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Barclays PLC (NYSE:BCS)

Q1 2013 Interim Management Statement Call

April 24, 2013 4:30 am ET

Executives

Antony P. Jenkins - Group Chief Executive Officer, Executive Director, Chairman of Executive Committee, Member of Regulatory Investigations Committee, Group Chief Executive Officer of Barclays Bank Plc and Director of Barclays Bank Plc

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

Analysts

John-Paul Crutchley - UBS Investment Bank, Research Division

Chris Manners - Morgan Stanley, Research Division

Jason Napier - Deutsche Bank AG, Research Division

Raul Sinha - JP Morgan Chase & Co, Research Division

Andrew P. Coombs - Citigroup Inc, Research Division

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Thomas Rayner - Exane BNP Paribas, Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Ian Gordon - Investec Securities (UK), Research Division

Peter Toeman - HSBC, Research Division

Christopher Wheeler - Mediobanca Securities, Research Division

Fahed Kunwar - Redburn Partners LLP, Research Division

Operator

Ladies and gentlemen, welcome to the Barclays Quarter 1 Interim Management Statement Analysts and Investors Conference Call. I will now hand you over to Antony Jenkins, Group Chief Executive.

Antony P. Jenkins

Good morning, everyone, and thanks for joining us. I'm here with Chris Lucas, who will take you through the numbers in a moment. But before he does that, I'd like to talk briefly about the progress we've made since February when I set out our goals to become the "Go-To" bank for all of our stakeholders. You will see clear evidence today that having outlined our Transform program in February, we are now very focused on implementation and have made good progress in the first half of 2013. As you know, in January, we agreed a single-crossed business purpose for Barclays, helping people achieve their ambitions in the right way and 5 core values which underpin it. Since then, we have focused on embedding these across the organization, and I'm pleased with how my colleagues have welcomed the changes, including how performance will be measured and rewarded.

We made 6 financial commitments for 2015 at our strategy review: to deliver a return on equity above the cost of equity; to reduce the cost base by GBP 1.7 billion on a net basis; to achieve a cost-income ratio in the mid-50s; to reduce RWAs by GBP 75 billion gross; to ensure our transitional common equity Tier 1 exceeds 10.5%; and to accelerate our progressive dividend policy from 2014, targeting a payout ratio of 30% over time. Cost is a critical underpinning of these commitments. Our work to transform our cost base by looking at processes end to end and by improving controls on the customer experience is already well underway. We are on track to execute the GBP 1 billion program of restructuring and investment for 2012, which we announced in February. Half of that cost has been taken in this quarter. Reducing our European retail branch network in order to focus on the mass-affluent segment and resizing our Equities and Investment Banking operations in Asia and Europe have been the immediate priorities. As we promised in February, we have also reallocated more elements of the Head Office cost to the businesses so that the aggregate of those businesses' results is more closely aligned to those of the group, including the group return on equity. This will increase transparency and accountability and reduce its execution risks against our Transform goals.

As we move from the planning phase into execution, I announced a number of organizational changes in our Corporate and Investment Banking and wealth businesses last week to support and accelerate delivery. These changes follow the elimination of the global Retail and Business Banking layer in late 2012 and the integration plans in hand to bring together Barclays Africa and Absa and ensure we have the senior team in place to build the "Go-To" bank.

We told you in February that we had a good start to the year, and that momentum has continued through the first quarter. I'm pleased also that we've delivered improved underlying profitability across most of our businesses. The cost to achieve Transform have impacted return on equity in this quarter. But it's important to bear in mind that over time, the program will help us both reduce our cost base and achieve sustainable returns above the cost of equity. Our return on equity, excluding the cost to achieve, is 10.6%.

I will now ask Chris to go through the numbers in more detail. Chris?

Christopher Lucas

Thanks, Antony, and good morning. We're reporting a good set of first quarter results this morning. We made a strong start to our Transform program, with significant restructuring especially in Europe Retail and Business Banking. Impairment has continued to improve. We further reduced operating costs, excluding the Transform restructuring charge. And capital liquidity and funding position remained strong.

As usual, I'm using adjusted numbers today because they give a better understanding of the business performance. The only adjustment is own credit, which is a much smaller charge than the first quarter last year. We have not adjusted for the Transform restructuring charge, but we will highlight the effect of these costs on key performance metrics. In general, my comments compare the first quarter this year with the same period last year.

Turning now to the headlines. We're reporting adjusted profit of GBP 1.8 billion, which is a reduction of 25%. This reflects restructuring costs of GBP 514 million and a one-off hedging gain of GBP 235 million in the first quarter last year. Excluding these items, adjusted profits would have been up 6%. Total income was down 5% at GBP 7.7 billion as a result of last year's hedge gains, as well as adverse currency movements in Africa Retail and Business Banking. Impairment improved 10% to GBP 706 million, with lower charges in both the Corporate and Investment Bank. We continued to reduce costs, which were 4% lower at GBP 4.8 billion, excluding restructuring charges.

This slide shows the adjustments to the statutory numbers. You can see that we've made no further provisions for PPI during the quarter. We told you in February that the year-end provision for PPI was just under GBP 1 billion. We've used GBP 300 million of that in the first quarter, leaving a provision of about GBP 700 million at the end of March. Claim volumes have come down slightly, and we continue to monitor them closely as provision reflects our best current estimates. There's been no material developments concerning redress on interest rate hedges.

