Barclays PLC (BCS) Q2 2007 Earnings Report, Transcript and Summary

Good morning and thank you very much for joining us today. If I could just remind you to switch off telephones and Blackberry's that would be very helpful. Can I start by introducing my team, I am joined on stage by Robert Diamond, our President and for the first time for our results, Chris Lucas, our Group Finance Director and in the front row we have got Frits Seegers, Chief Executive of GRCB and Paul Idzik, the Group COO. Chris will take you through the results in detail and after him, Bob will give you our view of recent developments in the markets, as context for BarCap's results. Today is primarily about the interim results of the Barclays Group. So I wouldn't be talking much this morning about ABN AMRO, but I will make a few comments on the investments in Barclays by China Development Bank and to Temasek. Today's results provide a significant staging post in the strategic transformation of Barclays, you know that strategy well. It's to achieve faster growth through earnings diversification. The strategy can be implemented through organic and inorganic means, say for the last years it's mostly been by organic development. The planned merger with ABM AMRO is a different route to the same end, profit growth through earnings diversification. Either way the investment story for shareholders is strong. When I look at the subject of implementing our strategy and at our performance in the first half of 2007, what I would say is we have been keeping at it and that, we have been doing what we said we would. Three years ago at this presentation, I talked about our priorities. In particular, I said that there were certain things that we wanted to see in our performance over the short and medium-term. On this slide, I summarized as priorities, and I tried to capture alongside each objective, the essential point of delivery in the ensuing period. We said that we would strive for higher growth. First half profit in 2007 exceeds full year profit in 2003. We said the profit diversification outside the United Kingdom would help us to achieve this higher growth and we have gone from 20% non-UK to 50% non-UK. We said that an increasing ratio of non-net interest income, the NNI would be a sign of growing financial health. We have gone from 45% non-NII in 2003 to 60% a day. We said that we would be more ambitious in our UK retail banking business, among other things by improving the cost to income ratio there. The cost to income ratio in UK albeit has improved significantly. We said that we expected strong growth, by which we meant 15% to 20% per annum in BarCap and BGI over time. The compound annual profit growth of each of those businesses has been 37%, since then. And lastly, we said that we wanted Barclays wealth to become an engine of growth for the group. Half year profit in wealth in 2007 exceeded full year profit in 2005; various priorities remain the priorities of today. You should expect to see them in the performance of Barclays in the years ahead. Back in 2004, we also expressed our belief that our strategy characterize by the operating principle of earn, invest and grow would serve shareholders well over time. And this slide shows our profit and dividend performance since 2003. Our profits have more than doubled over the period; dividends are up by about two-thirds. In late 2003, we set ourselves a goal of generating cumulative economic profit of between £6.5 billion and £7 billion during the period 2004 to 2007. Here on this next slide is that goal express on a straight-line basis and so far versus the goal, we've generated economic profit of £7.6 billion. That's more than billion pounds higher than the minimum we promised and went above the top end of the range. And we reached that figure six months before the end of the goal period. We'll be setting new goals at the beginning of next year for the period 2008 to 2011, and as you know our baseline requirement for economic profit growth is 10% per annum over time. Before I talk about the businesses, I'd to spend a few moments talking about the business model that we've chosen for Barclays, the universal banking model. If you look at Universal Bank TSR [Total Shareholder Return] over the course of the last 10 years, the out performance is clear and strong as this slide illustrates. Barclays is a good example of how the model can work successfully. Not so many years ago, Barclays was a UK clearing bank with limited activities outside the UK and with its earnings dominated by the core UK retail and commercial banking business. Today half of our profits are earned outside the UK and two thirds of our profits are made outside the two UK banking businesses. The number of people working for Barclays outside the United Kingdom exceeds the number of U.K.-based employees. We've achieved this transformation, which matters because we believe it increases the prospects for future growth, through the successful implementation of the universal banking strategy. Successful universal banks are specialists, not generalists. They incorporate specialist skills, expertise and practices which are directed at specific customer needs in specific markets. In Barclays, we've been building a business over the years which is characterized by the quality of its specialisms. Those maybe in investment banking or investment management or credit cards or wealth management. But it's the transmission of these capabilities through relationship managers and distribution networks around the world, which has been creating strong growth in Barclays along with a high group return on equity. I am confident that we can continue to generate good growth. I have talked in my presentations to you before about the sources of growth in the financial services industry. We think that industry will grow significantly over the course of the coming decade and our task in setting strategic direction is to maximize the alignment between Barclays in terms of brand and physical footprint and capabilities, and those sources of growth. The opportunity is very significant, it's to take market share in a growing market. Barclays is on its own and Barclays also with ABN AMRO can do that. Unlocking the massive economic opportunity created by future growth depends on creating the right organizational structure. Our structure is built around the two main business groupings of GRCB and IBIM. It is designed to enable us to lean into the growth by putting together within the two groupings, businesses that are naturally synergistic. We see substantial synergy within GRCB and within IBIM, and we see significant synergy between GRCB and IBIM. And because you know as well, you are familiar with the sort of things that I am talking about; the use by middle market customers in the United Kingdom and Spain and South Africa or BarCap's risk management and financing products, the distribution by our retail networks in France and Spain and Portugal and Italy of BGI's iShares and the injection of world class credit card expertise into our large South African retail customer base or into our Scandinavian joint venture or into our new Indian retail startup, those adjust some examples. We think we have plenty of further scope to generate such opportunities. Chris will take you through each of the businesses in a minute. So, I'll limit myself here to a few key points that caught my eye. I am very pleased with the performance of U.K retail banking in 2007. What do we say about this business banking in 2004, that it was capable of much higher growth, that it was inefficient relative to its best U.K competitors, and I think one or two key product areas, we needed to catch up. Today's business is much stronger. In 2007, we've built upon the sharply improved performance of 2006. Our profits have grown 9% this