Tushar Morzaria - Group Finance Director

Andrew Coombs - Citigroup Chintan Joshi - Nomura Raul Sinha - JPMorgan Chira Barua - Sanford C.Bernstein Fiona Swaffield - RBC Capital Markets Michael Helsby - Bank of America Merrill Lynch Peter Toeman - HSBC Martin Leitgeb - Goldman Sachs Chris Manners - Morgan Stanley JP Crutchley - UBS Tom Rayner - Exane BNP Paribas Fahed Kunwar - Redburn Manus Costello - Autonomous Shailesh Raikundlia - Banco Espirito Santo

Welcome to the Barclays Q1 IMS analysts' and investor conference call. I will now hand you over to Tushar Morzaria, Group Finance Director.

Good morning. Almost a year after Antony and I set out the new shape of Barclays, I'm pleased to report another quarter of good progress towards our objective; a balanced, focused, international bank, run for returns. We further strengthened Barclays' capital position and, at the same time, we've cut costs; reduced the drag from our non-core and improved the performance of our core businesses, the future of Barclays. So let me take you through the highlights. We increased Group-adjusted profits before tax by 9% to £1.8 billion, with core PBT up 14% to £2.1 billion. You'll see that we achieved positive jaws, at both the Group and also at the core level. We generated good income growth in our core businesses in Q1. We improved income by 6% across PCB, Barclaycard and Africa, helped by a 4 basis points increase in margins to 414 basis points. The investment bank also generated a 2% increase in income. We reduced total operating expenses by 7%, with a 2% reduction in core costs. Even after the substantial cost reductions delivered in 2014, we still anticipate further cost savings coming through in 2015 to achieve our £16.3 billion guidance, despite significant headwinds from the U.S. dollar and a substantial increase in the UK bank levy. Adjusted core RoE increased to 10.9% and this was 11.6% when you strip out costs to achieve. This is also on an equity base that is £7 billion higher at £47 billion. We continue to make progress with the rundown of Barclays non-core. RWAs were down £10 billion during the quarter and allocated equity reduced to below £10 billion. Non-core RWAs, as a proportion of the Group, decreased from 24% a year ago to 16% this quarter. Resolving outstanding conduct issues and avoiding new ones, are important tasks of our plan for Barclays. Antony was very clear at full year that we want to make significant progress in 2015. Reflecting developments with relevant authorities, we've taken additional provisions of £800 million in Q1, primarily relating to foreign exchange. Despite this provision, we increased our fully loaded CET1 ratio to 10.6%. Now let me take you through our summary financials. Group-adjusted profits before tax for the quarter were up 9%. Our statutory profits before tax were down 26%, after taking account of the further conduct provision and other adjusting items. Impairment improved by 13% to £477 million as we continued to manage risk carefully. We reduced the total Group-adjusted cost base by 7%, bringing it down to £4.1 billion or £4 billion excluding CTA. Compared to income which was down 3% overall as a result of the noncore run-down, this again gives us positive jaws overall. On adjusting items, I've already mentioned the additional provision of £800 million in Q1 which brings a total provision primarily related to FX to just over £2 billion. There was also an additional provision for PPI in Q1 of £150 million, bringing the total remaining provision to £943 million as at the end of March. Offsetting these charges was a gain of £429 million as the valuation of the component of Barclays' pension liabilities was aligned to statutory provisions, using the consumer, rather than retail, price index. Other adjustments that we've taken in the quarter are shown on the slide. After tax and minorities, including AT1 coupons, adjusted attributable profit was £1.1 billion and that generated an adjusted EPS of 6.5p. We're paying a Q1 dividend of 1p, again. Now, I'd like to turn to progress on capital and funding. We continue to maintain a sharp focus on our balance sheet and this slide shows further progress over the quarter in terms of capital. CET1 capital increased to £41.8 billion, despite the conduct provisions taken in Q1. I think that shows, once again, the fundamental resilience of the business we're building. RWAs were down £6 billion at £396 billion, including completion of the sale of our Spanish business. With our quarter-end CET1 ratio of 10.6%, we're well positioned to satisfy our end-state target of around 12%. While its progress has been good, I would not expect that progress will always be linear quarter by quarter. Leverage exposure increased slightly to £1.255 trillion, as a result of seasonal effects. But we maintained the leverage ratio at 3.7% which is close to our 2016 target of greater than 4%. TNAV was up 3p versus the year end at 288p, even though the additional conduct provision constrained our TNAV build in the quarter. Overall, our liquidity position remains robust and our funding profile well diversified. We've made further progress this quarter in the transition towards a holding company capital and funding structure by raising £2 billion of senior unsecured debt at the holding company. Now let me turn to core performance, where our business is doing well. We delivered an RoE in our core businesses of 10.9%, up from 10.7% last year. And that was despite increase in equity allocated to £47 billion. Our core business generated an adjusted PBT of £2.1 billion. This was driven by improvements in impairment and operating expenses, with income higher by 2%. Profits were up 14% in PCB; 23% in Africa and 37% in the IB. Barclaycard profits were down 1%, as we invested in the growth of the business. We continue to make good progress on costs. Total operating expenses for the core were down 2%. And we remain focused on further reductions in 2015 towards our 2016 core target of £14.5 billion, excluding CTA. Core attributable profit was £1.3 billion and that generated a core EPS contribution of 7.7p. All our businesses generated income growth in the quarter, as the next slide shows. IB income was up 2% year on year. And outside the IB, income growth has come from positive movement in our net interest income, as both net interest margin and average customer assets increased. NIM reached 414 basis points for the quarter, up 4 basis points. And that was despite some NIM dilution year on year in Barclaycard, as we continue to grow and expand the geographic mix of the business. Barclaycard NIM was, however, up strongly on Q4. Average customer assets increased year on year by 5% to £289 billion and this was spread across PCB, Africa and Barclaycard. Altogether, this led to an increase in net interest income from these businesses of 6%. While there are some competitive pressures on asset margins, notably in UK mortgages, at this stage, we expect margins to remain broadly stable through 2015. Our core businesses are characterized by strong asset quality, as we continue to grow without compromising on risk. As you can see on this slide, core impairments reduced by 7% to £448 million. This was driven by significant further reduction in PCB, where we have lower default rates and charges in corporate; partially offset by increased impairment in Barclaycard, as we continue to grow the business. We continue to see stable credit risk metrics across our portfolios. We reduced core costs by 2% year on year to £3.9 billion, driven