Return on equity decreased from 12.4% in the first quarter last year to 7.6% in the first quarter this year, as compared to a return in equity of 9% for the full year in 2012. The reduction is largely the result of restructuring costs as part of Transform, which is designed to help us achieve return above the cost of equity in 2015. As you know, we've allocated more Head Office results to the businesses, and this is reflected in our reported business level returns. The group's cost-income ratio increased from 61% to 68% almost entirely due to restructuring costs. Adjusted earnings per share decreased to 8.1p. And we've announced a cash dividend for the first quarter of 1p. As usual, we intend to pay equal dividends for the first 3 quarters and retain the ability to flex the dividend in the final quarter. Looking at capital, our Core Tier 1 ratio increased to 11%.

Before I talk about individual businesses, I'd like to talk in more detail about costs. Overall costs increased by 7% to GBP 5.3 billion. And they were down 4%, excluding the Transform restructuring charge of GBP 514 million. Performance costs for the group were down 10% to GBP 804 million. It reduced nonperformance cost by 2% to GBP 4 billion, excluding restructuring.

Looking at the Transform restructuring charge in more detail, GBP 356 million is in Europe Retail and Business Banking, GBP 116 million is in the Investment Bank and GBP 37 million is in Corporate Banking. This restructuring will result in a total headcount reduction of 3,800 people. Our program of restructuring and investment is intended to transform our cost base and help us keep to reach a target cost-income ratio by the mid-50s by 2015.

Turning now to the individual businesses. I'll start with U.K. Retail and Business Banking, where there was strong profit growth of 29% to GBP 299 million. Total income was stable at GBP 1.1 billion, with growth in mortgages offset by a decline in the contribution from structural hedges. Impairment charges were up by GBP 13 million, but the loan-loss rate increased just 1 basis point to 26 basis points. Costs reduced 7% to GBP 704 million.

Europe Retail and Business Banking made a loss of GBP 462 million, largely due to Transform restructuring costs of GBP 356 million. Income fell 6%, reflecting a difficult economic environment. The net interest margin was stable. Impairment increased 30% to GBP 70 million, mainly as a result of deterioration in mortgages. However, there was a slight improvement on the fourth quarter last year, and delinquency rates remained modest. Costs increased by GBP 362 million as a result of the restructuring charge. The restructuring will result in a more focused distribution network across all 4 countries in Europe RBB and the headcount reduction of about 1/4, which is nearly 2,000 people.

In Africa RBB, income decreased 13% to GBP 668 million, mainly due to adverse exchange rate movements. Impairments increased 8%, net of favorable currency movements. This was the result of further provisions taken in mortgages in the Absa recovery book. Charges in the first quarter this year was significantly lower than the previous 3 quarters. Costs decreased 10% largely due to currency movements, and profits were down 39% to GBP 81 million. In local currency terms, profits decreased 24%.

At Barclaycard, profits were up 5% to GBP 363 million. Income grew 12% to GBP 1.2 billion. Impairment increased 21%, mainly as a result of higher volumes. Further 30-day arrear rates improved in both the U.K. and U.S. Costs grew 11% due to business growth, including acquisitions. So the cost-income ratio was flat at 43%.

Turning now to the Investment Bank, where profits grew 11% to GBP 1.3 billion. Total income grew 1% to GBP 3.5 billion. There was a net impairment release of GBP 14 million compared with a charge of GBP 81 million last year. Clearly, we don't expect a net release each quarter. We reduced cost by 1% to GBP 2.2 billion. It's including the restructuring charge of GBP 116 million as we resized our Equities and Investment Banking operations in Asia and Europe. We're reducing headcount by 1,800 in Corporate and Investment Banking. The cost-income ratio improved from 64% to 63%. And the compensation to income ratio reduced from 43% to 41%. We continue to target a compensation to income ratio in the mid-30s in 2015. The return on equity was 16.3%, up from 13.8% in the first quarter last year.

Income in the Investment Bank is seasonal, and the first quarter has generally been the strongest in recent years. Total income was GBP 3.5 billion, which was up 1% on last year's first quarter but 34% higher than the fourth quarter. This income was achieved despite a 5% year-on-year reduction in RWAs to GBP 182 billion.

Breaking income down into more detail, Fixed Income, Currencies and Commodities decreased 6% to GBP 2.2 billion, compared to a strong first quarter last year. Equities and Prime Services grew 19% to GBP 706 million, reflecting both improved market volumes and share gains. And the Investment Banking was now 8% at GBP 558 million.

In Corporate Banking, profits decreased 10% to GBP 183 million as a result of the lower gains on fair value loans and cost to achieve Transform of GBP 37 million. U.K. profits improved by 8% to GBP 270 million, while losses in Europe increased to GBP 114 million as a result of the restructuring charges. Income was down 9% to GBP 772 million. Impairments improved 38% to GBP 130 million, with reductions in U.K. and Europe. There was a 39% reduction in Spain to GBP 57 million, resulting from lower exposure to the property and construction sector. We reduced costs in Corporate Banking by 3%, excluding the restructuring charge.

In Wealth and Investment Management, profits grew 22% to GBP 60 million as our investments in the business continued to bear fruit. Income grew 4% to GBP 469 million, driven by the High Net Worth business and related increases in both customer loans and deposits. Costs were up 1%. And client assets under management increased 7% to GBP 200 billion, mainly the result of net new assets in the High Net Worth business.

Losses in the Head Office were GBP 53 million compared to a profit of GBP 321 million in 2012. This was mainly due to a one-off gain last year of GBP 235 million on hedges relating to employee share awards. As you know, we've allocated Head Office results more fully to the businesses to give greater transparency. One-off gains like these are an example of the type of profits or costs we will not allocate out.

