Barclays' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Feb.11.14 | About: Barclays PLC (BCS)

Barclays PLC (NYSE:BCS)

Q4 2013 Earnings Conference Call

February 11, 2013 04:30 AM ET

Executives

Antony Jenkins – Group CEO

Tushar Morzaria – Group Finance Director and Executive Director

Analysts

Andrew Coombs – Citigroup

Michael Helsby – Bank of America Merrill Lynch

Raul Sinha – JPMorgan

Chintan Joshi – Nomura

Fiona Swaffield – RBC Capital Markets

Joseph Dickerson – Jefferies

Peter Toeman – HSBC

Chris Manners – Morgan Stanley

Tom Rayner – Exane BNP Paribas

Chris Wheeler – Mediobanca

JP Crutchley – UBS

Martin Leitgeb – Goldman Sachs

Operator

Welcome to the Barclays 2013 Full Year Results Analyst and Investor Conference Call. I will now hand over to Antony Jenkins, Group Chief Executive.

Antony Jenkins

Good morning and welcome to the call. 2013 has been a year of significant progress for Barclays. We have executed year one of our Transform program, we’ve taken steps to derisk the business and strengthen the balance sheet through bold management actions and we have implemented multiple initiatives to increase the efficiency of our operations. This is reflected in the performance we’re reporting today. These results clearly demonstrate the benefits of the diversity we enjoy in the group as well as the strength of our core franchises. In aggregate our performance has translated at a headline level into adjusted income of £28.2 billion in the year adjusted PBT of 5.2 billion.

While profits have clearly been impacted by the amount of restructuring and derisking activity we executed in the period, this represents our resilient performance. Our capital we have made really strong progress on managing down our CRD IV risk weighted assets bringing us in a little under our Transform target of £440 billion well ahead of the 2015 timeline we set a year ago.

You should expect some fluctuations in that position in the coming year as we continue to invest and mitigate but it is gratifying that we have been able to move more quickly in disposing of Exit Quadrant assets than originally anticipated. This is positive even if it impacted revenues in the short term. Supported by our £5.8 billion rights issue we have reached the CRD IV for fully loaded CET1 ratio of 9.3% at the end of 2013.

We remain on track to meet our targets of 10.5% in 2015. Regress control around leverage exposure reduction as well as £2.1 billion of additional Tier-1 issuance has taken our estimated CRD IV for fully loaded leverage ratio to 3.1% and our PRA adjusted leverage ratio was just under 3% at the year-end.

The fact that we have virtually achieved the PRA leverage target six months in advance of the June 2014 deadline we had set it's obviously pleasing but more than that it is a very important demonstration of the effort and focus we applied in tackling that challenge and putting it behind us.

As you know I’m on record many times of saying that I view cost as a strategic battleground for banks in the next decade. Those who control and get on top of it will be winners and I intend Barclays to be in the vanguard of that group.

We had a cost target in 2013 for Barclays of £18.5 billion excluding cost to achieve Transform. The outturn as you can see from the announcement is a little higher at 18.7 billion. This is largely due to a year-end decision to increase certain litigation provisions and we notified the market of that on the 29th of January. Excluding these items the true operating performance of the business is on track although there is still work to do. Progress on cost reduction will not be linear or uniform quarter-by-quarter but we remain committed to the Transform target of a cost base of £16.8 billion in 2015.

This was a challenging target when we set it last year and it remained so. But I’ve made clear to the business and to my senior leadership team in particular that our objectives on cost are going to be met. There will no retrading on these. While revenues may fluctuate particularly in the short term our intent on cost is that the market will see steady and increasing positive (indiscernible) over time. Confidence in our ability to meet the cost ambition is supported by the programs that we have in place. For example in the course of the next month some 220 Managing Directors across Barclays will leave as well as 600 Directors. I have also introduced strict criteria on new hires at either of these levels. This action will have the twin benefits of taking cost out and contribute to streamlining and delayering the organization.

Tushar will take you through some more detail on cost programs including broader restructuring plans in his presentation.

While we’re taking our headcount, compensation for key talent is one area where we’ve been prepared to invest strategically in 2013 in order to protect and grow our franchise. At Barclays we believe in paying for performance and paying competitively ensuring that we have the right people in the right roles, serving our customers and clients effectively in a highly competitive global environment is vital to our ability to generate sustainable shareholder returns.

After careful consideration we determined with an increase of £210 million in the incentive pool was required in 2013 compared to a year earlier in order to protect and build our franchise in the long term interest of shareholders. Notwithstanding this increase we remain committed to our goal of reducing the compensation to net income ratio for the group to the mid-30s overtime.

So in summary 2013 was a year of enormous change for our Company. For the year in which the business also continued perform. Consequently we begin 2014 in a healthier position than we have been in for many years and there are three reasons in particular why that is so. First of all 2013 showed the tremendous value in having the breadth and diversity of Barclays earnings profile and we have seen continued evidence of the strong fundamentals which were essential for longer term growth. Second, we have started to put many of our legacy issues behind us and have greater certainty on what the future holds particularly in terms of regulation and third the strong progress we have made on our Transform program in 2013 means we’re well set to reap the substantive benefits of that work in 2014 and 2015.

Let me now hand over to Tushar who will take you through the detail of our 2013 financials and importantly the outcome of the balance sheet review which I asked him to lead in the quarter. Tushar?

Tushar Morzaria

Thanks Anthony and good morning. Anthony mentioned the headline figures from the group results for the year. I’m going to go into more details on the key themes as well as divisional performance. Starting with the group P&L, Barclays adjusted profits before tax was £5.2 billion on £28.2 billion of income while statutory profit before tax was £2.9 billion. This is a resilient outcome in light of the significant transition Barclays is implementing. We made substantial investment in future cost reduction on the Transform with £1.2 billion of cost to achieve or CTA while we also started to reposition our balance sheet and strengthen the capital base. We continue to resolve legacy conduct issue taking provisions and write-off including £2 billion in conduct charges for PPI and swaps taken at the half year.

This has been excluded from our adjusted results which are the basis of most of my discussion today. Income was £28.2 billion reflected growth in our Barclaycard, UK Retail, and UK Corporate Businesses as well as the Equities Business within the investment bank. These increases helped to offset declines in other areas demonstrating the benefit of diversity. We charged just over £3 billion in impairment during the year as we maintained good control on credit risk with an annual loan loss rate of 64 basis points. I should add that we take the same risk appetite throughout the year. Totaling operating expenses including CTA were £19.9 billion.

Excluding CTA operating expenses were £18.7 billion. This is above our earlier guidance of £18.5 billion mainly due to additional litigation provisions of 220 million that we took in the fourth quarter. We have also shown on this slide several other items in Q4 which affected the full year results. We have not however adjusted for CTA charges even though they are material as we did not expect them to be incurred beyond next year. We believe that keeping these in our adjusted results will provide better control over cost and benefit within the businesses.

Our effective tax rate for the year of 39% on adjusted profits reflects a £440 million write-down of Spanish deferred tax assets taken through the 2013 tax charge. Our CRD IV capital ratio reached 9.3% and leverage ratio 3.1% which translates to nearly 3% on a PRA adjusted basis. The level that PRA requested we aim for in June of this year. I consider both of these to be good achievements on which to build and I reflect a lot of work completed in the past year.

As I get further into my role at Barclays there are two features of the group that I think are particularly noteworthy. First, the underlying strength, growth and stability provided by our traditional banking businesses and second the benefit provided by our financial fundamentals which are essential to long term sustainable profitability for any bank. Starting with its first point as you can see on slide 5, Barclays has a remarkable mix and diversity of businesses that are anchored by traditional retail and commercial banking franchises. These franchises performed well through the crisis and are leaders in their field.