by Transform savings. We experienced headwinds from U.S. dollar strength, notably in the investment bank. Some of our Transform savings were offset by increased costs of litigation and conduct and associated legal fees. Now let me take you through the performance of the individual businesses, starting with personal and corporate banking. PCB is our largest division with PBT of £787 million, up 14% and the most allocated capital at just over £18 billion. We delivered an RoE of 12.9% and an RoTE of 17.1%. We saw modest asset growth in Q1 in both personal and corporate lending. NII increased 5% to £1.6 billion which was largely offset by reduced fee income, resulting in flat overall income. The NII growth was driven by corporate deposits and personal savings and an overall NIM of 302 basis points, up 3 basis points, despite some pressure on asset margins, particularly in mortgages. Corporate income was up 3%, driven by our cash management business. Impairment was down 41%, with a loan-loss rate of just 14 basis points, as the positive UK economic environment encouraged a continuation of the underlying impairment trend. We also saw lower default rates and charges in corporate. We reduced total operating costs by 3%. And we will continue to drive down PCB's cost-to-income ratio over the next few years. Now Barclaycard which continued to grow in Q1, we increased income by 9% to £1.1 billion, driven by the U.S. and our corporate business; impairment increased 8% and loans and advances grew by 15%. As a result, the LLR decreased 20 basis points to 305 basis points. Costs increased 18%, reflecting business growth. We grew our customer base by 3.5 million and increased payments processed by 22% to £72 billion. Although PBT was down slightly for this quarter compared to Q1 2014, the RoE reached 16.6%; that's an RoTE of 21%. And I'm confident about the future prospects for the business. Now let me cover Africa banking. Currency moves had very little effect on the first quarter comparisons, so I'll reference the reported figures. We increased PBT by 23%. This was driven by 8% income growth and cost growth of 3%. The 8% income growth to £948 million included an increase of 6% in NII, driven by higher average loans and advances in corporate and investment banking and growth in customer deposits in retail and business banking. Non-interest income increased 11%, reflecting increased transactions in retail and business banking in South Africa and strong growth in CIB. Increased costs reflect inflation and investment in key growth and savings initiatives. Despite the increased PBT, RoE was down slightly year on year at 10.8%, due to higher tax and an increase in equity. Return on average tangible equity which excludes the goodwill we hold on the Group balance sheet, was 14.7%. Let me now turn to the investment bank which delivered a good overall performance in Q1 and is more indicative of what the franchise is capable of after our repositioning of last year. Investment bank income increased 2% year on year, while we also reduced costs by 9%; this resulted in a 37% increase in PBT. And while there is more to do, particularly on our cost base, we're seeing the positive impact of managing the IB for returns. And we produced an RoE of just over 9% for the quarter. Banking income increased 3% to £632 million and a stronger performance in debt and equity underwriting was offset by a decrease in advisory fees and lending income. In DCM, we had a strong quarter and increased market share to 5.7%; up around 100 basis points from full-year 2014. This included acting as book runner on over 150 trades, including the top five largest global deals. ECM fees were also higher, driven by growth in follow on and equity-linked activity in the U.S. Turning now to markets, over the past year we have resized our macro business and reduced headcount and capital significantly. Nevertheless, during the first quarter of 2015 macro was able to capitalize on the improved market environment to deliver a revenue increase of 13% to £624 million, driven by rates and currencies. Credit income fell by 21% to £274 million as an encouraging flow trading performance, particularly in EMEA, was impacted by underperformance in distressed debt and securitized products. And lastly, equities' income was up by 5% to £619 million, reflecting higher income across cash products and equity financing. The investment bank reduced costs by 9% to £1.5 billion as performance costs fell and restructuring delivered cost savings. Turning now to non-core, where we continue to rundown RWAs and release equity. Income was significantly lower year on year as a result of the non-core rundown, but at broadly the same level as Q4. We have now disposed of many of the income-generating assets and we do not expect material changes to income from the current level. As well as progressing with the disposal program, we continue to focus on reducing the cost base over time. Costs were down 49% year on year to £239 million. Impairment reduced 57%, including the impact of the sale of Spain. Attributable loss increased by £28 million to £199 million, with the non-core drag on Group RoE at 3.3 % for the quarter. I mentioned at our full-year results that I believe Q4 is a better indicator of the likely future income run rate than the first three quarters of last year. The main driver of the reduction in Q1 income compared to the final quarter of 2014 is the sale of the Spanish business and other legacy investment banking businesses which reduced income by £106 million. This was largely offset by an improvement in securities and loans and derivatives. Securities and loans' negative income of £73 million reflected a fair-value movement on the ESHLA portfolio in the quarter, partly offset by the release of a litigation provision. Overall, we expect quarterly income broadly to track Q4 and Q1 outturns for the year and that's consistent with our previous outlook. Our non-core cost reduction compared to Q4 was also largely the result of recent business sales, both in retail and investment banking. We remain comfortable with the cost guidance we gave at our full-year results which would see 2015 underlying operating expenses in non-core broadly halving year on year, with further reductions been driven by disposals, as these are announced. Non-core RWA finished Q1 at £65 billion and that's on track for our 2016 target of £45 billion. Our balances of derivatives and securities and loans were broadly unchanged versus the year end, but we have a program of asset reductions across all non-core portfolios over the remainder of the year. Perhaps most importantly, the non-core rundown released a further £1.3 billion of equity over the course of the quarter. So, in conclusion, I'm pleased to report another quarter of good progress. Our CET1 and leverage ratio of 10.6% and 3.7% mean we're well positioned for our targets next year and for our end-state CET1 ratio of around 12%. Our core businesses achieved a credible RoE of 11.6%, excluding CTA. Our cost program is delivering and we continue to make progress towards our targets, despite significant currency headwinds and the impact of the higher UK bank levy. Finally, the drag on Group returns from non-core has fallen to 3.3%. So overall, our Group is stronger and better capitalized, our core businesses are growing; our non-core is shrinking and our costs are down again. And while we have much to do, we continue to deliver against our strategy. Thank you and I'm happy now to take questions.