Moving on now to capital, liquidity and funding. Our Core Tier 1 ratio increased to 11% on a Basel 2.5 basis, reflecting first quarter retained earnings and the exercise of warrants. RWAs were broadly flat net of currency movements. Our liquidity position remained strong with a pool of GBP 141 billion. We had a liquidity coverage ratio of 110% at the end of the quarter based on the latest Basel standards. We aim to fund our retail banking, Corporate Banking and wealth businesses with customer deposits. Loan-to-deposit ratio for these businesses improved further from 102% to 98%. This has reduced our total [ph] wholesale funding requirements. Given the pre-funding we did in 2012 and our strong liquidity position, we did not access the public debt market in the first quarter this year.

As you'd expect, we've updated our Basel III ratios based on current expectations. Our latest estimates show a transitional common equity Tier 1 ratio of 10.8% as at March 31. We continue to make good progress building capital with a fully loaded ratio of 8.4%, up from our early disclosure of 8.2% as at the end of December. Detailed calculations are in the appendix to the slide pack. We continue to believe we are well capitalized.

Turning now to margins. On retail banking, Corporate Banking and the wealth businesses, all contribute to our net interest margin analysis. Overall margins from these businesses fell 4 basis points to 179 basis points. 1 basis point of this decline was from reduced hedge contribution. Increased volumes more than offset the slight customer margin contraction, so the net interest income generated from customers was up slightly at GBP 2.5 billion. Overall net interest income from these businesses grew 2% to GBP 2.8 billion.

As far as the outlook is concerned, a good start to the year has continued into the second quarter across our businesses. Although the macroeconomic environment remains unpredictable, we continue to focus on costs, capital and returns in order to improve performance.

In summary, we're reporting good results this morning. We've made a strong start to our transformation program. Adjusted profits were down 25% to GBP 1.8 billion. But excluding restructuring cost and one-off, they were up 6%. Impairments has continued to improve, with further reduced operating cost, excluding restructuring charges. And our capital, liquidity and funding position remained strong.

Thank you very much, indeed. I'll hand you back to Antony now.

Antony P. Jenkins

Thank you, Chris. You will hear much more about our progress and delivery of Transform later in the year, including in our seminars on the individual businesses. But as you can see, we're very focused on the execution of Transform, and there is good momentum in the business. The Investment Bank delivered a relatively good top line income performance compared to peers. In FICC, we continue to consolidate our leading position, outperforming our peers year-on-year. We monetized our build-out in equities, with revenues up by 19% year-on-year across the U.S., Asian and European businesses. And in the U.S. IPO market, we finished the quarter ranked #1 with a market share 12%. Barclaycard delivered a strong set of results, with a pleasing 12% increase in income coming from solid growth across the business and 2012 acquisitions. This drove PBT up 5%, with ROE stable at nearly 18%. And we've continued to support the U.K. economy by providing FLS-eligible gross new lending of an estimated GBP 20 billion to U.K. households and businesses in the first quarter. It's early days and there's a long way to go. But so far, we're doing exactly what we said we would do.

I look forward to giving a more detailed update at our first half results in July. And with that, I'd now like to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And today's first question comes from the line of JP Crutchley of UBS.

John-Paul Crutchley - UBS Investment Bank, Research Division

JP here. Two questions, if I can. The first is on impairment, particularly in the retail business for which I just wondered if you could maybe just give maybe a slightly broader color on that. And clearly, both in Barclaycard and the retail business, impairments have picked up albeit from very low levels. I'm just wondering how you feel about the shape of impairment trends playing forward there and particularly to dovetail it with the comments of the banking with an FPC earlier in a month or so about Transform, building expectations of future impairments down the line to capital plans. And looking at your overall capital position, clearly, 8.4% fully loaded Basel III is robustly above the 7% [indiscernible] of what -- that gives you probably about GBP 5 billion to GBP 6 billion of capacity above that number. And I just wondered if there are any conversations about how much they're expecting to be taken from your capital base in respect to managing to the 7% number.

Antony P. Jenkins

Okay. Thanks, JP. Let me take the question on impairment, and I'll ask Chris to deal with the capital question. So on impairment, although we've seen some uptick in the absolute number in Barclaycard and the retail banking, the retail banking is the sort of de minimis number in the scheme of things. In general, our outlook for impairment in our big retail businesses is where I would describe as broadly stable. As you know, in the last few years, we've seen an improving picture. We've been talking about that improvement beginning to slow down and stabilize, which is where we see it now. And if we look at the forward flows on delinquency across our big portfolios, the mortgage business in the U.K., on secured lending in the U.K. card in the U.K. and the U.S., here, we see, again, a stable to -- and in the U.S. case, slightly improving picture. We continue to watch closely the European retail businesses and our South African business, where there has been some stress. But I'd say in the aggregate, we think the picture is broadly stable from where we are, JP. And Chris, on capital?

Christopher Lucas

On capital, there's a loss of currency going on and lots of people making announcements. We've been focusing on building a capital base, whether that's through Basel 2.5 product to 11% in the first quarter or whether it's on Basel III on a fully loaded basis that went up to 8.4%. And to my mind, it's the delivery of internally generated capital that's going to be really important. And that's where we'll be focusing hard on.

Operator

And today's next question comes from the line of Chris Manners of Morgan Stanley.

Chris Manners - Morgan Stanley, Research Division

So I have 2 questions for you, if I may. The first one was, it seems to me that this sort of non-Investment Banking revenue you've been x-ing out, the derivative gain in Q1 last year was maybe a little bit softer than the consensus. And I was just trying to understand how you'll think the net interest margin is going to move from here. 1.79% is, obviously, a little bit lower than last year. But I would have thought with the deposit costs coming down. In fact, you shrunk your liquid asset buffer. That should actually offset some of the hedge decline. And the second question was just on the impact of the clearing of OTC swaps just in terms of what impact do you think that could have on your FICC business in terms of the volume impact maybe from hedge collateral being held, margin impact from the price transparency. Just how you guys are thinking about that?