half, without the impact of settlements on overdraft fees, which you might think was attributable to a prior period. The like-with-like profit increase was a lot higher. Back in 2004, we identified two sources of significant improvement which were mortgages and savings and investments. Chris will update you on our mortgage performance. It's got a lot better. In savings, we have taken market share and the balances have increased materially. This has generated a significant upward shift in the profitability of this product line. Three years ago, U.K retail banking cost income ratio was 65%. Today it's 56%. We have further to go but we have improved our competitiveness a lot. Turning to Barclaycard. I see the makings of a turn around here. You'll remember that in 2003, we said that we would aggressively internationalize our credit card business. At that time, we had 1.5 million credit cards issued outside the United Kingdom. Today that number is 7.5 million. The international card business has moved into profit in the first half of 2007. In Barclaycard U.K, our priorities for 2007 were bringing down the impairment charge, extending our partnerships business and getting back on to the front foot in the area of product innovation. We made precise commitments to you about 2007 impairments and we've met those commitments during the first half. Impairments in Barclaycard UK has responded to management action, the trends and delinquencies, and arrears balances and in loan loss rates all positive. As for innovation at Barclaycard, a good example is Barclaycard OnePulse. A three-in-one card incorporating Oyster travel functionality, a credit card and waive and pay technology for transaction below £10. Barclaycard OnePulse is currently in pilot and we're planning to launch it next month. As consumers increasingly go cashless, we hope that this will be a must have product. We formed GRCB during 2006, because of the clear evidence of convergence in customer buying behavior and need in the retail, commercial banking and card businesses in many markets around the world. The evidence we have in the following 12 months corroborates that view. GRCB as a whole is in a period of rapid investment and expansion, evidenced to as we forecast in February by the grit [ph] of our international distribution network during the quarter 2007. We've opened some 180 branches outside the UK so far this year. I would expect to see some positive consequences of this investment over the next couple of years. What early signs can I point you to? I see clear signs of acceleration in the Western Europe and emerging markets businesses of GRCB which together comprise IRCB excluding Absa. Underlying profit growth in these businesses was 19% in the first half. Our Western European business is growing at an emerging market rate during 2007 with profit up 17%. And in GRCB's emerging markets business profit is growing by 25%, despite increased investment in the business mostly in distribution and sales. As for Absa in land [ph] terms profit was up 32% and lending to customers rose 20%. The business is continuing to mature not withstanding that tighter monetary conditions in South Africa. The synergy program in Absa is running 12 months ahead of schedule. It will take a while longer for IRCB ex-Absa to generate profits as large as the profits we are seeing from Absa today, but I am confident that it will. In BarCap, we have consistently talked of achieving compound profit growth of 15% to 20% per annum through time. I am trying to steer you towards a growth trajectory for BGI. We think that 15% to 20% per annum through time looks like a good rule of thumb here too. In full year 2006, our profit in BarCap were up 55% and at BGI over 30%. We have seen further profit at BarCap during the first of this year of 33% and of 7% at BGI or 15% on a constant currency basis. This next slide shows you the relative rates of growth in profit, income, DIVA, and economic capital consumption at BarCap over the last five years. You will see that the rate of profit growth has significantly exceeded the rates of risk utilization and of capital consumption. BarCap continues to grow strongly in the United States and Mainland Europe and Asia. Its franchise strength is evidenced by the further increase in the number of £1 million a year relationships which have risen to about 480. As Chris will show you, our BarCap business has diversified significantly over the last years, both by geography and by product and that's enabled us to increase the rate of growth as well as to diversify our risk. The first half story in BGI is one of the strong flows of net new assets and strong investment for future growth. You can see how the size and shape of BGI's profits have changed. BGI is a good example of a business with a right specialist focus and expertise which is well placed to take share in a growing market. In Barclays Wealth we are developing the attributes that we need to grow very strongly; talent, relationships, infrastructure and product. Profit performance in wealth is shown on the next slide. A significant feature as I mentioned is that profit in the first half of 2007 exceeded full year profit in 2005. This is, I think another story of strong alignment between growth in the industry and the capability that we are developing in Barclays driven by the strong synergy opportunities that come from proximity in Wealth with BarCap and BGI. I said, I will say a few words about China Development Bank and Temasek. When we were presenting our full year results to in February, I said that as part of our strategy of seeking higher growth through profit diversification. I wanted Barclays to increase its exposure to emerging markets. So and you remember that I talked about looking East. It became clear that it would be possible for us to serve the twin objectives of increasing our exposure to Asia, and increasing the probability of merging with ABN AMRO by the single initiative of seeking a strong Asian presence on our share register. The consequent cash subscription helps us with the consideration mix for our bid, and in addition we create economic opportunities from new business collaboration. That's the strategic and financial context that what we announced last week with Temasek and CDB. Temasek and CDB like the existing Barclays story and they've committed $5 billion to it. They also like the ABN AMRO merger opportunity and they've committed a further $11.5 billion to that. Temasek's shareholding is financial, the holding of CDB is both financial and strategic. We believe that the opportunities that we'll pursue at CDB both inside China and outside, represent a further source of material growth which is not conditional on the ABN AMRO merger but which will be amplified by it. CDB has a unique relationship footprint in corporate China. As I said a moment ago, the Barclays have not so long back was a UK clearing bank. Today we're different. And that transformation will be further accelerated by our new relationship in CDB. Our strong performance in the first half gives us confidence for the period ahead. The outlook is undeniably less clear because of current market turbulence, but our business is broadly based and the fundamental story of significant growth in the financial services industry driven by strong world economic growth, that story remains unchanged. The strategy that we've chosen, the pursuit of higher growth via the pursuit of greater profit diversification is working well. You have as our owners, the right to expect from the ABN AMRO merger a rate of return and an absolute profit performance beyond those of today's Barclays. And the objective of the Barclays management team as we pursue the merger is clear and single minded; it's higher growth and through that, higher shareholder value. I'll hand over now to Chris.