[Operator Instructions]. Your first telephone question to you Tushar is from Andrew Coombs of Citigroup. Please go ahead.

A couple of questions on the retail and corporate banking divisions, please. Just firstly looking at the cost line, both in personal and corporate, but also in Barclaycard, you've seen a quarter-on-quarter increase in both divisions, 4% in the former and 2% in the latter. Barclaycard perhaps slightly more explainable given the FX translation move, but just interested in a bit more color there on what's driving the quarterly increase in costs. And then my second question which is on the outlook for interest margins, in the commentary you drew out the mortgage margin pressure that you are seeing. Obviously, you have been able to offset that by the overdraft re-pricing and also the move in the deposit rate, but perhaps you could just outline your expectations as the year progresses, given that ongoing asset margin pressure. Thank you.

I'll take the questions in the order you asked them. So, just some of the cost trends that you're seeing in personal and corporate banking and Barclaycard. In personal and corporate banking, there's nothing really significant to report there on a quarter by quarter. We'll continue to drive costs down on the comparative periods and for something like PCB, we tend to look year on year. And you've seen that in the first quarter we have continued to lower our cost base and show positive jaws. I think it's reasonable to think that, that will carry on for most quarters. It won't be linear, like nothing's linear, but I think you should expect us to see positive jaws as a regular feature within the PCB business. And that's really the fruits of all of the restructuring work that's been taking place in PCB over, I guess, many months and years now with rationalization of our branch footprint, increasing digital channels. I'll give you a little example of where you'll see some of that, their fruits in PCB. You probably recall the example I gave around personal unsecured lending for PCB at year end about we're getting quite a decent uptake in people taking personal unsecured loans through their mobile phones, rather than walk into a branch and filling in layers and layers of applications. Well, March for us was actually one of our best months ever for personal unsecured lending. But what was more pleasing is that almost half of all the personal unsecured loans taken out in March which, as I say, was a strong month, were actually done through the mobile phone or through digital channels. Now, the beauty of that is, obviously, that's, I think, somewhat of a drive of our increasing in market share in the business. It's a better customer experience; it's a better audit [indiscernible] but, most importantly, it's also a much better return for our shareholders because the cost-to-income ratio for that channel is substantially lower than a physical application. So, I think you'll just see more of that drip feed into the PCB cost line over time. Barclaycard, a slightly different story there, this is a core growth business for us and we're very excited about the prospects that we have for that business. What we're really trying to do here is balance investing for growth, but also generating really good returns. And even a quarter like the first quarter, where you can see we increased our investment spend somewhat, particularly biased towards our non-UK businesses, we're able to deliver 21% RoTEs and just a shade under 17% RoEs. What that's going to allow us to do is to continue to grow the bottom-line profit in future quarters to come, but yet compounding those profits at mid- to high-teen RoE. So I think over the course of the year you'll see that come through on the profits line, so we feel pretty good about that.

The next question is from Chintan Joshi of Nomura. Please go ahead.

Can I have three, please? First one, when you think -- you've been collecting detailed consensus now for quite a few quarters from us. I'm wondering, when you look at consensus, when you look out to 2015, 2016, 2017, is there something that you think that the street has got wrong? And, in particular, I'm interested in your thinking around non-interest income which has been soft for not only Barclays but for the UK banks for quite a few quarters now. Is this something that we're going to see? Are there headwinds that you are seeing that offsets some of the underlying growth? I just want to get a sense of how you are thinking about it is the street getting this wrong, because it feels like if there has been a miss in the traditional bank it's more driven by this fee income line. Shall I give you all or should we take it one by one?

Yes, Chintan, why don't you give me all of them and then I'll answer them in one shot.

Sure. Second one is if I think about Deutsche Bank's presentation the other day, it seemed to suggest a 20% RWA inflation in their business plan. Now, I recognize that Barclays has got more of a standardized model. The regulator has been not allowing that aggressive behavior in modeling RWAs as some of the French, German banks. But that 20% number implied is quite large and I wanted to see your thinking around that. Have you got additional thoughts on what RWA inflation you might be baking into your RWA guidance, because from £65 billion in non-core to £45 billion by 2016 feels really slow? So I'm just wondering how you see RWA inflation developing? And the final one is a quick one; just if you can give us some update on timing of various litigation items that might come in 2015.