These includes the UK Retail and UK Corporate Businesses and Barclaycard which combined more than £11.5 billion of income and over £3.6 billion in adjusted PBT last year. These businesses are strong in their home markets, have excellent brand recognition and equally have good growth potential. Complimenting these of course is the investment bank which is an essential part of Barclays and have several cornerstone businesses of itself.

Within the IB today we have particular strength in several strength FICC across classes [ph] such as flow rates, flow credit and FX, our equities and investment banking businesses have seen strong growth in terms of market share and provide income diversity that Barclays didn’t have pre-crisis.

Our geographical diversity is also a strength with 80% of income spread across our three key markets of the UK, Africa, and the U.S. My second observation is that Barclays has a number of fundamental strengths many of which can be seen in the balance sheet metrics on the next slide. These include funding, liquidity and capital, solid credit risk management and net interest margins.

Our balance sheet today is considerably smaller than it was two years ago in IFRS terms. We have higher fully loaded CET1 capital levels and ratios, lower leverage and substantially higher levels of customer deposits. With this reduction has come a shift in composition of rising proportion of loans and advances and the falling of our financial assets. Notably netting derivatives due to the effects of central clearing.

Returns both on an equity and asset basis are below our expectations but we’ve a clear plan to achieve our ROE targets. Regulation in its various forms is a reality while the picture is clearer than a year ago it's important to highlight that we’re already meeting many of the anticipated feature minimum requirements ahead of their compliance dates as soon on this slide.

We will anticipate regulation where we can and stay ahead of the curve as part of future proofing but we will also remain commercially sensible in terms of how and when we implement the necessary changes. Going through the financial fundamentals and beginning with funding and liquidity on slide 8. We’re impressed with the transformation in our profile over recent years. The banks deposit base has increased by 17% over the last two years driving the loan to deposit ratio down to 101% and this enables us to completely sell fund our customer balance sheet.

As you know we have been gradually reducing and remixing our liquidity pull to bring it more in line with the regulatory and internal stress requirements but I would like to draw your attention to the high quality assets we continue to hold and this active a conservative management strategy has resulted in Barclays having maintained an LCR above 100%. At the same time we have continued to extend the duration of our wholesale funding with 56% now maturing in over one year.

We estimate that these actions would enable us to operate without access to wholesale funding markets for 42 months up from 37 months in December 2012. In terms of leverage and capital I mentioned in October that my priority was a detailed review of that balance sheet accessing businesses and products through both a risk weighted and leverage lends. I will talk shortly about where we’re headed next but as you can see we have already made significant progress to improve our leverage position in just the past few months.

We completed a £5.8 billion rights issue in October and subsequently issued £2.1 billion of qualifying AT1. The PRA adjustments to our Tier-1 capital have been reduced by half mainly by the alignment of our PVA calculations leaving a residual £2.2 billion adjustment. In terms of the denominator we have already exceeded our £65 billion to £80 billion target for reduction in leverage exposure. As of December our leverage exposure stood at £1.38 trillion or £1.36 trillion adjusting for the release of central clearing as per the recent PRA and Bargle [ph] announcements.

This is a reduction of nearly £200 billion since June 2013 were approximately £140 billion excluding the favorable FX move and importantly this has been achieved without impacting income generation as we start the process of optimizing the balance sheet for better returns going forward. Bring in all of this together our PRA leverage ratio was just shy of the 3% expectation for June, an increase of almost 80 basis points over the last six months.

Our estimated CRD IV leverage ratio improved a 3.1%. On risk weighted assets we have made good progress in managing down our fully loaded CRD IV RWAs to 436 billion, a reduction of 32 billion over the course of the year. Our Exit Quadrant RWAs for legacy assets have reduced from 94 billion at the end of 2012 to 54 billion.

The rights issue combined with attributable profit and the exercise of warrants earlier in the year strengthened our CT1 base considerably. This was offset somewhat by the provisions of both PPI and swaps that we took at the half year as well as adverse movement in our pension deficit and an increase in PVA. We also are adjusting fully loaded CRD IV capital for the final 2013 dividends in-line with the recent EBA confirmation of this methodology and as a result we finished the year with a fully loaded CET1 ratio of 9.3%.

Moving on to net interest income the total was 11.4 billion driven by increased customer NII. We calculate our net interest margin across our retail, corporate and wealth businesses and we use total assets plus liabilities at the denominator. Average customer assets for these businesses were up 2% and average customer liabilities were up 14% as volume growth offset NIM pressures to drive an increase in NII for the year. NIM saw an 8 basis point decline to a 176 basis points. As a percentage of average customer assets the way some banks report their margins NIM actually increased from 347 basis points to 350. Most of our NIM pressure resulted from reduced contributions from structural hedges. It was anticipated and over the medium term I expect the customer margin to stabilize rather non-customer margin will be driven by prevailing interest rates.

However I would emphasize that we have many opportunities to grow volumes particularly in the UK to offset margin pressure and continue to grow NII. Our strong risk management was reflected in the impairment charge of £3.1 billion. This was an 8% improvement on 2012 with significantly lower charges in corporate banking, and Africa RBB driven by ongoing action to reduce exposures in Europe and lower charges in the South African home loans recovery book. This more than offsets increases in other retail businesses as we grew them.

Credit metrics are strong and credit risk loans continue to fall as a percentage of loans and the CRL coverage ratio continued to improve despite the reduction in total impairment allowance. The overall outlook for remains benign with must delinquency statistics either improving or broadly stable. As I hope you can see all of the fundamentals I’ve mentioned which are essential for any bank, our I believe particular strength for Barclays.

Turning now to cost a critical element of the Transform program, overall costs were £19.9 billion of which 1.2 billion represented a CTA charge as per our previous guidance. Excluding CTA, we saw a £160 million increase in bank delivery as well as infrastructure cost in the IB to meet regulatory requirements. As a consequence cost to income ratio rose to 71% due to the CTA charges and reduced income for the year. The largest component of CTA was related to restructuring charges of £853 million. As you can see in the table we’re in the process of reducing headcount by over 7500 which will ultimately achieve an annual run-rate growth savings of over £800 million. We expect to make additional savings with the recent Managing Director and Director redundancies that Anthony just mentioned which is equivalent to 10% of staff, a different [ph] level across the bank.

We are continuing to implement further cost saving actions and remain confident of achieving our objective to deliver a £16.8 billion cost base at CTA in 2015.

Turning now to each of the businesses, UK RBB performed well and is strongly positioned for economic recovery. Income was up 3% driven by 6% growth in NII particularly from mortgages both organically and from the ING Direct acquisition. Mortgage stock share reached a record 9.9% up from 9.4% last year. Operating expenses at CTA were down 2%; our return on equity was 11.5% and return on equity, 20%. We’re confident that the business will generate attractive returns comfortable above the group’s current cost of equity.

Barclaycard continued to grow the UK and international businesses delivering 10% income growth and maintaining strong returns with an ROE of 18.4%. With PBT of £1.5 billion low leverage and further growth opportunities, Barclaycard is a key element in the delivery of attractive returns to shareholders at the group levels.

