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Executives

Christopher Lucas - Chief Financial Officer, Group Finance Director, Group Finance Director - Barclays Bank Plc, Executive Director and Chairman of Disclosure Committee

Benoît de Vitry - Managing Director, Head of Commodities and Emerging Markets and Head of Global Markets - Trading Europe

Antony P. Jenkins - Group Chief Executive Officer, Director, Group Chief Executive Officer of Barclays Bank Plc and Director of Barclays Bank Plc

Analysts

Corinne Cunningham - Autonomous Research LLP

Ivan Zubo - BNP Paribas Global Markets

James Hyde

Lee Street - Morgan Stanley, Research Division

Barclays PLC (BCS) Q4 2012 Fixed Income Call February 13, 2013 10:30 AM ET

Operator

Welcome to the Barclays 2012 Full Year Results Fixed Income Investor Conference Call. During the call, Barclays representatives may make forward-looking statements within the meaning of the U.S. securities laws. By their nature, forward-looking statements involve risk and uncertainty and as a result, Barclays Group's actual results may differ materially from the plans, goals and expectations which they will talk about. The presentation also references such non-IFRS measures, such as key capital and liquidity metrics. Barclays management believes that such non-IFRS measures may provide useful information to the readers of its financial statements but we'd refer you to the reconciliations in the Form 6-K filing of our preliminary results filed yesterday. At the conclusion of the presentation, there will be a period where questions can be asked. [Operator Instructions]

Welcome to the Barclays 2012 Full Year Results Fixed Income Investor Conference Call. I will now hand you over to Chris Lucas, Group Finance Director.

Christopher Lucas

Good afternoon, and thank you for joining our very first fixed income results call. We plan to make this a regular feature, at the full and the half year, so we can address relevant topics for fixed income investors in more detail and provide further insight into our thinking on the key issues at Barclays. I'm here with our Group Treasurer, Benoît de Vitry. I'll make you a brief introduction and then hand over to Benoît. Together, we'll talk for about 15 minutes, then we'll move on to questions where we'll be joined by a number of people, by Paulo Tonucci, who's responsible for funding and liquidity management; Jennifer Moreland, the Managing Director within our Treasury Execution Services Team; and Rupert Fowden, Co-head at Capital and Balance Sheet Management.

As you know, we announced our 2012 financial results yesterday, and Antony Jenkins set out our plans to become the "Go-To" bank. This included the criteria against which we expect to be judged and the specific commitments you can hold us accountable for. Full details can be found on our Investor Relations website.

I'd like to start by briefly summarizing our 2012 results. On an adjusted basis, profits increased to GBP 7 billion. Adjustments to statutory numbers include a GBP 4.6 billion charge on own credits, a provision for PPI of GBP 1.6 billion and GBP 850 million charge for address on interest rates hedges and a gain on BlackRock. As a result, statutory profits were GBP 246 million. Our Core Tier 1 ratio at the end of 2012 was 10.9% on about 2.5 basis. Our total capital ratio was 17.1%. And risk weighted assets was slightly down at GBP 387 billion.

On the basis of adjusted profit, the business is generating capital of GBP 1.6 billion under CRD IV definitions. This represents a 35 to 40 basis point increase in our common equity Tier 1 ratio. We're also starting to see the resolution of regulatory issues and we do not expect anything of the magnitude of PPI to affect us going forward.

You've heard us say before that Barclays' financial strength remains a source of competitive advantage, maintaining this strength is central to how we run the business and you should not expect this focus to change. I'll now hand over to Benoît to talk in more detail about funding, capital, balance sheet and liquidity management.

Benoît de Vitry

Thank you very much, Chris. As this is our first fixed income results call, I would like to start by saying something about how Barclays Treasury has changed over the last 18 months. We have made a number of changes in order to create a single treasury function across the group. Our goal has been to create a function that takes the holistic view of the needs of the group. And that implements cohesive capital balance sheet funding and liquidity plans for the benefit of all our stakeholders. As a consequence of these changes, decisions are made in a tighter, controlled environment where commercial opportunities are identified in partnership with the business. We have a forward-looking approach to managing their impact of regulatory change that allows us to identify pressure points quickly and better mitigate any potential impact. And the results, we are better able to address the fundamental challenges currently facing the banking sector.