And I just realized, I don't think I answered Andrew's second question, actually, on NIM outlook, particularly in probably the retail space. Just to cover that one briefly, I think NIM should be broadly stable across both PC -- well, actually, all PCB, card and Africa. There will be some puts and unders, as Andrew sort of called out, some pressure on mortgage margin in the front book which we're reasonably comfortable with is real, but that will be offset by other actions elsewhere. So I think in the aggregate, across each of those respective business lines, a stable margin outlook is what I'd guide to. Moving on to Chintan's questions, your question on consensus for PCB, now, of course, we don't publish consensus. And given that we haven't published it, Chintan, I won't call out anything specific. What I would say for net interest income, though, if you think about it in terms of broadly stable margins which I think most of you do from what I can see, you've seen that we're able to increase our asset production somewhat steadily, another 5% or so, year on year. And assuming the macro environment stay where they are which will be our base case, at least for this year, you should see steady asset accretion and stable NIM generating NII. I think the flip side to your question was how should we think about fees within those businesses? You've got two different things going on there. In Barclaycard, there's obviously the change in interchange fees that have taken place over this year and these are the caps being put on interchange. It's not that big a component for our business. I think we said at year end it's around 5% of Barclaycard's revenues. So it's going to be a slight shrinkage in that revenue pool, but it's not significant in the scheme of things for us and should be more than offset by other actions that we can take and with expected growth profits in the aggregate in Barclaycard. In PCB, it's a little bit more complicated. You've seen that we've restructured our overdraft proposition. But, at the same time, we're rolling out more clients onto cash-management products which is a fee-based product. So it's more of a mixed bag and a little bit harder to give specific guidance quarter by quarter. Your second question on RWA inflation, I won't specifically talk about comparing us to any of our peers. Obviously, I won't know the intricacies of those peers nearly as well as you folks do or indeed our own business. But for ourselves, we do expect RWA inflation. I think the review of the trading book which is a little bit of an unknown still, we may get clarity on the specifics towards the end of this year with implementation probably further out still. So it's hard to be definitive on what to expect there, but we certainly wouldn't be surprised that there are some RWA inflation. I think operational risk RWAs may increase over the course of the year. As you may know, we're on an advanced model which is higher than a standardized charge for us already, but I wouldn't be surprised if we take some inflation there. And I'll try and call these out with as much advanced notice as I can. I think other things, like standardized counterparty credit risk weightings on mortgage floors, I still think are a little bit further out, but we're monitoring that to ensure we can absorb that. We would look to absorb that within the RWA guidance that we've given and not look to net-net increase Group RWAs or divisional RWAs, just for inflation and try and absorb it where we can. But again, we'll keep you updated. That may not be a linear thing; you may see some RWAs go up, before they go down as a consequence. Timing of litigation, yes, this is something some of you may have questions on, but I won't be able to provide any more information that's in our disclosure. They are fluid, real-time dialogs that are going on with a number of agencies, number of regulators on a number of jurisdictions. All I'll say is that, as a management team, we're entirely focused and working as hard as we can to put these matters behind us, to resolve them expeditiously as we can, as appropriately as we can and we're really focused on doing that. And the provision that we took this quarter is really some sign of the progress that we're making. With that, before I just ask for the next question, just so that everybody has a chance to ask their questions and that we don't spend several hours on this call, could you limit it to one or two questions each and we'll try and get through this as fairly as we can? So, could we have the next question, please, operator?

The next question is from Raul Sinha of JPMorgan. Please go ahead.

Tushar, can I have two questions, please, given the last guy asked three? The first one is on the IB. The last time you talked to us you said that you were approaching flat on the top line, so it looks like you clearly had a pickup through the quarter. Could you maybe talk to us about any big negative items that you might have to absorb in the IB in the earlier part of the quarter that might have depressed the performance relative to peers? And then related to that, your RWAs in the IB are broadly flat, I think, quarter on quarter. But in the slides at the back you do call out a £5 billion reduction in RWAs, driven by model changes on market risk. Was that all in core, can I check or was that some in non-core as well? That's my first question. The second one is one the Chairman's comments in his letter, where he talked about a more dynamic reallocation of capital. I was just wondering if you can talk to us about what that might mean through this year, particularly on Barclaycard, where you've talked about portfolio acquisitions. Should we expect you to see -- to do more portfolio acquisitions during the year? Thanks.

I'll take question 1a and 1b together and then I'll come on to question 2. Question one, was the top line in the IB, did it have any significant negative items? I don't know if you are alluding to First National Bank or stuff like that.

First National Bank, yes.

I thought you might be. Nothing significant that we'd call out and there's nothing that I would draw particular attention to. As you know, the trading businesses have various ups and downs, so nothing I would call out in the round. Overall, I would say that our macro business, we're particularly pleased with that performance because that's the business that's probably had the most adjustment made to it. We've reduced RWAs by a very, very sizeable amount and, actually, reduced headcount by a very sizeable amount. And the folks running that business, Mike Bagguley and team, when you look at their revenue performance in a quarter like this compared to the historical time periods that you'll see in our RNS, it's really pleasing that when it's a good trading environment that we're getting more than our fair share, both across rates and currencies. So very pleased with their performance on showing good, strong top-line performance, even on limited capital and human resource allocation. The other place that we did pretty well, actually, was in debt capital markets. We're involved in the five largest deals of the year thus far, increased our market share considerably. Particularly, in investment grade we had a, I think, pretty much record revenue print for us. And in leveraged finance, I think we had our second-highest market share, for us at least. So, it's good to see that. We're more focused, though, as you'd imagine, much more on profitability. And what was more pleasing really than the top-line performance was the bottom-line performance. Seeing profits increase by 37% is really what it's about, so very pleased with that. In terms of RWA changes in the investment bank, yes, there was a change in our general market risk, specific market risk models. That did cut across both the investment bank and our non-core division, so they both picked up a piece of that. The investment bank's RWAs, it's worth dwelling on a little bit. We gave a target of about £120 billion at May last year. If you translate that to current foreign exchange rates, cable was running in the high 160s then and was running a bit below 150 for most of the quarter; that's actually already running below 120. So the other very pleasing thing in investment bank's performance is the capital discipline, as well as the profits improvement. So lots more to do, but I think it's worth just calling that out to you. In terms of the Chairman's comments and dynamic capital allocation, I think you are beginning to see this already. If you look at our core business and you compare it year on year, the capital that we allocate to the core business has increased from £40 billion to £47 billion, that's, obviously, quite a sizeable increase in capital, yet the returns have actually increased year on year, so, therefore, profits are higher year on year. Now, it's good to see that we're generating a higher return on a higher capital base in the core business. And I think that's what John's talking about; trying to be as dynamic as we can around capital allocation to ensure that when we free up capital in the non-core we put it to best work in the core divisions which hopefully you're seeing evidence for. We do want to allocate more capital to card. We've increased capital allocation by about 10% to that business. We do have a good track record in organic portfolio acquisitions. And to the extent we see opportunities to do that, we will take advantage of that and have done successfully in the past. But nothing that I would guide to specifically, but we'll always be interested in those opportunities to the extent we see them.

The next question is from Chira Barua of Sanford Bernstein. Please go ahead.