Antony P. Jenkins

So on the first question, if we look at non-IB revenues, I think I've been very clear in my sort of central thesis around the macroeconomic environment that we're going to do clearing business in and I do think that it's going to be quite weak for -- as far as I can foresee. And so we haven't assumed, as you know, in our 3-year plan, a particularly aggressive income growth. And I think this quarter just validates the hypothesis. Of course, you can see the impact in there of some of the hedging gains rolling off over time. But by and large, I think the performance of the businesses, on an underlying basis, when you look at the shares of product -- we're #1 or 2 on the new flow across the whole product suite in our major market, is very encouraging. And I continue to believe that we've got good underlying momentum that will allow us to win more than our fair share of the available business that's out there. I think our margins -- we've talked about broad stability. But as you know, we divide it into sort of cost of the margins and other margins. And Chris, anything or something you want to add on margins?

Christopher Lucas

I think you're absolutely right. The pleasing point from my perspective is that the margins have performed very much as we expected them to do. So Chris, you're absolutely right. There's a fall of 4 basis points to 179. The hedge contribution reduction is one of that. The customer margin is down 3 basis points. What we expect to see is the margin decline but to be offset by volume increase. So taking it around, net interest income should be flat to up in the customer level. And that is exactly what we are expecting to see for the second quarter and onto the rest of the year.

Antony P. Jenkins

Chris, could I take your second question in terms of clearing of non-OTC swaps? And I do think it is very early days. We have been a leader in the primary swap clearing markets, and we think that we'll continue to have that role. We do welcome these developments. And we have made huge strides in other areas, like FX, which helps markets to be more transparent. Our initial conclusion is that we don't expect there to be a major impact on revenues, but I think it's quite early days.

Operator

And today's next question comes from the line of Jason Napier of Deutsche Bank.

Jason Napier - Deutsche Bank AG, Research Division

Two, please, if I may. The first for Antony and then second, perhaps, for Chris. Antony, the reference you made to leadership change announcements, I wondered, given the almost complete change in top level management at the firm now, can investors sort of take it as read that leadership is stable and this is the team that's going to deliver Transform over the next 3 years? And then the second question, for the IB, clearly, the top line performance, one of the best in the industry and there is reference made to credit and securitized products benefiting from tighter spreads in the quarter. CS have also broken securitized products, just being a place that they've done well. I just wondered whether you'd quantify the benefits from spread change or perhaps talk about where spreads are relative to the end of the first quarter just as a source of momentum into the second quarter?

Antony P. Jenkins

Thanks, Jason. Let me just talk about, at least, the changes first. Yes, we've announced a new director of the bank with a "Go-To" bank and the Transform program. And although when people look at the executive leadership of the group, they always tend to see it through the lens of individuals. For me, it's equally or perhaps more important to look at it through a lens of the structure of the Executive Committee. And we've made some quite profound changes to the structure. So we eliminated the Retail and Business Banking layers that I used to run by the appointments of Valerie Sorrano Keating and Ashok Vaswani to the Executive Committee. We both did the second line of defense by creating a totally independent function and having that represented at the extra level by Hector Sants. We've created a group operations and technology function led by Shaygan Kheradpir. And last week, we announced essentially an elimination of a layer in Corporate and Investment Banking with the appointments of Eric Bommensath and Tom King to the Executive Committee. And we've also increased our focus on the U.S. with the appointment of Skip McGee. So those are all very important structural changes to the organization. In addition, we, of course, have a very big strategic push against Africa, which is very ably led by Maria Ramos. And our group risk function remains led by Robert Le Blanc. And so I think that we have the right structure for the group now. We have the right individuals in role to take the strategy forward. And I do think that in the course of the coming months, we will complete the appointments of the group HR director, finance director and general counsel. At that point, the executive team will be in place to take the strategy forward. In terms of the points you made about spreads and so on in the credit market, I wouldn't want to get too excited about that. But I think Chris maybe wants to say a couple of things on that.

Christopher Lucas

I wouldn't. Jason, I'm afraid I'm going to disappoint you because I'm not going to break out the asset analysis by further categories although, I think, I would say in overall terms, it's been a fantastic first quarter for the Investment Bank. The FICC business, the Equities and Investment Banking business, I think, is really much of what we've been talking to you about over a number of years that has come to fruition, and we're very pleased by it.

Jason Napier - Deutsche Bank AG, Research Division

Just to sort of follow up on that. And I can almost hear what sort of the bears are going to be thinking. When you talk about a fantastic quarter for the IB, you're not trying to say that the inventory had a fantastic quarter, right? That's a flow characterization, not to put words on your mouth.

Christopher Lucas

No. Thank you for that. It was meant to be a description of the overall performance of the business.

Operator

And today's next question comes from the line of Raul Sinha of JPMorgan.

Raul Sinha - JP Morgan Chase & Co, Research Division

Can I have 2, please, as well? The first one, could you comment on the outlook for impairment in the non-retail areas? It looks like you had a bit of help in the quarter from recoveries in the IB and in corporate. And I guess IB kind of -- can be a bit volatile. But can we expect some of the improvement in corporate to sustain going forward? And then the second question is on IB regulatory pressure. Antony, I was wondering if I could get your current thoughts on the U.S. disposals around legal entity structure for foreign banks? And I was wondering if we should be expecting some changes to your U.S. business entity structure?

