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Executives

Robert Edward Diamond - Group Chief Executive, President, Chief Executive of Corporate and Investment Banking and Wealth Management, Executive Director, Executive Director of Barclays Bank Plc and Member of Executive Committee

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

Rich Ricci - Co-Chief Executive and Chief Operating Officer of Investment Banking & Investment Management

Jerry del Missier - Co-Chief Executive of the Corporate & Investment Bank, Co-Chief Executive of Barclays Capital, President of Barclays Capital and Member of Executive Committee

Antony Jenkins - Former Chief Executive officer

Robert Le Blanc - Chief Risk Officer, Member of Executive Committee and Member of Disclosure Committee

Maria Ramos - Group Chief Executive of Absa and Member of Executive Committee

Thomas L. Kalaris - Chief Executive of Barclays Wealth and Member of Executive Committee

Analysts

Thomas Rayner - Exane BNP Paribas, Research Division

Manus Costello - Autonomous Research LLP

Gary Greenwood - Shore Capital Group Ltd., Research Division

Michael Helsby - BofA Merrill Lynch, Research Division

Edward Firth - Macquarie Research

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Peter Toeman - HSBC, Research Division

Robert Law - Nomura Securities Co. Ltd., Research Division

Michael Trippitt - Oriel Securities Ltd., Research Division

Chris Manners - Morgan Stanley, Research Division

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

Ian Gordon - Investec Securities (UK), Research Division

Andrew Coombs - Citigroup Inc, Research Division

Barclays PLC (BCS) 2011 Earnings Call February 10, 2012 4:00 AM ET

Robert Edward Diamond

Good morning. Thank you for joining us today for the full year results. You will see this morning that our performance in 2011 was reassuring in a very challenging environment.

We delivered profits of GBP 5.6 billion for the year. The contribution from our businesses in Retail and Business Banking broadly balanced those of Corporate and Investment Banking, and revenues were well diversified geographically, demonstrating the strength and diversification of the universal banking model.

Importantly, our major businesses also improved their market share. While top line income was down 8% in a difficult environment, income grew in 5 of our 7 businesses and impairment improved 33%.

We controlled costs tightly so that we now have the confidence to double our cost reduction target for 2013 to GBP 2 billion. We reduced performance-related pay by 25%, while profits were down just 2%.

At the same time, our capital ratios have continued to strengthen. We have a deep pool of high-quality liquid assets, and we have good access to a range of funding markets. This financial strength gives us a significant competitive advantage.

We recognize the importance of dividends to shareholders, and we are pleased that we're able to increase the dividends by 9%.

We have delivered these results by playing an active role in the real economy. Let me give you a few examples. Our lending to U.K. businesses exceeded targets set under Project Merlin by 13%, and within that, we exceeded our lending targets for small businesses. We supported more than 100,000 U.K. start-ups in 2011. Bank of England data show that U.K. net lending was down 5% on 2010. Our net lending to companies in the U.K. increased 3% year-on-year.

Not surprisingly, our 4 main execution priorities -- capital, returns, income and citizenship -- continued to be our major focus. I'll talk later about the progress we've made on each of these, but before that, Chris will take you through the numbers, and we'll take questions at the end.

We have a very strong team. This team has been together for many years, and we are united in our commitment to delivering on our execution priorities. It's good to have here with me Robert Le Blanc, Tom Kalaris, Antony Jenkins, Rich Ricci and Jerry del Missier have joined Chris and I on the stage, and we have Maria Ramos on the phone from South Africa, where Absa is also announcing their earnings this morning. Chris, can you take us through the numbers?

Christopher Lucas

Thanks, Bob, and good morning, everybody. We delivered adjusted profit before tax of GBP 5.6 billion in 2011. This was well balanced across the group. Statutory profits were broadly similar at GBP 5.9 billion. The adjusted numbers principally exclude gains on own credit and debt buybacks of GBP 3.8 billion, impairment on our state in BlackRock of GBP 1.8 billion, the GBP 1 billion provision for PPI and almost GBP 600 million of goodwill write-offs taken in the fourth quarter, mainly in Spain.

I'm going to use adjusted numbers throughout my presentation because I believe they give a better understanding of the operating trends and performance. We have, of course, provided statutory numbers in our announcement.

Turning to the headlines for the group. Income declined 8% in a very challenging environment. Impairments improved 33% to GBP 3.8 billion, and our annualized loan loss rate reduced to 77 basis points from 118 basis points last year.

We reduced costs by GBP 869 million or 4% to GBP 18.9 billion, excluding the bank levy. Profits declined just 2% as a result of our focus on cost control and strong risk management.

Our return on equity was 6.6% and return on tangible equity was 7.9%. We recognize that this is unsatisfactory, and Bob will talk more about returns later.

Earnings per share were 25.1p, and as Bob announced, we have decided on a final dividend of 3p, bringing the total dividend to the year to 6p.

Turning now to the performance of the individual businesses. I'll start with U.K. Retail and Business Banking where profits grew 60% to GBP 1.4 billion. Income increased 3%, mainly in mortgages and personal savings. Impairments improved 35% as a result of lower unsecured lending charges, and costs were down 4%. This delivered a return on equity of nearly 15%, up from 10% in the prior year. Total loans and advances to customers increased 5%, driven by mortgages.

Europe Retail and Business Banking reported a loss of GBP 234 million. This included GBP 189 million of restructuring, principally in Spain, where we've closed 20% of our branches and reduced headcount by 18%. Impairment in Europe improved 17%, reflecting our relatively conservative risk profile.

Africa Retail and Business Banking profits increased 26% to GBP 908 million with improvements in income, impairment and costs, despite depreciation of the rand against sterling.

Our Barclaycard profits grew 53% to GBP 1.2 billion. Income rose 2%, while impairment declined 25% as arrears improved in all of our major markets. Return on equity rose to 17.4% from less than 13% last year.

Barclays Capital reported profits of GBP 3 billion. Income was down 22% to GBP 10.3 billion in difficult market conditions. Impairment was less than GBP 100 million, and expenses decreased 12% to GBP 7.3 billion as we exercised tight cost control. This included a reduction in both performance and nonperformance costs.

Income in the fourth quarter was down 19% on the third. FICC revenues decreased 32%. Equities and Prime Services were down only 10%, which is a good performance compared to the industry. Our revenues in our M&A advisory business increased 30%. We've continued to grow market share, which Bob will talk about later.

The cost to net operating income ratio was 71% as a result of weak market conditions in the second half as well as ongoing investment in the business. This compares well to the industry, though it's above the target range of 60% to 65% to which we remain committed. Despite market conditions, Barclays Capital generated a return on equity of 10.4%.

Barclays Corporate delivered profits of GBP 126 million compared to a loss of GBP 388 million last year. The U.K. business reported profits of almost GBP 750 million while lending in the U.K. increased 5% to GBP 66 billion.

Performance outside the U.K. improved dramatically. In Europe, losses reduced 39% to GBP 524 million, driven by improved impairment in Spain, which halved to just under GBP 500 million. This shows the benefit of the early action we've taken to recognize impairment in 2010. Losses in other corporate markets reduced 74% to under GBP 100 million.

At Barclays Wealth, we continued to invest in the business, and profits increased 27% to GBP 207 million as income grew 12% and exceeded cost growth.

At this point, I'd like to talk briefly about margins across the retail, Corporate Banking and wealth businesses. Our overall net interest margin was broadly flat year-on-year, which is a good performance given the environment.

Looking forward, the continuation of low interest rates will result in a lower but still significant contribution from our structural hedges. You'll find more detail on margins in the results announcement.

Gains on own credit and debt buybacks are now accounted for in the head office, and the impairment on our stake in BlackRock is in Investment Management. Adjusting for the bank levy, head office losses of about GBP 780 million are broadly flat year-on-year.