Moving onto Africa RBB, Europe RBB and Wealth. I’ve grouped these together as all three are implementing plans to improve returns. Africa RBB improved performance with PBT just over £400 million up 25% despite a significant depreciation in the Rand. This improvement reflects actions we took in 2012 to provide against risk particularly in the South African home loans recovery book. We still have some way to go to bring returns up to a satisfactory level but we have strong market positions in Africa and critical mass across the continent another element in our geographic diversity. The loss [ph] for Europe RBB includes £403 million of CTA reflecting the significant restructuring we announced in the first quarter we reduced branches and distribution points by nearly 50% over the course of the year. The new management team in Wealth has started to implement revised strategy to simply the way the business operates. The revised strategy involved a CTA charge of a £158 million with a planned 7% reduction in FTEs and goodwill impairment of £79 million.

The investment bank generated £2.5 billion of PBT for the year, confidence in FICC markets were subdued particularly in the second half of 2013 as uncertainty over the effect of proposed tapering reduced client activity but our equities and investment banking businesses continued to make good progress. Income was £10.7 billion with declines in FICC businesses partially offset by growth in equities of 22% and 3% in investment banking. We’re showing our Exit Quadrant income separately from FICC and have also included a gain relating to the recoverability of Lehman assets in H1 in that line to allow a cleaner comparison.

Impairment continued at low levels and cost were £8 billion in total which included a CTA charge of £262 million. So our headwinds from the allocation of bank levy of £333 million an increase of 62% and infrastructure cost of over £300 million relating to regulatory compliance. Nevertheless made progress on implementing our cost reduction programs the benefits of which are not fully reflected in the cost run-rates. RWAs continue to be tightly controlled and were reduced from £258 billion to £222 billion. The IB today is much more balanced than it was in the past with the successful development of equities and investment banking which tend to be less capital intensive than much of FICC. This surely does from some of the impact of falling FICC income that has affected the market over the past year. The equities and investment banking franchises are growing with a record year in equity underwriting, acting as a lead on almost 40% more equity offerings and we were ranked number one in UK IPOs.

FICC income saw 16% in the fourth quarter versus Q4, 2012 which is broadly in the middle of the European tier [ph] group. We remain confident that our flow businesses are well positioned to grow in the near regulatory landscape and for example FX saw a 9% increase that is Q4 of 2012. Lastly to turn around in corporate banking continued as PBT reached £800 million, this reflects rationalization of the geographic footprint and further improvement in impairment particularly in Spain. PBT improved across all regions with the UK business just under £1 billion as we started to see the benefits of repositioning of the business.

Returns overall are not yet at a satisfactory level despite the increased PBT which has offset by the write down of the majority of the DTA in Spain but we’re confident about the direction of travel as we remain focused on reducing RWAs and our Exit Quadrant assets.

Let me turn now in more detail to leverage both on the reductions to-date and where we go from here. As I indicated earlier we’re ahead of schedule with leverage exposure down to £1.36 trillion on the PRA adjusted basis and we have achieved this with a minimal impact on income. Looking first at derivatives we generate a very material component of the estimated leverage exposure. We gave you a target of £30 billion to £35 billion in permanent reductions of potential future exposures or PFEs.

The second half of 2013 we reduced PFEs by 46 billion excluding the beneficial impact of FX. This was achieved by better application of netting rules and other operational efficiencies. The PRA announcement late last year also gave some benefit for centrally created derivatives. This reduced our derivative exposure by 14 billion and allows us to increase our business still further in this area.

Turning now to securities financing transactions or SFTs, we continued to reposition the portfolio in Q4 for higher returns on assets for example during the quarter we reduced fixed income repo and recycled the capacity into high yielding SFTs such as equity financing. We also worked on optimizing netting of collateral against exposures. Overall in Q4 while the CRD IV measure did not show a net reduction we achieved gross reductions in SFTs of £14 billion through optimizations and this is a good example of how we could improve the efficiency of that balance sheet by utilizing excess leverage capacity to generate higher returns.

Rebalancing leverage exposure in this way on a broader scale will be an important element of balance sheet optimization which we will pursue vigorously this year and this will be of particular importance given the additional exposure that SFTs will generate under the BCBS proposals.

Other movements included reductions in surplus liquidity, inventory, reductions in Exit Quadrant assets and seasonal effects at year-end. Overall the improvement in leverage exposure was a £196 billion since June of 2013 or approximately £140 billion excluding FX which is a strong outcome in a relatively short space of time and this has taken us very close to a 3% PRA leverage ratio at year-end.

During our third quarter results I said I would come back to you with further deleveraging actions, above and beyond the initial 65 billion to 80 billion exposure reduction following the top down analysis of our balance sheet that we have been undertaking. With our achievements in the second half we are now confident of reaching 3.5% ratio by the end of 2015 and aim to be in the 3.5% to 4% range beyond that as shown on the next slide. I encourage you to focus on the leverage ratio rather than the component parts of the numerator and the denominator of subject of volatility from market based factors such as FX interest rates and credit spreads as well as seasonal movements in the balance sheet.

However reducing the leverage exposure denominator is key and we believe that we can reduce this to below £1.3 trillion by 2015. This involves an additional net reduction of approximately $60 billion. This would take total net deleveraging from June 2013 to approximately 200 billion excluding the impact of FX. This could be through a combination of the following, on derivatives we expect to achieve an additional reduction of around 50 billion to 60 billion through trade compressions, tear-ups, collateral optimization and other operational improvements.

We should have a dual benefit to both the PFE add-on and derivatives replacement cost. SFTs is captured under CRD IV currently accounts for 92 billion of our leverage exposure. We plan to reduce this by 25 billion to 30 billion through efficient management of underlying transactions, collateral optimization and further work on netting as well as some inventory reduction. As I mentioned earlier we will also aim to increase the return profile as we focus our prime services business towards generating a higher return on assets and this will become increasingly important as the BCBS proposals are developed.

Undrawn commitments we have targeted only a modest reduction as we expect to see some benefit in this area from the BCBS proposals. Importantly for our franchises none of these planned actions have any meaningful impact to current income run-rates. They will be phased in over the next few years and as a result we do expect to forego some future income growth going forward with a negative drag of approximately £300 million in 2015.

Think of this as the opportunity cost of running a £1.3 trillion leverage exposure versus 1.5 trillion leverage exposure. In addition to these deleveraging actions our leverage ratio will also be increased by ongoing capital accretion including further AT1 issuance and retained earnings.

So what does this mean for how we intent to manage leverage going forward? As I mentioned we will be aiming for a full loaded ratio of at least 3.5% by the end of 2015 and in the range of 3.5% to 4% beyond that. Managing the business at these levels feels appropriate to me given the direction of regulation. Despite this leverage guidance we continue to believe that risk based measures will be the primary business constraint with leverage acting as a backstop to these measures.

We’re currently embedding leverage management formally into our daily routines to ensure the same levels of discipline around our leverage exposure as we have in place for RWAs. Really given the evolving regulatory environment there are a number of variables that can still impact the leverage calculation and the BCBS announcement in January provided helpful clarity of a number of points. It remains early days but based on initial analysis we anticipate that our leverage ratios could be reduced by approximately 20 basis points under the BCBS proposals. However this is before any management actions and we’re already looking closely and the areas which give rise to the most significant increases.

But to conclude on leverage I’m very pleased with the quick progress we have made in Q4. We still have a lot of work to do this year as we start optimizing the balance sheet for the best and most sustainable returns. We will be identifying and taking actions to optimize and we will update you periodically.

I would like to turn now to capital and to give you our latest thinking about the direction of risk weighted capital ratios for Barclays. You will recall that the PRA confirmed in December 2013 that UK banks will have to hold at least 56% of their Pillar 2A capital requirement in CET1, at least 19% in AT1 and the remainder in Tier-2 by January 2015.