Thanks John and good morning. You know from our announcement last week that we have delivered another strong set of results this half, building on the excellent performance of last year. In particular there has been outstanding profit growth in Barclays Capital, continued good progress in UK Retail, improved impairments in UK unsecured loans and cards, and another very strong performance from Absa in South Africa. Before I go in to more detail I'd like to run through the headline numbers. Profits fro the first half were £4.1 billion, which is if you look back exceeds profits for the whole year of 2003, showing how our recent growth has accelerated. We grew profits by 12% despite considerable currency headwinds, income grew 9% and so the cost as we continue to invest in the business to drive future revenues. Earnings per share were up 14%, return on equity was 26% and the economic profit grew 16%. We have increased the dividend... interim dividend by 10% to 11.5 pence. So divisional numbers are presented on the basis of the restatement we published in June. Starting the Global Retail and Commercial Banking, profits in UK banking grew 9%. Within that UK Retail continued to make very good progress with profits also up 9%. Income grew 5% to £2.2 billion adjusted for settlements on overdraft fees. There was a strong performance in current accounts and savings, when net interest income increased 12%. This was supported by product launches such as new instant access savings account day-to-day saver and high interest account savings build up. Net interest income in consumer lending declined on... as our more selective approach led to a reduction in outstanding balances. Our net shareholder mortgage lending for the first half compared with minus 1% for the same period last year and our gross lending has increased 45% during this half. This reflects the continuation of significantly better processing capability and attractive products. Our assets quality remains very strong; average loans to value in the residential book is 32% and on new business the average loans to value was 51%. Headline income growth of 1% reflects settlements of £87 million for claims on prior year overdraft fees. Our approach has been to process claims promptly and inline with the FSA guidelines. In view of the current test case the FSA has agreed there will be no further settlements and we therefore expect any further impact this year to be limited. Costs were broadly inline with the first half last year, as were the level of property gains which were mostly reinvested in the business. The village migration program has been completed with 3.3 million customers now transferred to Barclays accounts and branches. Impairment charges improved by 9% reflects in lower flows into delinquency and lower arrears. Mortgage impairment remains negligible. In UK business banking, profits grew 9% and income grew 8%. Net interest income increased 5% driven by good average deposit growth at improving margins. Average lending grew 2% reflecting in part our disposal of the vehicle leasing in European vendor finance businesses in the second half of 2006. The lending margin was broadly stable. Net fees and commissions were up 13% including higher debt fees and income generated from transactions executed from Barclays Capital on behalf of business banking customers. This is a good example of the benefits of the model that John talked about earlier. Cost growth of 3% was well controlled resulting in 2 percentage points improvements in the cost income ratio to 33%. Impairment grew £23 million to £123 million mainly in larger business. The cost income ratio in UK banking as a whole is improved by 1 percentage point to 48%. Excluding the impact of settlements on overdraft fees, it improved 2 percentage points and on the spaces we continue to target a 2 percentage points improvement for 2007. This in addition to the 6 percentage points improvement delivered in the last two years. There were gains £138 million from property sales in UK banking, mostly in UK Retail. This is a similar level to the gains in the UK banking in the first half of 2006 and most of this is being reinvested in the business. Moving to Barclaycard; profits have more than doubled from the second half last year to £272 million. But if you exclude a property gains of £38 million last year and the £27 million loss on the monuments sales this year, profits were up 4%. Income was steady in relation to the first half of 2006, as strong increase in the international cards offset lower income in UK cards, resulting from a reduction in balances as well as 12 pound cap on late and over limit fees. Costs increased 16 % as we continue to invest particularly in Barclaycard international excluding prior property gains costs increased 70%. Impairment has improved by 9%, new flows into delinquency and levels of arrears in UK cards have continued to decrease. As you know we have been reviewing the business mix in Barclaycard, and refocusing our business in the UK and we continue to pursue rapid growth in Barclaycard international, where we have issued over a million new cards during the first half. Barclaycard US has moved in to profit ahead of schedule and is on track to deliver the $150 million of profits in 2008. Moving to International Retailing and Commercial Banking, Absa Limited has reported outstanding profit growth of 32% in line this morning. Loans and advances were up 20% largely driven by mortgage growth and deposits grew 13%. Attributable profits increased 33% in Absa capital and as John has said, we are delivering revenue and cost synergies ahead of schedule. Most of those revenue synergies were delivered in Absa retail, Absa cards and Absa capital, as a result of combining Barclays product capabilities with Absa's distribution network. In sterling, Absa profits were flat mainly due to a 20% decline in the valley of the rand. As we anticipated, impairment charges increased sharply from historical low levels in Absa driven by interest rate increases in 2006 and 2007. Excluding Absa, IRCB delivered profits of a £142 million, last year profit included a £55 million property gain and £21 million form our associates First Caribbean, which was sold at the end of the year. Excluding these items profits grew 19%. There was very strong income growth of 16% with a particularly good performance in