge included a further GBP1 billion net increase from modeling revised COVID-19 scenarios with macroeconomic inputs based upon a slower recovery than we had modeled at Q1. We continue to see limited effects of the pandemic on delinquencies, partly as a result of support programs. Net write-offs in the quarter were just GBP0.5 billion and GBP0.9 billion for the half. Assuming no further deterioration in the macroeconomic variables we are using, we would expect to report a lower impairment charge in the remaining quarters of the year.

Before I go into the performance by business, a few words on income, costs and impairment overall. The quarter showed the benefit of the diversification of our sources of income across consumer and wholesale businesses. CIB income increased 19% to GBP3.3 billion, driven by an increase of 49% in Markets which was down just 8% on Q1. Conditions remained challenging for our consumer businesses, with reduced balances in a low rate environment, as I'll show on the next slide. However, with the recovery in levels of consumer spending, there are encouraging signs starting to emerge.

We've highlighted here the headwinds from balance sheet reductions in BUK and US cards and also summarized the interest rate developments that have put pressure on income across our lending businesses. We have seen some signs of recovery in consumer spending in both the UK and US through June and into July as lockdowns have eased, but of course, there will be some time lag in converting this spend into associated increases in interest-earning balances. Spending recovery should have a quicker transmission to income levels in US cards due to the higher interchange income we earn on card spend in the US. We've also put on the slide a reminder of the headwinds in BUK we quantified at Q1. These continue in H2, but following the repricing of deposits, the margin compression may moderate in H2.

Looking now at costs. With the 8% increase in income and costs down 4% in H1, the group delivered positive jaws of 12%, and the cost:income ratio reduced from 64% to 57%. I would remind you that costs in H2 will include the bank levy, and we expect the additional costs relating to the pandemic to outweigh cost categories such as travel which are reduced in the short term. Of course, the level of costs in H2 will vary with the performance-related cost flex in CIB. The pandemic is also changing the ways in which we work, so our continuing focus on cost discipline remains critical to our performance going forwards.

I've mentioned the additional impairment charge in Q2. As you can see, there was a year-on-year increase across all businesses, but the quarter-on-quarter progression shows an increase in BUK, reflecting a slower forecast economic recovery, but a decrease in CCP. The effect of this slower forecast recovery in the US was offset by a lower 2020 peak for unemployment and the significant reductions in U.S. card balances. In CIB, we had lower single-name charges than in Q1, but the effect of the slower recovery on expected losses in corporate lending kept the charge at an elevated level.

We've shown on the next slide a breakdown of how we built up the Q2 charge and the macroeconomic variables or MEVs underlying the expected loss calculation. We've used a similar format to Q1 to explain the workings behind the charge. The modeled impairment calculated during the quarter using the MEVs we set prior to running the COVID scenario for the Q1 close generated a figure of GBP0.4 billion. I think of this as a sort of baseline model charge. In addition to this, we had another GBP0.2 billion in respect of single-name wholesale charges in CIB. As in Q1, some of these names may have been affected by the pandemic, but the sum of these two is not materially above our underlying quarterly run rate in previous years of around GBP0.5 billion. The remainder of the increase reflects the GBP1 billion net impact from updated COVID scenarios reflecting the deterioration in forecast MEVs and an overlay of GBP150 million for selected sectors. This book-up, as I call it, compares to the GBP1.35 billion we charged in Q1.

We've shown on the slide some of the key UK and US macroeconomic variables used, and there's more detail in the results announcement. The key changes are that, while the peak unemployment level in the US is lower in the Q1 COVID scenario, the unemployment levels of both the UK and US remain high for longer. The modeling is subject to inherent uncertainty with respect to forecasting incremental credit losses, and it is difficult to give guidance on the charge going forward. The levels of defaults flowing through will be a key determinant of the charges for the next few quarters. The extension of support programs may delay visibility as to the ultimate level of such defaults and to the extent that they were already included in the expected loss book-up.

Taking a step back from the level of the Q2 charge, it's important to look at the coverage ratios to see the full extent of our cumulative protections against downside risks. This slide summarizes the loan books, impairment builds and resulting coverage ratios for the wholesale and consumer portfolios over the last two quarters. You can see that our coverage ratio increased at the group level from 1.8% to 2.5%. Of course, coverage ratios vary materially across the secured and unsecured portfolios. The wholesale coverage has increased from 0.8% to 1.4%, and a large portion of this is in the selected sectors which we consider to be more vulnerable to the downturn, which I'll cover shortly. I would remind you that we are looking at the major risks in corporate lending on a name-by-name basis, including taking into account assessment of any value of collateral. The other major area of focus is the coverage on the unsecured consumer books, where the ratio increased from 8.1% to 12% overall; and to 23.1% on stage 2 balances, most of which are not past due. We split out the unsecured portfolios on the next slide. You can see here the increase in the coverage ratio across the U.K. and U.S. card portfolios at 16% and 13.9%, respectively. And coverage on stage 2 balances have increased to 28% and 24.5%.

Turning now to the wholesale coverage on selected sectors. We've shown here our exposure to those sectors which we feel are particularly vulnerable to the downturn. I won't go through each of them, but you can see that the balance sheet exposure is just over GBP20 billion, and our overall coverage ratio across these sectors has increased from 2.3% to 4% through H1. I'd also highlight that, as a result of our cautious approach to wholesale risk management, we have synthetic protection in place covering over 25% of our exposure. As I've mentioned before, we've been happy to sacrifice some income in order to reduce the downside on credit risk.

Before I move on to individual businesses, a few words on payment holidays. We've set out on this slide the balances in the major portfolios receiving payment holidays as at 30th of June, staging of those balances and coverage ratios. As you can see, 10% of the mortgage book was on a payment holiday, but these are mainly stage 1 balances, and the average LTV is 57%. In UK and US cards, the percentage of balances with holidays was much lower at 5% and 3%, respectively. The portion of these that have stage 2 balances is considerably higher, where the coverage ratios on those balances are well above-average stage 2 coverage on cards at 43.9% and 35.3%, respectively. That means the total uncovered balances on payment holidays across UK and US cards was under GBP1 billion at 30th of June. And you'll see on the next slide that this is coming down materially in July. It's still too early to draw firm conclusions from the behavior of customers rolling off payment holidays. However, we set out here the evolution of holiday grants and rolloffs through to the 22nd of July. You can see that, as the first wave of holiday grants have started to expire, a significant portion have been rolling off payment holidays. And many of those, these are returning to regular payment schedules as their payments become due. So there was a marked decline during June in net balances still on payment holidays, and this trend is continuing in the first three weeks of July.

Turning now to the performance of individual businesses. We mentioned at Q1 some of the income headwinds BUK is facing; and these are reflected in the Q2 performance, with income down 17%, in line with consensus. Although we saw recovery in spending toward the end of the quarter, as I showed earlier, unsecured balances reduced significantly, with interest-earning card balances down 18% year-on-year. Mortgage balances, on the other hand, were up year-on-year and broadly flat on Q1, with slightly improving pricing. There was a significant increase in business banking lending, with GBP7 billion combined in bounce bank loans and CBILS. Meanwhile, deposit balances continued to grow, resulting in a loan-to-deposit ratio of 92%. Overall, as indicated at Q1, NIM was down materially in the quarter at 248 basis points from 291 for Q1. We still expect the full year NIM to be in the range of 250 to 260 basis points.