Tushar, two quick questions on card; so one is both on card and PCB. The fee income drop, you have mentioned interchange. On one hand, you're saying it's not material. I just want to understand the Q4 to Q1 drop in fee income, both in Barclaycard and in PCB. Is it debit/credit interchange or is there something else working on that? That's one. The second is the volatility in the margins in Barclaycard quarter to quarter. It's been very volatile in the last four quarter, if I look at RNS, so it'd be great if you could just bring out the moving parts in there.

Chira, in terms of interchange fees in card, most of our income in card is actually net interest income. We make most of our money through lending, rather than charging for payments processing, etc. Now, payments processing is a great business for us, carries very little capital, but the bulk of the top line is through lending. So fee income did go down and was impacted by the interchanges that you're seeing take place in Europe and that was the biggest driver of the downward adjustment in fee. But in the round, you can see that top line grew quite nicely and that's because we're biased towards net interest income in that business. In PCB, we made a change to our overdraft charging schedule for current accounts or checking accounts here in the UK and that had an impact on our reported fee lines, at least in that particular line item. I think that will be limited for -- you'll see that for the first couple of quarters for comparative periods and will normalize as we go through the year. In terms of Barclaycard margin, the Q4 to Q1 jump was really -- you'll probably recall that I guided towards a change in a one particular impairment assumption that we were making that I talked about in Q3. So that just created, if you like, a one-time change in Barclaycard NIM for the fourth quarter and you saw that drop down quite a bit and rebound back to where it is. But if I look at the -- I'm just turning to the page for the NIM disclosure in our RNS, 8.92%, 8.84%, 8.78%, these are still very high NIM margins. And 10 basis points here or there does get impacted by both the number of days in any one particular quarter. You've got a different number of business days in Q1 to Q4, that has a little bit of a wobble there. And also, we're constantly refining the effective interest rate assumptions that we have for accounting purposes, so you'll see a little bit of ins and outs there. But I think to perhaps be more helpful, looking at NIM in the first quarter for Barclaycard and how I think about it for the rest of the year, I think broadly stable is a reasonable assumption to make.

[Operator Instructions]. The next question is from Fiona Swaffield of RBC. Please go ahead.

Can I have a follow up on operational risk-weighted assets? They don't seem to have moved at all this quarter, but can you talk through how they could potentially move? Because in the past year or so, even though you've had settlements, they haven't changed, so could you discuss that a bit more, please?

Yes, sure. Fiona, operational risk RWAs, I do anticipate some inflation that we will experience there. It's as much a sector thing, than an idiosyncratic thing. So the individual banks themselves having settlements isn't the only reason why RWAs could inflate in operational risk; it could be just general industry-wide settlements or any other risks that are exhibited would result in RWA changes My guess is that we would expect to see that change over the course of this year. It could be as early as Q2, more likely, maybe, around Q3. But we'll try and give as much guidance in advance as to how to think about that. I would say, though, that in some ways underlying RWA inflation and changes is a way of life for us. And the steady capital progression that you've seen us able to achieve over the last year or so now is something that we remain firmly focused on. And we'll try and call these out to you well in advance, but we'll try and absorb it as best as we can as we go through the year.

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

Just two from me. Tushar, firstly, clearly, you mention FX was a big deal for you in Q1. I was wondering if you could call out what the impact was on your leverage exposure, risk-weighted assets and on costs, please. And then secondly, just in your remarks you mentioned non-core costs, I think you said, broadly halving in 2015 which I think is a new piece of guidance. Can I just check what baseline you're measuring against there? Is it the costs, the OpEx line, so the 1.5 last year? Or are you wrapping into that the litigation in conduct and the bank levy and the cost to achieve as well? Thank you.

So I'll take them in the order you've got them. On foreign exchange, in terms of leverage and RWA, it did inflate, if you like, the headline leverage exposure and risk-weighted assets. As sterling weakened, our dollar-referenced exposures get translated to a higher level in sterling. The reason why I don't call these out specifically is because we're quite well hedged as a ratio matter. So, of course, our capital levels obviously change with foreign exchange rates as well and so the ratio captures that all. So the increase in CET1 ratio wasn't materially impacted in itself by changes in foreign exchange rates. And same be true for leverage ratio. And even though the headline leverage exposure went up, somewhat driven by exchange rates, but the ratio we kept it flat at 3.7. The only point I wanted to make in for the IB itself, because we're very specific on the amount of RWA consumption that the IB was targeting and just wanted to let folks know that they're operating at that consumption level already, just because you can't always see it with the headline FX rate. The non-core costs, yes, my jumping off point is the £1.8 billion in round numbers that I referenced at year end. I think, from memory, that's everything excluding CTA charges. And we should be about half of that.

The next question is from Peter Toeman of HSBC. Please go ahead.

Tushar, I suspect you've probably answered this question already, but I'll mention it. Because you have gone through your £400 billion RWA target and you seem to be giving the impression that future changes in regulation can still be absorbed within that £400 billion target. So I just wondered if you could provide more color on that and whether my interpretation is correct.

Our objective is certainly to do that. We're running a bit lower than £400 billion at the moment. And probably, as I say, on an equivalent foreign exchange rate, even lower than that and you can see that reflected in our capital ratio. We will look to absorb all, if you like, RWA headwinds within that guidance. It won't be linear. I can certainly anticipate quarters where headline RWAs would go up and then we would look to work them down over time, because some of these increases can be quite significant in any one quarter. But our real objective here is to steadily accrete capital. We won't see capital increases literally every quarter, but we do want to, on a trend basis, steadily accrete capital and discipline around RWA management is going to be key to that for us.

The next question is from Martin Leitgeb of Goldman Sachs. Please go ahead.

On capital, please, if we were to assume that the trading book review were to be implemented as it stands now, could you give us a sense on what the implication would be on the risk weight of Barclays as of now? And just a quick follow up on the leverage ratio. How comfortable are you with the current 4% target, just in light now that we have some of the European large cap banks targeting 5%? Thank you.