Let me discuss each in turn, starting with funding, then capital and balance sheet, and liquidity before commenting on the regulatory environment. During the last 18 months of heightened market volatility, Barclays has been successful in consistently accessing both short-term and long-term funding at highly competitive rates and in all major currencies. We have, at no point, had to stress our key funding or liquidity metrics. We have been strategically reducing our wholesale funding requirements and reducing our reliance on short-term money market funds. And our loan-to-deposit ratio has reduced in 2012 to 110% from 118% last year.

Our approach on funding remains unchanged. Retail and Business Banking, Corporate and Wealth and Investment Management activities continue to be largely funded with customer deposits. The loan-to-deposit ratio of these businesses is 102% -- the loan to deposit and secure funding ratio is 88%. The Investment Bank principally funds itself with the wholesale debt. At the end of 2012, our total wholesale funding, outstanding, excluding repo, was GBP 240 billion. 42% of this funding matures in less than 1 year. We expect this proportion to be broadly stable throughout 2015, albeit on lower outstanding volumes. Of the last 18 months, our proportion of secured funding, relative to unsecured, has increased as we utilized assets for diversity of funding and cost management purposes. Our encumbrance on customer loans and advances is currently 17%. We think that encumbrance levels up to 25% have a benefit for all bondholders in term of funding costs and stability. However, we do not plan to be much above 20 -- 25% by 2015. Excluding the impact of GBP 150 billion liquidity pool, our outstanding wholesale funding has a weighted average maturity of 61 months. We expect this number to reduce slightly over the next 3 years as we rebalance the behavioral duration assets and liabilities. Lower levels of unsecured wholesale financing and a greater emphasis on customer deposits and also secure financing will reduce funding costs annually by about GBP 400 million to GBP 450 million by 2015, that, based on current market conditions. For our other funding needs, we are committed to maintaining a highly diversified funding by products, currency, geography, jurisdictions and investor base in order to maintain our financial stability and efficiencies.

Turning to our funding plans. The bank's funding plans are managed dynamically throughout the year. But with reference to a set of clear principle that determine our approach to issuance. The group has GBP 18 billion of term debt maturing in 2013, and the further GBP 24 billion maturing in 2014. Compared to previous years, our wholesale unsecured funding volumes will reduce, and the mix of funding sources will change over the 2013-2015 period, mainly as a consequence of, one, the continued sell down of legacy assets; and then the continued high grossing customer deposit inflows relative to growth in customer loans and advances. Our approach to funding, however, means that we remain committed to the annual issuance of public benchmark, both fixed secured and unsecured debt to ensure outstanding on-the-runs notes to a level -- to maintain market access and our investor franchises. Our funding plan will remain adaptable and adjust to factors, such as our liquidity risk appetite and deposit growth from the retail, corporate and wealth businesses.

Moving to RWAs. As you can see from this slide, GBP 387 billion of RWAs, as of December 31, 2012, results into a pro forma CRD IV RWA position of GBP 469 billion at January 1, 2013, an GBP 81 billion increase. This is a result of CVA increases, securitization and other impacts, such as IFRS 10. The accelerated rundown of legacy assets between 2013 and 2015, and ongoing RWA optimization initiatives mitigate these increases to leave RWAs broadly flat. This gives us headroom for growth in selected businesses, and/or a buffer to absorb additional regulatory changes or marketable activities.

Barclays has nearly doubled its Core Tier 1 ratio since 2008. Despite stricter application of RWAs for Basel II and Basel 2.5, and other regulatory developments, such as commercial rates is floating and sovereign LGD floors. We have increased Core Tier 1 capital in absolute terms by 75% to over GBP 42 billion. We have total regulatory capital of GBP 66 billion. Barclays has been pricing its products and allocating capital on Basel III basis for some time. While the precise timetable of CRD IV is not yet defined, we were prepared for January 1, 2013, implementation, and for planning purposes we currently assume implementation on July 1, 2013, although we fully expect the actual implementation date to be later.

Even after substantial provisions for complex issues, our Core Tier 1 ratio has stayed broadly constant compared to 2011, largely as a result of GBP 1.8 billion of retained earnings, capital, retained capital and [indiscernible] from earnings. This strong capital generation has been offset in 2012 by movements in our currency transition reserve that had netted against RWAs and pension movements. As shown in the capital bridge, at December 31, 2012, our CET1 ratio was 19 -- was 10.9%. Assuming CRD IV impacts on RWA of about GBP 81 billion, and including around a GBP 400 million of reduction in CET1 as a result of IFRS 10, our position, or CET1 ratio, would have been 10.6% on January 1, 2013.