I'd like to give you now more detail on costs, capital, liquidity and funding. I'll start with costs.

This slide shows the breakdown between statutory and adjusted costs in 2011. Excluding PPI and goodwill, costs amounted to GBP 19.2 billion.

The U.K. bank levy of GBP 325 million also affects the year-on-year comparison, but excluding this, costs were down 4% to GBP 18.9 billion.

As you know, we announced plans last year to achieve a cost reduction of GBP 1 billion by 2013.

This slide gives a more detailed breakdown of the reductions we have made. Costs decreased by GBP 1.4 billion after adjusting for year-on-year changes and a one-off pension credit. The reduction breaks down into performance costs of GBP 823 million and nonperformance costs of GBP 592 million. Again, you'll find detailed disclosure on performance costs in the announcement.

The target for 2013 is based on nonperformance costs. These are being reduced through actions such as rationalizing allocations across the business; sharing infrastructure between Barclays Capital, Barclays Corporate and Wealth; integrating global support functions such as IT and property management and challenging all additional spending.

Having started to make these changes, it's clear that they will deliver more savings than we initially expected. And as Bob has said, we're now increasing our nonperformance cost savings target to GBP 2 billion.

Moving on to look at the balance sheet. Total assets grew 5% to almost GBP 1.5 trillion. I know this is a large number, so I want to spend a few minutes looking at this in relation to our funding requirements.

Approximately 1/3 of the gross balance sheet is accounted for by broadly matched derivative assets and liabilities. Most of the total asset growth in 2011 relates to this part of the balance sheet, where 7% growth in derivative assets is matched by equal growth in derivative liabilities.

A further proportion of the balance sheet is reverse repos. These are used to either settle short inventory positions or to provide customer financing that's collateralized by highly liquid assets.

Customer loans and advances are largely financed by customer deposits. A substantial portion of our liquidity pool is funded with wholesale funding that has maturities of less than one year, and all short-term liabilities that we raise are put directly into liquidity pool. The remaining assets on our balance sheet are primarily funded by longer-term wholesale funds and equity.

Analyzing the balance sheet this way shows that only GBP 265 billion of our total balance sheet relies on wholesale funding. We've raised GBP 30 billion of wholesale term debt in 2011 against maturities of GBP 25 billion.

Our wholesale funding maturities for 2012 are GBP 27 billion, and we've raised GBP 5 billion in January at highly competitive rates, reflecting the strength of our brand and credit quality in the market.

Most of our outstanding term debt is unsecured, and the level of encumbrance on our loan book is approximately 10%, so we have a lot of flexibility going forward.

Despite stresses in the funding markets, our liquidity remained strong throughout 2011, and at the year end, our liquidity pool stood at GBP 152 billion, most of which is in central bank deposits and high-quality government bonds.

We're confident that we will meet the Basel III liquidity coverage and net stable funding ratios in the timescale required.

Moving on now to capital. We strengthened our Core Tier 1 ratio from 10.8% to 11%. Retained profits added 70 basis points to the capital ratio during the year, which more than offset pension fund contributions and other movements.

Adjusted gross leverage was stable at 20x, and risk weighted assets were slightly lower at GBP 391 billion despite absorbing a GBP 30 billion increase in market risk RWAs resulting from the introduction of CRD3.

This was a -- this reduction was the result of management actions as well as lower business volumes in Barclays Capital during the second half.

We continue to work on the implementation of Basel III, but the way in which we've managed Basel 2.5 demonstrates how we're able to respond to regulatory change.

Pro forma calculations show consensus retained earnings delivering an increase in our capital ratio of 150 basis points by the end of 2013 on a Basel 2.5 basis.

We estimate that this increase will be offset by Basel III impacts on capital and RWAs, mitigated by management actions such as further reductions in legacy assets, tight management of counterparty risk and reductions in securitization positions.

This takes us to a pro forma Core Tier 1 ratio of about 11% at the end of 2013. This allows capacity amounting to about GBP 50 billion of RWAs above a 10% Core Tier 1 ratio. We view this as a suitable buffer to manage business growth, regulatory uncertainty and volatile market conditions.

Finally, I'd like to comment briefly on the outlook for 2012. The performance of RBB and Corporate Banking in January was consistent with the good performance achieved in 2011. Though it's too soon to suggest a trend, improvement in market conditions has resulted in an encouraging start to the year for Barclays Capital.

So to summarize, we delivered profits of GBP 5.6 billion, with income growth in every business except Corporate and Investment Banking. Impairments improved 33%. We've managed costs down 4%, excluding the bank levy, and we've increased the dividend by 9%. Our capital ratio increased to 11%, and our funding and liquidity strength continues to give us a competitive advantage.

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

Robert Edward Diamond

Thank you, Chris. We've been focused on our 4 execution priorities for a year now, so this seems like a good moment to stand back and look at what we've achieved.

Let me start with capital. You've heard from Chris that our Core Tier 1 ratio stands at 11%. This is even after absorbing the full impact of CRD3. You've also heard that our capital position will remain rock solid under Basel III.

When I look back over the last few years, one of the best decisions that we have taken at Barclays was in October 2008. When regulators told us that they wanted banks to raise the bar for equity capital, we decided then to raise capital swiftly and in scale, to put our ratios ahead of regulatory requirements. We wanted to put a sign up, a metaphorical sign for our customers and clients saying very simply that Barclays was open for business.

Today, we're recognized for our strength in terms of capital, liquidity and funding, and as a result, we're seen by our customers as a safe haven in times of stress, and that is why our competitive position has improved during the difficult markets in 2011. Our competitive position has improved in U.K. Retail and Business Banking. It's improved in Africa. It's improved in our cards business. It's improved in our corporate, Investment Banking and wealth businesses. This strength in capital liquidity and funding gives us a very real competitive advantage.

Let me move now to returns. We continue to believe that return on equity is an appropriate target. As you would expect, we also use other metrics to manage our business and to measure the business, measures such as return on risk weighted assets, leverage ratios and cost efficiency. But return on equity is the financial measure that correlates mostly with shareholder value, so it's extremely important to us and, more importantly, it's extremely important to our shareholders.

We also know that our returns today are unsatisfactory and that we have a lot more work to do. But let me take you through what we've done in 2011. We told you that we would either exit or improve those businesses with returns below our cost of equity.

We closed our business in Indonesia. We refocused our businesses in Russia and India on Corporate and Investment Banking. We restructured our business in Spain, and we closed Barclays Financial Planning in the U.K.. We now offer retail investment services online instead of through our branches. Two of our biggest and most important businesses already deliver return on equity above our target.

U.K. Retail and Business Banking returns were almost 15%, up from 10% last year, and our cards business delivered returns of 17.4%. Investment Banking made profits of GBP 3 billion, representing a return on equity of 10.4%.

While this does not yet meet our goal, it is a good performance relative to the industry. We were one of just a few firms able to deliver double-digit returns in a very tough environment.

We reduced our credit market exposures by 37% during the year, so they now stand at GBP 15.2 billion. This brings the total reduction since 2008 to 64% or GBP 27 billion.

Risk weighted assets reduced 2% year-on-year despite having absorbed a GBP 30 billion impact from CRD3. This was, in part, the result of lower business volumes due to lack of confidence on the part of clients in an uncertain economy. The reduction in RWAs at Barclays Capital over the last 3 years amounts to GBP 41 billion.

We've also been building areas with low capital consumption and higher returns such as our equities and advisory businesses. I'll talk more about those later.

We continue to examine each and every part of the business to ensure success when changes in capital treatment are brought in under Basel III, and we'll talk more about this at an Investor Day in the fall when we have even more complete information on CRD4.

In those businesses where we have been investing, returns strengthened to 10% in Africa and to 11% in wealth management where the Gamma plan will deliver a business with high returns and low capital consumption.