Spain with freighting our past investment in that business. Excluding last years property gain, costs grew 15% as we invested in pursuit of higher growth rates outside the U.K. We have continued to invest in IT infrastructure as we moved to a common platform in IRCB and we made good progress building our distribution network. We opened a 185 new branches in IRCB during the first half, 70 in Western Europe as we extend our operations into Portugal, Italy and Spain. A 103 in emerging markets and 12 in Absa in South Africa. We expect the average time for breakeven for new branches to be 12 to 18 months. Moving to Investment Banking and Investment Management, Barclays Capital had another outstanding six months with profit of 33% to £1.7 billion. Income growth of 21% was broadly based across regions and assets classes with particularly strong performance is commodities, credit products and equity products. In the past year, we have acquired mortgage servicing business HomEq and a mortgage origination business EquiFirst in the U.S. EquiFirst completed a very significant reduction to the price we announced. Both these investments have strengthen our capability in a large and important market. As you know there has been volatility in the US sub-prime and leverage lending markets. In preparing our results we ensure that our balance sheet positions are properly mark-to-market and that we carry appropriate reserves for risks in the business. Our results take in to account all the information available to us today, Bob will tell more about our view at that market in a moment. Costs increased 17% largely reflecting performance-related pay and continued investment in the business. Headcount has increased by 2500 in the first half including 1400 in EquiFirst. The cost to net income ratio improved 3 percentage points to 60% and our cost base continues to be flexible with over 50% taken up by performance related pay, discretionary investments spend and short-term contractors. Impairment charges remain as a low level. At Barclays Global Investors profit grew 7% to £388 million driven by income growth of 12%. Both profit and income growth were reduced by 9% decline in US dollar. Most of the income growth came from increased management fees particularly in iShares, active management and securities lending. The contribution from incentive fees was stable relative to the first half of last year. We had met new asset in flows of $50 billion as compared with $68 billion for the whole year in 2006. Assets under management increased by a $199 billion to $2 trillion in total. Costs grew 15% as we continue to invest in the infrastructure to support further growth in the business and board an integrated platform across all asset classes. Headcount increased by 400 to 3100 and the cost income ratio rose 2 percentage points to 59% which does remain in top quota. We completed the acquisition of index change in February, which brought $23 billion of assets under management and considerable strengthens our iShare business in Europe. There was an excellent profit growth of 34% in wealth to a £173 million. Income increased by 10% as a result of growth in client funds and greater transaction volumes. Cost growth of 3% was well controlled as volumes increased across the business, the dress [ph] costs were low and efficiency gains were reinvested to add more client facing professionals and strengthen the technology infrastructure. The cost income ratio improved 6 percentage points to 72%. Moving to impairment for the group, charges reduced by 9% by about a £100 million. The most significant change was the lower charge in UK cards and unsecured loans, reflecting lower balances, lower flows to delinquency and lower absolute levels of the arrears. Following the restatement, these are now reported partly in Barclaycard and partly in UK Retail. You should bear in mind that there was an £83 million available for sale charge in 2006. And in IRCB and business banking, impairment increases reflect to move towards this tendency. The coverage ratio in potential credit loans has declined slightly from 55% to 54%. This reflects our assessment to the risk and the level of security on a handful of larger non performing loans. We remain comfortable with this level of coverage. Moving on to capital our ratios at the end of the first half were broadly in line with our targets. Our tier 1 ratio was stable at 7.7% and our equity ratio was 5.3%. We continue to make a good progress in our preparations for Barl [ph] we completed our second parallel run in May and still expect to modest reduction demand for capital. Recent discussions between the regulators in the industry however suggested this is lightly to be offset by increased deductions which we would fund with hybrid and tire-2 issuance at minimal costs. Our overall regulatory capital position will remain broadly similar. We intend to take advantage of continued low yield on property to extend our certain lease program. We expect to realize gains of about a £100 million in the second half mostly in UK banking and all of this will be reinvested in the business. Looking at our main UK pension scheme, the fund is showing IAS 19 surplus of more than £850 million largely as a result of an increase in the discount rates. This is an improvement of well over £1 billion from the end of 2006. The acturial funding is more stable and continues to show a surplus of over £1 billion. We continue our policy of weighing the dividend towards the final payment to retain flexibility, and we have announced strong dividend growth of 10%. On Monday last week we indicated our intention to buyback £2.4 billion of share in order to neutralize a dilution impact of the new investment by China Development Bank and Temasek. We announced today that the regulators have given approval to proceed and we will start this on August 6th. It should take three to four months to execute. You will find further details of this on the OpEx. So in summary, we have delivered another strong set of results this half, building on an excellent performance of last year. In particular there has been outstanding profit growth in Barclays Capital, continued good progress in UK Retail improved impairment in UK unsecured cards and loans and another very strong performance from Absa. Thank you very much indeed. I would like now to hand over to Bob.