Antony P. Jenkins

So on impairment in the non-retail space, of course, that tends to be susceptible to more volatility quarter-on-quarter because it tends to be the sort of so-called single names. We did have a very good quarter in the Investment Bank. We should not expect that necessarily to be repeated quarter-on-quarter. But again, I think the impairment will be driven by the general macroeconomic environment in which we operate. I'm grateful that we don't have large exposures to things like commercial real estate in the U.K. But from time to time, there will be challenges. And as I said before, the environment is quite muted and, therefore, susceptible to impairment from time to time. But I don't think -- as we look at it right now, we see a material deterioration in the environment. And therefore, we wouldn't expect a material change to our impairment. What you will -- you might see from time to time is a bit of volatility and the like. In terms of regulation in the United States, the regulation, as you know, is in the process of formulation. The consultation period has just closed. I did meet with Governor Torullo when I was in the States a few weeks ago. It is too early to say, by far, what the specific output of this will be. But my view is that given all of the changes that we have to make to accommodate the ring fence in the U.K., whatever comps are in the U.S. CRD IV in Europe that we will be able to accommodate those within the group structure, and that we'll be able to implement them over time in a way that allows us to do that, to preserve the benefits of the universal banking model for our shareholders. But I can't be specific because there is nothing to react to at this point.

Raul Sinha - JP Morgan Chase & Co, Research Division

Okay. If I could just follow up on the impairment question and on corporate, specifically whether there was a little bit of improvement in the quarter. And I -- again, I understand it can be volatile. But just in terms of -- we are starting to see credit availability pick up in the U.K. And is that any cause for optimism there on the corporate side? And do you think the European corporate provisions are now past the peak?

Antony P. Jenkins

We have continued to see improvement in our wholesale impairment levels in Spain, in particular, and we signaled that to you previously. And I think we see moderate improvement in the U.K., but it continues to be quite a challenging environment for corporate. Corporate's are, in general, being conservative. I think that helped overall impairment in the sector. But I -- as I say, I think our general view is that the situation has not changed very much from what we signaled the last couple of quarters.

Operator

And today's next question comes from Andrew Coombs of Citigroup.

Andrew P. Coombs - Citigroup Inc, Research Division

Two questions from me, please. Firstly, thanks for spilling out the GBP 500 million Transform restructuring cost on Slide 6. Would it be possible to give some guidance on the annual cost saves, which is specific to those actions, so the 2,000 headcount reduction in Europe, 1,800 in Investment Bank and so forth? And are those cost saves split in a similar proportion to the restructuring charge? My second question is on capital. I mean, the penultimate paragraph on Slide 32, you state that there will be an extra GBP 4.5 billion capital deduction for CRD IV rules on financial holdings but that you adjust that for management actions. So perhaps you could just elaborate on exactly what those actions are? And then in the context of the wider discussion on capital, how you believe the FPC and PRA will interpret those rules when they use their own calculation methodology relative to that 7% target that they've set?

Christopher Lucas

So I'll start on capital. If you go to Slide 31, you see on there the GBP 4.5 billion non-significant holdings in financial institutions offset by mitigation, the management action. They fall basically into 2 categories: one, improvements in hedging; and secondly, just generally a reduced activity in financial stocks. Both of those, we think, are eminently achievable. And therefore, we've got to mitigate almost fully the impact of the nonspecific holdings of financial institutions. So it's early days. We disclosed this at the year end although we had netted the 2 down. It followed that it was appropriate to show the 2 numbers' gross. But as you can see, they're included in the fully loaded ratio, as is appropriate.

Antony P. Jenkins

And on the benefit of the cost saves, I think we signaled about 2.5-year payback on the initiative. So I think you can probably do the math from that.

Andrew P. Coombs - Citigroup Inc, Research Division

Okay. Just coming back to the mitigating actions, would there be any revenue attrition associated with those if you had to proceed down that route?

Christopher Lucas

We would expect there will not be anything insignificant.

Operator

And today's next question is from the line of Chintan Joshi of Nomura.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

First question, I just wanted to clarify something. The cost run rate that we should be thinking about going forward, you've highlighted to GBP 16.8 billion in 2015, about GBP 17.5 billion including CTA. If you're thinking about a sustainable cost base, which one of those 2 numbers should we think -- be thinking about?

Antony P. Jenkins

Well, what we gave is a 2015 number. And the GBP 17.5 billion is the number that you should think about in terms of what would flow through the P&L.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

So that's something that we can take forward into the following year? Or we should be thinking GBP 16.8 billion as the base?

Antony P. Jenkins

Well, we've only talked through 2015. So when we get to -- close to 2016, we'll provide you with some more direction on that. But I mean, clearly, my view is that the process that we're in here is one that is not just about running a cost program for a 3-year period. This is about changing the way we fundamentally run the business so that we're constantly reengineering our core processes in a way that provide a better customer or client experience, greater control and lower operating cost. And to do that requires money. But by the time we get to 2015, '16, the benefit of past year savings will go, in large part, to fund the investments that we have to make to continue this 11 [ph] sort of cost saves that we see. And obviously, beyond '15, our view will be influenced by our growth opportunities that we may have and other investments we want to make. So I would think -- I would focus on '15 at this point.

Christopher Lucas

You see that in the strategic review deck that we produced that shows in 2015, the target is GBP 17.5 billion, which includes GBP 0.7 billion of cost to achieve for future cost reductions going out beyond 2015.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Yes. A second question was in Barclaycard. You've done quite well on volumes out there, growing that very nicely. But margin compression seems to be an ongoing feature. I remember when you gave an update, you were hoping -- I think it was last year you were hoping that margins will stabilize here. And given that there is a kind of ambitious revenue growth target here, I was just wondering what the headwinds for margins are. How much will they continue just -- so that we can think about volumes and margins in this area?