Costs in the quarter decreased 4%, as efficiency gains were offset by costs related to the pandemic. And circa GBP25 million of costs were transferred with our partner finance business from Barclays International. Impairment for the quarter was GBP583 million, an increase on the Q1 level of GBP481 million, reflecting the updated COVID scenario that I mentioned earlier. As I noted earlier, arrears rates at 30th of June do not yet reflect the developing economic downturn.

Turning now to Barclays International. The BI businesses delivered an RoTE of 5.6% for the quarter, down year-on-year as the positive jaws from a 3% increase in income and 10% reduction in costs were more than offset by an increase of GBP0.8 billion in impairment. I'll go into more detail on the businesses on the next two slides.

CIB delivered an RoTE of 9.6% in Q2, with another strong performance in Markets more than offset the increased impairment provision. Income was up 19% at GBP3.3 billion, while costs were down 10%, delivering positive jaws of 29%. Markets grew income to GBP2.1 billion, up 49%. The increase was driven by flow trading, as in Q1, with increased client activity, and the trading businesses capturing a good portion of the widened bid-offer spreads as a result of the heightened volatility. This was despite sizable headwinds from hedging counterparty risks, including funding valuation adjustments.

FICC income was up 60% on last year; or up 90%, excluding the net effect of the Tradeweb gains, with a particularly strong performance from flow credit. Equities had a record quarter in terms of sterling income at GBP674 million, up 30%, with particularly strong increases in derivatives and cash equities. Banking increased 5%, reflecting improved performance in DCM and ECM but lower advisory revenues. So overall it was a strong performance by historical standards.

We talked at Q1 about the effect of the corporate lending income of mark-to-market moves on loan hedges. And in Q2, we saw most of the Q1 benefit reverse as market conditions improved, with circa GBP280 million negative in total from mark-to-market and carry costs of the hedges. We also had some positive marks on our leveraged loan commitments totaling circa GBP140 million taken through the income line. Costs reduced 10%, resulting in a cost:income ratio of 51%. Impairment increased to GBP596 million, driven by the effects of the updated COVID scenarios on some single-name charges. RWAs reduced by GBP3 billion in the quarter to GBP198 billion, significantly lower than anticipated. I'll come back to that when I talk about capital progression.

Turning now to Consumer, Cards and Payments. Income in CCP was down 37% year-on-year. This included a GBP101 million writedown on Visa preference shares. Excluding this, income was still down 28% year-on-year, reflecting a significant reduction in U.S. card balances which were down 18% in dollar terms. In addition to affecting balances, lower spend volumes are also a headwind for interchange income in cards and payments income. Although the income environment is expected to remain challenging in H2, recent spend data from June and into July, particularly in the US, have suggested some recovery in income if those trends continue. Costs were down 11%, reflecting both cost efficiencies and lower marketing spend in light of the pandemic. While the arrears rates have not yet responded to the downturn, we have taken an additional impairment provision of GBP0.4 billion as a result of running an updated COVID scenario with a slower economic recovery than forecast at Q1, partly offset by lower balances.

Turning now to Head Office. The Head Office loss before tax was GBP321 million, up significantly year-on-year and quarter-on-quarter. The negative income reflects the main elements I've referenced before, circa GBP30 million of legacy funding costs and residual negative Treasury items, while hedge accounting this quarter generated negative income compared to a positive contribution in Q1. And that is expected to continue in H2. These were partially offset by the Absa final dividend of circa GBP40 million. Q2 also included some mark-to-market losses on legacy investments in the income line and a writedown through the other net expenses. These were each of the order of GBP40 million to GBP50 million. After an unusually low Q1 print costs of GBP109 million, we're above the usual run rate of GBP50 million to GBP60 million due to the inclusion of around half of the community aid program of GBP100 million we announced at Q1.

Moving on to capital. We began the quarter at a CET1 ratio of 13.1% having seen a material increase in RWAs in Q1, and we had guided for a slightly lower ratio at Q2. And further procyclical increases in RWAs were expected to more than offset capital generation. As we flagged in our announcement a couple of weeks ago, the combination of some beneficial regulatory changes and lower RWAs have contributed to a higher-than-expected ratio, ending the quarter at 14.2%. We continue to generate capital, with profits adding 60 basis points of capital, excluding the pre-tax impairment charge. The full impairment charge will have taken 51 basis points off the ratio. And this was partially offset by IFRS 9 transitional relief of 35 basis points, which included the benefit of the rule changes in Q2. We've shown how these new rules work in the callout box, and there's more detail in an appendix slide. The PVA reduction added 10 basis points, which includes the adoption of the rule change in Q2. There were also increments from fair value moves and the pension position.

I'll say more about the way we are looking at our capital flight path in a moment, but first I'll go into detail on the RWA bridge. Here we've broken down the elements of the GBP6.6 billion decrease in RWAs. The procyclicality we had anticipated at Q1 only partially materialized, and we were able to take management actions to mitigate potential increases. We did see some credit RWA inflation from credit quality deterioration, which we estimate at circa GBP5 billion. However, other credit risk movements reduced RWAs by a total of GBP7.6 billion. Over half of the March drawdowns on revolving credit facilities were repaid in Q2, contributing GBP3.7 billion to that credit RWA reduction after an increase of circa GBP7 billion in Q1. Counterparty RWAs reduced by GBP3.1 billion. And in market RWAs, management actions we were able to take resulted in a GBP2.7 billion net reduction in the quarter, a good result given our strong performance in the Markets businesses.

Our plans for running the businesses do currently assume some further procyclical effects materialize in H2, but as we are saying, forecasting the timing of such effects is difficult. Overall, I would expect the RWA flight path to be a headwind to the capital ratio in H2. The other headwind I'd call out is the potential capital effect of the H2 impairment charge to the extent it has an increased element generated by defaulted balances, which should not be eligible for the increased transitional relief that benefited the Q2 ratio. This would limit the capital generation from pre-provision profitability in H2.

Looking at the next slide, at our capital requirement. We've shown here our current capital requirement and how it is reduced to reflect the removal of the counter-cyclical buffer in Q1 and the recent reduction in Pillar 2A. As a result, our MDA has reduced by 130 basis points to 11.2%, so our Q2 ratio of 14.2% represents a 300 basis point buffer. We also expect some further reduction in our MDA hurdle in percentage terms over the stress period through some further reduction in our Pillar 2A requirement.

With regards to headroom, our capital ratio has strengthened over the recent years to put us in a passion to absorb precisely the type of stress we are now experiencing. In this environment, we will manage our capital ratio through this stress period to enable us to support customers while maintaining an appropriate buffer above the MDA. I wouldn't look at the 300 basis points buffer as any sort of benchmark. We expect the buffer that we consider to be appropriate to evolve over time, having regard to the expected flight paths of both our ratio and our capital requirement. In summary, we are comfortable with our capital ratio and would be comfortable for it to reduce in H2, but it's too early to give definitive guidance on the H2 flight path.

Finally, a few words about our liquidity and funding. You can see on this slide some of the key metrics showing we are well positioned to withstand the stresses that are developing and to support our customers.