The more [indiscernible] management of legacy assets and continued RWA optimization, will boost our position, or CET1 ratio by 200 basis points over the 2013 to 2015 period. This effort would be partially offset by CRD IV transitional adjustment to CET 1. We expect our transitional CET1 ratio to be 11.7% by December 2015, well above our 10.5% target. To be clear, this number in this chart does not assume any RWA growth in the businesses or retain earnings for the next 3 years. And therefore, we are confident that we do have sufficient headroom to absorb additional regulatory adjustments and, more importantly, growth businesses are to be considered necessary.

Let's move on to capital structure. Our reported Core Tier 1 ratio of 10.9% at the end of 2012 is 3.9% above the 7% trigger of our recently issued Cocos. Central to our thinking about capital management is the transition of our current capital structure to the one we consider efficient and compliant with new regulatory requirements. We have defined our end-state capital structure to allow a CET1 ratio of a minimum of 10.5%. 1.5% above the CRD IV requirement for 2% G-SIFI bank, and this excluding any contracyclical buffer. As communicated during the investor roadshow for our inaugural contingent capital transactions, we also intend to raise 2% of RWAs in CoCos form with the mix of A [ph] Tier 1 and Tier 2 hosts. While our end-state goals is for 1.5% A [ph] Tier 1 and 50 basis points of Tier 2 legacy Tier 1 positions, and a desire to develop this market further may change the proportions in the short term as we transition to the preferred end space. A viable and scalable market in CoCos is important for Barclays and the banking sectors, more widely, and we intend to continue to play an active part in it. Finally, on the topic of bank capital, recent announcements by the financial policy committee, or FPC, of the Bank of England, have led the FSA to look at a number of items, the calculation of RWAs using advanced models, expected future losses on commercial weighted assets, and conduct issue provisions. Our discussion with them on these topics are already advanced as our previous disclosure on Q3 demonstrates. We continue to remain engaged with the FSA to help them to produce the report in time for their March deadline. It is our hope that the report's finding will move the debate on -- move the debate on the adequate capitalization of the U.K. banks forward. In the same vein, we continue to work with FSA and the Bank of England regarding the Basel committee work on market risk RWAs modeling for theoretical [ph] Portfolios.

Moving on to balance sheet management. We continue to proactively manage the size and the composition of our balance sheet to meet commercial objectives. To enhance our approach, we now manage our balance sheet to average limits, rather than managing long-term targets that allowed for higher volatility. As you can see from the slide, this approach has sharply reduced volatility in the balance sheet during the last quarter. Over time, we are planning to reduce the average -- average leverage ratio as the balance sheet growth, you forecast to be below Tier 1 capital growth. For 2015, the average leverage targets is 19x. Based on our current interpretation of the rules, our CRD IV leverage as of December 31, 2012, was within the 33x negative limits allowing for transitional relief to Tier 1 capital. On an end-state measure of capital, we expect leverage to be within the limit before the end of the transitional period. Further detail on our share default leverage ratios will be provided in our 2012 regulatory disclosures.

Looking at liquidity risk management now. Since 2008, Barclays' liquidity pool has increased -- has increased from less than GBP 50 billion to a peak of GBP 170 billion at the half year 2012. The GBP 170 billion peak reflected voluntary and temporary growth beyond our internal risk framework requirements to reflect our cautious approach in then-volatile markets. We define our liquidity pool by reference to our own liquidity risk appetite framework, which while aligned to the FSA and Basel III prescribed tests, leaves us with liquidity -- liquid assets in excess of regulatory requirements. We estimate that recently announced Basel III changes will benefit our 103% Basel III defined liquidity coverage ratio, or LCR, by 23 basis points -- by 23 percentage points.

In 2013, this allows us to reduce level of liquidity by holding a lower surplus of our internal requirements and still be 100% compliant with the LCR. You can expect to see the liquidity pool reduce in size to approximately GBP 125 billion to GBP 150 billion before adjustments are made for changes in the size of our balance sheet.