On the review of the trading book, I can't give you any specifics. We just don't have enough information to form a very accurate calculation and know what impact it has. We'll keep you posted as we get more information, although I suspect it will be made public to everybody. So we'll run the calcs, alongside you guys as well, I imagine and we'll update you as best as we can. The one thing I will call out and someone mentioned it earlier in the call actually, from market risk, risk weighted, obviously, that's what the trading book will be impacted, we're more biased towards the standardized model set than perhaps many of our peers. So that might act as some sort of mitigation as a relative matter for us, but let's wait till we get the final rules before we can talk more specifically on that. In terms of leverage ratio guidance, I'd reiterate, a lot of people say 4% and I keep on reminding everybody it's greater than 4%. The word greater there is very deliberate. And we'll look to get to 4% as quickly as appropriate and then run over 4%. I think that's reasonable for us. Our shape and size is very different to perhaps other peers. We're -- our largest division is our PCG division. It has the most capital, has the most risk-weighted assets, has the biggest set of earnings. And when I look at that as the central part of our company, a leverage ratio greater than 4% with that shape company feels appropriate to us. And to the extent we need to change that, we obviously will do. And you've seen the Bank of England/PRA's guidance on what UK banks need to run in terms of leverage ratio, so above 4% would take us comfortably above any regulatory minimum as well.

Could I just quickly follow up on the trading book review? How likely you think it is to be implemented in the current form?

We had all be guessing, to be honest, Martin. I think there'll be further work that's ongoing, further reviews that are taking place and I don't think it's reasonable to speculate as to what the final form would be yet. Plenty of distance to travel yet, I think.

The next question is from Chris Manners of Morgan Stanley. Please go ahead.

Tushar, two questions. First one was just on capital. It did look to me you've crept up your capital target from 11.5% to 12% to circa 12% and so I thought I'd just ask you about how you see that evolving. And in relation to that, I see you're doing a scrip dividend now. Your payout ratio that you're guiding, would that be a real cash payout ratio that you would be targeting there, the 40% to 50%? Or that actually includes a scrip component, so be diluted a little bit? And the second question was on impairment, obviously, 37 bps in the quarter is really very good. I know we used to always get [indiscernible] and he would explain about the impairment trends; I know people aren't so focused on at the moment. But do you think you might stick at a lower impairment charge for the moment? Or how is that evolving? Thanks.

In terms of capital objectives, CET1 objective, the way I really think about this is rather than perhaps just talk about an absolute level it's perhaps more helpful to take about the buffer that we would choose to run above a minimum level. And I think, based on everything we understand today, somewhere round 150 basis points above a minimum level would feel appropriate. Now, the minimum level for us today is 10.6%; that's with all the buffers fully phased in with a Pillar 2A add on. That may change in the future. Pillar 2A, obviously, gets determined year on year. We may have countercyclical buffers and there may be refinements as a result of stress testing that are relevant as well. But if I put it into everything we understand today, the 150 basis points above 10.6% gets you to around 12%. And that's really how we think about it. But, of course, it may change in the future and we'll adapt accordingly. You mentioned dividends. We actually don't pay a scrip dividend, it's all cash. Some people choose to take it as scrip and it varies actually quarter by quarter how many people prefer to take a scrip rather than the cash, but is actually a cash dividend. And that, I think, will be at least the current status and policy, is to remain with a cash dividend rather than change that. Impairment levels, you're right, they are running quite low. And 37 basis points is about as low as we've seen for goodness knows when. I would say our credit risk metrics are pretty stable, not really seeing any signs of distress or early warning indicators that are concerning. Having said that, we're still getting some benefit from one-time recoveries which are becoming less and less. I think as we go through the course of the year some of the past lower levels of impairment we saw last year were influenced by one-time recoveries which we're running out of, frankly. So I would certainly caution people to take our current impairment charge and straight line that. That almost certainly won't be the outcome. I think you would expect current numbers times for the overall impairment for the year to be higher than that. And when I look at where consensus that we published last Friday, I don't think that's unreasonable where you guys are projecting impairment at the moment. I just think Q1 was quite low, but I doubt if we'll continue at such low levels continuously.

The next question is from JP Crutchley of UBS. Please go ahead.

There are two, actually, sacred of business questions; the first on Barclaycard and the second was on the wealth part of PCB. Just on Barclaycard, you call out in the slide nearly 17% return on equity as showing the healthy sustainable return of that business, but it is, of course, substantially down on where it was one year ago. Now, that business is obviously shifting in terms of mix and profile as it becomes more international, more UK focused. But the question I was interested in is in terms of whether you think this level of return is what you would look to sustainably generate, going forward? Or are we still seeing a rebating of the overall returns from that business so that as the proportion of overseas business continues to tick up we should expect the RoE to track down, obviously still giving accretive earnings and accretive to cost of equity, but below the current level? I just wanted to get a feel for how you see that business evolving. And the second was just on the wealth bit of PCB, where it looks like income, deposits and lending all went backwards in the quarter. I was just intrigued as to what was going on there, because historically that was a key growth component of the business as well. And it doesn't really seem to be moving forward and I wonder if you could just provide a bit of color about what's going on in that part of the division.

On card, the good thing about the card business it's a good growth engine for us. And when we're trying to grow the business, what we're trying to balance is investing for growth, but continuing to keep superior returns posted. So what you're seeing in the first quarter of 2015 is a spurt of investment spend going through the books which brings the year-on-year comparison on RoE down a bit. But I think the outlook is to continue to grow profits at healthy levels and continue to have aggregate returns. And I wouldn't look at it quarter by quarter; perhaps looking on a calendar full-year basis is a better look through. Operating in the mid-to-high teens, I think, is where we'd like to be targeting. Now, as the balance of business becomes less and less UK centric which it will do over time, the non-UK parts of the business won't exhibit as high an RoE, although there'll be still high RoEs, just, as a relative matter, won't be as high RoEs as the UK business. So you're just seeing a little bit of that rebasing going on. But I don't think you should expect much more downward pressure on RoE. I think you should expect to see reasonable increases in profit and reasonable returns in the mid-to-high teens on a trend basis.