Christopher Lucas

We've given you the information at the group level, which picks up the credit cards, as well as the -- well, it is in commercial lending. I think that's probably as far as we're going to go, which is that 4-basis-point number that I gave you earlier and would increase on the customer side. I think the overall position looks pretty good, though. As I've said, the important aspect, from my perspective, is the hedges are operating exactly as we would expect them to operate. The margin is down slightly because of the competitive pressure. But the volumes are improving. So with that said, it's a slightly positive upward story.

Antony P. Jenkins

Yes. And I think in that business, we do have good momentum, as you said, on the volume side. And I think the margin picture is stabilizing. And when we get to the seminar on Barclaycard, we'll talk in more detail about how we foresee the opportunities in that business. But 5% income growth is something -- sorry, 12% income growth is something which, of course, we're very happy with.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Okay. And if I could just follow up on Chris Manners' question. If I think about the traditional banking people within profits, it's quite below what market expectations are. And I can't put a finger on which division is missing expectations, if you could help out there.

Christopher Lucas

I think when we look at it, we look at a slightly different picture to the one you've had. The business is -- I think has performed well and particularly on an underlying basis. So I don't think there's much for us to say.

Chintan Joshi - Nomura Securities Co. Ltd., Research Division

Okay. And just one request -- thank you for the Head Office allocation. That really helps, see a better picture of the group, but it also messes a little bit up your divisional targets that you'd given with the strategic review. And I was wondering if at the half year stage you could update us with what the restated numbers would look like in terms of target.

Antony P. Jenkins

Yes, we will, be sure to do that.

Christopher Lucas

We will, certainly.

Operator

And your next question today comes from Fiona Swaffield of RBC.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

I had 2 questions. One was on the strategic review, you talked about businesses you're exiting or I think transforming or transitioning. Has any of that flowed through to revenues already in Q1? So if you've already seen some offset to revenue growth from that strategy. And the second issue is on costs, the performance costs. Is most of the 10% decrease due to deferred compensation going down? I'm just trying to look at the GBP 18.5 billion for the full year. And obviously, you're, because of seasonality, running above that at the moment. I just wondered if you could comment on that.

Christopher Lucas

So the performance cost, as you know, is an accrual at this stage. So we're trying to split it between deferred and in cash for the current year is a level of detail that we would probably look at, at the half year rather than the quarter. So I think that one should probably be part. And we'll come back to it in July, August time.

Antony P. Jenkins

Yes. And on the portfolio repositioning, obviously, Fiona, as you know, we've been doing that really for a number of years. And we've significantly reduced our exposure -- in credit market exposures, for example. But I would not say that there is a material reduction in those assets within the quarter that would affect revenue. Obviously, we really began the program in the first quarter, so no impact there yet.

Operator

And your next question this morning is from the line of Tom Rayner of Exane BNP Paribas.

Thomas Rayner - Exane BNP Paribas, Research Division

Tom Rayner here. I was also going to start a couple of questions on cost. The first one really just follows on, I think, from Fiona's question. I'm just interested in the Q1 performance on costs, excluding the cost to achieve. I'm just trying to get a sense of how comfortable you are with that performance in Q1 versus the 18.5 full year target for '13 you set out in the strategic review. I know there is sort of seasonality here. So I just wondered if you think that further, it's is heading very much towards achieving that number? And I had a second question on cost within the Investment Bank. And if you want that now or after?

Antony P. Jenkins

Yes, if we can have the second question as well, Tom, please.

Thomas Rayner - Exane BNP Paribas, Research Division

Yes, just -- I mean, just looking at the combination of the accounting changes and then the reallocation of Head Office. I mean, for the Investment Bank, it seems we have left revenue broadly unchanged. It's pushed cost out and bought impairments down. I'm just wondering if you're likely to sort of recalibrate the cost to net income, net-net operating income target of 60% to 65% on the basis of all those changes. And I'm just thinking along the lines that if the comp ratio does get down to the mid-30s, then even with the restatements, the 60% to 65%, possibly doesn't look that challenging as a target any longer. So I just wondered if you could comment on that as well, please.

Antony P. Jenkins

Yes, I'm smiling at the "not looking very challenging" comment.

Thomas Rayner - Exane BNP Paribas, Research Division

Well, if you can get the comp down, I mean, that might be the challenging bit.

Antony P. Jenkins

Okay, I understand the arithmetic. So let me just talk about cost in general. I think we have successfully run a cost reduction program in the group. We started in 2011 under Bob's leadership. We called it Project Green. We targeted taking GBP 2 billion worth of cost out. We've done that successfully. And you can actually see that when you adjust out the cost to achieve in the year-on-year decline in cost. But that is different from what we're talking about now. We're talking about a structural transformation in the cost base that requires a lot of very detailed work, to look at how our core processes operate, identify the activities that really drive costs, track them and track the gradual reduction of the work. So if you don't reduce the work, you can't reduce the cost. And I would say that we've made very good progress in the last 2 or 3 months in putting in place the architects to allow to do that. So we are very much committed to the cost reduction targets that I gave in February. And I think we are making progress against that. Of course, in any given quarter, things may move against you. FX rates, in particular, affected the cost number in this quarter. But we are still committed to that overall direction. As you have observed, we have pushed out a lot of the cost across the group. I think that's very appropriate. And I certainly have sympathy for the position of our investors, who want the business' cost structure to reflect more accurately the true cost. And a consequence of that, of course, is that the ratios have deteriorated. But we remain committed to the 60%, 65% ratio over the medium term.