We are also changing the composition of the liquidity pool to move some of the cash held at Central Banks towards highly rated government bonds. We will maintain our very conservative approach to liquidity management despite these changes. We only hold very high quality and liquid assets, mostly in select government securities. The details of which can be found in our results announcement. Importantly, we do not hold securities as equities, CDOs, CLOs or CDS positions within the portfolio. And we will continue to manage the portfolio for concentration risks by issuer, currency, asset type and country. This, along the way we manage the size of the buffer, will result in the annual costs falling to GBP 300 million by 2015 from around GBP 600 million currently.

These reductions in the liquidity buffer costs does not take into account the benefits of reduced funding cost mentioned earlier.

Finally, to regulation. As I look forward, one of the biggest challenges we face is the ongoing uncertainty about structural reform. We understand the concerns that this raises within the debt investor community. The industry faces a number of different regulatory pressures, mainly from the U.K., European Union and the U.S. The good news, in my view, is that over the last -- the past 12 months, there has been more commonality between the views of regulators and more clarity in their response, albeit, there is further to go. That said, we still cannot say that regulation is wholly consistent, but it is, at least, more highly correlated. With respect to ringfencing in the U.K., as you know, our intention is to design the ringfence around the minimum required liability cutoffs for individuals and small businesses that will be set in the legislation. We plan to complement those liabilities with assets that will fully satisfy the letter, and more importantly, the spirit of regulatory requirements. The primary concern for U.K. banks to address is where within the group structure the ring fence entity should be located. Our preference is to operate the ringfence entity as a subsidiary of our principal operating entity, Barclays Bank PLC. We are confident that these structures is just as resolvable as any other. However, we are also very confident that if the outcome of this debate on corporate structure requires us to do so, we could operate the ringfence entity alongside Barclays Bank PLC, that without material incremental cost or negative impact on our stakeholders. We will be able to meet our recovery and the resolution requirements in any scenario.

Moving to the U.S. and Section 165 of Dodd-Frank, in particular. We anticipated the direction of the proposed rule and recognize what the U.S. authorities are seeking to achieve. We are currently assessing the potential impacts of the proposed standards. And based on our preliminary assessment, we believe that we will be able to meet the Fed requirements through a range of management actions over time. As a proposed rule, it's still in the comment periods, and in the absence of a final rule, it is premature to comment on what combination of management actions will be taken.

With respect to the legal reports, it's also too early to say what material incremental impact, if any, this could have. It is hard to see, at this time, what it would deliver that the ICB ringfencing and Dodd-Frank's [indiscernible] rule do not. We expect that it will be less relevant for U.K. banks.

Finally, and importantly, we continue to work closely with regulators on our recovery and resolution plans. We made our first formal recovery and resolution plan submissions to the U.K., and the U.S. regulators in May 2012, and have had regular discussions since. Our current processes and our comprehensive liquidity framework will enable us, the regulators and administrators, to manage business liquidity needs in a resolution scenario.

So in conclusion, under Antony's leadership, we have renewed focus on the organization's strength, and how we build long-term stable performance. The financial strength of Barclays, as defined our position in capital, funding and liquidity remains a critical priority for Barclays' management. Our approach to funding remains unchanged. Although our needs are reduced and the mix of funding shifted more toward customer deposits and secured sources, we remain committed to benchmark issuance and meeting the needs of investors.

Our capital position remains strong as we approach the implementation of CRD IV. We have started some transition our capital structures with the issuance of CoCos and remain committed to developing this market. We are reducing the volatility of our balance sheet and planning to continue over time to reduce leverage. Currently, our liquidity buffer is in excess of internal and regulatory requirements, but we are taking steps to reduce its overall size and cost to the business, albeit within a stringent risk framework as the current market environment is more benign. Finally, we remain engaged with regulators in all jurisdictions in which we operate to ensure that we correctly anticipate and adapt to change. We have a high quality business that is capable of generating resilient earnings. Barclays has an established track record of innovating and market-leading benchmark issuance across key markets, and we are committed to maintaining our fair approach to investors.

Thank you for listening. Chris?

Christopher Lucas

Thank you, Benoît. And with that, I would like to open the call to questions. As a reminder, Benoît and I will be joined here by Paolo Tenucci, Jennifer Moreland and Rupert Fowden. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question this afternoon comes from the line of Corinne Cunningham of Autonomous.