So, the non-UK business is at least a mid-teens type RoE business that you're growing, effectively?

Yes, that's right. It is in, if you like, a cruising altitude steady state. Obviously, as we invest in that business the RoEs will be a little bit lower as we go through that investment.

Okay. And on wealth?

On wealth, the wealth business, there is geographic mix here. In the UK, we're the second largest private bank in the UK and have very nice shaped business, nice returns, nice prospects, as you'd imagine really given who we're in the UK. You've seen us change the balance of our geographic mix outside of the UK, so you're seeing some of that come through in our revenue line item and in our deposits and assets for that matter. I think, again over time that sort of rebalancing is taking place and you should see better, if you like, cleaner comparisons. But I think at the heart of it we're UK centric in our private banking wealth businesses with decent businesses in Asia and we also have a U.S. business as well. But that's really what's going on there.

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

Tushar, can I ask you a couple, please; first, on litigation; second, on costs? Try and phrase it so that you can answer without getting thrown in jail.

I appreciate that.

Thanks. Yes, no problem. Legal and regulatory provisions on balance sheet about £2.5 billion now, of which £2.1 billion, you've indicated, is for FX. I guess just focusing on that part first, according to media stories, a settlement with FCA and DoJ is probably fairly imminent, so I'm suspecting that much of the recent increase in that provision reflects that part of the FX story. I'm just wondering if you can comment at all on the DFS and what's happened previously and what's been said more recently, about their own investigation and whether the provisions, the £2.1 billion, has any element in that to cover potential costs from that part. And when I look at the remaining £400 million, again, just thinking about the various RMBS issues with FHFA and the Department of Justice and, again, that seems quite a small number relative to some of the other numbers settlements we've seen out there. I was wondering if you could comment quite generally, without obviously giving anything that you're not allowed to say, on that issue. And I have a second question on your core cost target, please.

Do you want to give us that question as well, Tom and then I'll try and do them both together?

The question is, is how confident are you still on the £14.5 billion? Because it looks from all the other guidance, from the Q1 run rate, from what you're saying on bank levy, that core costs will be somewhere around £15.5 billion this year. You may dispute that, I don't know. That leaves you with a whole £1 billion to still take out in 2016 to meet the target. I don't know, it just seems quite challenging. I just wondered if you've had any thoughts about that target or whether it's very much as you were before.

Tom, I appreciate you trying to keep me out of jail, that's very helpful. On litigation, there's not a whole load I'll be able to say on that. As much as I know you tried to phrase it in a way that may try and get some information, there's not much I can say, either in terms of the timing of the settlements or indeed who is going to be party to that. Obviously, you'll know the reasons why, unfortunately. These are ongoing, fluid discussions, a number of regulators, a number of geographies, etc. I'm not going to comment on [indiscernible] press stories around timing and who's involved. But we work as a management team, so I can assure you that we're super-focused on this. We're working as hard as we can to get these matters resolved in the most expeditious way. Provisions are taking us close to that point, but can't give you any more detail on that, unfortunately. In terms of the remaining provisions, though, you called out FHFA, we actually have settled FHFA. That happened over a year back. In terms of the remaining provisions, again, we can't give you specifics as to which particular cases we've provided for or not. You've obviously seen all the cases listed in our annual report that was out in early March. Nothing's changed since then; otherwise, we would have reflected that in the RNS itself, if it was material to disclose. I refer you back to that which I'm sure you've already digested, but can't give you any more details on that. On the core cost target, what's interesting there is that I think we're one of the few banks that have been very specific around our cost objectives in terms of giving an absolute cost to measure which we feel is the right thing to do, the clarity that provides. Of course, the disadvantage of that is foreign exchange rates can bounce you around and, at the moment, with at weak sterling it's actually inflating our cost base. And if I was to retranslate the target for this year, before I come onto next year, the £16.3 billion for the Group this year at current exchange rates, because when we set it cable was running just a bit below £1.7 in early May last year, you get to a several hundred million pound increase in that cost target. And, of course, the bank levy's going to go up by another 40%. We want to eat as much of that inflation as we can. That's our objective and that's our target for this year. But I do want to point out that if cable continues to weaken, that's going to put a lot of pressure on us. We won't do things that are damaging to the business to the extent if it's sensible to revise guidance we will do. But we're not doing that at the moment. The same will obviously translate itself into the core costs for next year. The other thing I would probably draw your attention is because of the nature of foreign exchange rates and the difficulty in predicting what they'll be in any one quarter to the next, another way of knowing how well we're performing is cost-to-income ratios. If you look at Group cost-to-income ratios, they fell from 67% down to 64% and likewise, core cost-to-income ratio fell from 63% to 61%. You'll see that in the RNS. Now, that obviously captures the full effect of FX on all line items. So we feel pretty pleased with our cost performance, but are experiencing very significant exchange and bank levy-related headwinds which we're, at this stage, continuing to look to absorb.

The next question is from Fahed Kunwar of Redburn. Please go ahead.

Just one question, it was on the non-core. It was obviously a very good performance in this quarter, but I'm just worried, just thinking about the [indiscernible] going forward, the £180 billion. If I look at your RWA number, the derivative portion of it, the £31 billion, basically hasn't changed since December 2013. I know you're running down more and more the ex-derivative business. But looking out past 2016, considering your costs are probably going to stabilize at the £250 billion level, to get rid of that £31 billion I guess you've got to do more the compression and tear-ups. Are you going to start to see increased costs and more significant negative revenues as you try to move that £31 billion down to zero? Or are there reasons as to why that number hasn't changed over the quarter, the whole of the non-core rundown? Thanks.