Then we have 2 businesses that we are fixing: Corporate Banking and Europe. Corporate Banking made a significant move from negative to positive returns during the year. In Spain, we wrote off goodwill, which decreased returns in Europe in the short term. We have a lot more work to do across Europe to return that business to profitability. Given their significance, addressing these businesses is an important priority.

Our 13% target has been a vital factor in making disciplined choices over the last 12 months. Since we set our target last year, however, we have faced some significant external headwinds.

The Eurozone crisis has impacted confidence and resulted in much lower levels of client activity in the second half of 2011. We face the challenge of a low interest rate environment for the foreseeable future.

There have also been new political and regulatory constraints. These include the introduction of the U.K. bank levy, the subsequent increase in that levy, the treatment of our BlackRock stake in European stress tests, as well as cumulative calls to hold additional capital.

We continue to believe that a return on equity of 13% is the right goal and is achievable, but given the impact of these changes, we may not be able to achieve our target in 2013. Timing could be affected both by the macroeconomic environment and by any unexpected changes in regulation or in its implementation.

We continue to focus on those factors within our control and expect to make steady improvement in our return on equity going forward through a combination of capital discipline, controlling funding costs, restructuring or exiting businesses, growing revenues and reducing costs.

Let me talk about costs as an example of the action we're taking. This time last year, we told you that we planned to reduce costs by GBP 1 billion by 2013. We have now doubled that target to GBP 2 billion. We're able to do that because we are operating in a much more integrated way across Barclays. We now run our support functions -- finance, human resources, legal, compliance, risk -- in a much more integrated and a much more efficient way. An outwards manifestation of this integration is that we are now moving to one global brand and consolidating suppliers.

This integration is not just about delivering efficiencies. It's also improving our ability to serve customers and clients in order to support the real economy.

Our Corporate Banking business brings this to life. We have integrated Corporate and Investment Banking, and they now use a shared infrastructure, which is both more efficient and enables us to serve our clients better.

Our Investment Banking clients increasingly turn to the corporate bank for cash management and trade finance, and our Corporate Banking clients gain access to capital markets and risk management through the investment bank.

The closer integration of these businesses led to an increase in revenues last year of 14% from sales of corporate products to Investment Banking clients and vice versa.

We introduced our wealth management services to the people who run these corporate businesses. Last year, this resulted in the introduction of more than GBP 1 billion of new client funds, double the previous year.

We're delivering payments expertise from Barclaycard to clients of the corporate bank. Barclaycard signed up 70% more clients from these referrals than the year before. This is a tangible example of what we call One Barclays, where our people work together collaboratively to ensure that we deliver the best services to our customers and to our clients.

Given the difficult economic environment, we're pleased that we were able to grow income, underlying profit and market share in so many of our businesses.

In U.K. Retail and Business Banking, net operating income grew 11%, adjusted profit was up 60% and our customers grew 700,000 as we continued to grow market share across all our product offerings: current accounts, savings, mortgages, loans and general insurance.

We were named Best Current Account Provider in the Consumer Moneyfacts Awards, and we were ranked as the best mortgage lender for the second year running.

In our cards business, net income was up 21%, and adjusted profits were up 53% to a record GBP 1.2 billion. We won 3.4 million new accounts organically, 5 million if we include acquisitions. The corporate business is a priority. It grew 25%.

Most importantly, we continue to drive innovation for our customers and our clients. Our mobile and contactless payments technology won several awards for innovation, and we continue to deploy it across Barclays. Barclays is now responsible for over 90% of the contactless merchant terminals in the U.K. We launched the first U.K. mobile phone payment scheme in 2011, and we have widened access to banking through mobile phones in Africa, which include tap and go and cashsend payments.

In our African business, net income grew 11% in local currencies. This translated into strong profit growth of 26% in sterling despite adverse currency movements.

We now have a single management team driving our One Africa strategy, and that is clear: to become the leading international player in the third fastest growing region in the world.

In wealth management, this was the third consecutive year of double-digit income growth. Profits grew 27% while we continued to invest. We're now in year 3 of a 5-year program, which will position this business in the top tier of its industry and as a much more meaningful contributor to Barclays' results.

Income and profits were down in Investment Banking in a tough market, but we continue to have real momentum. This is clearly evident in those areas where we have been investing.

We ranked #3 in U.K. mergers and acquisitions with a 20% market share, and we advised on 9 of the top 20 global M&A transactions.

Our equities business was involved in each of the top 5 IPOs globally as well as the top IPOs in Japan and in India. And in 2011, we won 17 new corporate broking mandates in the U.K., bringing our total to 25. This is a significant achievement for a business that started in 2010.

Meanwhile, we remain #1 in global fixed income, one of our traditional strengths. We have a market share in global fixed income of 11%. Remember, fixed income is a client-driven business, serving pension funds and insurance funds, in other words, managers that help people save for their retirement.

Barclays Capital was also awarded the IFR Bank of the Year last month and, in so doing, was recognized for growing market share across the board and becoming an increasingly go-to investment bank.

In a world where the industry is polarizing, these results are indicative of our relative strength and ability to maintain our position as a top-tier player. As regulation results in further polarization, we believe we will continue to gain market share as weaker players withdraw from the market.

I want to turn now to citizenship. You've heard me say that banks need to become better citizens. Our ability to do this is critical to creating long-term value for shareholders. This is not about philanthropy. It's about delivering real commercial benefits in a way that also creates value for society.

For me, becoming a better citizen means 3 things. It's about how we behave, especially with our customers and clients. It's also about what we do, helping those customers and clients create jobs and drive the real economy. And it's about how we contribute to the communities we serve in so many other ways.

Let me talk first about how we behave. We recognize that we have to win back trust from the public and from our customers, and an important step in that process is improving standards of service. One way we track this is by monitoring the number of complaints we receive.

Our U.K. banking complaints fell 30% year-on-year. The changes we've made were also recognized by the U.K. consumer group, Which. Which gave us their Positive Change award for 2011.

We know we have a lot more to do, but we have the right strategy, and we know we're moving in the right direction.

How we behave also includes how we manage difficult issues such as compensation. In compensation, we have to balance our obligation to recruit and retain the very best people we can in order to remain competitive and to drive results. We need to balance that with the need to be responsive to our shareholders and sensitive to public opinion.

The 25% reduction in performance-related pay at Barclays was much greater than the 2% fall in profit. We placed a cap on cash bonuses of GBP 65,000, and more pay is now deferred and paid in shares so that employees are even better aligned with shareholders.

This represents a significant change not just in structure but in quantum and as you'd expect in a year where both income and profits were adversely impacted by the economic environment.

I know that tracking conversation has -- excuse me, I know that tracking compensation has become more difficult with deferred payments because there's a difference of timing between when an award is made and when it appears in the cost line, so we are giving more information today to make it easier to follow the component parts of performance-related pay.

As you would expect, we give a great deal of thought each year to getting the balance right between being responsible and remaining competitive. That's exactly what our shareholders expect of us.

Let me turn now to the real economy. Supporting customers and clients has been one of the most important priorities for our senior management team in a challenging environment.

We exceeded our targets under Project Merlin by 13%. We did this by lending GBP 44 billion to U.K. businesses, including GBP 15 billion to small- and medium-size businesses.

We didn't just wait for customers to come to us. We ran over 800 seminars and lending clinics around the U.K. in order to help businesses find the funding that they need. Lending clinics help attendees to create a business case, to think about the best way to use a loan and to decide how to manage repayments. We've also empowered relationship managers to make a lot of local lending decisions immediately.

These kinds of initiatives resulted in us supporting the start up of over 100,000 new businesses in the U.K. last year. We approved a new loan to a small business every 4 minutes. Our U.K. retail bank helped almost 10,000 customers buy their first home and gave over 100,000 new mortgages during the year.