The Pillar 2A requirement represents the capital that UK banks need to hold to cover idiosyncratic risks not fully captured under Pillar 1. It is determined at least annually by the PRA in consultation with each bank as part of its capital advocacy assessment and resulting capital guidance to each bank. The PRA expects to consult further on Pillar 2 during 2014 and the EBA are currently developing guidelines for the approach to Pillar 2A requirements is not yet finally settled.

However, if our 2014 Pillar 2A add-on were to be the same next year it would result in a Pillar 2A CET1 add-on of 140 basis points. This number could vary one year to the next and suddenly could change before taking effect on the 1st of January, 2015. This reinforces that the 10.5% fully loaded CET1 guidance we have given for 2015 remains a valid and a sensible milestone as it will be well in excess of the 7% PRA regulatory target at that time and in excess of the end-state 10.4% that we have shown on this slide. I expect that we will always operate with a certain level of management buffer above regulatory minimums recalibrating it alongside the PRAs individual capital guidance.

We would not however expect it to be greater than a 150 basis points in our current plans. Once the combined buffer requirements are fully phased in and we have decided on the appropriate calibration of the management buffer we might be looking at an end-state ratio in the 11.5% to 12% range and we’re confident that we can build to these levels organically over the next few years.

In terms of the outlook for dividends I would say a 2014 dividend at the 40% payout level I would not expect it to rise further into the 40% to 50% payout range until at least the 10.5% CET1 milestone has been reached while we focus equally on capital accretion.

I’ve covered a lot here so let me full together my thoughts for you. As I reflect on the 2013 results for Barclays I believe progress has been made and momentum is starting to build. We have had a sharp focus on leverage and capital with solid progress on both. Guidance for a 10.5% CET1 ratio in 2015 rising to 11.5% to 12% overtime and the range of 3.5% to 4% for our leverage ratio should provide a degree of future proofing as regulation settles.

There are lot of strength in the franchises and I found that there are several areas that are better than I expected or so when I started. As I look forward in 2014 it will be another year of transition as we continue to make investments and reposition several businesses. I’m tracking our overall progress on the financial elements of Transform carefully and while our objectives and plans remain appropriate we will make business cost level corrections promptly when or where necessary. My focus is now in optimization of our balance sheet as well as cost reduction in order to generate higher and more sustainable returns. These won't happen overnight but the quick progress that we have made in the fourth quarter on leverage for example demonstrates a commitment that we have to make these happen. I look forward to providing you with further updates as we go along and with that Antony back over to you.

Antony Jenkins

Thanks Tushar. What is clear from the analysis which Tushar has just shared is that the fundamentals of our business are strong and while we have answered the leverage question with a good degree of future proofing against regulatory shifts we still have further work to do to optimize the balance sheet or returns. That is the next phase in what will be a perpetual rather than cyclical examination of how we can make our balance sheet work harder for shareholders. On February 12th last year a year to the day tomorrow I shared the outcome of our strategic review and unveiled our program for changing Barclays into the go-to bank.

What gave particular credibility to that ambitious plan for transforming this business were the public commitments we made at that time. As you will recall we made eight specific promises, six of them financial and two of them non-financial. Across the financial commitments as Tushar and I have recounted in our remarks, we’re making good headway and this progress plus the additional work on deleveraging with Tushar has shared means we remain convinced of our ability to deliver a return on equity for the group in excess of the cost of equity during 2016. There are of course always risks to a plan. Last year I laid out four main areas which could pose a threat to achieving our goals. Let me give you a brief update on how I view these today.

The first was the risk of a major macroeconomic downturn, this thankfully has not occurred and here in the UK we’re even starting to see signs of a sustained recovery. While the threat of a downturn has somewhat lessened the environment remains uncertain and volatile. Second was legacy issues, we’ve managed these well in 2013 and must continue to do so because the reality is that such masses will be with us for few years to come. The third was a failure to execute the plan with a new senior management team established I’m content that we have the appropriate focus on all work streams. Fourth was a significant, unexpected change in regulation and to-date we have been at debt [ph] daily with such challenges. In the round therefore our current confidence level our management for risks to the plan is high.

Turning to the two non-financial commitments we made in Transform the first of these cultural change and in particular the process of embedding our purpose and values throughout the organization is going well. But this morning I want to particularly focus on the second non-financial commitment, a introduction of a balanced scorecard for Barclays which we’re publishing for the first time today. It is the crucial final component in our leadership system of becoming the go-to bank. The scorecard details how we’re going to make measure the holistic performance of our business overtime across what we call the 5Cs. How we’re delivering for our customers and clients? Our colleagues? On citizenship? On conduct? And ultimately the financial benefits for our company?

As you can see we have specified eight targets across these five categories. What is really powerful in the balanced scorecard is the breadth of our risk covered with specificity of the targets we have set and the transparency we intend to have in allowing people to see how we’re tracking against them. All stakeholders will be able to see progress or otherwise every year in our annual report. We’re measuring performance in this way because we’re clear that Barclay’s long term sustainable success relies on delivering for all of our stakeholder groups.

Finally let me just say that Barclays is a very different and more positive place than 12 months ago and 2014 will be a pivotal year in the transformation we’re undertaking. We’ve invested considerably in that transformation and in the months to come we will many more benefits of that investment starting to flow through. We do expect the operating environment to remain challenging but today we’re exercising much greater control over our own destiny as a consequence of the actions we’ve taken and will take going forward. We therefore have every reason to feel positive about our prospects.

Thank you. I will now hand over to the operator to open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first telephone question today Antony is from Andrew Coombs of Citigroup.

Andrew Coombs – Citigroup

I’ve three questions; one is on costs, one on the investment bank and one on the long term ROE target. Firstly on cost I was looking at slide 12 where you identified the major restructuring programs to-date and there was a comment on the why there is about 10,000 to 12,000 job cut this year. But I guess the first thing was just to check if that’s inclusive of the 7650 on slide 12 or whether that is in addition to those existing FTE reduction levels and accordingly whether we can gross up the annual savings in proportion if you’re saying a 50% additional FTE reduction would it be point A, going to 1.2 billion in terms of the anticipated annual savings. So the first question is cost, secondly, in terms of the investment bank your FICC revenues were fairly weak compared to U.S. peers in the past three quarters and that’s even excluding the legacy quadrant asset. Now you said the revenue attrition associated with the leverage ratio, asset reduction has been minimal so just want to get a bit more clarity on why the underperformance has continued for three consecutive quarters whether that’s a reflection of business geographical mix and so forth and then also within the investment bank just when you look at your compensation measure for the full year is 43% versus your mid-30s target how much of that is, you know to achieve your target how much is revenue upswing versus taking further cost down and I’ve one final question, on group ROEs but perhaps I will stop that for now.

Tushar Morzaria

What you see on slide 12 is the amount of headcount reductions that’s associated with the CTA charge booked in 2013 so some of that would have already be in action some of that will be actioned substantially so it's more of an accounting view of the amount we have charged off execution of which some of which will have in the year and some of which subsequently. I think some of the announcements that we also made earlier this morning was further reductions in 2014 that will also be charged during 2014 and that will be the use of CTA over this coming year. So just think of them it's sort of separate kind of numbers, don’t sort of necessarily add them together or confuse them in that way.