Yes, the £31 billion, that's the risk-weighted assets, I think the £180 billion you quoted is more the leverage exposure. Now, they're actually - - it's important we made that distinction then you'll know this, but line-item reduction will impact the leverage; it won't necessarily impact risk-weighted assets. The risk-weighted assets is more counterparty credit risks. So these are coming from uncollateralized derivatives which are fewer and far between, but expensive as a counterparty credit risk/RWA matter; not particularly impactful to leverage. Leverage is impacted by, actually, a large number of collateralized derivatives. We're working on both, actually. You'll see leverage, actually, has been coming down. You mentioned tear-ups and you can see that come through our leverage measure. The risk-weighted assets, it's a different discipline, in a way. With leverage, it's more of an operational grinding through the portfolio, tearing things up, back-loading them onto clearing houses, etc. With uncollateralized derivatives, these are helping clients restructure, [indiscernible] reset those derivatives. And given that they're non-collateral posters, by and large, these are a different client set than your typical institutional client is, so it's more of a banking relationship than a typical sales-trading relationship. So, it will happen. It will take a bit of time. I'm not anticipating that to be necessarily very expensive, but has a different discipline to it than leverage which is more of a grinding in-out, quarter in quarter out.

I see. Is it just that you've been focused on other things as to why that number just hasn't moved for the last, whatever, four or five quarters?

No, we're very focused on it. You have got and I don't want to make too big a deal of it, but there is [indiscernible] the foreign exchange rate component going on there as well. So it probably belies what's really happened underneath because, if you look at this year to last year, the big weakening in sterling inflates that number because quite a number of those transactions are dollar-denominated. But we're working hard on that and we'll continue to make progress on that; you'll see that in subsequent quarters.

The next question is from Manus Costello of Autonomous. Please go ahead.

Just one question from me, I was looking at the leverage exposure in the core bank which rose pretty sharply versus yearend, about 7% I think. I appreciate that FX would have been a part of that, but only a part of that and I wondered if we should conclude that with that exposure now rising you're quite comfortable with the core bank now adding to leverage exposure and that any improvement in leverage ratio is going to come through capital build and non-core run-off and actually that the foot is off the throat, so to speak of the core business in terms of managing its leverage exposure.

Yes, you're right to point out. Obviously, the bulk of the deleveraging was in non-core and was offset by an increase in leverage exposure in the core. Some of it was foreign exchange, but some of it was just seasonal effect. You can imagine, settlement balances generally tend to run lower at the end of a trading year, just because of the holiday period, from Christmas to New Year, so you have a lighter settlement balance running on your balance sheet. In terms of, from this point on reductions, obviously, non-core, we've been quite specific on guidance and we'll continue to target the targets that we've already set for that. I think you will see core leverage probably glide down, continue to glide down a little bit. But, as you can see, we'll be more judicious on how we can deploy leverage, where we can. What we're really targeting, at the end of the day, is a greater than 4% leverage ratio. We'll get a weigh there by deleveraging out of non-core, but you'll see some continued reductions in core and really as we continue to become more efficient ourselves in terms of around capital management. So, I think you will see some benefits there as well.

Sorry, just to be clear, because it's not really gliding down at the moment, it was up, are you saying that this is partly a seasonal effect, that Q1 is always just higher and actually, if we were to get to the end of 2015, broadly speaking, you should be gliding down versus end 2014 in core?

Yes, I think that's a reasonable assumption. Q1/Q4 is always a little bit of a wobbly seasonal effect because of the particularly settlement balances, the trading books just tend to be lighter at year end. But your point's probably a fair one; you'd expect year-on-year like for like to be a bit lower in core as well.

Your final telephone question today to you Tushar is from Shailesh Raikundlia of Banco Espirito Santo. Please go ahead.

Tushar, I just wanted to ask one question on the IB returns. Obviously, it's been a pretty strong quarter this year, so far in 2015 and we've seen return on equity still at 9.1%. I was just wondering whether this is as good as it gets in terms of the returns for the rest of the year. Or do you feel that you can reduce costs significantly more going for the rest of the year? Because I don't see how you get to your core 12% Group RoE, given the fact that the IB is running pretty short of that. Thanks.

The underlying RoE in the IB, as I sort of said earlier on, is higher than the reported 9.1%. It's actually pleasing that we're already getting close to double-digit already. On an underlying trend, if the deferred comp gets normalized to current comp levels for the accounting effect, there's restructuring charges, conduct litigation, we'd be comfortably in double-digit territory in the IB. Now of course, that doesn't mean that we're finished on that journey; we've got further work to do. But it's pleasing that we're already in double-digits, on an underlying basis, three-quarters into the very substantial repositioning that we did in the IB. You will see and we will continue to target, further cost improvements. And we're very focused on improving profitability rather than just top line in of itself. And we're very confident we can get the IB there. We're getting better at deploying our capital. You can see that I mentioned to you that our risk-weighted assets utilization continues to become quite productive in the IB and the folks running the business there are really showing some really significant improvements there as well. So I remain confident that we can get there and I think this quarter is a good proof point of that. The franchise holds up well. The returns are improving on an underlying basis and in a quarter like this we're already in double-digits, comfortably in double-digits. But I take your point, Shailesh and it's a correct one, we still have further work to do and we've certainly not finished the journey yet.

Yes. Just to follow up, in terms of the RWA inflations coming from the trading book review and stuff, I guess, is that more of a 2016 story? And also, obviously, the impact of the bank levy will have a more sort of negative impact than was anticipated, given the significant rise.

Yes, I think the fundamental review of the trading book I don't think will inflate RWAs this year; may not even happen in 2016, depends on the lead time for implementation. So bank levy has gone up, has actually been going up for a number of years, so it's just what we're used to, unfortunately. And every time it goes up, we assess what business continues to be appropriate and profitable and sensible for us to be doing and adjust accordingly. That's just a way of life for us; it's nothing new this year versus previous years. The bank levy's been going up and up and up steadily. And I'm sure all banks are doing the same thing as we're on that and that's just part of running a business, I think.

Okay, well, I think that's the final question. Thank you, everybody for joining us. Hopefully, this has been helpful. And we'll get a chance to speak, perhaps in person over the coming days and next week. Thank you.

Thank you. That concludes today's conference call.