Let me be clear. Lending is what we do. So going forward, we will continue to do everything we can to support customers and clients and expect that lending will continue to grow as a result. We intend to remain leaders in this space.

Investment Banking also plays a part. Investment Banking helped clients raise over $1 trillion of financing through the capital markets. Of this, almost $400 billion was for governments and the public sector. Helping the public sector to raise finance is another way in which we support the real economy.

Barclays also made a contribution by hiring 1,500 graduates in 2011, 24% more than the previous year. And we have just announced a new scheme to create 1,000 apprenticeships in branches throughout the U.K. in order to help tackle youth unemployment. We believe giving young people their first job opportunity is one of the most effective ways we can contribute to economic growth. We'll talk about this scheme in more detail at a Citizenship Day later in the first half.

We know we have a responsibility to help generate economic growth and create jobs, and I hope you can see from these examples that we are fully committed to playing our part.

As I look back over 2011, while we made good progress on a number of fronts and our results are good in relative terms, we recognize that, in order to achieve our return target, we need to improve profitability substantially going forward, and we are determined to do that. We will use all the means within our control to continue to drive the business.

Turning to the external environment, I think it's fair to say that we feel a bit more sanguine about the outlook than others. In the U.S., we're seeing positive signs of economic recovery. Importantly, U.S. Treasury funding is cheaper now than ever before. Emerging markets continue to grow at a faster pace than developed economies, while in Europe, there's been a real slowdown in economic growth, which we believe will be short and shallow rather than deep and prolonged.

Of course, we recognize that we're still operating in an environment with significant event risk from both a political and macroeconomic perspective.

We also face ongoing regulatory challenge. And as you would expect, we're engaged with regulators to ensure implementation that balances making the system safer and sounder with the need for economic growth and job creation.

We have more clarity about the impact of Basel III and the Independent Commission on Banking than a year ago, and we will continue to adapt the business in order to adhere to the new rules.

In the meantime, we believe that we have the right model, we know we have the right strategy, and we have a very strong management team, a team that is wholly focused on execution in order to deliver sustainable returns over time for shareholders.

When we are at our best, we serve the real economy by doing our best for all of our stakeholders, for our customers and clients, for the communities in which we live and work, for our people and our shareholders. To be anything less than our best is letting all of those people down, and that's why we aspire for Barclays to be one of the best organized, best managed and most productive private sector banks in the world.

Thank you very much. We'd like to take your questions. Tom?

Question-and-Answer Session

Thomas Rayner - Exane BNP Paribas, Research Division

Tom Rayner from Exane BNP. Can I have 2 questions, please, Bob? Very strong cost management in the fourth quarter, I think, in the face of difficult revenue conditions in Barclays Capital. Even so, if you take the second half, the cost ratio for the second half of the year is still running above 80%. And obviously, the return on equity, consistent with that, is not as good as the full year, sort of 10%. So what I'd really like to get is some thoughts on the outlook for revenue in Barclays Capital going forward and what Plan B might be if you don't see any meaningful recovery from what's obviously a very soft second half for 2011. My second question would be on Basel III.

Robert Edward Diamond

Let me take the first, first. We'll come back on Basel III. Let me kind of give some context in my mind and then pass on to Rich and Jerry. I think you would have been surprised, given some of the comments you've made recently in your research, about the tough environment. The second half is about as tough as it gets, and I think a 10.4% return on equity shows how well this business is being managed and also shows how it is in a premier position in terms of market share and client flows. So we think a 10%-plus return in that environment is actually a pretty positive sign. But your question was more on how do Rich and Jerry feel going forward.

Rich Ricci

I think that if I take you back to the Investor Day we had last June, we talked about a revenue profile of somewhere between GBP 12 billion and GBP 14 billion as being what we believed is a rational view of what our franchise can deliver, given a more normal environment. That's not talking about a big robust environment, taking us back to 2009. In fact, it looks a little bit more like the first half of 2011 or the second half of 2010. I think in the first half of 2011, as an example, we printed GBP 6 billion of revenue. So there's no doubt that the second half of the year was difficult. We look at that as more of an anomaly. I think the GBP 12 billion to GBP 14 billion allows us to deliver 15%-plus returns over time to the shareholder.

Jerry del Missier

I would just add, Tom, on the, kind of, the "What if the market doesn't recover?" I mean, we have clearly seen a return to a more normalized conditions, although event risks are still clearly there. And as Rich says, we're certainly not planning a very -- for a buoyant environment. I think the key is not about having a Plan B. The key is actually about kind of being consistently focused on and disciplined on cost and capital management, and that's what allowed us, I think, to outperform. I mean, it's something that you've heard from us before, the ability to outperform in challenging markets. The fact that we have scale presence in all of the, kind of, the key markets businesses, the balance of the U.S. and of our European franchises with strong and growing presence in Asia, is the key to, kind of, continued outperformance. And we won't lose that focus on discipline, kind of, regardless of what's happening in the underlying market.

Thomas Rayner - Exane BNP Paribas, Research Division

Sorry, the second question was sort of on Slide 19, the Basel III slide. And it's a similar question, I think, that I asked you at the Strategy Day, the mitigation of the risk weighted assets. Can you give us an update on your thoughts on what impact that might have on revenue or the P&L in general, actually putting those initiatives through?

Robert Edward Diamond

Chris, do you want to start and then Rich would certainly want to add?

Christopher Lucas

We're working pretty hard on it, and part of the reason we wanted to give you an update was to show you where our thinking is going. It has to be said, though, that when you take the fact that the rules are still being written, there's still significant amount of variability in the results of the application of the rules. It's pretty hard to land to a spot example or a spot answer. What does give me comfort, though, if I think of the Basel 2.5 experience we had, when we first gave you some numbers, I think the impact on RWAs was about GBP 70 billion. And when we finally implemented, that was about GBP 30 billion. And that was through a whole series of actions including pricing, modeling, waivers from regulators, so a whole range of things.

Rich Ricci

Sale of assets, as well.

Christopher Lucas

Sale of assets, and I think we're in the middle of doing the same piece, the same activity. The sale of the assets, so the sort of assets that have high risk weighted asset components, actually are generating relatively small amounts of income. So we think that it's possible to work down without having a massive loss of income.

Robert Edward Diamond

It's a bit tricky, Tom, when we don't have all the final rules, which is why I mentioned we will come back in the fall when some of it's more clear and do it again. Not because we want to kick it off but because I think we'll know a little bit more. But I would go back to what Chris said. We have always said -- Rich and Jerry, Chris and myself -- that the starting position is 15% returns over time in the investment bank. Frankly, I know our shareholders have said that, if we can return 10% in environments like this, they know we'll be returning 15% in more normalized environments. I hope you take some confidence in how well we've managed the capital and the RWAs day-to-day because a lot of this is kind of day-to-day combat. But the big picture of that success is because we're seeing customer flows at the leading end of the market. And I think when you have those client flows, even in slower markets, it keeps the returns at these kinds of levels. Now I didn't say it for -- when I started, but one question each. Yes?

Manus Costello - Autonomous Research LLP

It's Manus Costello from Autonomous. I have a question for Chris, I think, on the net interest income outlook, please. Chris, I noticed you've changed the wording slightly around the impact of the structural hedge to highlight that it will decline year-over-year. I wonder if you could just give us a bit more color. Would you expect the impact of the product hedge to be bigger -- a bigger delta in '12 on '11 than '11 on '10? And secondly, on the equity structural hedge where you saw an GBP 824 million impact in 2011, how much of that was capital gain? And would any of that be repeated? Because there's clearly some headwind on NII going into this year?