Corinne Cunningham - Autonomous Research LLP

Couple of questions, one about the PLAC buffer. And the other one about the core capital so I guess they're both about capital really. The first one, on the PLAC buffer, I have been under the impression originally that it was supposed to be made up of senior debt as well as subordinated debt. But from what we're hearing from other U.K. banks, it seems the pressure is on more to have that made up of specifically subordinated debt. Can I just check on that question what your understanding is, in terms of the composition?

Benoît de Vitry

Yes, I think the starting point is we have currently running a 17.1% capital base. Before we have also the demand to grow the CoCos market in the next few years. For what we do anticipate for the next -- for the foreseeable future is that any maturity or called Tier 2 debt will be replaced by A Tier 1 form or Tier 2 form CoCos. For the foreseeable future for us, we expect that ratio to be maintained. Also, it's too early for us to determine either final shape of the composition of this buffer. It's unclear yet how the billing rules will work. And then we'll make the final decision at the stage. We want to ensure that we make a marked difference between senior debts and the debts included into this buffer and we will make the decision at the time.

Corinne Cunningham - Autonomous Research LLP

Okay. Second question was along similar lines. You keep mentioning the need to issue additional Tier 1. But if you get to the target 10.5% Core Tier 1, and indeed your forecast there was showing, excluding growth in earnings, if you get to 11.7%, why do you need to issue additional Tier 1?

Benoît de Vitry

I think the 10.5% Tier 1 is end-state target, is a fully absorbed Basel III limit. And don't forget understanding of the CRD IV is you have to have -- it's much more efficient for us to have an A Tier 1 -- IV for a number of reasons. Well, you're right, you don't to a issue A Tier 1, you could issue -- you could have community Tier 1 instead. But the couple of articles on the CRD IV [indiscernible] 131 make it more valuable for us to had added Tier 1 CoCos. The first article I mentioned is referring to the 6% minimum range we're going to have. You can use A Tier 1 against that target. And the other article I mentioned is, if you don't A Tier 1 forms, CoCos, if your community [indiscernible] is below 10.5%, you're entering into the restrictions in dividends and payments. For those reasons, it's much more efficient. Also, let's not forget the economic side of the equation. If you follow the pricing of this debt, it should be cheaper than equity for us to have that -- for both on a regulatory front but also on economic front, it makes sense to us to have that issuance. The question is how fast do we do it.

Corinne Cunningham - Autonomous Research LLP

The way that you describe that in terms of your G-SIFI buffer, so it sounds like your -- the way you think it works you is, it's almost as if you need to add your G-SIFI buffer to the capital conservation buffer, so if you start to dip into the 2 of those combined, that's when you think the dividend restrictions would start to take effect, not when you hit the 7%.

Benoît de Vitry

That is correct, that is our current understanding, yes.

Operator

The next question comes from the line of Ivan Zubo of BNP Paribas.

Ivan Zubo - BNP Paribas Global Markets

I just had a question regarding, also on Slide #9, the role of traditional Tier 1 instruments going forward. And in particular, the non-step instruments. We see the structure going from today to where you aspire to get into the future. But I guess, one, I would like to have a better idea how long it will take; and two, especially with regards to the non-step, the Tier 1 instruments, wanted to see if you would also aspire to retire those as soon as possible, i.e. as soon as the [indiscernible] arises or whether it's possible that these instruments could even be considered a Tier 2 in the new regime given that, in the U.K., we do have a resolution regime?

Benoît de Vitry

Our understanding is all this Tier 1 instrument, for most of it, will be grandfathered for 10 years. The non-step of preferred shares could be viewed as a Tier 2, but all the others will be grandfathered and then they will expire, they will expire much [ph] Less for capital purposes.

Operator

The next question comes from the line Ron Perota [ph] of Goldman Sachs.

Unknown Analyst

You kind of alluded to this, but on the timeline of layering in the additional contingent capital securities you were talking about, is there kind of a timeframe of when you think that will happen or is it driven in part by what comes out on the new regulations for Tier 1 securities, et cetera?

Benoît de Vitry

Before -- we have indicated that our issuance requirement for 2013 is for GBP 14 billion. We don’t precise -- we don’t give details which portion is spread -- that are in it. We have GBP 25 billion of Tier 1 and Tier 2 debt, therefore, you should expect that, every year, we have some of them either maturing or could be callable. Therefore, you should expect those would be replaced by new issuance at the time. I don't know if I give you -- respond to your questions.

Unknown Analyst

Okay, So you got -- so you would be looking for, as securities do become callable, those could be opportunities where you could choose to exercise the calls to replace it with a contingent capital security?