Christopher Lucas

Tom, one last comment. I think when we look at cost overall, and I'm looking at Page 6 of the IMS, you see a degree of seasonality in the operating expenses line, excluding levy and Transform. So I think I would hesitate to annualize because of that seasonality. The first quarter is always the richest from a cost-spending perspective.

Thomas Rayner - Exane BNP Paribas, Research Division

Which is quite interesting because the -- excluding cost to achieve, it looks like Q1 was about 25% of the year target, which -- if that's a seasonally adjusted high quarter, then it possibly bodes quite well for how you're getting on. Is that fair enough?

Christopher Lucas

I would just hesitate to just use the quarters as an annualized.

Antony P. Jenkins

I mean, it's tempting to do. I understand it's tempting to do that math. I'm tempted to do it myself on occasions. But all I can say is there's a lot of work to be done to deliver the cost commitment that we made. And as far as I'm concerned, we're right on track at this point for those commitments. And I think we should just, periodically, in these conversations, come back to the proof points around that.

Operator

Question comes from the line of Michael Helsby of Bank of America Merrill Lynch.

Michael Helsby - BofA Merrill Lynch, Research Division

I did have 2, but unfortunately, I've got another 1 now. Antony, can I just get you to clarify that point that you just made because now you've completely confused me. I don't see how you can be committed to a 60% to 65% cost-income ratio in the Investment Bank when the overall group is targeted at 55%? Did you just slip up there? Or are you implying that the cost-income ratio outside of the Investment Bank is going to be materially lower than 55%?

Antony P. Jenkins

That's always been our commitment on the Investment Bank at a...

Michael Helsby - BofA Merrill Lynch, Research Division

You didn't really restate the 60% to 65% at the Strategy Day. You just talked about the comp ratio going from sort of the low 40s down to 35%, clearly, your target in infrastructure savings. So I'd always assumed that naturally, the cost-income ratio would be going lower.

Antony P. Jenkins

No, I think it's -- that's the commitment we've made. We've made the task harder by allocating out more central cost. And you'll recall that the cost-to-income ratio in a business like Barclaycard and the retail bank are lower than that. So we remain committed to those numbers.

Michael Helsby - BofA Merrill Lynch, Research Division

Okay, fair enough. In that case, can I just have the 2 questions I was going to ask? And firstly, just to clarify on the risk-weighted assets. Was there any RWA [ph] improvement from the management actions that you'd identified in the context of legacy assets in Q1? So that's question one. And then just on -- in the sort of non-Investment Banking revenues, clearly, Africa was weak Q-on-Q. And you talked about the FX and volumes, but cost actually went up pre the levy Q-on-Q. So I was wondering if you could just talk more about that pre-provision movement in Africa, which was actually quite weak relative to certainly my expectations?

Christopher Lucas

Let me start with risk-weighted assets. As you see, the move is from GBP 387 billion to GBP 397 billion. And GBP 8.5 billion of that is foreign exchange. There is some small amount of what would be the drivers, business activity adjustments, but it's relatively small. It doesn't, at this stage, warrant its own number. But perhaps, I think it's a reflection of one quarter rather than where the overall programs are heading.

Michael Helsby - BofA Merrill Lynch, Research Division

Okay. So basically, nothing really. Okay, fair enough.

Antony P. Jenkins

So on Africa, in specific, we have experienced some decline in volume really through the course of last year and into this year. We believe that, that is stabilizing and we should see better performance going forward. On the whole, that's specifically to do with our retail business in South Africa. On the whole, the African performance was good. And we expect stronger performance, prospectively.

Michael Helsby - BofA Merrill Lynch, Research Division

Okay. And the -- sorry, the movement in cost because the cost line clearly could affect -- drove revenue down but the cost went up. So it went up even more on an underlying basis. Is there anything to talk about there because you didn't really mentioned it in the commentary on the Q -- in your statement?

Antony P. Jenkins

Yes. I don't think you should read too much into that, Michael. I think it was just an in-quarter movement. I don't think that's a trend.

Operator

And the next question is from Ian Gordon of Investec.

Ian Gordon - Investec Securities (UK), Research Division

If I could have just 3 quick ones, please. Firstly, on U.K. retail in terms of balance sheet footings, equity, ING acquisition, the numbers look pretty static. And I guess that's actually out-performance against pretty dire industry numbers. And today's BBA numbers are no exception. I guess, my question is what, if anything, does this morning's FLS announcement do for you other than extend the period of contingency funding requirement, which you probably don't need and may or may not use? Second question, again, focusing on the overnight announcements, the e-mails that came out from Bully-Banks seemed quite smug in terms of the scale and the scope of redress offers so far. I wondered if you got any comment on that? And then thirdly -- forgive me. I haven't actually found your normal geographic split of revenues, but my question was more specific to Barclays Capital. Can you just provide any commentary on the split by geography of revenues either in this period or forward looking -- well, I guess, you've had a bit of a FX tailwinds from the currency movements.