Christopher Lucas

There is, and that's why we changed the wording to reflect that. I think if I look at it -- and we can go through with you the different components -- but when I look at the impact of hedging on the, what I call, the banking businesses -- and that -- by that, I take the structural hedge move, the equity hedge move and the gains on sales of hedging instrument sales, all of that has a positive impact of about GBP 100 million year-on-year. So therefore, what we've been able to do is manage a declining contribution from the hedges. But that won't go on forever, and I'll leave it to you to work out what is the level of decline. But we are definitely seeing some headwinds. My final comment would be, again, when I look at the net interest margin across, again, the banking businesses, it's flat year-on-year. And I think that's a pretty good achievement and a pretty good management of margin in a difficult environment.

Manus Costello - Autonomous Research LLP

Sorry, just to be clear on the equity structural hedge. Of that GBP 824 million, how much related to capital gains? And can you foresee similar actions happening in 2012?

Christopher Lucas

Yes, the net year-on-year impact of gains on sales across the group is about GBP 500 million. We would expect that to be -- there's always going to be an element of it. There's always going to be an element of it, and therefore, we would expect there to be some reduction but not a complete reduction, and that gives you the sort of flavor of the capital gain.

Robert Edward Diamond

I think it was right here. Can you just pass it down right to the end? Yes.

Gary Greenwood - Shore Capital Group Ltd., Research Division

It's Gary Greenwood, Shore Capital. I just wanted to ask you about the LTRO and your thoughts in terms of pros and cons of using the LTRO when it comes up at the end of the month.

Robert Edward Diamond

I'm happy to talk in general about the impact it's had on the market, which I think is positive. I think we've had a policy of not disclosing our activity on things like this over time. But what has been the impact on the market, I think it was very positive. And I think in many ways, the actions of Governor Draghi were very positive for a market that was very skittish on funding. So that was -- it was a real relief to the market. But I think it had with it aspects of quantitative easing, aspects of buying the periphery, aspects of confidence in the banking. And I think the fact that they are coming back to the markets in February with unlimited 3-year 1% funding is very positive in Europe. And so it's -- I think it's part of the reason that we're seeing investors confident to come back into the markets.

Gary Greenwood - Shore Capital Group Ltd., Research Division

Do you think there's any stigma attached to strong banks like yourselves using it?

Robert Edward Diamond

Well, I think a number of people have talked about this, and I think it's kind of been a good debate. But I think any bank that doesn't worry about issues of stigma, given what we've been through over the last 3 or 4 years -- of course, we have to think about brand and reputation. In our case, being rock solid in funding, capital and liquidity is our #1 priority, and you could imagine that was a big part of our thinking. Yes?

Michael Helsby - BofA Merrill Lynch, Research Division

It's Michael Helsby from Merrill Lynch. I see on the risk weighted asset reduction in the fourth quarter that about GBP 37 billion of it was due to FX and just lower market risk/VaR counterparty risk. On that basis, given that activity levels have bounced back a bit in Q1, should we expect the risk weighted assets to jump again in the first quarter? And I guess if you could, therefore, should we expect the previous RWA guidance that you've given for Basel III to still hold in terms of the absolute levels? And just attached to that, I was wondering, based on the full year balance sheet that you just reported, if you could give us any idea of what you see, Chris, as the fully phased-in impact of the deductions from 2014 to '18? And if you let me, I'd love to ask Antony a question on credit.

Christopher Lucas

Should I start? You're absolutely right. There was a reduction at the end of the year. My numbers, which are year-on-year, show a reduction of about GBP 30 billion business adjustments and about GBP 10 billion FX. If I look at the GBP 30 billion, of course, some of that will spring back as volumes increase. We're absolutely delighted when they do that because we make a better return and net-net, we're better off. It's difficult to say how much of it springs back in which sector. What I would say is that of that GBP 30 billion, about GBP 10 billion is a permanent reduction in underlying assets, in particularly some of the credit market exposures. And that, we won't see come back. That is a permanent saving. Mike, I'm going to -- I'm in the dark at this stage on the sort of fully loaded Basel III numbers. We know you're interested in them. We've got a lot of work to do, and we'll come back to you in the fall. But I do reiterate my previous comments that, if I look at the performance in terms of Basel 2.5, I'm pretty confident about the future.

Jerry del Missier

So the other -- the only thing I would add, Mike, is that as -- yes, generally speaking, if activity picks up, you would -- it's a general statement to say that RWAs would follow. But the other thing you have to consider is that the pace of our ability to sell down legacy assets and manage down the balance sheet also slowed down in Q4 as a result of what was going on in the market, and we would expect to see that again pick up back to levels that we saw earlier in the year. So that's kind of an offset as well. You have better conditions to be able to continue to manage down your exposures.

Robert Edward Diamond

So Mike, truth be told -- I said just one question, but I also had a side bet with Antony before we started. I said that the results in Barclaycard are so strong that you're going to get more questions than Rich and Jerry. And since we have that side bet, I'll allow the question for Antony. In fact, you can have 2 more for Antony, if you like.

Michael Helsby - BofA Merrill Lynch, Research Division

Perfect. How about 3? Yes. No, I guess I was just looking at the credit metrics at the back. And it looks like from -- certainly from the half year, you've continued to see an improvement in certainly 30-day arrears and everything. It looks like on a forward-looking basis, things continue to improve. So I was just wondering, given people are still quite concerned about the outlook for the economy, I was wondering if you would like to draw out some of the trends there and give us -- maybe Robert, you could help -- and give us more of a forward-looking view from how you see 2012.

Antony Jenkins

Why don't I talk about the RBB businesses and then Robert can talk more generally? The first thing to note is that as we've discussed in the past, our businesses are generally quite conservatively positioned from a credit point of view. So our mortgage book is relatively low LTV. Our credit card portfolios are at the higher end, the prime, super prime space. And so we are well protected from any potential downturn. That would be the first point. The second point would be, as we talked about at the half year, what we've seen is that the rate of improvement has been slowing over time from the sort of 2008, 2009 position. But really, if we look at the forward flows across any of the businesses, we're not seeing marked deterioration at all. We're seeing broad stability, and our view is that, that will largely continue through this year. Now the exception to that would be if we saw a major downturn in the U.K. economy or a major downturn in the Eurozone. But again, in that circumstance, I would refer back to my first point, which is, because of the relative conservative nature of our books, we'll be able to manage through that volatility. And the second thing is, as we demonstrated in the sort of 2006, '07 downturn in the cards business and in the '08, '09 downturn across the piece, we are skilled at managing our collections and so on through these difficult times when they come. So I'd say, in summary, for the Retail and Business Banking franchises, we're cautiously optimistic. For this year, I wouldn't expect to see very dramatic improvements, but I don't expect to see dramatic deterioration either.

Robert Le Blanc

Let me add. Thank you. There's a lot of detail we could get into but won't get into that and try and just do the big picture. But as a point of context, which is certainly true for the U.K. and for our retail businesses also in Europe and the U.S. and other areas, a couple of factors just to mention very quickly. Households are being very careful about their spending and they are reducing household debt, and that can be seen in a lot of statistics. Now that has a couple of effects. One effect, of course, is that the economy is slow. The other effect is that debt performance is better and our credit portfolios can improve and have improved, and that's really a big factor that's driven it. Unemployment, of course, is always the most difficult factor for a credit portfolio, and unemployment has stayed high, particularly youth unemployment. But of course, not many young people have mortgages with us or anyone, and not many young people have large loans from us. Antony runs a very client-driven and client-focused business, and I think the target criteria we've been able to apply for our loan books over the last several years have really driven -- the improvement in credit performance has been very steady. So if you look forward, it's always best to sort of look at what happened last year to understand what will happen next year. And we had a 33% reduction in credit impairment in 2011 year-on-year, and that was very broad across virtually all of our retail books and all of our wholesale books internationally, with a couple of exceptions. And when we look at what it means for next year, I think we can see -- for this year, I should say, I think we can see some further improvement in some books because of the circumstances that are playing back and forth. And I think probably, most of our books will be steady performers rather than seeing a significant increase like we have seen for the past few years. One thing to note, for example, is that in the investment banks, the loan loss rate was only 8 basis points last year. And our models would tell us that we shouldn't expect that to reoccur, but we don't expect it to jump up significantly. So there will be different parts moving back and forth. If you look at the analyst consensus for us for impairment for next year, it's about the same as last year, so in other words, about GBP 3.8 billion. And I think that's a reasonable place in a tight range and wouldn't want to steer anybody away from that. And of course, if we do see things changing, we'll update you for the half year.