Benoît de Vitry

Yes, we don't have an absolute rule to call in any debt we have. We have recognitions of the difference between retail and wholesale banking. We will -- on retail, prefer share call [ph] , but we will not call them. But historically, we have called any Tier 2 that can be callable. Our intention is within our constraints and within the kind of situation is to continue that, but we cannot formally commit to that.

Unknown Analyst

Okay, understood. And you mentioned in the progression of the capital and the RWAs that part of it will be driven obviously by true sales of assets, some legacy assets, but then some other additional optimization. Any color you could give on that, as well as you're planning on reducing a lot of the RWAs and improving capital in the investment bank, but there will also be an impact on growth and other regulatory changes which absorb some of that. Any color you could give on those 2 items would be great.

Benoît de Vitry

Sorry, did you want me to give more description on what we expect -- on the GBP 75 billion optimization we are planning to do?

Unknown Analyst

Correct. [indiscernible]

Benoît de Vitry

If you want to look at that, there are 3 big buckets. The first big bucket is what we call legacy CME legacy sales, rundown [ph] . That's about GBP 23 billion on a Basel III equivalent that we will remove the next 3 years. And of that bucket, there is 3 big piece of it. There's the CDOs for senior, there's a commercial risk portfolio of crescents [ph] ; and then there is the rundown of the leverage portfolio. On all 3 of them, we are back [indiscernible] the credit quality of the portfolio, as you know we sold the most of the other commercial real estate portfolio at a gain, and the quality [indiscernible] is very strong. Same thing for the leverage finance group, the biggest block, the [indiscernible] block is the leverage finance portfolio. And we have very good quality name like "Boots" and [indiscernible] and we're not worried at all on the quality of this portfolio. And the maturity of this debt is next -- is '14 and '15. That big block will disappear automatically over the next few years. And also, to put it in perspective, in asset size is GBP 9 billion. And if you look at the -- when we started with the [indiscernible] portfolio, we had GBP 43 billion for sale. We've sold 3/4 of portfolio successfully the last few years. The second block of the GBP 75 billion is, what I would call, the legacy fixed income FICC portfolio. For this, the number of trade that we've done a long time ago created Basel III rules. We have stopped this type of product a long time ago, and that's about GBP 20 billion worth of RWAs. The maturity of this trade is also a very short duration trade for, when they were done, 4, 5 years ago, there were anywhere from 5 to 7 years, therefore, there's not many years left in this portfolio. For -- on this one there is a very high degree of certainties on the reduction of RWAs. On the other 2 buckets, which is a GBP 18 billion -- GBP 19 billion on the investment bank, and GBP 13 billion on the non-investment bank. It's quite difficult to give you specific details because this is really a series of 1 and 2s. We have roughly about, let's say, less than 100 different subprojects on those, and to some of this very small things may make a difference. I mean, after the call, I'd be happy to give you more color. But once again, this is very much in line with our performance the last few years, where we have been able to reduce anywhere from GBP 20 billion to GBP 25 billion of RWAs on a Basel 2.5 equivalent less Pinol [ph] on Basel III equivalents on this portfolio. And the number looks big because it's based on a 3-year horizon [indiscernible] we only spoke of 1-year horizon.

Unknown Analyst

Okay, that's helpful. So I guess, is it fair to say then, given the color on those first 2 buckets, that the vast majority of this will really be driven by actual risk reduction as opposed to things like model improvements and things like that which you would get nor [indiscernible] .

Benoît de Vitry

Absolutely. Even same could apply for the [indiscernible] for the other 2 buckets. A lot of it is actual size -- actual reductions.

Operator

[Operator Instructions] The next question this afternoon comes from the line of James Hyde of U.S.A. Prudential.

James Hyde

I want -- I have a number questions. First of all, yesterday during the earnings conf call, Chris had promised to give some options on what happens to the U.S. business, under Section 165 [indiscernible], et cetera. Looking through all the transcripts, I don't actually find anything that was given. So my question about this is, if there is going to be trapped -- if there's going to be a separate U.S. subsidiary under which a lot of the IB activities will sit, does the fact that there'll be trapped liquidity and capital change your -- would it change your plans regarding where you see the liquidity pools and where you see the capital buffers? So I don't know if you want to the take questions in sequence or shall I [indiscernible].

