Earnings Call Transcript - BCS Q2 2021

Jes Staley, CEO

Good morning, everyone. I'm joining you from New York this morning while Tushar is in London. I am pleased to report that Barclays has had a strong first half of the year. Our financial performance has been good, with robust revenues and profitability, and we have had opportunities to grow our business further. I'm also particularly pleased that we have been able to increase distribution to shareholders. Throughout the COVID crisis, we have demonstrated support for customers and clients at a time when they really needed it. I'm mindful we will need to continue to do that over the coming months and that this pandemic is not over yet. But we are seeing encouraging signs that the global economy is recovering, and this is reflected across Barclays businesses. We've had a good start to the year with group profit before tax of £5 billion. That's quadruple the same period of last year. Earnings per share were 22.2p in the first half. For 2 quarters running, all 3 of our major lines of business have delivered double-digit returns on capital. Our return on tangible equity for the group was 16.4%, and we expect to be able to deliver our target of above 10% RoTE this year. We remain in a strong capital position. Our CET1 ratio was 15.1%, which is above our targeted 13% to 14% range. That strength means we have been able to increase capital distributions. We have provided a half year dividend of 2p per share, and we will initiate an additional share buyback of up to £500 million following a £700 million buyback we completed earlier this year. Improved macroeconomic conditions resulted in a net impairment release of £797 million in the second quarter. We will continue to maintain prudent impairment coverage ratios over the coming months, and we will also be careful to gauge the real economy as government support measures are limited. But it's very important to note that even without impairment releases, the group's return on capital would have been above 10% in both the first and second quarters. We're also managing our costs appropriately with a cost:income ratio of 64%. Our base costs remain stable, but we have taken a number of structural cost actions in the second quarter, most notably reducing our real estate footprint in Canary Wharf, London. Excluding the structural cost actions, our cost:income ratio for the half year was 61%, close to our 60% target. We're also focused on investing in the right parts of the business to deliver future income growth. That means investing in talent and technology in the investment bank as the capital markets continue to grow. It means investment in the corporate bank, particularly in Europe. It means investing in our U.S. consumer franchise organically and through scaling up our U.S. card partnerships, and it means continuing to transform our U.K. payments capabilities through technology, most notably in merchant acquiring and small business banking. Our performance continues to benefit from the breadth of our business with our income diversified by type, by customer and client, and by geography. I'm pleased to see the strong performance of the Investment Bank continuing for another quarter, demonstrating the sustainability of the franchise. One of the drivers for this is the continued growth of the global capital markets themselves. Since 2018, there has been a 53% increase in the market capitalization of global equities and bonds outstanding, and we reflect in our business that increase. As more and more businesses and institutions use the capital markets as a source of funding, Barclays is well positioned to continue to benefit. I'm encouraged by the improved performance we have seen in Barclays U.K. and in our Consumer Cards and Payments business. Both businesses have benefited from the economic recovery, and we have taken actions to improve future revenue growth. Many of our leading economic indicators improved in this quarter. U.K. debit and credit card spend was up 11% in June versus the same month in 2019. U.S. card spend has almost recovered to 2019 levels. It was up 21% in the second quarter compared to this year's first quarter. Unsecured lending balances have lagged spend with U.K. card balances down £300 million in the second quarter. The recovery in consumer spending in both the U.S. and U.K. is encouraging but it will take time to rebuild interest-earning balances. Mortgage growth, however, remains robust, with the portfolio of £3.3 billion in the second quarter, and applications continue at elevated levels, and pricing is at attractive margins. As I've spoken about before, we're excited about the development of our payment services, particularly our new Barclays Cube platform. Taken holistically, payment activities represent some 8% of total group income. As I said in the first quarter, we believe there's a £900 million income growth opportunity for Barclays in payments over the next 3 years. In the first half, we've already seen evidence of this growth with payments income up approximately 15% year-on-year or around £120 million. We continue to expand our digital capabilities with merchants and have worked in collaboration with the CIB to deliver better services. This quarter, we have successfully integrated a number of solutions into our corporate bank iPortal platform. Take just one example, clients can now manage both the emerging servicing accounts and their bank accounts without needing separate log-in credentials or processes. We've also launched a new platform to deliver our franchise FX capabilities to e-commerce merchants. We have established new client relationships as well as strengthened existing ones. I'm delighted that a leading U.K. supermarket has recently decided to consolidate all of its payment processing with Barclays. Like so many of our partners, they are also leveraging some of the next-generation services we offer through Barclays Tube, including things like point-of-sale finance using data and analytics. We remain focused on the sustainable impact of our business and on our role in society. I'm extremely proud of what we've been able to do to help people during the pandemic. To date, our 100 million COVID-19 community