Thank you Chris. John has asked me to say a few words about Barclays Capital and the market conditions. You have heard from Chris that we had a record first half in Barclays Capital with a record in each of the first two quarters with PBT up overall 33%, and as you can see on this slide strong growth across all assets classes. Now I know you are interested in how we performed in July so, let me tell you. Despite the significant up tick in volatility in July and taking into account all the information and valuations we had a good July with both revenue and net income ahead of last year. The diversification that you will see on this slide really, really works. We have a very well diversified business in Barclays Capital in our rates business, our commodities business our foreign exchange business in emerging markets and in equities, all those businesses are experiencing increased client flows, increased investor interest and increased trading volumes. Let me give you an example, with our Fx business and the performance in July. During the very volatile markets and the demanding market environments, we have experienced daily Fx trading volumes of close to 100,000 clients transactions per day. This is double the daily average for June. In fact, if you look at our volumes in the first half of 2007 they were three times the volumes in the full year of 2005. Our capabilities and our scalable platform in foreign exchange have enabled us to continue growing, while many market counter parties are flagging capacity issues as a concern. Let me turn now to credit which is, I think the area you want to hear about. The market environment in credit has clearly become more challenging, the credit markets are experiencing a necessary repricing of risk. For the first time in four years, investors have pricing powers and can demand the terms upon which they will take credit risk. The two most challenging sectors in the credit market now are sub-prime and leverage finance. My thoughts are different as it relates to both of those, so let me take them in turn. Sub prime markets continue to be volatile and a source of concern for investors and this will take sometime to unwind. At BarCap we have built a very strong business, as Chris referred in the U.S. and that business originates securitizes and services sub prime mortgages. We don't hold inventories for long periods and we have been proactive in our risk managements. In fact by May of this year we had reduced our sub-prime warehousing limits by more than 50%. Our loan exposure to sub-prime mortgages in this business is 99% first lien. The sub-prime comprises a very small proportion of our trading in loan book. Today the credit spread VAR, or the value at risk, the measure of how much risk we have on our secondary books, despite the increased volatility is below the average level for all of 2006. The mortgage and assets backed businesses have had good growth for us, but as you can see in the slide, that's a small proportion of a very well diversified revenue base in Barclays Capital. We are comfortable with our business model, we are comfortable with our positions and our ability to repackage and distribute risk, but make no mistake it will take some time for the sub-prime market to work through the excesses of the recent past. Leverage finance; let me talk about leverage finance what we are seeing in this market is different its clearly an imbalance in supply and demand and we believe the difference is that the underlying fundamentals of corporate credit remain very strong. Barclays Capital is a very strong player in both the U.S. and in Europe in the leverage finance markets, we have consistently been ranked in the Top 2 in European primary LBO origination. We have executed over a 175 transactions raising more than £80 billion in debt over the last decade. Yet our portfolio of loan positions that we hold today the loans we have on our balance sheet are about 2% of what we have originated and 98% of that is senior debt. We clearly have a very, very strong track record of syndication sell down. We have experienced just £5 million of credit losses, over the last 10 years. We are comfortable with our leveraged finance model and its focus on the distribution of risk. We have no evidence of deterioration and quality of our underlying book. Our average hold in leveraged finance is around £30 million per transaction and is well diversified. And as a final point, our total equity risk exposure is less than £100 million. Let me also talk some more for just a minute about a diversified business model; you know about our track record. We delivered 25% compound annual growth rate in both revenues and profits since 1999. But now, more than ever, keep in mind that this growth has been achieved across the business cycle and in all market conditions, and you see on this slide across both loosening and lightning of interest rates, in periods of widening credit spreads and contracting credit spreads across periods of both high and low market volatility in bull markets for equities and bear markets for equities in active in quite and M&A markets, and throughout periods when inflation is going up and inflation is coming down. Our business model has always put the client very, very much at the center. And in these volatile times more than ever, we are working very, very closely with our clients and in fact we are seeing some good signs. We are seeing increased demands for hedging and risk management. We are seeing the opportunity for better trading in investment opportunity is going forward with wider credit spreads and we are seeing increased flow in the foreign exchange in interest rate products. So, looking forward we continue to have a positive outlook on the fundamentals of both the economy and of corporate credit. We believe the repricing of risk is a healthy correction that will take some time for the excess of the sub-prime market to be resolved. So to sum up a terrific first half. In fact the first half of 2007 in BarCap exceeded the full year 2005. July was a good month with both revenue and net income ahead of July last year. Market conditions are clearly more volatile and more challenging, yet we continue to see strong economic fundamentals across the markets. Thank you. Question And Answer