Robert Edward Diamond

Before I call on the next question, I just want to remind you that, for the first time, we have Maria Ramos, who's a key member of our executive team on the phone. We always have the Absa results the same day. So keep in mind, GBP 1 billion in earnings from Africa, almost 20% of the group, one of the fastest-growing regions in the world, a real important part of the earnings. And if there are questions for Africa, Maria is happy to take them. Who's next?

Edward Firth - Macquarie Research

It's Ed Firth here from Macquarie. Just a couple of points of clarification, actually. I mean, the first one is just in terms of your answer to the last question. If I look at U.K. retail, it looks like in Q4, the performance was well down on Q3. Are you -- is that just a seasonal issue? Was there some sort of seasonal variation there rather than -- I think income was down and provisions were up?

Christopher Lucas

I wouldn't read too much into that. The trends on impairment are as we've said, and on the income side, I would go back to the discussion that we've had since the mid part of 2010 where we believed at point that the economic environment where we did business was going to be quite challenging. We did not expect to deliver very significant income growth. We were orientating the business towards that, so focusing on costs. And sadly, we've proved to be right about the economic environment. But the income performance that you've seen in the retail bank, I think, last year was good in the circumstances, very good actually, and I think we feel pretty confident that that's about where we are.

Edward Firth - Macquarie Research

Great. And sorry, just my principal question. On Note 15 on Page 75, you've given us a lot of new disclosure about pension liabilities. And I think you've disclosed the GBP 5 billion deficit at September 2010. I think that's the first time you've disclosed that. You've also given sort of quite detailed guidance about contributions you're going to make right up to 2021. I guess my question is, do any of these have P&L impacts? You're talking about making additional GBP 500 million next year and then I think GBP 650 million from 2017? I suppose my question is, is there a P&L impact to that? And what is the rationale for starting your contributions in 2017 not somewhat sooner? And I guess my last point is...

Robert Edward Diamond

It's a long question. Let's take...

Christopher Lucas

I'm taking the first 2 bits, anyway. The result -- this is the result of the formal triennial valuation that you work through. And as we saw and as you quite rightly pointed out, there was a deficit on the pension fund valuation. We then go into a process of agreeing a payment schedule with the trustees, which we have done, and that comprises some quite significant upfront payments this year and last year to work the deficit down, then a gap and then some further committed payments in 2017 and onwards. Now of course, what happens is you do the next valuation before the 2017 payments ever get made, so to some extent, the ones that I really look at are the ones that are committed short term, and that's what you've done. So you see the valuation of the scheme at 31 December after the payments is actually in asset rather than deficit. So of course, the trustee is fine. The funding bears little resemblance to the profit and loss account charge, which as you know, has to do with service costs and the service elements of the people who get pension benefits. So this is important because it has an impact on capital, but is less important in terms of P&L. But I hope that helps just set out some of what's happened.

Robert Edward Diamond

Let's go to the call on the phone then we'll go right here and then to Robert.

Operator

We have 2 questions on the line for you. The first is from Fiona Swaffield from Royal Bank of Canada.

Fiona Swaffield - RBC Capital Markets, LLC, Research Division

Can I ask questions, just 2? One is very short. On fixed income, I'm just trying to compare you with your peer group, and it looks to me like you've been somewhat weaker than some of the others. And I just wondered if you could talk about where you think you've outperformed and underperformed. And secondly, on this issue of pension, you used to adjust the pensions in Basel III, and now you don't. Yet I read that there's GBP 1.7 billion adjustment to equity happening. I'm just trying to understand why that's not about 30 basis points.

Robert Edward Diamond

Chris, why don't you take pensions and then Rich and Jerry on fixed income?

Christopher Lucas

I'm going to have to admit, the deduction from capital is because of the contributions we're making, and that's reflected there. You can see it. Beyond that, I think there's no further adjustments because you have to take the deficit reduction program for 5 years into capital. And what we've actually done is taken the 3 years because we have it in a 2-year gap. So we have taken into account the contributions we make up until 2013, and that's what you see in the capital calculation.

Robert Edward Diamond

Jerry?

Jerry del Missier

On fixed income, actually, we wouldn't see underperformance. On the contrary, we're actually very pleased with how the businesses had performed relative to competitors. What we can say is that within the fixed set of businesses, the -- our rates, credit and commodities businesses had a more challenging year than they did in 2010. And that was somewhat offset by a very strong performance in foreign exchange, which saw significant increase in market share and, given the volatility in the market, actually had an outstanding year.

Peter Toeman - HSBC, Research Division

Peter Toeman from HSBC. I can appreciate that you have a positive view about BarCap's future returns, but when I look at the numbers, if one assumes that sort of quarterly revenues got back to GBP 3 billion and you apply the 65% cost-income ratio target, you then drop with sort of post-tax profits of about GBP 3 billion. And when you last updated us on the Basel III consequences on BarCap, you spoke about GBP 270 billion of WRAs. So it seems to me that on these numbers, BarCap would be a 10% or 11% return business, and that's before factoring in, say, the higher cost of unsecured funding, which could be a consequence of the ring fence.

Robert Edward Diamond

I'm not sure if there's much to add. We've given you a pretty clear guidance on how we've managed Basel 2.5 and the returns on this environment and the 15% outlook going forward. Maybe we just agree to disagree.

Rich Ricci

I think the only thing I would add, Bob, is that, and I think demonstrated your point, in the fourth quarter, flexibility around costs and being able to deliver. So you're using 65%. It was a range 60% to 65%, depending where we fell on that revenue spectrum. I think we've demonstrated the ability to be pretty nimble around driving returns. So again, in that range of GBP 12 billion to GBP 14 billion, we remain pretty confident given the efficiency we've shown, the sureness of foot, the nimbleness, our ability to reduce RWAs, that we can get to the returns we've committed to.

Robert Edward Diamond

Happy to spend time off -- it's tough to follow when you do some kind of numbers on the back of an envelope and calibrate them up. So happy to take it offline, but we feel really confident. And I think as Rich said, it's -- our businesses increased market share at almost every area, so 11% market share in fixed income. Fixed income might be tough environment, which it was to be #1 with customers and clients with 11% market share when you know the business will come back. And I think the progress that we're making in the advisory business and the equity business, having -- being on the lead of Facebook, being on the lead with Xstrata, these are big important transactions where we're newly placed with the acquisition of Lehman Brothers business and then the buildout in Europe and Asia. We would have loved, as many people would have, for a better market conditions last year with the pipeline we have, but that will come. But again, happy to take it offline. Robert, sorry.

Robert Law - Nomura Securities Co. Ltd., Research Division

Robert Law, Nomura. Could I sneak in 2, as well, please?

Robert Edward Diamond

Well, if you call one a principal question. I think learned that...

Robert Law - Nomura Securities Co. Ltd., Research Division

One's a principal and one's a supplementary unrelated. And so in terms of the principal, I can see why you'd moved away from the 13% ROE target, and the outlook is obviously pretty volatile.

Robert Edward Diamond

We did not move away from the 13% ROE target. Let's make this very clear.

Robert Law - Nomura Securities Co. Ltd., Research Division

In 2013.

Robert Edward Diamond

Moved away from 2013.