Antony Jenkins

Okay and on the IB question around FICC clearly we have seen some weakness in FICC revenues, there is a contrast between the European and the U.S. players in the markets like the U.S. players have done better but we continue to remain strong in the FICC business as Tushar said, we’re about in the middle of the pack of the Europe players and finally on the compensation ratio we do think that this was a soft year for the reasons that I’ve said. In FICC we do expect to recovery an income but we also think that the ratio was impacted somewhat by one off litigation costs on the income line and of course you will continue to see the flow through of the benefits of cost reduction. So it will be a combination on the cost reduction on compensation and some growth and income.

Operator

The next question is from Michael Helsby of Bank of America Merrill Lynch.

Michael Helsby – Bank of America Merrill Lynch

I’ve got three questions on the investment bank if I can. Firstly, just on revenue Antony you just mentioned that you expect FICC to recover in 2014 clearly the second half of last year saw a big step down at an industry level and for you guys as well in FICC. You’ve had your January account now for well over a week and I was wondering if you could tell us if that year-on-year step down in FICC experienced in the second half of last year has continued into January versus year-on-year performance versus last year, so that’s question one. Question two; I’m just a little bit perplexed on the messaging on cost in the investment bank because clearly the investment bank is one of the few divisions where you’ve actually given a firm cost target, performance pays up 17%, revenues down 7%. You said you’ve cut 1400 jobs but actually the headcount is up year-on-year and it's actually up 700 since the first half of the last year, i.e. first half of ’13. So if you can just talk to us and give us a little bit more granularity around that I would certainly find that helpful and then finally just on strategy on the investment bank. Tushar I think you promised to give us an updated on strategy post this balance sheet review on risk and leverage. You clearly made great progress on leverage, I think people have recognized that but you’ve had to increase your Core Tier 1 target to 11.5% to 12%. If I adjust the 2013 profit further litigation and cost to achieve and allocate capital in the IB at 12% then it looks like you’ve made an ROE of about 8% and that’s clearly well below your cost of equity. Even if I include the 900 million of cost saves that you’ve told the market it still only gets me to a 10% ROE. So I think quite rightly what’s happening this morning is people are disappointed that you’ve not made some new commitments in the investment bank. So can you explain to us what we’re missing and how you’re going to get the investment bank ROE above cost of equity? Thank you.

Antony Jenkins

Michael let me just clarify my comments about the FICC income recovery were not specific to 2014. I will ask Tushar to talk briefly about what we see in the first few weeks of this year and also on your cost question and then I will come back to your point on strategic.

Tushar Morzaria

In terms of first few weeks in FICC we got to be a little bit careful, it's only been a small number of week so we don’t want to extrapolate too far but probably no surprise that January turns out to be materially stronger than activity we have seen in the second half of last year. It's really too early to call whether this quarter is going to be any better or worse than this time last year so I will be cautious of getting you to extrapolate too much there but a stronger start to this year than certainly the second half of last year, no surprise there.

In terms of headcount in the investment bank your question around you see [ph] the reported headcount goes up. We’re announcing job losses. You got to be careful when you look at just headcount in isolation I would really encourage you to sort of focus more on the cost line. The reason I say that is there are occasions when headcount will go up but if the cost will go down I will give you a couple of examples one is when we’re doing a lot of right shoring moving functions and processes to other regions quite often we will run those processes in parallel so you get actually a significant let down in your cost base but in the interim basis the reported headcount goes up. Another good example is insourcing, I will give you an example of say technology work or other processes that we bring in-house, our reported headcount goes up but it's actually a cheaper way to deliver that function or process.

So I would caution you a little bit, don’t get too sort of focused on headcount and focus on the cost line. In terms of and then I will hand back over to Antony on the broader strategic question but you asked me about the strategic review of the IB. I will say Michael my number one priority over the last quarter or so has been focused on leverage and to get the company in a position where we get the bulk of the leverage issue behind us and have a good platform to build from here. I mentioned at the end of my prepared remarks sort of the two areas of focus for me now are balance sheet optimization and cost reduction.

So in terms of talking to you more about what that really means particularly on the balance sheet optimization, as we do further work on there and I’ve further things to share with you we will do that but think of it as an intense focus on leverage rotating on to a much more strategic review of balance sheet optimization.

Antony Jenkins

I think that’s well said Tushar and as we communicated this time last year we laid out six financial commitments. As you can see we’re on track for those commitments at the group level and the return on the IBs is really a function of the capital consumed and to a very large extent the driving down of the cost base and as we have talked extensively in the presentations we have made good progress particularly on the balance sheet side of it, we expect to make increasing progress on the cost side and that is the path that we will take to get the returns above the cost actually which as you know we’re deeply committed to.

Operator

The next question is from Raul Sinha of JPMorgan.

Raul Sinha – JPMorgan

Could I’ve maybe one question for Antony and one question for Tushar if I can? Maybe starting with Tushar first, just on the Core Tier 1 ratio range of 11.5% to 12%, obviously you say there is a management buffer in there but the 1.5% seems to be quite a high number right now presumably driven by the fact that you’ve got a lot of uncertainty on your Core Tier 1 requirements are in the UK. Should we assume that how much do you think that should reduce once you get clarity on what the other buffers are that are coming into Core Tier 1 and then is there a possibility that your 11.5% to 12% Core Tier 1 range actually starts rising as these buffers come in.

Antony Jenkins

The way I think about the 1.5% buffer range is it's much trying to future proof us until we get end state and I just think it's a prudent way to be running the company. The kind of stuff that we haven't assumed in there for example a counter cyclical buffers or sectoral buffers which may or may not be applied or relevant at that time. I think the real answer to your question Raul is we sort of said no more than 1.5% we will recalibrate that buffer to the prevailing regulatory environment at that time so for example if we do see the likelihood of counter cyclical buffers coming in we will probably run a slightly larger buffering anticipation of that to the extent that we don’t foresee that or foresee a counter cyclical buffer actually being removed. We would want to be tighter so we will be commercial and sensible about that but I doubt it will be any higher than 1.5%.

Raul Sinha – JPMorgan

And the 12% sort of top end of Core Tier 1, is there anything in sort of the current rules that leads you to believe that you might have to raise that going forward once you get clarity?

Antony Jenkins

No nothing, I mean things that are variable (indiscernible) charge may come down but will see how that goes, either two I’ve mentioned to you, you should not just take the extrapolation of 1.4 and assume that’s permanent it may go up, it may go down we will obviously do what we can to bring it down but that’s an annual in fact it happens more than annually so that’s a variable. But I think 10.4 is a reasonable point to assume given all the information we have now.

Raul Sinha – JPMorgan

Antony if I can just attention on to cost and I guess the underlying difficulty that people face today is forecasting what is a very difficult revenue environment especially in fixed income that can be quite volatile. It was quite helpful Transform last year when you gave us absolute cost guidance $16.8 billion in 2015 but obviously that was based off an environment of rising revenues also included within the investment bank. Is it fair to assume that if the revenue in the investment bank disappoints as it has done in 2013 then that $16.8 billion cost number could also potentially come down maybe because of lower performance related cost?

Antony Jenkins

Let me make a couple of comments on cost in general, the first is that there is a lot of tactical cost opportunity within the group and we have talked about some of those things today particularly the reduction of 820 jobs in the sort of management cadre but there is also a lot of strategic opportunity in the group from the automation of our retail businesses for the customer, we’re also in the operation of our institutional businesses particularly in the middle and back office.

It has clearly take us time to put the components in place to deliver that but I feel pleased that we delivered the cost target last year notwithstanding that we have to deal with headwinds or things like regulation. So as we said in the speeches both Tushar and I, we don’t expect progress to be linear but you should expect an acceleration on progress on cost reduction over this year and next.