So to recap. We were profitable in Q2 as well as for the first half overall despite the effects of the COVID pandemic. Although some income headwinds across the consumer businesses are expected to continue into 2021, we do expect a gradual recovery from the Q2 levels. We continue to see the benefits of our diversified business model coming through with strong income growth in the CIB in H1, and our franchise is well positioned for the future. Costs were down year-on-year, resulting in positive jaws for the quarter. The pandemic has increased costs in certain areas but is also changing some of the ways we work, so our continuing focus on cost discipline remains critical to our performance going forwards. We have taken very significant impairment charges in Q1 and Q2. And while the future is hard to forecast, without further deterioration in economic forecasts, we expect to report lower charges for the remaining quarters of the year. Our funding and liquidity remained strong and put us in a good position to support our customers and clients during this difficult period. Though we may face further headwinds in H2, our improved CET1 ratio of 14.2% puts us in a good position to deal with further challenges resulting from the pandemic. However, I won't comment further on the potential future capital distribution at this stage. The Board will decide on future dividend and capital returns policy at the year-end.

Thank you. And we'll now take your questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question on the line comes from Joseph Dickerson of Jefferies. Joseph, your line is now open.

Joseph Dickerson -- Jefferies LLC -- Analyst

Hi, thank you for taking my question. Just the first question is, do you expect any benefit on capital in the second half from the recent changes around the treatment of software intangibles? And then secondly, from a top-down standpoint, everything that you're saying suggests that you have reached an inflection point on margins. It sounds like volumes at the system level are picking up, from what we saw from the BoE data today and your own commentary, and then provisions coming down in the second half. It seems like there is a fair amount of earnings momentum available to you in the second half. Would you agree with that?

Tushar Morzaria -- Group Finance Director

Yeah. Thanks, Joe. All right, let me take both of those questions, and Jes maybe want to touch on the operating environment in the second half as well. In terms of tailwinds to our capital with regards to potential rule changes around software intangibles, to the extent they go through it, it's in the order of somewhere around 20 basis points for us. Let's see if it goes through. If it does, that's what it is, but we'll see how that evolves. In terms of the operating environment into the second half of the year, in many respects, you are right in the sense that we should see some sort of, if you like, mechanical benefits coming through in the second half of the year, particularly in our consumer businesses. For example, if you take net interest income, for both the U.K. bank and indeed CCP, there'll be the mechanical effects of lower deposit rates just coming through in the third and fourth quarter in the U.K. Obviously, just under U.K. rules, we're not able to pass-on lower base rates for a period of time.

So our deposits actually repriced in July onwards, so you get the -- sort of no effect in the second quarter but a full effect in Q3 and Q4. In CCP, for example, we have dropped our deposit rates in the U.S. from about 1.5% to 1%, but that reduction was very much toward the back end of the second quarter, so you'll see the full effect of that come through in Q3 and Q4. And in addition to that, we've noticed some peers that have lowered deposit pricing yet again. And we'll take a look at that. And there's a reasonable chance we may follow suit given how strong our funding position is.

I think the other thing on the consumer businesses that's sort of worth bearing in mind is obviously the decline in income that you saw in the second quarter. That quarter was characterized by both the U.K. and the U.S. being principally in lockdown for the entirety of that quarter, and therefore you've seen continuing declines in spending and balances. As we exited the second quarter, of course, those lockdowns were being reduced, and therefore we've seen spending pick up. In fact, in the U.K. spend levels are down only sort of single-digit percentage points from pre-lockdown levels. And we've seen a material pickup, you've seen in our slides, in the U.S. as well.

Another sort of just a data point to tell you is sort of how quickly spending seems to be recovering. If you look at SMEs that we have in our acquiring business, less than half were actually open during the lockdown. More than 90% are now operating, so -- and this stuff transmits to income relatively quickly. And on the back of that, actually in the U.S., of course, it transmits into income just through your transactor balances both on the card interchange as well as on the U.K. side on the acquiring fees that we earn as well. If spend continues into the third and fourth quarter, as we've seen at the moment, anywhere around these levels, you would expect to see interest-earning balances on the unsecured credit side also begin to recover as well. And that would be helpful both to margins and indeed net interest income.

And the final point, Joe, just on impairments. Yes, we've tried to be conservative where we felt it was appropriate. We'd encourage folks to look at coverage ratios to give you a sense of how much protection we have against a downturn in credit. Of course, these coverage ratios are principally driven by the provisions we have against non-defaulted credits, so these are sort of anticipating losses. And I think, if we don't feel the need to increase those coverage ratios any further, absent significant changes in the macroeconomic outlook, then you would expect our impairment charge to be lower, but that is a difficult thing to forecast with a high degree of certainty just given we're just going into a post sort of lockdown environment in most of those economies. And the next few months will be critical in that, but absent any changes, yes, I expect impairment charges to be quite a bit lower than we had in the first half. I think that's probably all.

Is there anything else you want to add, Jes?

Jes Staley -- Group Chief Executive

No.

Tushar Morzaria -- Group Finance Director

So I think, hopefully, that's helpful, Joe --

Joseph Dickerson -- Jefferies LLC -- Analyst

Yes, that's helpful. I think that you had guided on the kind of roundtable following Q1 for circa -- I think we tallied the GBP5 billion impairment charge for the year. I think the consensus that we all sent around was for around GBP5.7 billion, which looks like a GBP2 billion kind of incremental charge in the second half. Are you still comfortable with that guidance? Or how would you -- I guess, how would you position the current outlook now versus what you saw coming out at the time of Q1?

Tushar Morzaria -- Group Finance Director

Yeah. The way I think about that, Joe, is if you think about the charge we had in the second quarter, the three building blocks of that, if you look at, and if you like, the underlying baseline run rate, absent any changes or updates to economic forecasts, we called out GBP400 million. In addition to that, we had single-name charges of GBP200 million, giving you a total of GBP600 million. That's the kind of run rate that we're experiencing at the moment, absent any changes to macroeconomic forecasts. So if economic sort of forecasts don't change much from here and let alone improve, then obviously the impairment charge ought to be a lot lower. If economic forecasts deteriorate, the thing that's most relevant to us is long-term unemployment. And you see we've increased the levels of long-term unemployment, going into 2021, quite materially, particularly in the U.K. The other thing to bear in mind here, of course, is just what happens when the government support schemes come to their natural end, whether they're the furlough schemes or various other things. We'll just have to see how the economy responds to that, but I think, all things being equal as we see today, those kind of underlying impairment levels running at the moment would be how we looked in Q2 and you can build from there as appropriate.

Joseph Dickerson -- Jefferies LLC -- Analyst

Very helpful. Thank you.

Tushar Morzaria -- Group Finance Director

Okay, thanks Joe. Can we take the next question please, operator?

Operator

The next question comes from Jonathan Pierce of Numis. Jonathan, your line is now open.

Jonathan Richard Kuczynski Pierce -- Numis Securities Limited -- Analyst

Good morning Jes. I've got two questions, please; the first, on impairment; the second, on risk-weighted assets. The first question, on impairment, is it's more qualitative really and it's the same question as Q1. I'm just interested in how your thoughts have developed since then on how these models are going to work. So I guess the general expectation is the genuine impairments will pick up into the back end of this year and next year, but how do you think the models will react to that? The forward-looking provisions you've taken, so far, are you expecting those to start releasing fairly quickly as we actually get the pickup in stage 3? Or is it going to be this period of almost double counts where the reserves remain elevated but the stage 3 charges pick up sharply? So I'm interested in how your thoughts have developed on the working with the models into higher stage 3 charges.