Robert Law - Nomura Securities Co. Ltd., Research Division

But you are focusing on what is within your control.

Robert Edward Diamond

Yes.

So could I invite you, absent volatility or unexpected events, to give us some kind of quantification of the kind of progress you'd expect, given the moves that you are -- that are within your control that you are planning?

Robert Edward Diamond

I think I made clear last year that we would expect 13% in 2013. So what's happened since last year? We've had some things that are outside of our control, and I kind of listed them, so let's go through. A bank levy was not in the 13% numbers. That's easy to adjust for. We're running our core equity at 11%. We're expecting 10%. We think that comes back. That's probably 1.4%, 1.5%. It's going to be a 0 interest rate environment in terms of flows a bit longer than maybe we expected. And it's possible we move back from the kind of slowdown that fear of European contagion caused. What's in our control, to be perfectly frank, most of that operated better than we had expected. We're going to hit GBP 2 billion in cost savings, not GBP 1 billion. Barclaycard, for the first time, over GBP 1 billion in earnings. Africa, for the first time, over GBP 1 billion in earnings. We now have 4 businesses at that level. Lot more work to do to fix Europe, and Antony and I top of that. But if it were not for those, we would not be backing off 13% in 2013. So another way to say it is, if we have a faster normalization of those things, we'd be sticking with 2013. So don't treat this as anything other than we are very committed to both the 13% as the right target but also very achievable, but we need to be honest. Some of the external environmental factors out of our control could affect the timing.

Robert Law - Nomura Securities Co. Ltd., Research Division

And let's say you're -- the return at the moment is probably somewhere around the 7% level or something in that sort of order. Do you expect you can improve the ROE 1% a year, 2% a year? I'm trying to get some type of...

Robert Edward Diamond

It's tough to give targets, but you should expect a smart acceleration toward those levels, absolutely.

Robert Law - Nomura Securities Co. Ltd., Research Division

Moving to the second area. It was really on the information you've given on the hedges. Could you comment on what the unrealized gain is on the product hedges at this point and how it's moved over the last 12 months? And obviously, as interest rates and long yields have come down, it's going to be more difficult to replace that with the same kind of duration. Would you consider going out on the level of duration to improve or sustain the income? Or would you consider going out, too, on the risk curve in terms of the assets you hold in that portfolio to sustain the yield?

Robert Edward Diamond

I suspect I know Chris's answer, but I'll give him an option, which is we've given a lot of transparency around this. We've probably said as much as we can. You touched the risk thing. Whether it's the hedge or anything else, the one thing we're not going to do is increase our risk to hit 13% returns. It's our underlying core businesses, and we're going to continue to drive. And that's why it's important for us to say, if the macroeconomic environment, if the regulatory capital environment is different than we thought, what we're not going to do is do something silly. We're not going to increase risk in order to get to 13%. It's going to be our core underlying businesses.

Christopher Lucas

Robert, the only thing I would add to it is these are hedges, so therefore, you don't have complete freedom in moving the duration of it. It has to bear some resemblance to the underlying assets. But we have extended them, as you know, which realized some quite significant profits. And if the opportunity remains or appears within the hedging requirements, we expect us to do more.

Robert Edward Diamond

We have another question from the phone. Thank you.

Operator

The next question, gentlemen, is from the line of Mike Trippitt from Oriel Securities.

Michael Trippitt - Oriel Securities Ltd., Research Division

Bob, just looking for some clarity on the cost target, actually, the GBP 2 billion by the end of 2013. I think you said that is, if I'm reading this correctly, is all in the nonperformance area, which was a 592 reduction in 2011. I'm just trying to sort of really get a measure of what is the -- almost what is the starting point now going forward as to how we would sort of look at the cost reduction over '12 and '13?

Robert Edward Diamond

In terms of calibrating? Chris, do you want to take that?

Christopher Lucas

Let me have a go. The way I look at it is we made a savings -- and I'm just talking gross numbers, so before restructuring costs. We made a saving in nonperformance costs in 2011 of about, round terms, GBP 600 million. If you annualize that, that's about 1.2 billion. So that is my starting place for 2012. And what I'm going to be expecting is there to be about 400 increase in 2012 and another 4,000 increase in 2013, getting to that GBP 2 billion. The start place is our plans, which have all agreed medium-term plans, which have in there costs of somewhere between nonperformance costs, GBP 15.5 billion and GBP 17 billion, that sort of number, over, per year, over a 3-year period. So that gives you the starting place and the projection I see of gross savings.

Robert Edward Diamond

I think importantly, that the work we did last year gave us such confidence that we can become more efficient in the way that we operate, that it was a quite comfortable leap, if I can say it that way, from GBP 1 billion to GBP 2 billion, because we could see it developing as we worked through it. Let's go right here and then right next door. You guys decide the order.

Chris Manners - Morgan Stanley, Research Division

It's Chris Manners from Morgan Stanley here. So I had just a couple of questions. The first one was on Africa. I mean, it looked like a pretty decent results despite the rand. Are we looking like this business could generate GBP 1 billion of PBT going forward? And maybe, I don't know Maria's on the phone, but just comment about loan growth because it looked like it was negative, even excluding the rand impact in the year. And the second one was just on the fight for retail deposits. Some your competitors are indicating that competition really is stepping up there. Is that something that you're seeing, and will that be one of the crosswinds in your RBB margins as well?

Robert Edward Diamond

Is that a general deposit question or Africa?

Chris Manners - Morgan Stanley, Research Division

Sorry, that's the -- well, more of a U.K. deposit question, actually.

Robert Edward Diamond

Okay. We'll start with Maria. Let me just -- because we can be confusing. You saw GBP 900-odd million in PBT for RBB Africa. We're over GBP 1 billion if you look at all Africa, including what's happening in wealth, what's happening in BarCap. So that's why I say 2 different numbers. I think you're saying can RBB Africa be over GBP 1 billion, right?

Chris Manners - Morgan Stanley, Research Division

Correct.

Robert Edward Diamond

Maria, did you -- were you be able to connect, I hope?

Maria Ramos

Yes, Bob, I'm on the line. Can you hear me?

Robert Edward Diamond

Yes, perfectly. Thank you.

Maria Ramos

Great. Yes, I think that's absolutely right. In total, actually, PBT is closer to GBP 1.3 billion. So GBP 908 million of that is in RBB, but if you add back cost, which is about GBP 233 million, which has seen strong growth for the last year, has also been a very big contributor to the numbers. I think going forward, we do see good, strong opportunity for growth across the business, so across RBB, across cards and, in fact, across corporate. So I think we are looking for good growth on the income side. We've also seen good progress on the costs side. So for last year, we saw costs down 1% in the business, both across the entire spectrum, so the whole of Africa, including Absa. And we've seen strong improvements in impairments. So impairments are down 17% for the region. So I think this is a good story going forward as well, so we expect to see contribution to PBT strong in the year ahead.

Robert Edward Diamond

One of the things we're finding so exciting about this is, the more time you spend in Africa, you realize the incredible connection between what's going on in Africa with China and India directly. And it's not as we traditionally thought going through New York and going through London. It's really a direct trade relationship, and it gives us a real competitive advantage. Even here in the U.K., as John Winter would tell you, that the U.K. businesses are increasingly having trade relationships not just with Europe but also with Africa. So it's -- we think it's pretty exciting. It's one of the fastest-growing regions in the world from a GNP point of view as well, which is -- it's nice to have that position in an area with above developed economy growth. Antony, on the deposit question? Thank you, Maria.