Of course we will continue to revisit the targets in the light of the performances of the businesses and it would be foolish of me to roll out that we wouldn’t potentially have a different cost target in a different revenue environment but for now we remain committed to the 16.8 billion in 2015.

Operator

The next question is from Chintan Joshi of Nomura.

Chintan Joshi – Nomura

Can I have three as well, please? Firstly I will just follow-up on the capital question, if I try to reconcile slide 21 which is saying 10.4% plus 1.5% management buffer which gets you to 11.5% to 12%, with slide 35 which adds up to 10.5% I mean how should we reconcile this slide? I was also after a breakdown of that 1.4% Pillar 2A if you can give that. The second question was for 2015 RWA target for 40 billion is ahead of what you already are at currently. So question is why shouldn’t it be lower? Are you expecting some kind of add-ons you already have a 54 billion Exit Quadrant which should be a tailwind i.e. it should reduce the 2015 number. So what is your assumption there? Why hasn’t this target brought down already? And then the final question is I’m just trying to think from a regulators point of view that they weren’t happy in June with the backup [ph] balance sheet at a $1 trillion. You’ve got it down to 800 probably goes to 700 with your measures but then it will gross up back to 800 with the change in the rules from January 2014. So the question is do you feel as in state the regulator would still be happy with the $800 billion backup balance sheet? Thank you.

Antony Jenkins

I will let Tushar answer your other question, just let me respond to your last one. Actually the regulators asked us to deliver a leverage ratio expectation by the middle of the year and as you know we have substantially done that by the end of last year and we have shared our funds with the regulators. So I think we will deliver on our commitments to the regulator and as Tushar described in other areas of capital as those evolve we will deliver on those commitments as well. But on the overall technical points I will hand it over to Tushar.

Tushar Morzaria

So I think the first question was just understanding difference between slide 21 which showed our capital stack minimum requirement of 10.4% and slide 35, the real difference is there is no Pillar 2A in slide 35. You may have seen slide 35 in the past and you will see we sort of added a couple as well actually three arrows so you can see where Pillar 2A would insert itself inside that capital stack. So if you put an extra 1.4% into the dark blue area you get to 10.4% above which you run 1.5% off, it will get you somewhere between 11.5% and 12%.

Chintan Joshi – Nomura

So we should add 1.4% to slide 35 effectively?

Tushar Morzaria

That’s right. To make it a bit easy for you where you see Pillar 2A CET1 you can add 1.4% in that.

Chintan Joshi – Nomura

Understood and the breakdown of that 1.4%?

Tushar Morzaria

Yeah so we’re not going to provide our breakdown. The PRA have been in dialogue with the banks and have only recently granted permission for the UK banks to discuss the impact of Pillar 2A which we’re doing today. So we’re very grateful for that and it's good constructive dialogue that we have been having with the PRA. But we’re not in a position to provide you with a breakdown of that. So I can’t do that.

Chintan Joshi – Nomura

And finally that of your target?

Tushar Morzaria

Yeah the RWA target, so as you pointed we’re sort of there about £440 billion. I think where all this comes down to is my earlier comment which is we need to have Barclays running a sort of an equilibrium across leverage and risk-weighted assets and at the moment because we’re still doing a little bit more work on leverage you’re not sort by reducing risk-weighted assets you’re not necessarily freeing up leverage capital. I think there are continued reductions that we have in place, you can see that in our Exit Quadrant we targeted £36 billion of RWA so we will continue to work to get down there and we will look for opportunities to reinvest that capacity. I will give you a couple of examples, if you see our Barclaycard in UK retail businesses we have actually grown RWAs in those businesses, they have super, super attractive marginal rates of return and you know we will continue to be commercial [ph] and take those opportunities where we can. So that’s where I would guide you towards for now.

Operator

The next question is from Fiona Swaffield of RBC Capital Markets.

Fiona Swaffield – RBC Capital Markets

Could I ask a couple of questions please? Can I just clarify on the Common Equity Tier 1ratios, if when the CCCB comes in would the management buffer go down so the 1.5% could we assume that and the secondary is you gave some interesting comments on repositioning the repo in prime brokerage to kind of equity financing. Could you kind of give us some information on how important that’s being for revenue or ROE basis and sorry just one last one just on the deductions against Common Equity Tier 1could you help us a little bit on how those could potentially be reduced overtime? Is there any scope there for example on PVA?

Tushar Morzaria

So to your first, I will just fill it you [ph] I’m just saying the CET1 ratio, repeat your first one I don’t think I wrote it down properly it's counter cyclical buffers the CCCBs when they are coming in. So I go back to my earlier comments which is we recalibrate the buffer when we get to those point. So if you ask me hypothetically if we have got a 1% counter cyclical buffer at some point in the future would we run 1.5% buffer above that? It's so difficult to answer that question until we get to that point; it really comes to the outlook and making sure that we’re future proofing ourselves. So it may be lower it may not be. But I guess I would encourage it I think we will be transparent and continue to recalibrate that buffer based on all the information that we can anticipate for reasonable point in the future.

Moving on to your other question on repositioning around the repo book, it's relatively small and modest you know towards the end of the year we rotated from a leverage exposure of computation remember this isn't the same as on balance sheet, rotated about £14 billion out of fixed income repo into equity financing. It's really an example of where because we had overachieved to our internal objectives around reduction leverage firstly. It just shows how we can be smart around reposition our balance sheet to soak up that capacity and generate attractive returns, equity financing returns tend to be somewhere around four times better than fixed income repo so it's a good business, it's repeat [ph] business and just gives you a flavor of the kind of things that we’re doing when we’re talking about optimizing our balance sheet and improving return on assets profile.

The final question on CET1 deductions yeah there are something’s we can do, good example of the, we had clarification in EBA rules around investment in your own shares which actually created a drag for us in our Common Equity Tier 1 on the quarter of somewhere around seven basis points. Well this is to the extent that for example our pension fund invest in Barclays shares mostly indirectly for through trackers or fund holdings then that becomes a deduction from capital that’s obviously something we can do things with and there will be opportunities like that, not all of them we will be able to do things with some of them are deliberately designed to be permanent deductions but you know where we can we’re intensely intended to be optimal about that.

Operator

The next question is from Joseph Dickerson of Jefferies.

Joseph Dickerson – Jefferies

I’ve two brief questions, the first being how much of the 300 million of foregone income associated with the leverage plan can be offset by the mix shift to bonds and liquidity pool and secondly I noticed not referenced a specific cost of equity in the documents this morning. I mean surely it's fallen materially below the 11.5% that you’ve given in the past due to the derisking and deleveraging of the business and we just ask for your comments on that. That’s all I’ve got thanks.

Tushar Morzaria

The £300 million the way you should think about is an opportunity cost of foregone revenue so if we’re allowed to run obviously a larger leverage exposure we can put more assets on the balance sheet and the return. How much of that could be mitigated by optimizing the liquidity pull? Some of it I guess. It's something I think we use the liquidity pull to make sure that the Company has a robust liquidity position. I don’t think of it as a profit center in of itself so I wouldn’t get sort of too drawn into that being as a management action to offset some revenue decline. In terms of cost of equity I’m glad you think our cost of equity is reducing. If something will be driven by the market and the market will price our cost of equity, there is various ways in which can back into it. It's an internal matter today changed any of our assumptions but it's the market we price it to new level we will be responsive to that obviously.

Operator

The next question is from Peter Toeman of HSBC.