Benoît de Vitry

Let's do one question at a time. Chris, do you want to -- I'm happy to respond to that. In my script, I just said we -- it's too early for us to comment on what management action we can take. As the rule is still a draft form and for comments and not a final rule. We have been anticipating this ruling for quite a while. We very well -- we had very good discussion with the U.S. regulators. And we believe that we can take [indiscernible] Actions, mitigate all the risks and all costs, and most of the cost for us on this -- our current understanding what is going to happen on Section 165. I think that's all we can say at this time.

Christopher Lucas

I think that's a right. Maybe I promised a little bit early, the different scenarios we're looking at, but they would include reducing the U.S. balance sheet, reorganizing the U.S. structure, then increasing capital which would be our least preferred option. So there's a range of things were working on it, and as soon as we got something tangible, we'll let you know.

James Hyde

Just to take that a bit further, and it's probably not so much of direct relevance to you, but some of your peer issuers. Is the possibility that you still have a U.S. branch continuing alongside a ringfenced capitalized subsidiary? Is that a possibility?

Christopher Lucas

That is a possibility, absolutely.

James Hyde

Okay, great. Thanks. Secondly, on what's been alluded to about PLAC, PLAC and the ringfence structure. I understand perfectly that your preference is for a parent and child structure, i.e. that the ringfence sits under the non-ringfenced Barclay op co. [ph] , rather than a sibling that sits under the hold co., does -- if you have the sibling structure, i.e. under the hold co., does that mean that you will have to have external issuance by the ringfenced entity? And sort of particular relevance to covered bonds because my understanding is that if you can have the ringfence under the op co, the whole issue of having a large leverage ratio or smaller leverage ratio by having all the covered bond issuance out of it, comes into play, that if you have -- would it mean that if you got it alongside the main op co, under the hold co., you will have to have some of the covered bonds still out of the current op co.

Benoît de Vitry

There is a lot of pieces to your questions. Let me try to answer them in order. On the first one, we believe there is a current interpretation of proposed rule accommodation that we're able to satisfy the U.K. ringfencing entities on a narrow ringfencing. So just from that perspective, we expect -- we expect assuming those structures, it's likely that our ringfenced entity with a balance sheet of about GBP 150 billion. Just put in perspective GBP 150 billion is 10% of our GBP 1.5 trillion balance sheet. And if we do that, we believe that it would be a smaller impact on our balance sheet as a lot of people expect. On the second questions you have, which is the -- what will be the additional costs? We view that the 2 main driver of operational cost in Cisco [indiscernible] was increase of cost funding of the non-ring fenced entity, the transformation cost, the 2 biggest blocks to get there. But if you look at my first response is now in ring fencing, the numbers facility will remain as diversified and almost as large as today, we do not expect any change in that funding cost.

James Hyde

Okay. And finally, in terms of -- back to Slide 9 as everyone else. The envisaged structure with T2 and AT1, does that at all -- when planning this, do you at all look at the ratio that was floated by the CMD by the crisis resolution directive, resolution of the [indiscernible] directive, i.e., I currently calculate that you got basically a senior bondholder that is, as a percentage of funding, there's like 7% of loss taking ahead of me, in the form of Core Tier 1, other Tier 1 and Tier 2. Do you look at this ratio at all? I mean, do you think this matters at all, how much ahead of senior unsecured there will be? And would there be at -- would this current target translate to something bigger than the 7% I calculate?

Benoît de Vitry

The first question, do we look at it, we don't believe it's a constraint for us. And we don't look at it, no.

Operator

The next question comes from Lee Street from Morgan Stanley.

Lee Street - Morgan Stanley, Research Division

I have 3 quick questions. Firstly, how do you define encumbrance, and if you were to take it up the 25%, I mean, presumably you've discussed this with the agency, do you think it's consistent with current ratings.

Benoît de Vitry

Yes, the encumbrance is based on the percentage of secured balancing versus the advanced -- loan advances to customer.

Lee Street - Morgan Stanley, Research Division

Okay. And consistent with your ratings?

Benoît de Vitry

Yes.

Lee Street - Morgan Stanley, Research Division

Okay. Secondly, just a question really, what level of Core Tier 1 is the bank being managed because in the presentation yesterday, I kind of got the impression it was a management target of 10.5% and the reason I ask is because of the 10.5% [indiscernible] issued less than 400 basis points over your CoCo trigger which, under the S&P criteria and your current [indiscernible] rating, wouldn't be compatible with investment-grade rating. So I'm just trying to square exactly what level of Core Tier 1 we're looking to manage [indiscernible] over there, I guess over the medium-term?