The second question, on risk-weighted assets. I wonder if we can just press you a bit more on where we may go in the second half because in Q2 there was obviously a 2% fall in risk-weighted assets, but there was lots of big moving parts contributing to that. So maybe you can give us a feel for your thoughts on the book side and the credit portfolio that fell GBP8 billion in the quarter. But I guess the RCFs, sort of the movements, level out. Credit card balances may level out, so perhaps those are flat in the second half. Counterparty credit risk, that was down, I think, GBP4 billion in the second quarter. Should we assume that levels out as well so that the second half movement in risk-weighted assets is really all about procyclicality? And maybe give us a feel as to where we could end the year in risk-weighted asset terms.

Tushar Morzaria -- Group Finance Director

Okay, yeah. Thanks, Jonathan. Why don't I take a crack at both of them? With impairments, yes, this is -- it's a really good question in terms of how the models behave. I think what we'll see is -- the way I think about it is the book-up that we've taken, if you like, the anticipated expected loss over the cycle of GBP2.4 billion. If our models are -- I guess two sort of things you've got to believe. One, our models are perfect at forecasting. No models have gone through this particular sort of unusual scenario, so you have to sort of put a bit of a caveat there. And secondly, that we've forecast the economy perfectly as well. We may be too conservative. We may not be conservative, not again. We'll find out, but on the assumption we've got the call on the future economy right and our models indeed are perfect, in principle we've already taken the loss associated with future expected losses. However, I think your question is a good one because the timing of that will be important.

So typically what will happen is you will have some credits that go all the way through to default and we would write them off ultimately. And some credits won't go through to default and will sort of keel back into lower stages. I think what will typically happen is, the defaults, we would be sort of conservative and maybe recognize them sooner -- well, you recognize them and see if they default, but I suspect they will happen sort of earlier on in that cycle. And we're probably going to be conservative in curing, if you like, those undefaulted credits sort of back into lower stages. So I think the net P&L charge, if we are right, is going to be around that sort of level, but you may see a sort of a mismatch in terms of timing, with defaults happening at slightly earlier than cures. It remains to be seen, of course. You've got government support measures going on here, so that might delay, if you like, those credits that were going to default till much later. And maybe that gives time for good credits to keel back. So it's a little bit uncertain, but hopefully, that gives you a sense of at least how we think about it.

RWAs and sort of guidance prospectively on that. Again I'm always a bit nervous to say this now after the first quarter. It just shows how quickly can -- things can change, but things feel very different now to when they did at the back end of April, when there was a quite a meaningful degree of procyclicality and draws on revolving credit facilities and economies going into lockdown, etc. Economies have sort of -- or asset markets, if you like, have sort of calmed down a bit. You've seen very strong capital markets activity, which is a good representation of that. And we've continued to see, for example, RCF draws reverse even since the end of the second quarter. So that trend has somewhat continued. I do expect that the economy will be -- or it will be difficult to forecast the economy over the next sort of short to medium term. You have got the difficulty knowing exactly how governments and economies will respond to if there is another wave of infections. I don't have the crystal ball on that, but that's a level of uncertainty.

We've got elections in the U.S. We've got geopolitical stuff going on, so there may be some choppiness in markets. And if there is some choppiness in markets, then there may be some procyclicality that comes through. And we'd sort of be fine with that with a jumping-off level of 14.2%. If we do get that procyclicality and capital goes back a bit, I think we'd be quite comfortable with that. Absent any sort of choppiness in markets and if it's more of a normal year, then you've seen that we should be continue to, hopefully, be profitable; and that will be reflected somewhat in our capital ratio as well. The other final thing I'll just say, Jonathan, is -- which I know you're aware of, is our MDA level may move as well. It's now a variable actually on a positive light because it's a sort of a fixed-quantum Pillar 2A inside our sort of capital stack. It does mean it gets reset as a percentage of RWAs, so it may go up or may go down, depending on where our RWAs are. And of course, you've got the reevaluation of Pillar 2A at the back end of the year, so that will come through as well. But hopefully, that will help, Jonathan.

Jonathan Richard Kuczynski Pierce -- Numis Securities Limited -- Analyst

Yeah, that's really helpful, but can I -- because it is extremely difficult from the outside to model RWAs, as I'm sure it is within the bank itself, but would it be as good a guess as any at this stage just to bolt on another couple of quarters of maybe GBP5 billion procyclicality to leave with year-end at around 330 [Phonetic]? I mean accepting it could be miles away from that, but is that as good a guess as any?

Tushar Morzaria -- Group Finance Director

Yes, look, it's tough, Jonathan. I -- the best I'd say is, if markets are choppy, the models -- the whole framework is designed to be procyclical, so we will respond to that. If markets aren't choppy, then you've probably got sort of previous quarters that you can refer to as how we sort of normally fare in the second half of the year. I think, for me to give a number out -- it's very difficult to forecast given I don't have a crystal ball on how choppy or not markets may be.

Jonathan Richard Kuczynski Pierce -- Numis Securities Limited -- Analyst

Yes, understood. All right, thanks a lot.

Tushar Morzaria -- Group Finance Director

Thanks, Jonathan. Could we have the next question please, operator?

Operator

The next question is from Andrew Coombs of Citigroup. Please go ahead Andrew.

Andrew Philip Coombs -- Citigroup Inc. -- Analyst

Good morning. If I could ask a couple of follow-ups, please, relating to slide seven. The first question is on the weekly spend data that you provide. UK that comes back to normal. The US is still lagging, down 25% year-on-year. Interested to see if you are seeing divergence between the Northern and Southern states within that; and if you can elaborate as to how Barclays US credit card splits out regionally, as obviously the consumer card spend will drive the balances and the revenues from here. And the second question, I guess, kind of relates to the right-hand side chart on slide seven looking at the digital versus branch engagement. The branch engagement is starting to come back, but it's still running 40% below where it was and it may never fully recover, so at what point do you take another look at the branch footprint? When do you review that as a potential further cost-save opportunity?

Tushar Morzaria -- Group Finance Director

So I'll get Jes to talk about the sort of digital branch footprint. And why don't I talk about some of the US -- sorry, UK, US sort of spend trends that you're seeing? First thing I would say is that the graph here -- and I'm not sure we put it in the caption, Andy, so I apologize if we didn't, but the UK is a measure of debit and credit spend, whereas the US, we've only measured credit here. Now in the UK what we have seen is a pickup in debit spend. So our spending has improved. It's been more skewed toward debit cards, so that's probably why you're seeing a difference in those two graphs, but coming back to your question on the U.S. and the sort of differences by state, a few comments from us; one is obviously, as you know, in our business we are probably overweight in sort of the airlines and travel retailers. We've been watching whether the spend on our cards, relative to industry spend levels, is any different. And actually it's been remarkably consistent. We are slightly lower in travel spend itself, so to the extent people are well booking in the second quarter sort of flights and things like that, because it's slightly more of a larger-spend category but only slightly more, relatively to the industry, for us. We did see that, but on the flip side, on other types of spend we were bang in-line or sometimes slightly better than the industry. So that's very positive.