A question for Bob predictably on the 15% to 20% over time growth in PBT on the back of much higher than that growth in the first half and so it was the starting point for your next period of 15% to 20% growth. So I think I asked this question last year and I will deliver it again, but does 33% in the first half 18 to your starting point or is that again not in a specific period but over the next several years, is that valid figure starting from today, particularly in the light of the strategic credit... I mean you point well taken on your balance sheet positions, your risk management but it was in same line through the strategy credit markets will have much lower revenue opportunities to speak over the next 12 to 18 months. Thanks.

You know it's interesting in this, we are always managing one or two product lines, when the volumes are down. So you get environments, that's why I put the slide of the environments in foreign exchange where currencies are very stable, has not a lot of volume. It's very high to predict. I think the difference here is we are pretty certain, that the volumes in sub-prime are going low for some period of time. So that looks clear. I think, importantly as you can see that's not a big share of our income in the path. So it's not going to have a huge impact. The 15% to 20% growth I talked about is about not in any one month period. It's very hard to say that, but in BarCap do we still see 15% to 20% opportunities for growth going forward? Absolutely.

James Invine here from Dresdner Kleinwort. Got a question on the retail banking, I see that you have extended the property gains and you are again going to reinvest that. I was just wandering how much more scope is there for further one-off investments. So if you could find another say billion of property gains would you be... how much of that, would you be able to put into the retail bank as one-off investment?

The decision around the properties and our activities there are driven predominantly by the rates that govern the property market. We found that one more recent transfers of properties we have been selling have been at yields of about 4.5%, which remains very good considering when you look at what's happed to the interest rates. So that's what's driven us to extend the property in certain respect. I think last year we mentioned that we are about a third of way through, so that gives you a flavor for how much is remaining. And I look at the investment in the retail bank as one of the things that we are able to flex really based on the overall income performance, the cost of running the business and the cost to income ratio targets that we have set for ourselves.

And I would just add the following that. We have said before one of the things we are shooting for here, as part of our UK banking cost to income ratio improvement is structurally lower cost to income ratio. If you look at the components of UK banking I mean, business banking is pretty competitive, 33% cost to income ratio improvement, half-on-half always been there about. The business has been off the place as you know. There has been the UK retail banking business and I've consciously put out that slide showing you the improvement from 65% to 56%. We don't yet no, and that's one of the reasons why we have been investing is because we can create significantly improved structural efficiency in that business. Operating size will be a very good example I can give you where I would say that if I looked back over the last 10 years, and our retail platform here in United Kingdom here it is too fragmented and there are significant efficiency opportunities. And some of the investment that we have we have liberated through the sale of properties has been directed to adjust that concentrating operational activity, synthesizing it into as much smaller number of sites and we are some way through that. We will make a decision later this year whether we should be setting a cost to income ratio goal for a further period in relation to UK retail banking and we will of course if we decide to do that, then we will give you information about that at the end of the year.

You are not to wishing to a preempt that when you have already seen a 9 percentage point improvement in the retail banks costing for money share. I mean another 9 percentage points over the next few years is that going to be too aggressive?

I know you are really keen to get, let me give you a forecast on it and I assure you that we have a current goal period on cost income ratio and it expires again at the end of this year. I don't want you think that at the expiry, if we capture the 8% over the last three years, if we intend to, that will then sort of relax in the pattern [ph]. I don't think that we will be where we need to be in UK retail banking cost to income ratio, by the end of this year. So in my mind I have the thought of the further challenge. I am not making any commitment to that today but we will inform you that at the time. But I am clear in saying that it is further to go.

Mohamed Afzal [ph] from Merrill Lynch. Two quick questions if I can, first of all the... international secondly on Absa. On both volume you are in profit. Obviously you have been investing very heavily in that business. Do you see this is now sort of coming around the J curve and now its moving seriously into profitability or do you see yourself sort of stepping up the investment in that business as you look to moving on to the next stage which will cap some of the profit growth opportunity leaving?