Antony Jenkins

Well, Chris, on deposits, of course, it's quite competitive out there in the marketplace as people seek funding and seek funding relative to their other choices in terms of cost. But actually, as you'll see in our numbers, our numbers of savings accounts increased significantly and our overall deposits increased 3%, which I think is a fantastic performance in a very challenging market. And the way we've been able to do that is, firstly, because we focus on the customer and the customer relationship, and secondarily, because we've be able to launch innovative project -- products like our Flexible Bond where customers can take a proportion of the money out of the bond even before it expires. So this is about how we compete day in and day out on the high street, the quality of our people, quality of our products, the quality of our brand. So while we think the market will be quite challenging, we think we'll be able to deliver a very strong performance in the market going forward into '12.

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

Chintan Joshi from Nomura. First question would be on -- just digging into the credit trends in the peripheral Eurozone countries, if you could elaborate on how should we be thinking about your corporate exposure, particularly in Portugal and Spain. And the second question is on equity.

Robert Edward Diamond

Robert, you want to take that?

Robert Le Blanc

Sure, thank you. Looking at the peripheral countries, let's focus on Western Europe. On the retail side, we've seen good performance there, a slight increase in early- and late-cycle delinquency in the mortgage books of Spain and Italy, which I wouldn't call peripheral, but let's talk about them as a part of Western Europe. And -- but those are increases from very low levels. We have very conservative LTVs there in the range of 40% to 60% across those 2 countries, and the performance there is good and the other retail performance has been improving. On the corporate side, we saw our higher level of impairment on the corporate side back in the first half of 2010. And the impairment charge for corporate exposure in Spain has been declining every half and declined again through 2011, and we're not worried about a reversal of that this year. You will have seen some significant impairment charges for Spanish corporate being taken around the industry in other banks. We think we were recognizing those problems very early. We've got something like a 58% coverage ratio of our nonperforming loans in corporate exposure in Spain, and we don't think we have got any big moves ahead of us there. The one more difficult market there right now on the retail and small business side is in Portugal where the economy remains very weak. And we saw some increase in retail and wholesale impairment in Portugal, and we'll see probably another increase this year. It's a small part of our overall book for Western Europe, where the trend remains positive.

Ian Gordon - Investec Securities (UK), Research Division

It's Ian Gordon from Investec. Just one question for me, please. A follow-on from Peter's. On ICB, you referenced in your remarks that there's improving clarity. Can you share any update on your remarks to the Parliamentary Select Committee in December on the quantum of impact, the timescale of impact? And do you share the views of one of your peers that there will be an enduring negative impact on achievable ROE in the medium term?

Robert Edward Diamond

There hasn't been anything really new since the Treasury Select, to your point. I guess the bill goes before Parliament or is prepared for Parliament this summer. That will be the next new thing. For us, preparing for this and all the things we're doing around resolution and recovery are somewhat similar. So we think of it as how do we best prepare ourselves, Barclays, for the new world where resolution and recovery is important? But there's nothing specifically new. And there's not a lot to add to the fact that this would not have been our first choice. It does add cost to banking in the U.K., but the decision's made and we're getting on with it. Yes?

Andrew Coombs - Citigroup Inc, Research Division

It's Andrew Coombs from Citigroup. Just 2 questions, 1 on Absa and 1 on Barclays Capital, please. Firstly on Absa, it was mentioned that volumes had been a little bit weak. I think the market share within South Africa, with new mortgage issuances has been down. And my understanding is that that's due a change in the mortgage distribution strategy that has now been reversed. So just the thought perhaps on when volumes pick up in terms of Absa mortgage lending there. Then my second question is with regards to the outlook statement on Page 7 of the report. You talk about the start to the year in January being in line or consistent with 2011 in RBB and corporate whereas for Barclays Capital, you talk about an encouraging start to the year, but you don't set it in line with 2011 or you make no commentary along those lines. So does that mean we should think about a meaningful uplift from Q4 but perhaps lower than Q1 of last year?

Robert Edward Diamond

Do you have any idea how careful we are with every word that's in that sentence? There's a lexicon, I think. It gives you exactly that. Why don't we go to Maria first to answer the question on mortgages in Absa, and then to Rich and Jerry on how it's going in BarCap to start the year. Maria?

Maria Ramos

Thanks, Bob. Yes, we did pursue for most of last year's a strategy where we used our own internal channels for mortgages. And that was really very much a strategy that was focused on serving our own customers, keeping costs down, utilizing our own distribution points. I think that, that worked, and it did achieve what we wanted to achieve. We've improved the quality of our book significantly. What we have recognized is the fact that a lot of our customers' feedback was that they also wanted to be able to use other channels, including mortgage originators. So we've now taken the decision to use mortgage originators again. We've renegotiated these with mortgage originators. And what we have not done, however, is change our credit policy. So we're using mortgage originators. We're using it for our own customers. We have started to see volumes increase again in the last quarter of last year. And so I think it's a strategy that we're going to be pursuing, but we're not opening it up significantly outside of our very large customer base. I think it's worth noting that Absa remains the largest bank, from a customer point of view, in South Africa. We've got 11.6 million customers on the retail side, and we've grown our customer base by 3% to 12.1 million customers last year. So that's the perspective that we've taken on it.

Robert Edward Diamond

Thanks, Maria.

Rich Ricci

On Barclays Capital, Bob wasn't joking. We do look at these words very carefully, and I think that we wouldn't be saying encouraging if it certainly wasn't better than the fourth quarter. I don't think anything that we could say about the fourth quarter would have the word encouraging in it. Certainly, it's been a big start to the year for us. We're ahead of where we were last year at this time. But 6 weeks don't make a year, and we're cautiously optimistic. We talked about the year hopefully doing more like the first half of 2011, second half of 2010 rather than the second half of last year.

Robert Edward Diamond

You got back, Mike.

Michael Helsby - BofA Merrill Lynch, Research Division

I've got a question for Tom, actually, and then I just want to pull out on bonuses because I think that's very topical. Tom, wealth clearly going okay, but the revenue trends have been pretty flat quarter-on-quarter throughout the year. There's a lot of change going in the wealth management industry at the moment. I was wondering if you could just comment on what you think you can do in the next couple of years. And then just on BarCap comp, the pay numbers that you've disclosed actually probably overinflate what you've actually achieved because I noticed that your current year bonus is down 68%, which is quite phenomenal, really. So I guess the question is, could you give me a equivalent for what it was in the third quarter? I'm just trying to gauge what the clawback was in Q4.

Robert Edward Diamond

We don't really do things like that, so the bonus discussions are at the end of the year. Trying to compare quarter-over-quarter just would do no good. So we'll go over that one, but it's good to wrap up with Tom making some comments on wealth and then I'll make a few comments before we cut it.

Thomas L. Kalaris

This is the traditional last question on wealth?

Robert Edward Diamond

They're always after you, Tommy.

Thomas L. Kalaris

Absolutely. It's pretty simple. We have laid out the strategy that is a 5-year strategy. We're 2 years into it. We are -- we're exactly where we should be after 2 years in terms of financials and also in terms of delivery. So we have a plan here which we think is executable regardless of what happens in the environment. There is lots to play for here, and we feel quite comfortable with where we are 2 years into the game.

Robert Edward Diamond

Thank you for coming. Just a couple of comments. We're really, really serious about -- although that was a tough environment in 2011, what made us so pleased is, when you look at our -- the businesses, every one of our businesses is performing really well in an environment and increasing its business and increasing its market share. 5 of our 7 businesses increased their income in that kind of an environment. We're also really serious about the real economy and doing everything we can to make sure that we're focused both on how we behave and what we do, and in terms of what we do, the impact we can make through our lending and through our capital markets businesses and helping the real economy get going, and what we can do with graduate programs and apprenticeships to help get people back to work. And lastly, we're really, really serious about 13%. We're not wavering a bit on 13%. There are some environmental issues that will affect the timing, but they won't affect 13%. We're very convinced on it.

Thank you very, very much for coming. We look forward to hanging out with you for a few minutes before we all have to go off. Thanks.

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