In terms of by state, individual states. The large economies, things like California, Texas, the Tri-state area, are also important to us in our cards. We're not very, if you like, sort of clustered by state. It's relatively representative. It's more clustered by partner rather than by state. And if we look at our data now, we're not like sort of a nationwide sort of open-card-type business. It's tied to the retailers, so we don't get a great sort of, if you like, index view of the US in the same way we do it in the UK, but on our spend at least, we're not seeing any discernible differences between, if you like, those states that are having higher infection rates and talk of maybe some sort of restrictions coming in, for example, like Texas, versus other states which are probably not experiencing those level of infection rates. So at the moment, it feels quite balanced from our perspective. And card spending is improving. You've seen it sort of down almost 50% and then recovered quite sharply and looks like it's got some momentum still going into the third quarter. And we'll obviously see how economies perform further into the third quarter. Jes, do you want to talk more about sort of use of the branches and digital?

Jes Staley -- Group Chief Executive

Yeah. So a couple of trends, I think, coming out of the pandemic. For sure, the use of digital networks from our consumers and small businesses across the U.K. has been increasing. And the use, for instance, of cash has been probably the spending item that has most contracted during the pandemic. And while in the short term that clearly impacts our transactional volume, particularly in the branches, in the long term, the more we can get consumers migrating to our digital offering and using mobile banking app and online to manage their transaction volumes, the better for us. That is a higher-margin way to engage with our consumer. Vis-a-vis the branches, we're running some 800 branches now. We've been slowly decreasing our branch footprint over the last couple of years. The branches were very important during this pandemic, though.

You have a lot of customers and small businesses that are under stress, that are concerned about their financial future. And having the ability to go in and to talk to someone physically in a branch is very important for the well-being of our consumers, and we see it in the engagement scores we have with our consumers. I think the impression that Barclays has remained open for business through its branches has -- and has been providing support to our -- to the communities where we live, there clearly is value there.

The other thing that we did as response to the pandemic, our -- the call volumes overall of customers with issues, with concerns, at some point in time, were up 4 times to 5 times what they were this time last year. In order to give relief to our call centers, we actually began to retrain a lot of people in our branches so that, as of now, we are fielding about 200,000 incoming consumer calls every week with our personnel that are resident in the branches. So rather than just being there waiting for someone to walk in the door, we're actually repositioning the branches to do much more than that, take incoming calls, make outcoming calls, to keep that engagement with our consumers in the time of this crisis as high as we can. In the longer term, as finance increasingly digitizes, I think we will always be evaluating our branch footprint. And I would imagine the trend that we've seen over the last couple of years will continue.

Tushar Morzaria -- Group Finance Director

Thanks for the question, Andy.

Andrew Philip Coombs -- Citigroup Inc. -- Analyst

Thank you.

Tushar Morzaria -- Group Finance Director

Thank you. Could we have the next question please, operator?

Operator

We have a question from Chris Cant from Autonomous. Chris, please go ahead.

Christopher Cant -- Autonomous Research LLP -- Analyst

Hi good morning. Thank you for taking my questions. One on costs and then a follow on RWAs, please. The cost:income ratio across the U.K. and CC&P, I know you've shut some stuff between the divisions, but if I just merge them together to ignore that, was 67% in the second quarter after adjusting for the Visa preference share impact. I understand that you expect some top line recovery there, but if I look at 1H, which obviously includes the first quarter when you didn't have the impacts of the rate cuts in and COVID wasn't in full flow, it will be 62% across those two divisions, again adjusted for Visa. You've still got your target of less than 60% for the group over time, including Head Office which is a drag and CIB which would normally be above that level, so what do you expect the cost:income ratio for your retail-facing businesses to be if you think about the U.K. CC&P in the round? What do you expect the cost:income ratio to be next year and looking into 2022?

And on a related point, the cost:income ratio for the CIB of 49% looks unsustainably low. And it looks low versus what the CIB divisions at other banks have printed. Could you comment on your comp accrual policy, please? What is going on there? Because it looks like you're not really reflecting the very strong performance in the bonus accruals. And I'm just not sure how your year-end conversations with desk heads will go later in the year given that you're also flagging the strongest-ever capital ratios. Should we be worried about a 4Q comp catch-up again?

And just one quick follow-up on RWAs, please, on Jonathan's question. I understand the reluctance to guide, but it does feel like this is a bit of a random number generator from the outside. First, do you have any more model change impacts in your back pocket to come through in the second half? And what's the quantum, please? Presumably you do have visibility on management actions. And you said to look at prior-period movements, Tushar. Last year, we saw a GBP14 billion reduction in the CIB in the fourth quarter. Are you suggesting we might see the same this year, absent a big spike in volatility? Thank you.

Jes Staley -- Group Chief Executive

Thanks. Maybe I'll make an opening comment then let Tushar answer the rest of your questions. One, we stand by our target of a 60% cost:income ratio for the banks over time. In the first half, we delivered 57%. So those are the numbers. Obviously, in an environment like this when spend just literally fell off a table on our two principal consumer businesses, the UK and US, you're going to have a move in your cost:income ratio. And also remember we felt that it was very important that this bank stay open for business and stay engaged with our small business and consumer clients and maintain the employment head counts for us to do that. We also publicly came out and said that we were going to cancel any redundancy moves in our consumer businesses until we get through the end of September. During a moment of crisis like this, it just didn't seem appropriate to us that we start laying off a lot of people.

So I don't think the current cost to income ratio in our consumers business at all are reflective of what it will be in a normal state. And they have been comfortably below 60% in the past; and they, I think, feel -- comfortably get below 54% [Phonetic]. In terms of the CIB, that cost to income ratio, obviously very, very strong in the first half of the year. I would expect that to go up as the market progress. So you essentially have the pandemic creating a distortion on one level in BUK and then creating a distortion to a certain extent on the level on the CIB to the positive. And our anticipation is, in the third and fourth quarter and next year, you'll start to normalize those cost:income ratios. And our target remains the same.

In terms of accrual for compensation, again the ultimate decision around compensation will be made at the end of the year and beginning of next year. We are very aware that we are in an industry with competitors. And we have to recognize what the industry is doing and we want to pair -- compensate people fairly, but also we have a very uncertain economic environment right now and we need to be mindful of that. We are accruing. And I think I'm not worried about being able to keep the very talented people that help us in the wholesale side of our business.

Tushar Morzaria -- Group Finance Director

Yeah. And just to round that off, Chris, I think the other thing I'll just -- I know probably those that have spent a long time looking at our numbers are aware of, but as a more broader comment: Our costs have been declining in absolute terms for a number of years now irregardless of size, shape and environment that we're operating in. So cost discipline is an important thing for this management team and perhaps even more so given some of the uncertainties we have on the top line.

Your question on RWA. As I said, in terms of are there any sort of -- I think your question was are there -- have we got any sort of model changes or something like that in the back pocket. Nothing I would call out. I mean there's a rule change that may or may not happen on software intangibles. There's SME factors that we didn't put through. I mean these are relatively small. I mean I wouldn't call them out as sort of big drivers of our capital ratio. I think really what will be the thing, as we look at it now sort of third or so week into July, will be just whether volatility in markets sort of goes back to anything like they were sort of in the March, April period that will transmit some pro-cyclicality. If that does, RWAs will inflate. And we're OK with our capital ratio going back up there. If it doesn't, then it may be sort of more what you're used to. In terms of the fourth quarter, it does tend to be it's just the way the -- because you've got Christmas and New Year right at the back end, the trading book settlement, balances, etc just tend to be very low at that point in the year. So you do get a sort of an additional, if you like, tailwind if that remains the case this year into the fourth quarter, which I think you've seen in most years now. But not much more I'd give other than that, Chris.