I think JP were very struck by the scale of the international card opportunity. I mean there is a handful of credit card companies around the world that have genuine scale and genuine competitiveness, and we do think that the scales that we have are well deployable around the play. Absolutely the best example of where we got a lot of survey charge in that side of the business as a result of deploying those skills into Absa. The biggest part of the J curve is the U.S. business and as you know, when we said when we bought the business, we're going to invest $100 million a year in marketing through a period. But we will come of the J curve in 2008. That looks like 150 million as you heard from Chris that's dollars. We will hit that $150 million in 2008. But the business is at quite different level of maturity. So if I look at a card market like Germany, well we've been in Germany for quite a long time. It's a profitable business. If I look at our joint venture in Scandinavia where I would we're starting there. We're partly way through the J curve in the United States. Our end game is to have an international card business of the same heft as our UK card business. And I think, when we set out on that journey in 2003, we said we thought it would take us 10 years to get there. I've mentioned to you before that our plan has been to accelerate the rate of investment in our proposition because we think we can get that earlier through time. I don't know whether helps and your question.

The second one just Absa, we have clearly very strong results coming through in this first half. The language you use on Absa's tendency [ph] which we put up. The picture struck a slightly more cautious tone looking forward and as long as you can maybe just amplify our comments where we should be bracing ourselves to --

Can you just give me the middle bit of what you said.

The risk tendency increased in Absa and the comments you make around might increased in risk tendency, seems to be just a more medium growth period as provisions normalize.

Yes, I mean, let me make a comment and then Chris might want to add and I think the way you should think about this is that in circumstances where there has been quite a significant increase in interest rates in South Africa. It will be surprising if some of the demand and we have seen fabulous demand on full particularly retail banking products and absolutely over the course of last year. Some of that gets choked off and you would expect to see the level of impairment rising and it is rising, not out of line with expectation but it is. I think its that, that we are saying. But meanwhile don't loose sight of the fact that we have got breadth of business advance and profit growth there and two very fast growing parts of the business all the Absa capital and then the Absa card. So we feel pretty confident about the medium term outlook and when we invested in that business, our view decades of growth here ahead of us. That's what we were backing. Nothing causes us to change that point view

HSBC Expedition you had given on the Barclays Capital but one area you haven't touched on is the CDO market and I know its the markets of the third largest issuer of CDAs in this half year, I know that sub- prime US mortgage assets have been increasing, a part of CDO issuance and as a leading originated one might expect that mezzanine and equity charge of as might have been CDA's payment within your balance sheet. I am wondering if you might be able to give me some indication and if my thesis is correct, some indication to the volumes or at least if not volumes how for counting purposes, those residual interests accreted are they not to market, are they available to sell securities as your losses were recognize when sales actually take place?

It's part of the secondary business and that's why I went kind of pains to say in July all the valuations, all the mark-to-markets are included in the July numbers. So the CDOs would form part of a secondary market which will form part of the credit spread VAR which as is I said even with the increased volatility the VAR in credit spread is below where it was a year ago.

Anything on the accounting part.

I have to say in accounting terms, Bob is actually right we do mark-to-market but in terms of some of these residuals, we have actually been incredibly conservative over the years since they have originated and we have not taken any upside into income. So actually in a mark-to-market we are just taking the downside.

It's Steven Anderson [ph]. Just a quick question on that net interesting count growth from the retail banks where the story is too hard. The liability size is also very impressive but the asset size looks like its down 5% or 10% year-on-year, can you just give us a bit flavor and detail us to the drivers of that?

Mix really.

And as to what we might see going forward. I mean obviously as mortgage asset versus... would you expect that stabilize and start making a positive contribution at some stage in the next 6 to 12 months?

Yes, I mean I think that the -- it's principle mix Steven. that has been if you look at the drivers of the asset margin, its been an intensely competitive period in the mortgage market we have been pricing at market, but the market has itself been quite intensive and there is been some downward pressure on the non-card consumer landing market but I wouldn't overstate that and as you rightly point out, if you look at the liability side then what we see there is a resilient margin or better. But that mix change I think is you should expect that mix change to be a feature of the future. We have raised our game and we need to do what we have raised our game significantly in mortgage competitiveness.

I think anything I would add and you said make contribution that the mortgage business even at the rate at which new business is being written, once you take of who makes significant [ph] impairment and the low economic capital charge makes a contribution than economic profit level.

Good morning, Sandy Tran from Gordon [ph]. Two related for Bob. The net trading income was up, obviously very nicely, £2.8 billion for the first half and 20%... 29% up year-on-year and what we double versus the second half. I would just like to get more flavor on really what is driving that. Is that mainly fair value mark-to-market gains behind that on net trading income and... that's first part of the question?

Yeah we have always been clear that the accounting convention of trading net interest fees in commissions. The fees in commissions can tell you something. When we look at the interest in the net trading together, quite frankly, as being our secondary business, the best measure you have on that is how is our VAR doing or value at risk. We don't... I think it's fair to say that we have less focus on proprietary trading in most of the other investment banks, we have said it consistently. It doesn't mean, we don't take risks. So it represents a lot more flows in the secondary market and in the growth in our business. If you will get a business like commodities for example, over a $1 billion in income in the first half, almost double what it was in the first half last year, clearly that's a lot more client volumes.