aid package has supported over 219 charity partners around the world. While our colleagues have raised more than £13 million using our matching gift program. All that money has gone to charities delivering COVID-19 relief. As we approach the COP26 meeting in the second half of the year, we also continue to think deeply about our environmental impact, specifically, how we can best support the global economy's transition to low carbon. The Paris agreement sets us on a clear path to make that transition, and the world has come together behind it. Barclays shares that commitment. That is why we were one of the first banks to set an ambition to be net zero by 2050, not only for our own operations but across our entire portfolio. That means we are accelerating the transition through the way we deploy finance, helping companies of all types from startups to global corporations. At the smaller scale, via Barclays' principal investments, we have a sustainable impact capital initiative to invest £175 million in new companies. This helps these new companies get the early-stage capital they need to finance their growth and to innovate new technologies. Companies like AirEx, a clean tech company helping to reduce energy consumption in homes. So far, we have made 7 similar equity investments all over the world, and we have a very strong pipeline. At the other end of the scale, we are using our financial and capital market expertise to support large companies. We're helping them raise money through the equity and bond markets and advising on M&A transactions. Safe electric vehicles is one example. This year, we helped a company called Blink, who make charging equipment raise over $200 million through the equity markets. We also led a $400 million placement for electric bus manufacturer called Proterra. Both these companies are making a significant contribution to scale up low carbon transport networks in the United States. So let me close by repeating how pleased I am with our first half performance. It provided a strong platform on which to build in the second half of the year and beyond. Our balance sheet has never been stronger, and we will remain focused on returning excess capital to shareholders. As the global economy continues to emerge from the pandemic, Barclays remains fully committed to playing our part. Now over to Tushar to take you through the quarterly numbers in more detail.

Tushar Morzaria, CFO

Thanks, Jes. As usual, I'll start with a summary of our H1 performance. We again saw the benefit of our diversification as the strength of the CIB continued to offset the effects of the pandemic on our consumer businesses. Overall income decreased 3%, but this reflected a weaker U.S. dollar. And on a constant currency basis, income was up around 2%. Costs increased by £0.6 billion to £7.2 billion, including the structural cost actions we flagged at Q1 of £0.3 billion. It also reflected higher performance cost accruals due to improved returns. I'll go into more detail on the other cost drivers shortly. After a small impairment charge in Q1, we had a large lease in Q2 giving a net release for the half of £742 million compared to a charge of £3.7 billion for last year. This resulted in a PBT of £5 billion, a significant increase on H1 last year. The EPS was 22.2p, generating a RoTE of 16.4%. The CET1 ratio ended the half at 15.1%, well above our target of 13% to 14%. This has put us in a position to declare a half year dividend of 2p and announce a further share buyback of up to 500 million, following on from the 700 million buyback completed in April. Turning now to Q2. Overall, income was up 1% on Q2 last year but was up around 7% on a constant currency basis. We saw some increase in the consumer businesses, and the CIB performed well against a strong comparator. Cost increased by 10% or £0.3 billion, reflecting the structural cost actions, principally a charge following the real estate review we mentioned in Q1. The improved macroeconomic outlook and lower unsecured balances resulted in a net impairment release of £0.8 billion compared to a charge of £1.6 billion last year. The profit before tax was £2.6 billion, up from £0.4 billion last year. In light of the corporate tax increase scheduled for 2023, we have recorded a benefit of about £400 million through the income statement for remeasurement of U.K. deferred tax assets, although this will largely reverse in the course of next year if the proposal to reduce the bank's surcharge is enacted. As a result, the effective tax rate in the quarter is lower than we would expect on a normalized basis. Of the income statement benefit, close to half is offset through reserves. Distributable profit for the quarter was £2.1 billion, generating an EPS of 12.3p and an RoTE of 18.1%. I would remind you these are all statutory numbers absorbing a litigation and conduct charge of £66 million. TNAV increased from 267p to 281p, principally reflecting the 12.3p of EPS and also 1p from the completion of the April share buyback. Our capital position strengthened in the quarter with the CET1 ratio increasing to 15.1%, driven by robust profitability and reduced RWAs. A few words on income, costs, and impairment before moving on to the performance of the businesses. I've already mentioned the benefit of diversification, which is visible in the Q2 income performance. CIB income was down against a tough Q2 comparator, but the Investment Bank performed strongly versus peers. Meanwhile, we saw some increase in BUK income, which was up 11%. In terms of outlook, the CIB remains well positioned despite the currency headwind and some moderation in FICC activity so far this year. The income outlook for the consumer businesses, BUK and CCP reflects a continuing tailwind in secured lending in the U.K. with the prospect of a slower recovery in unsecured lending in both the U.K. and the U.S. The U.K. mortgage business had another strong quarter with £3.3 billion of organic net balance growth. In unsecured, we saw further balance reduction in U.K. cards by £0.3 billion to £9.6 billion. And although the U.S. card balances ended the quarter up at $20.1 billion, this increase is weighted towards full payer balances. We are now