Christopher Cant -- Autonomous Research LLP -- Analyst

Thanks very much guys.

Tushar Morzaria -- Group Finance Director

Yeah, thanks for your question Chris. Can we have the next question please?

Operator

Our next question comes from Alvaro Serrano with Morgan Stanley. Please go ahead.

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Hi, can you hear me right?

Jes Staley -- Group Chief Executive

There some noise --

Tushar Morzaria -- Group Finance Director

There is kind of noise.

Jes Staley -- Group Chief Executive

We [Indecipherable], Alvaro --

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Is this better?

Jes Staley -- Group Chief Executive

Yes.

Tushar Morzaria -- Group Finance Director

Yeah, slightly better, yes. Go ahead.

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Sorry. Most of my questions has been answered, but I had a follow-up call -- follow-up question on provisions. You've seen quite a lot -- I mean you've done obviously of -- good effort topping up in the reserve build on credit cards, but just qualitatively, your balances in credit cards are down 18%, I think, in the U.K. and certainly more than double digit in the U.S. From a qualitative point of view, can you give us some impression how that derisks your book? What kind of clients are paying down the balances? I don't know if you have any color on the rating of those clients. Is it good clients that are paying it down, or is it across the board? Is it high balance, or small balance? Just something that can give us a qualitative impression of is that really derisking the book or the riskier clients are still there. Obviously, payment holidays have almost released 0, but just qualitative on the balance sheet.

And related to that, in -- obviously, in Q1, you had a big oil sort of reserve. I think it was GBP300 million. Oil price is now much better. And versus your Q1 in your wholesale exposure, what areas of the portfolio are you more concerned about? Would you say retail is now the major concern? And there how do you see reserve building up in the wholesale in the second half and not just in the second half but medium term, again from a qualitive point of view? Thanks.

Tushar Morzaria -- Group Finance Director

Yes, thanks, Alvaro. Why don't I have -- take both of them? In terms of the balance reductions, I don't want to characterize it as a virtual slice. We didn't see a particular skew toward more riskier or less riskier credits both in the US and the UK. I think the reduction in balances was as much driven by just people spending less, and that's finding its way into lower balances, rather than those that afford to just paying off their cards and those that couldn't or leaving their balances running. We didn't really see that at all. What we did see at a very marginal level was on payment holidays, those that are, if you like, more riskier credits having a higher propensity to take payment holidays, but looking at the numbers now, I'd say that's sort of behind us. And these are sort of in the -- back in the books, if you like, rather than in the sort of a special payment holiday category, as you can see in our disclosures. For example, you'll see our FICO scores in the U.S., broadly speaking, what they were sort of before the pandemic.

So we haven't really deteriorated there either. In terms of -- the other thing I would say, just in terms of just asking everybody to take a look at coverage ratios because provisioning is something that is difficult given that we're sort of making sort of quite long-range estimates based on uncertainty around the economics, uncertainty around government support schemes, customer behaviors or whatever. And what we've tried to do is to be as prudent as is appropriate and then -- and have what I'd consider strong coverage ratios on some of our more riskiest parts of the book. So on the retail side, U.K. cards were at 16% provision rates, and U.S. cards at 14%. I mean these are pretty high by any historical measures for those of you that will have this data. The last financial crisis, our U.K. cards business have NPLs, cumulative NPLs, of 6.9%. So we feel appropriately provided given the credit profile of the book there.

Your other question, on wholesale, the areas we're most focused on. We've called out on a slide it's about GBP20 billion of exposure. And it's in the sectors that you would expect, transportation, retail, hospitality, etc. We're 4% covered there. Now you've got to remember most of that, again, is non-defaulted, so these are sort of book-up type provisions. We do, do quite a bit of hedging there. We're 25% synthetically hedged across those sectors. We obviously have collateral levels. Covenant triggers were inside as to the company. And these are much more of a sort of, if you like, bottoms-up, name-by-name assessment of what's the right provision level. So you'll have the numbers there in the slide, but we think we're well provided and relatively modest in terms of exposure to us. So hopefully, that helps you with the qualitative commentary.

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Thanks.

Tushar Morzaria -- Group Finance Director

Thanks, Alvaro. Can we have the next question please, operator.

Operator

The next question on the line comes from Rohith Chandra-Rajan of Bank of America. Please go ahead.

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Hi, good morning. It is Rohith.

Jes Staley -- Group Chief Executive

Hi, Rohit.

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Just to follow up actually on Alvaro's question on just in terms of sort of behavioral activities that might give us some indication of credit quality going forward. I think the comments on the cards book and the payment holidays were helpful. Are you able to expand that at all in terms of, I guess, the corporate business? You referred earlier to what your sort of acquiring business is telling you about SMEs open for business. Is much there on activity levels or type of activities for SMEs? And then presumably, on the large corporates, the fact like it's primary -- capital markets have been opened, presumably, is helpful in those large corporates being able to refinance. So that was the first one, just in terms of any lead indicators on credit quality. And then the second one was just the BUK NIM. So the guidance reiterated for the 250 to 260 NIM for the year as a whole. It looks like a spread of 230 to 250 in the second half. Just wondering what the uncertainties are that drive that sort of 20 basis point range in that margin for the second half, please.

Jes Staley -- Group Chief Executive

Maybe I can start, give some color on the first question. And Tushar will pick up on the second one. And on the consumer side, I think what was a little bit of a surprise to us on receivables was -- I think, historically, going into an economic downturn, you see consumers and small businesses actually increase their reliance on short-term credit in order to maintain a lifestyle or to keep a business functioning. And then as you come out of recession, they more normalized. In this event, well, clearly what's driving consumer and small business behavior was fear. And so people who have good credit quality and even those businesses that stayed opened, use of short-term credit declined. And they wanted to get their balance sheets in shape, less worried about their own personal income statement. And you also see that in this -- in the payment holidays you see this very interesting move where we've done hundreds of thousands of payment holidays. In the mortgage payment holiday portfolio, we're actually seeing a slight uptick in requests for extensions of payment holidays as the holiday periods come to an end. In the cards side, as we showed, people are not asking to extend or roll their payment holidays. And so the consumer is acting rationally in terms of, OK, I will roll my debt which has got a very low interest rate number to it like a mortgage, but I'm not going to continue with a payment holiday on something that's got an interest rate in the high teens.

So they're acting rationally and I think it's resulting in a book which is maintaining its overall credit quality, and we'll expect the same to come back as we see spend numbers come back now. And for sure -- so then on the corporates and the SME side, what we're seeing in merchant acquiring, one, is a pretty dramatic recovery in spend. And so the -- at the trough of this crisis, spend was off anywhere 30% to 40%. You take away cash spend. And spend numbers are almost getting back to where they were a year ago, this time, which is quite a reversal. And that's very encouraging in terms of what we see for SMEs. And then on the SMEs and to a certain extent the corporates as well, two phenomena -- or two things are having a marked impact on our credit risk to SMEs and corporate, and those are the government programs. We put GBP21 billion into 0.25 million small businesses and large corporations that have government programs provide them liquidity and funding at extremely attractive rates. We've done close to GBP11 billion of commercial paper issuance in the U.K. through us to Treasury. And that's been a -- that's a lot more attractive funding than going to a bank revolving line of credit.