Maybe another way of asking that question is. I noticed in the balance sheet the derivatives held for trading purposes went up from roughly about $140 billion at the end of the year to $177 billion. Now, how much of that increase or how... what percentage of those derivatives held for trading purposes are on mark-to-model versus mark-to-market i.e. marked to your reference market observables versus mark to an actual market.

Well it depends on the underlying market, if there is a clearing underlying market, you clearly to that, if there is not you mark-to-model. These things aren't very complicated. We can take you through in detail how we do all that, if you want to spend some time. But I know from accounting [multiple speakers] looking at derivatives on their own can sometimes be misleading, it is quite often they are offsetting physical securities positions that are also mark-to-market.

There is also very large provisions held for all the reasons you would expect in derivates. So if you want to dig deeper it might be better to do offline. We will be happy to show you some of the other publicly available information.

The last part of that was just on risk tendency for BarCap was at 110 million for the first half... as of the end of the first half versus the 10 million charge in impairments. I mean should we really be looking at this tendency, or is it a bit out nowadays.

That would be an anti-religious statement, if I can tell you. No we believe in it, but then actually if you look at the risk tendency in BarCap it's been pretty stable over the costs of last two three years.

And we want to always be outperforming that, right. But it has been a fairly benign credit environment. Of the last three years, I don't to want to take too much credit here. The credit environment has been pretty good, one of the things I was saying and one of the reasons that we are confident that the supply demand balance and leverage finance will work out is we still feel that corporate credit is very strong. So that hasn't...in past cycles and leverage finance has been slowdown in 2002 for example. It might have been more around the underlying credits concerns. That's not the issue we have today. So we are quite confident and holding on to some of these positions until the supply demand balance comes back and as I said investors are demanding better space right now. It's a change in the last three or four years in the market. It is not necessarily bad for us, when this liquidity comes back and there is a bit more balance between buyers and sellers, it maybe just a little more spread for the dealers to --

Yes hi, I am Phil Richards [ph] got a question on the buyback program that you gave the details this morning. You are saying the same release of program will be executed by an independent third party broker acting independently and uninfluenced by Barclays. However I am not mistaken, Barclays have chosen is acting as your joint finance advisor, joint sponsor and joint broker, when you are paid for IBN, can you just reconcile the two, please?

Well I can reconcile the two, which is that we give clear instructions there is a framework within which the operation will be undertaken. We have set that out in very considerable detail for you in the announcement and you can imagine that the program will be carefully monitored by the regulators who have blessed it and they wouldn't have blessed it if they thought there was any scope for manipulation. I feel entirely comfortable with the fact that. What we have orchestrated here is something that is designed to fit for purpose. The purpose is to neutralize the impact of the unconditional investment we made by TTB and Temasek. I think that's the certain, I can have very much to what we have said. I mean what you can imagine; I mean what lies behind your question of course. This is the some scope for manipulation here. I hope you feel the sense of real reassurance about the way in which we structure the program and you can imagine that we will have to go through that in some detail with the FSA and SEC, but these are tough demanding regulators, they are absolutely satisfied with what we are doing. I mean I think there is not much more I can add to it.

[indiscernible] I am wondering if you can say something about the UK retail banking credit impairments. You indicated some changes and methodology for risk tendency and also provisioning. Can you give an indication of what's happening to the P&L charges as a result of that and also could you comment just a bit further on some of the trends you are seeing delinquencies. You have indicated quite a good trend in the first half of how far do you see that going? Could you split out the credit card and the other unsecured loan in there?

And starts by saying there are two pieces part of the businesses in Barclaycard and part of it is in the UK Retail Bank. In the UK Retail Bank the methodology changes are around with tendency and those models are always moving and in terms of changes we may try to input in all parameters. In terms though of the underlying trends the trend in the unsecured lending in the UK Retail Bank and Barclaycard is actually similar. There is improved fleet into delinquencies, there are better areas. I think in the UK cards business, we see that translating through into lower charge-offs and lower impairment charge. In the UK unsecured lending business, there is a same delinquency improvement; there is the same areas improvement, what we haven't yet seen in that business is a change or reduction in charge-off rates. I think in all terms we would say that the environment in which we operate for UK consumer remains tough, I think we called it challenge the last time when we were here, I think it remains that. And you will be seeing the impact of interest rates in terms of people's disposable income. So I think that would be much my summary. And what we have done I mentioned in my presentation as you heard that we think that the performance here just wanted to management action. So if I look at decline rates for example in Barclaycard in the first half of this year, they are operating at 55%. Its an indication of stringent financial criteria being directed it at new applications. But there are sort of fundamental position I think its very much as Chris has described and the way I have that in my head just in terms of the math sort of I have sort of rounded a bit, that if you look at particularly Barclaycard the impairment number in the first half of this year is £440 million rounded, if you look at it in the first half of last year, the equivalent number was 580 and then the second half 480, so you can see some significant step change. That's really what the principle fundamental reflection I think of what we are seeing. Next question if any?