Antony P. Jenkins

Okay. Let me deal with those. Firstly, on the retail bank, you're right to say that the market is quite low growth. And I do think that we've got more than our fair share of business across the major product categories, whether that's savings, mortgages, loans, et cetera. Funding for Lending is a scheme that we've supported. We think it's important to make sure we're doing everything we can to support the British economy. But as we said before, we don't need the liquidity. We've got plenty of liquidity. The scheme changes have just been announced, and we're looking at them quite closely. But I would expect we would continue to support the Funding for Lending Scheme. On interest rate swaps, I think that Bully-Banks have actually been quite complementary of how Barclays has handled the processing of claims and the engagement that we've had with that lobby group. We are just beginning to pay out the first claims on this. And we have an enormous focus on addressing these claims not only fairly, but also expeditiously. They're quite complex claims, very different from PPI, for example. Every claim has, on average, about 3,000 pages of documentation that needs to be reviewed. So -- and as we said in our announcements, we don't see the need to change our provision at this point. And finally, on the geographic split, Chris, do you have a comment on that?

Christopher Lucas

Yes, the end of the first quarter or the first quarter broadly has followed about 50% in the U.S., 40% in Europe and in U.K. and 10% through the rest of the world.

Operator

And your next question today is from the line of Peter Toeman of HSBC.

Peter Toeman - HSBC, Research Division

At the Strategy Day, you talked about the reduced cost of the U.K. ring-fencing regime, and I think you also indicated that there's a high capital requirements -- or dedicated capital for U.S. subsidiaries wouldn't be too onerous in P&L terms as well. So I just wondered if you could highlight why you're thinking about the cost of the ring fence has now become more sanguine, if indeed it has become more sanguine?

Antony P. Jenkins

Yes, I think our view on that hasn't really changed from what we discussed at the Investor Day. I do think that as the regulation, in general, becomes more clear and the time frames are also clearer, we have a better sense of how we will run the ring fence. So I think it's possible that we'll be able to operate what we've described in the past as a narrow ring fence with basically retail deposits, current accounts and small business accounts in there and to match that up with appropriate assets. And we also think that the market has begun to price in the funding costs around ring fence because, as you see, we've raised long-term debt in the last year, which would exceed the period in which we've got to implement the ring fence. So we do think that the -- it's been reflected in our cost of funding. That's really what we said in February and we don't have anything more to say at this point or new information.

Operator

And the next question today comes from the line of Christopher Wheeler of Mediobanca.

Christopher Wheeler - Mediobanca Securities, Research Division

A few questions but hopefully quick. The first one is on the transformation costs, obviously, the GBP 500 million charge in the first quarter. Are you expecting to bring forward much of the GBP 1.7 billion which is planned for the next 2 years? Or are you assuming you'll just stick around the GBP 1 billion for this year? That's the first question. And linked to that really is, where will it be charged? Is Slide 23 a good guide? Or can we start to see some of that shift out of European RBB? That's the first question. Second one on Investment Banking, equity is obviously an excellent performance, up 19%. I think if we look at the whole peer group so far, they've fallen 6% quarter-on-quarter. You said market share gains. Is that mainly in the United States on the back of that strong IPO performance? Or is it more broadly based than that? And then staying on IB, you, at the investor meeting in February, talked about aiming for the 35% -- yes, I think a 35% compensation ratio. But that was obviously against the 39% under the old accounting regime. Where are you on that? Has that changed at all? And then finally, just on wealth management, obviously, Tom's departure last week raised a few questions about the future of the plans you had for that business. Could you perhaps confirm that you expect to continue with your plan of building out post Project Gamma and perhaps give us a feeling for the sort of person you are looking for to run that business going forward?

Antony P. Jenkins

Yes. So that's quite a lot of questions there. Let me just deal with them in no particular order. On the equities, we are very pleased. It really was across-the-board not just in the U.S., but also in our Asian business in particular. On the cost to net income ratio number that we signaled for the group, we were talking about the mid-30s. We're not changing our aspiration there. On wealth as a business, we remain committed too. I do think there are opportunities for us to further leverage capability across the group, but that will only help us to execute the strategy more effectively. And in terms of costs, Chris?

Christopher Lucas

Cost to achieve target for the current year is GBP 1 billion, of which, as you've said, we spent GBP 514 million in the first quarter. The remaining GBP 500 million will be over the second, third and fourth quarters.

Christopher Wheeler - Mediobanca Securities, Research Division

Okay. So just to go back there, Antony, I think you said the 30 -- the mid-30s comp ratio if for the whole group. I think if you look at the slide, I think it was 44% in your strategic review. It was specifically focused on the Investment Bank.

Antony P. Jenkins

Yes.

Christopher Wheeler - Mediobanca Securities, Research Division

Sorry?

Antony P. Jenkins

Yes.

Operator

And the final question we have time for today comes from the line of Fahed Kunwar of Redburn.

Fahed Kunwar - Redburn Partners LLP, Research Division

I just had a couple of questions on capital. The first question is on the PRA and the FPC, obviously, the GBP 25 billion capital short was identified. I'm just wondering where in the process you guys were with the PRA in terms of discussions around filling that shortfall and if you expect that number kind of allocate you to increase? Obviously, it didn't test, creating but risk weight at x [ph] 2004, but you expected to increase once they're doing with the time management on that? And the second question is following up from earlier. And are there any other netted items within the kind of fully loaded Basel III ratio? And obviously, there are nonsignificant holdings at the netted items. But I was wondering if there were any other nettings in the kind of detail you gave on Page 31?

Christopher Lucas

The answer to the second part of the question, first, is no, no, no on the nettings that we're aware of. And I'm looking at that. There aren't any. In terms of where we are more generally on capital, we speak, as you'd expect, to the regulators on a virtually continuous basis about a lot of things, including capital plans, including capital raisings, including distributions. And that has continued. And I think if we had anything specific to say to you, we'd have said it. And I think we have -- otherwise, have a long dialogue with the regulators, and we will update you as and when it's appropriate.

Antony P. Jenkins

Thank you very much, everybody, for joining the call. We really appreciate the time. Thank you.

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