So both corporates and the SMEs have been actively losing -- using government support mechanisms for credit, and that clearly had an impact on the credit profile of Barclays. Then as you said, following an unprecedented injection of liquidity into the capital markets as well as central banks around the world using their balancing -- or their balance sheets to actually buy credits in the capital markets, those markets reopened with an extraordinary amount of volume. And as we mentioned this morning, we participated as a manager in $0.75 trillion of debt issuance around the world, most all of it in the second quarter. That's $3 trillion [Phonetic] of funding for corporates that is not going to find its way back into a request for our balance sheets. So on the one hand, we are open for business. We believe it's an obligation of this bank to keep our balances open and to have those facilities available to our customers. Between the government programs and the robustness of the capital markets, quite frankly, the demand is out there.

Tushar Morzaria -- Group Finance Director

Yeah. And your question on NIM, Rohith. I mean that's the trickiest thing to gauge there, of course, is balances and just how quickly recover. And it's quite early on in sort of post-lockdown environment and quarantines and what else, but they are -- I think we've seen a plateauing. We're seeing -- or balances, that is. We've seen a fairly decent recovery in spend levels. I think, if those spend levels stay anywhere where they are at the moment, let alone continue to recover, you ought to see balances sort of come after, growing shortly thereafter. But there is some uncertainty there. It's we don't have much to model this stuff off and it's only a small number of weeks post lockdown, and that's why there's a sort of a broad-ish range.

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Okay, so it's really about loan mix in terms of the UK NIM uncertainty. So obviously you -- I guess you have -- so you have a clear understanding of what the deposit impact is, but it's the asset side of the balance sheet which is the uncertainty.

Jes Staley -- Group Chief Executive

Right.

Tushar Morzaria -- Group Finance Director

Yeah. And you'll probably see mortgages continue to grow and -- but if -- the unsecured card balances, how quickly they come back is a little bit harder to forecast. It's good signs, but we need to see that momentum continue.

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Okay, thank you very clear on both. Thank you.

Tushar Morzaria -- Group Finance Director

Okay, can we have the next question please, operator.

Operator

Our next question comes from Guy Stebbings, Exane BNP Paribas. Please go ahead, Guy.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Good morning. Thanks for taking my questions. First, actually just a quick follow-up on BUK; and then a question on CC&P. I just wanted to check on the Barclays Partner Finance move, whether that was then captured in the Barclaycard consumer line. If that's the case, balance will be in about GBP9.5 billion, ex that change, from GBP13.6 billion at the first quarter. So underlying decline in balances are roughly sort of double the industry level. So is there anything you'd call out there? Which obviously plays into the prior question on the NIM outlook.

And then on CC&P revenues. You've talked to a gradual recovery and some of the better spend trends in US more recently, so I'm just trying to gauge what you expect a gradual recovery will look like and how it will be achieved. I mean clearly, sat here today having delivered just GBP1.7 billion, or just over GBP1.8 billion in the first half if we add back the Visa headwind, and the balance is down to GBP33 billion, we need to see quite a strong recovery to get back to market expectations for the GBP3.9 billion this year and north of GBP4 billion thereafter. So should we assume a fundamentally different outlook to prior market expectations given the environment? Or if not, what sort of revenue margin expansion and balanced growth are you targeting?

Tushar Morzaria -- Group Finance Director

Yes, thanks, Guy. Let me do the second one first, and I'll come back to your first question on BUK. Yeah, we -- there's three things on CCP that I think will be tailwinds into the second half of the year. I've talked about net interest margin on the liability side. I've talked about a sort of 50 basis points margin pickup toward the back end of the quarter on our liability balances. And we may drop deposit rates again, so that is a tailwind quite obviously very different from where we were in Q2. Second thing is payments. The transmission effect on payments is relatively quick. You've got obviously in -- our acquiring business, now that the bulk of those businesses are actually open and you're seeing spend levels particularly in the UK, where our acquiring business is most important, almost back to pre-COVID levels, that quickly transmits back into sort of safe. And in the US, sort of interchange fees are still quite attractive. There's a spend recover in the U.S. which will sort of translate back into fees there pretty fast as well.

And then the harder one to gauge is balances really, particularly on U.S. cards. If spend levels continue, then balances will follow, but there is a delay effect there. And I think that's a little bit dependent on obviously how the economies perform in a post-lockdown sort of period. Do they continue as they are at the moment? And in all intents and purposes, even though there's a lot of concern around the infection rates and whatever, we're not really seeing any tail-off in consumer strength at the moment, at which point we would expect to see balances and card openings increase. So look, I can't give you numbers on that. It's a bit too early in the quarter to start extrapolating, but those are meaningful sort of tailwinds that we'll have from this point on. And we've talked about a sort of a steady recovery. We'll see how strong that is as we go further into the quarter.

Just to answer your first question just to help with the geography. The Barclays Partner Finance business is recorded in the personal banking line. And if you want to sort of just make sure you know we're recording what out, where, then Chris or James behind the scenes can spend a bit of time with you just to point you into the right places into the disclosures that we've got.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay, perfect. I don't know if I could just push you a little bit on the CC&P revenues. I mean, if those three items all do come through and the balance -- so I appreciate it's hard to gauge, but if that was to come through nicely over the course of the second half of the year, are you hopeful we can get back to a GBP1 billion type quarterly run rate revenue?

Tushar Morzaria -- Group Finance Director

Yes. Look, I know you're keen on sort of trying to get me to get to a range. And I'm reluctant to do that only because it's quite a fair old extrapolation. All I would say is I'd be disappointed if there isn't a pretty -- a recovery into the third quarter that has momentum into the fourth quarter and beyond. It's a momentum business, so once things start moving in the right direction, there'll be sort of follow-through. That -- how strong that follow-through is -- times look pretty OK at the moment. Spend levels are improving. Margin is improving on the liability side. If that all continues, then I think we're cautiously optimistic, but it's early days in a post-lockdown economy to be -- to give you too much precise guidance.

Guy Stebbings -- Exane BNP Paribas -- Analyst

Okay, great. Thank you.

Tushar Morzaria -- Group Finance Director

Thanks Guy. Can we ask the next question, please, operator.

Operator

The last question we have time for today comes from Edward Firth of KBW. Please go ahead.

Edward Hugo Anson Firth -- Keefe, Bruyette & Woods Limited -- Analyst

Yes, good morning everybody.

Tushar Morzaria -- Group Finance Director

Good morning.

Edward Hugo Anson Firth -- Keefe, Bruyette & Woods Limited -- Analyst

Hi. Can I just ask you -- or bring you back to costs? Because if I look at your -- I think it was your second slide, Tushar. You're talking about income up 8% and costs down 4%. And I guess I've followed around banks for a while. I mean those numbers are almost unbelievable, and I guess, looking at the share price reaction today, I'm not alone in that concern, so -- and if I look into the second half consensus, you're looking -- I mean consensus looks -- seems to be looking at revenue falling something like GBP2 billion and yet costs actually going up a little bit. So it almost looks like there's a complete disconnect between what's happening to your costs and what's happening to your revenue, so could you help me a bit with that? And in particular, I'm not asking for a number, but I mean if the revenue environment stays very benign, should we expect costs at the current level? Should they grow quite substantially from here? And also, if we see a big falloff in investment banking revenues, have you got flexibility? Could that minus 4% be minus 6% or minus 8% at the full year? So I mean, what are the sort of levers you can pull, and what sort of comfort can you give us on that?