Peter Toeman – HSBC

Just to sort of going back on Michael’s question I was just wondering I’m still struggling to see how the investment bank could make a cost of equity of return on the basis of the 12% Core Equity Tier 1 on the 221 billion of CRD IV assets and I’m not quite sure what assumptions you’re making long term about the cost income ratio but the comp to income ratio maybe has sort of 8 percentage points to 4 but it wouldn’t suggest me that the business would be able to make a cost of equity try to return.

Antony Jenkins

I think I answered that question the first time around, it is the product of what’s on the balance sheet and primarily the cost base but Tushar if you add a couple of clarification.

Tushar Morzaria

Yeah just to build on Antony response it's just reinforcing what Antony said really but one of the things that’s inside the investment bank that it's difficult for you guys to look inside because we haven't provided that detail somewhat deliberately, is what goes in our Exit Quadrant. If you were to look at the investment bank and try and see the impact the Exit Quadrant have on the IB you will see that there is a reasonable drag in there and now as I have mentioned to Michael earlier on my focus up till now was being really focused on leverage and getting really after that as we’re getting to optimizing the balance sheet overtime when we have got things to share with you around that we will I think you will get a very different picture if you were to strip out the Exit Quadrant, but leave at that for now I think.

Antony Jenkins

Just as a point of principle and I will reiterate as I have said in previous calls, I expect all the businesses in Barclays to have a track to get there return on equity by the cost of equity. Those businesses have those tracks, they are executing those tracks and you will begin to see the benefits of those plans as you can already see in the investment bank with the excellent work done on the Exit Asset Quadrant.

Operator

The next question is from Chris Manners of Morgan Stanley.

Chris Manners – Morgan Stanley

So I had two questions for you if I may, the first one is about the leverage ratio target you’re saying you sort of expecting to run 3.5% to 4% but when we look at what the (indiscernible) to Osborne it was talking about scaling up leverage ratio requirements proportionally with the CET1 ratio requirement and obviously you’re also now targeting 11.5% to 12% in 2019 of CET1. So that’s 1.5% of AT1 on top of that if you were to scale up the 3% in that ratio you’re getting to more like 4.5% that you might need obviously we’re not there yet and there is a bit of road to travel. I just thought I would ask you how would you react if you saw what the SPC was thinking moving in that direction. What are the levers you’ve to pull over and above what you’ve already executed and obviously $820 billion in the quarter is very good. Secondly, just on the cost base, obviously we appreciate the hard target of £16.8 billion you’ve given us for 2015. How should we think about the trajectory beyond that? Would it sort of be growing at CPI or in line with revenues and given as they were cost income ratio or actually if we have got more benefits from Project Transform that will actually be filtering through into more streamlining in ’16? Thank you.

Antony Jenkins

Well Chris let me just answer the question on the cost base. We haven't provided any guidance beyond 2015 and we’re not going to, but as I have said in my remarks cost is a strategic battle ground for the industry so you can expect us to continue need to focus intensely on cost going forward and do you want to take the leverage ratio?

Tushar Morzaria

So Chris I mean the reason why we, I think it's appropriate and prudent to run the company at 3.5% to 4% is partly for the reasons you laid out minimum leverage ratio requirements it may or may not increase. I think you got to be a little bit careful at wondering whether it's going to be gross topping [ph] reference to 12%. You can see that our minimum requirement would be more closer to 10% and I would have thought that would be the jump in off point rather than all the way to 12% but we will see the SPC a bit doing their review. They said it will take 12 months to the conclusion. You know we will do everything we can to get ahead of it to the extent that there is a new minimum flow. I think we feel very well positioned to be able to cope with that well that to be the case.

Chris Manners – Morgan Stanley

So I guess I was just asking any more sort of easy wins so you could tweak if that number was to get higher that you’ve thought about but not laid out because you don’t need to do them yet.

Tushar Morzaria

Well we have laid out the plans that we have, if we will need plans we will share them with you.

Operator

The next question is from Tom Rayner of Exane BNP Paribas.

Tom Rayner – Exane BNP Paribas

Can I ask question please? First on the investment bank, sorry for keep coming back to this but Antony you’ve talked about over the last year a few times the cost flexibility in the investment banking business and in the face of sort of poor revenue. Clearly I could quote a few stats but I won't, it doesn’t seem to have been much evidence of this cost flexibility in 2013 and a sort of question is what happens if revenue disappoints again in 2014? It sounds as if the cost plan you’ve is already quite a stretching one so I just wonder what other levers you might be able to pull and then my second question is on capital and dividends you mean to do that now? I mean just looking at your sort of new thinking around the sort of PRA and what sort of Common Equity Tier 1. I mean it looks like 12% is not a bad number now to think of it as a go-to. My question really is given that your own sort of targeting is that when you get to 10.5% for 2015 why would you be so keen to sort of increase the dividend payout at this stage? And why would you be thinking of increasing say beyond the 40 once you get to 10.5% and not wait until you’ve got to at least a 12%? Thanks.

Antony Jenkins

So Tom I would really just to reiterate what we said on cost in general for the group and in particular for the IB. We’re going to drive the cost base down across the organization, that takes time because you’ve to address it both structurally and tactically as we describe but you should expect accelerating momentum there. Obviously we believe that we’re in a structurally lower revenue experience for a long period of time that will force us to go back and look at what we can do in the area of cost but it comes back to the discussion that we have had on this call a few times now from different questioners about how do we get confident in the track of the investment bank to deliver returns on equity above the cost for equity and I think you can see what we have achieved on the balance sheet and you can expect us to achieve similar sorts of moves on the cost base which will allow us to get there with confidence.

Tushar Morzaria

On the sort of the dividend and capital accretion I mean I think the message that I wanted people to get across is that capital accretion is just as important as capital distribution at this stage. So when it comes back to we guided the market to a 40% to 50% payout ratio we’re now getting very specific to say that that will be at 40% until at least reaching 10.5% CET1 so to make sure we have the right balance between accretion and distribution. We certainly haven't said that we would increase it, at that point we will review it at that point and if capital accretion is still that priority will continue to reflect that in our dividend forecast.

Operator

The next question is from Chris Wheeler of Mediobanca.

Chris Wheeler – Mediobanca

Of course two questions, first one is you appear to not have mentioned the cost target you set last year for 2014 of 17.5 billion. Is that something you think might now move up as you’ve actually have to perhaps spend more to get down to the 16.8 for next year or will it sort of pretty well be the same number that you’re focusing on? And the second question really is on page 41 of your release which is your, the total incentive awards page. Can you perhaps give us a clue as to how this might look next year given obviously the changes that are required given a new EU requirements on bonuses being capped? And I mean just perhaps talk a little bit through what that might mean to efforts to push down the comp ratio in the first year of the new scheme given the fact you’re going to have to I assume put in place some additional payments which are going to be based on some form of revenues which obviously may or may not be met. So I would be interested to know what that might mean in terms of both disclosure but also what it might mean in terms of a tough job of pushing down the comp ratio? Thank you.

Antony Jenkins

Tushar is going to talk about the comp and I will talk about the cost. So Tushar do you want to come first?

Tushar Morzaria

What I sort of say to that is we operate a total comp philosophy so whether it's a shift out of variable to fixed which is essentially what the CRD IV regulation results in, we still have a meaningful portion of our compensation in variable and we will hopefully have the ability to vary [ph] that. Maybe only slightly, problem with that is of course as an accounting matter because we tend to differ most of our variable comp. It tends to have a slightly delayed effect so you will see the benefit of any reduction variable comp in ensuing years rather than in the year which we’re granted but at least you can see what to expect in those ensuring years and we show those disclosures on the pages you referenced. So we have plenty of variable comps that we can vary just a slightly delayed effect.