Benoît de Vitry

For our target, our total target for equity Tier 1 is 10.5%. The requirement we have for -- on the [indiscernible] side is 9%. I'm not sure I understand your question. Is it the numbers you're looking for?

Lee Street - Morgan Stanley, Research Division

It's just isn't the criteria for rating CoCos, you need the 400 basis point headroom above the mid -- the trigger level to have an investment-grade rating, that your standalone rating. [indiscernible]

Benoît de Vitry

Well, currently -- until [indiscernible] is implemented we are making it on the C Tier 1 basis and we're currently running around 11% which is 400 basis points above the trigger. The 10.5% have indicated is the minimum we intend to keep at all times.

Lee Street - Morgan Stanley, Research Division

Okay, fair enough. And finally, just a quick point of clarification. In response to that other question, did you say that you thought if preferenced shares were left outstanding at post [indiscernible] , they could count as Tier 2 capital?

Benoît de Vitry

Yes, that's correct.

Operator

The next question today comes from the line of the Gil Diseri [ph] of Citigroup.

Unknown Analyst

You mentioned earlier you're [indiscernible] history until [indiscernible]. Can you just please comment maybe on your approach to have cause for the turns and RCIs [ph] that got tendered in December '11. And also any potential Tier 2 recognition after their call date?

Unknown Executive

Sorry, we had a really bad line and didn't catch that question. Would you mind just repeating yourself?

Unknown Analyst

Yes, you know the Tier 1 instruments they got tendered in December 2011 for the terms on RCIs which have...

Christopher Lucas

The one we did on the leveraging management size [indiscernible] in December.

Unknown Analyst

Exactly, exactly.

Unknown Executive

We had them.

Unknown Analyst

Yes, so there are step-ups other than non-step?

Unknown Executive

Yes.

Unknown Analyst

And can you comment on your approach to have future calls?

Benoît de Vitry

Any Tier 1 which has a step features in it will not be viewed as a Tier 2 instrument going forward. It will be grandfathered, but it will be extinguished, and then -- but it will not be extinguished in the Tier 2, it will be extinguished as a senior debt.

Antony P. Jenkins

And you're broader question in terms of whether we would set out our plans for the future ability to exercise [indiscernible] The answer is, no, not...

Benoît de Vitry

We do continue to view [indiscernible] management as an important business tools, available to us, too much funding and liquidity. As it would depend on market conditions, but we never disclose presets, in advance [indiscernible] on regard of that .

Operator

The next question today comes from Kana Norimoto of Fidelity, via the webcast, who asks: "Please, could you give us a breakdown between organic growth and the regulatory changes for the GBP 47 billion RWA growth, expected between now and 2015?"

Christopher Lucas

No, we cannot provide that detail at this time. But we won't provide it at this time, we don't have it at this time. There is details in Antony's presentation yesterday on capital allocation where we intend to allocate it. As you can see from -- it's well spread around the back, this notes, Investment Bank has about roughly 1/3, or 1/4 to 1/3 and the rest is spread around business.

Antony P. Jenkins

I regard it as an indication as to the relative quantum of available RWAs [indiscernible] business expansion or regulatory change. I wouldn't go beyond that at this stage in terms of trying to allocate it. It does give you a flavor of the quantum relative to our GBP 440 billion December 15 RWA targets.

Operator

The final question this afternoon comes from Cindy Harlow of Imperial Capital, via the webcast, who asks, "Regarding the contingent capital structure, issued in November 2012, is the CET1 ratio trigger based on fully loaded or phased-in calculation?"

Christopher Lucas

So the CET1 -- this issue, the trigger is based on CET1 ratio on Basel 2.5 until CRD IV is implemented. And then once CRD IV is implemented, it's based on the CET1 ratio traditional phase. It's not based -- it is not based on Basel III, fully loaded.

Unknown Executive

I would say it's based on the actual reported ratio, not one that's calculated on a pro forma basis.

I think that's the last question that I heard. So on behalf of all of us, thank you very much for joining. We hope you found that helpful. If there are follow-up questions, the team are ready to help out. So thank you very much indeed.

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