Tushar Morzaria -- Group Finance Director

Yes, why don't I start? And Jes may want to add a few comments. Look, I think, first of all, the backdrop I'd start with is just if you folks just look at the trend over the last two or three years. We have been reducing our cost base in absolute terms regardless of size, shape of the company and the economy we're operating in. So cost discipline is very important to us, and that's something that's a constant focus of this management team. And well, I'd like to think that we've got a track record of every year reducing our costs year-on-year. This year, obviously much more complicated because, as Jes sort of mentioned earlier on in the call, when we went into lockdown, the plans that we had in place, we put on ice. So for example, we were very public that we wouldn't lay anybody off until at least September.

People that we did lay off actually before we went into lockdown, we actually gave them, even though we had -- this is completely discretionary on our part but just to try and do the right thing for people, gave them the same terms as those that were on government furlough schemes to pay for by ourselves. So now that comes with a cost. Obviously attrition levels fall quite meaningfully. Job market sort of dries up. So we've got a higher head count on both levels, lower attrition and sort of staff-reduction programs that we didn't implement and then, of course, just the costs of keeping businesses open in -- with social distancing requirements and deep cleaning and all the various other things that go alongside that. So it is an unusual cost shape, but I think, as we go into, if you like, a normalized operating environment, whatever that is in a post-environment, we will absolutely reexamine, examine all the new ways of working that we've learned. I mean one of the things that I think is absolutely eye opening in lockdown, there are some things we've been able to do as an industry and certainly as a bank that we thought unachievable previously. I'll give you an example: some of the largest capital markets transactions that were done quite early on in lockdown.

You have the issuer working from home. You have the investors working from home. You have the research analysts working from home. You have the syndicates. You have the traders, the salespeople. I mean even the settlements engine, the folks sort of driving even the mechanics of settling these trades. Everybody at home, and yet we were, as Jes sort of mentioned, something like, just for ourselves, $0.75 trillion of capital markets issuance raised. None of us would have thought that would have been possible on the 1st of March. So that's a really interesting new way of working that we will examine and understand and to take the benefits from, but that's probably more sort of looking into next year and beyond in terms of opportunities. For this year, it's just a slightly unusual year that we had good momentum in the back end of 2019 that's come through in the first half, but obviously we put on ice a lot of the plans that we would have otherwise had. That will be a slight headwind going into second half, but cost discipline is super important. Jaws are very important to us. Cost income levels are very important to us. And I mean we're just focused on --

Jes, anything else you want to say?

Jes Staley -- Group Chief Executive

No. Again putting in rank order the sort of -- our priorities we focused on in this unprecedented medical crisis leading to pretty much an unprecedented economic crisis leading to an unprecedented government and central bank response. First and foremost is the financial integrity of the bank, so tracking the liquidity profile of the bank; tracking the capital level of the bank; and making sure, if at all possible, to remain profitable each quarter, which -- and we, I think, accomplished all three of those in the first half of the year: record level of capital, record level of liquidity and profitable through each quarter. And in that profitability story there's a 27% improvement in pre-provision earnings year-over-year.

Now we take a hard look at that and we're encouraged by the sort of move forward led by the CIB, but then the next thing you look at is what can we do to give back to our communities. And we have 85,000 employees. We can move that employment number up and down as we -- when we got here 4.5 years ago, we were about 120,000-some-odd employees. So we will make the moves when we need to make it. We used to have, when we got here, 1,400 branches. Now we're running 800 branches. So we can manage our costs, but we're going to do it with a focus on the challenges that particularly the U.K. is going through. And we're going to be there with payment holidays and overdraft fee waivers and bank fee waivers and keeping people employed.

So you're going to have, for sure, distortion in an environment like this, which will settle down, I think, as the economy starts to settle down. And we hope to see that in the third and fourth quarter. So you have big positive jaw movement led very much by a Markets business which hit all sorts of records, but I -- we have our pulse on what's going on in the bank. We're serving the communities and the consumers that we need to. We're partnering with our regulators and the central bank and governments. I think the bank is in a good place. And so I guess that would be my comment.

Edward Hugo Anson Firth -- Keefe, Bruyette & Woods Limited -- Analyst

So can I just come back quickly on that? And I know I'm running out of time, but a lot of those things you highlighted from the first half are things that I would have thought have increased your costs, not decrease them. You were stopping redundancy, relocating people, etc. And so it's still a struggle to me to see why people seem to be expecting a big falloff in revenue in the second half but actually costs to be actually up slightly. And I'm just trying to think, is that a sensible type of forecast? Is that -- or would you feel that that's the right way of looking at it, or what?

Tushar Morzaria -- Group Finance Director

Yeah. Ed, the only thing I will say is we had -- we were on a sort of declining cost trajectory as we came into 2020. You've seen that momentum in the first half. That momentum will be frozen a little bit by delivering actions that Jes called out that we've done. So we don't have the same momentum going into the second half. That's just the way it is, for all the good reasons we talked about, but there are new ways of working and new ways of doing things that none of us thought were that possible. That's a really interesting opportunity set that we'll start examining and see what that means, but it's probably more a 2021 conversation. Income-wise, look, we'll see where the CIB goes, but you've talked about us expecting the consumer businesses to start recovering, so there'll be some different trends in the different businesses --

Jes Staley -- Group Chief Executive

Just to add those -- the technology spend of moving 60,000 people to work from their kitchen tables, where they have -- where we have compliance, where we have controls, where we have insights into what our systems are, that's a first around the world. That's a lot of money, to set all that up and track it. And we gave pretty much carte blanche to our technology people to allow us to work as remotely as we have. Now the flip side of that, there aren't a whole lot of people jumping on airplanes right now, so our travel and leisure expense absolutely collapsed in the first half of the year. What's incumbent upon Tushar and myself is, as the economy begins to normalize, we look at the spend and technology and ops. And as we bring people back into offices, does that decrease? And do we think about rationalizing the real estate footprint? And on the flip side, we'll probably start to let people to go out and visit a client every now and then. So I think -- and we will keep our hand on those cost levers to ensure the financial integrity of the bank, the profitability of the bank and the capital strength of the bank.

Edward Hugo Anson Firth -- Keefe, Bruyette & Woods Limited -- Analyst

Great, Thanks so much.

Tushar Morzaria -- Group Finance Director

Thanks, Ed. We took -- gone past our allotted time, so sorry to keep you on a bit longer. But hopefully, we'll see you virtually in some way or another over the next few days and weeks. With that, we'll close the meeting here. Thank you very much.

Jes Staley -- Group Chief Executive

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 90 minutes

Call participants:

Jes Staley -- Group Chief Executive

Tushar Morzaria -- Group Finance Director

Joseph Dickerson -- Jefferies LLC -- Analyst

Jonathan Richard Kuczynski Pierce -- Numis Securities Limited -- Analyst

Andrew Philip Coombs -- Citigroup Inc. -- Analyst

Christopher Cant -- Autonomous Research LLP -- Analyst

Alvaro Serrano Saenz de Tejada -- Morgan Stanley -- Analyst

Rohith Chandra-Rajan -- Bank of America Merrill Lynch -- Analyst

Guy Stebbings -- Exane BNP Paribas -- Analyst

Edward Hugo Anson Firth -- Keefe, Bruyette & Woods Limited -- Analyst

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