Antony Jenkins

And just on cost we have reiterated the 16.8 target for next year. We said that we expect the direction for this year to be downwards but not linear. I still think it's good to think of the 17.5, it's a way point on the road to 16.8.

Operator

The next question comes from JP Crutchley of UBS.

JP Crutchley – UBS

I’ve two questions actually one broader, observational question I guess on the investment bank and I know this has been slightly done today. But I guess the observational question on the IB, is as I think about as I look it through a shareholder lend, it's trying to me that when a situation where clearly the caps [ph] of demands are moving up overtime and is very much dictated by constraints or regulatory influence beyond your control. It appears from the way you’re talking terms of compensation ratios and alike and the short term direction if not medium direction on that is somewhat again dictated by events outside of your control and the capacity of framework largely put in place by the U.S. banks which are working on a different time table and framework in terms of implementation…

Antony Jenkins

Hey JP you’re a little bit quiet.

JP Crutchley – UBS

I guess the question is from a shareholder perspective which we come back to the, we have gone on it I think that is incumbent we try and get the initial come back at another stage and varies in more detail. If your cost is dictated by external influences and the competitive framework of investment banks the cap is dictated by the different environment, is that higher? And the revenue is obviously driven largely by market. Are we not in a position where (indiscernible) investment banking proposition is always going to deliver subpar return relative to its peer group which is, it's a difficult question I mean to reconcile from a shareholder perspective. Now I would appreciate, you probably can’t give a categorical cost to that but I think a lot of what we’re floating [ph] aren’t here is trying to address that situation get into expected returns overtime. So I know you’ve have commented on that but I know I think that’s kind of where we need to try and get a final answer. But two quick questions really I just like to touch on which are probably more concrete. The balance sheet reduction I mean you said fairly clearly the 60 million versus the 140 done, I mean why 2015 rather than any further time scale on that, I just want to understand the sensitivities on the deliverability and execution on that and second one just on regulatory charges and PPI which I know has been a feature more of other banks reporting this time around. You obviously took the (indiscernible) charge at the first half stage but your charge is probably looking or your provision is looking a bit light against some of the stock piles that your peers will have every stage and just wondered if you can comment on that.

Antony Jenkins

Okay let me fill with you observational point first and Tushar will answer your second two questions. On your observational point we have talked about this many times on the call. Basically every business in Barclays has to get to a position where it can deliver returns above its cost of equity otherwise we’re not going to allocate capital to that business. We think we have track in the management of the balance sheet but also in the management of the cost base. It's clear to us that the cost base has to come down in the investment bank that means that we have to employ fewer people which is true across the Barclays Group through automation particularly of the middle and back office and certain functions in the front office. As we do that we can then bring together revenues cost and capital as you said to generate the returns that we seek and that is the body of work where we’re engaged on the present. But Tushar do you want to answer the other two points?

Tushar Morzaria

Yeah just briefly JP, on the could we go quicker on the £60 million? Well we have said by the end of 2015. We feel confident we can do that in time. You would obviously appreciate that these things are non-linear so the incremental pound gets a little bit trickier than the first incremental but I feel very confident. I also feel that getting to 3.5% in 2015 feels very appropriate given where we see regulation heading and we need to be commercial about these things. In terms of PPI and our provisions, we obviously look very closely at this each quarter, each month for that matter. We have given you our sensitivity analysis so folks can make their own judgments. We feel obviously pretty good about where we’re provided and we would adjustments if we didn’t feel that case. So I’m not sure there is much more I can I add. I would just urge you to look at the sensitivities and people can form their own judgments if they wish to do so.

Operator

The next question is from (indiscernible) of RedBurn.

Unidentified Analyst

I just another couple of questions the first one is on the investment bank compensations, I was going to step up to the 43% and I think JP touched this in the last question but I mean I assume a part of that is because the U.S. investment banks are starting to payout more but obviously there is regulatory disadvantage there as they operate that probably close to a 10% a quarter or one threshold. So how sustainable is it in terms of competing with cost in the IB and actually being able to generate an ROE there and when your peers can operate at lower capital threshold and therefore are likely to pay or is this kind of a franchise losses in certain areas that you’ve expect going forward? And the second question was just looking at the group RoTE for a second it's kind of a (indiscernible) looking at the holistic picture. You’ve given RoTE adjusted at 5%. If I take out the kind of cost to achieve I get to about 6.5% then taking forward your kind of cost reduction another $2 billion top of that yet about 8.5%. Now you said by ’16 you have 11.5% RoTE, now the loan impairment charge at the moment is 64 basis points which is well below the 90 basis point threshold. So I mean I appreciate you’ve answered this question about the investment bank but across the rest of the business it looks like revenue is the only real lever you can pull to make up that 300 basis point shortfall by ’16, where do you see that coming from outside the investment bank? Thanks.

Antony Jenkins

I mean that’s a long and complex question which let me give you the short answer to that one. We have laid out a clear direction of track [ph] our aspiration have our ROE above cost of equity in 2016. We remain confident we can deliver that, that will be through a combination of the management actions we have described particularly on cost. We do see revenue growth opportunities in many of our businesses, in Africa in corporate banking in (indiscernible) and retail.

Our non-investment banking I don’t want to repeat what I’ve said many times on this call we will deliver at track where the returns will be above the cost of equity overtime in the investment bank. We have talked about that many times and we will deliver them.

Operator

Our final question this morning is from Martin Leitgeb of Goldman Sachs.

Martin Leitgeb – Goldman Sachs

Just a quick question with regards to the situation in the U.S. in particular regarding the rule of proposal, could you just give us a quick update on where we’re there now in terms of what is your total assets of the intermediate holding company, is that roughly the 330 billion we see as last reported in the U.S. broker dealer and I think the last report that capital position in Tier 1 there was around $6 billion but I think that’s 2010 [ph], is that still accurate? And also if you could give us just your outlook there is it going to come shortly or will this be disruptive to your business or how will you adjust your business with regards to that new proposal? Thank you.

Tushar Morzaria

So in terms of for the clarification around Section 165 intermediate holding company, we’re expecting it soon don’t know exactly when maybe in the first half of the year. I don’t have the inside track on that. In terms of disruption to our business obviously we will need to wait and see exactly what the rules before I can give you a category response but we have certainly incorporated at least our anticipated expectation of what IHC will be for us into our leverage plans so that the plan is holistic in that regard. In terms of the exact assets and capital I will just refer you to the public disclosures we have there right, I haven’t brought them with me so you can get them for the accounts if you need to.

Antony Jenkins

Thank you operator. Before we close the call let me just reiterate three points which I believe typify why we feel particularly positive about Barclays prospects for 2014 through a year of substantial transition in 2013. The first is that the performance we have reported today shows the tremendous value in having the breadth and diversity of Barclay’s earnings profile and we have seen continued evidence of the strong fundamentals which are essentially for our longer term growth.

The second is that we have started to significantly derisk the business addressing the leverage challenge and as much greater certainty on what the future holds particularly in terms of regulation and third the strong progress we have made on our Transform program in 2013 supported by all 140,000 of my colleagues in Barclays means we’re well set to reap the substantive benefits of that work in 2014 and 2015.

Thank you all for taking the time to join this morning’s call. Tushar and I look forward to seeing many of you in person in the coming weeks. Thank you.

Operator

Thank you.

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