seeing clear signs of recovery in consumer spending in both the U.K. and the U.S. But as we flagged at Q1, the building interest-earning balance is expected to take some time to materialize. And to remind you that the translation of recovery in card balances into income and profits will be affected by the so-called J-curve as we invest in partner and customer acquisition and in card utilization. This is expected to dampen returns initially as we reinvest, but over time, will lead the Consumer businesses well placed to generate attractive risk-adjusted returns. We still expect a headwind to NII from the role of the structural hedges given the low rate environment. However, the recovery from the trough in yields since year-end, plus a site extension to our hedge maturities means we currently expect the headwind from the role of the hedges to be around £300 million this year, the low end of the range I referred at Q1. Based on the current yield curve, any further headwind next year would be materially lower. Note that this is based on the current sizing of the hedges, we are still considering whether to increase the hedges and have identified £20 billion to £25 billion of additional potential capacity. Were we to do this, the headwind next year would reduce further. I would note that most of this potential increase would be embarked in international rather than the U.K. Looking now at costs. We plan to keep our base costs close to flat this year. That's cost excluding structural cost actions and performance costs. In Q2, we implemented the structural cost actions we mentioned at Q1 results. The charge was £0.3 billion, resulting in Q2 costs being up 10% year-on-year at £3.7 billion and a 67% cost:income ratio. Across the first half, the cost increase was also 10%. And you can see on the right-hand chart of this increase reflected those structural cost actions in Q2, and the increase in the performance across the bulk of which was reflected in Q1. The structural cost actions in Q2 primarily related to real estate. Following the review we flagged at Q1, we took the decision to vacate 5 North Colonnade building in Canary Wharf by the end of 2022. This is expected to result in annual cost savings of about £50 million from 2023. Other structural cost actions will continue through the second half of the year, including the continuing rationalization of the BUK cost base. So overall, the total for this year will clearly be higher than the £368 million for last year. Cost actions will continue next year, but I wouldn't expect another real estate charge of the size of the Q2 charge. The next slide shows the key drivers of the base costs. Last year's total costs were £13.9 billion. Excluding structural cost actions and performance costs, the base costs were around £12 billion. We've shown here the key drivers, which we expect to be broadly offsetting each other this year, assuming the June 30th sterling dollar rate of 1.38 applies through the second half of the year. First, increases in costs associated with volume related or demand-led growth. For example, U.K. and U.S. card origination and taking advantage of the high levels of activity in the primary and secondary markets in the investment bank. Although these drive higher costs, we would expect to see associated income generation and we believe the start of a new economic cycle is exactly the right time to be leaning into the growth. Secondly, investment spend, including the strategic investments we've talked about previously, like in growing payments, our U.S. partner cards expansion, and parts of our Global Markets and Investment Banking businesses. This also includes ongoing investment in technology as we continue the transition to cloud-based technology, and migration to digital channels across the bank. Capacity for these investments is created by continuing to improve the way the bank is run, driving cost efficiency savings. These actions include decommissioning applications, the optimization and automation of processes, and more selective use of suppliers. Finally, we also have some specific tailwinds this year from the weaker dollar, lower bank levy, and non-repeat of the community aid package, which gives us greater capacity for gross cost investment at an early point in the cycle. I'm not going to give a forecast for each of these elements, but I would expect them to result in the aggregate base costs for the year being in the region of £12 billion. Looking beyond that, as the recovery continues, we'll continue to manage the balance of growth in investment spend and cost efficiencies, with the aim of delivering positive jaws to achieve our target sub-60 cost:income ratio in the medium term. Moving to impairment. There was a net impairment release in each of the businesses with the largest release being in BUK, as you can see from the chart on the left. On the right, we've shown the split of the charge for recent quarters into Stage 1 and 2 impairment and the Stage 3 impairment on loans in default. As you can see, there was a significant stage 1 and 2 book ups in Q2 last year, whereas the charges in Q3 and Q4 were principally on Stage 3 balances. In Q1 this year, we had some release of Stage 1 and 2 book ups, resulting in a small net charge. In Q2, we've seen a large net release of Stage 1 and 2 impairment amounting to just over £1 billion, with the Stage 3 impairment just £221 million, resulting in the net release of £0.8 billion. The Stage 1 and 2 release was driven by the improved macroeconomic variables we've used and the level of unsecured balances, but our coverage ratios remain above pre-pandemic levels. The MEV was used for the Q2 modeled impairment is shown in the upper table, and you can see the improvements in the 2021 and 2022 forecasts. However, there still remains uncertainty as to the level of default we'll experience and support schemes are wound down despite the improved economic forecast. We want to make sure that as we imply improved MEV, we don't lose sight of this risk. Therefore, we've made refinements to our post-model adjustments to focus them more on the cohorts of borrowers we believe are most at risk from the tapering of support. The result is that we're maintaining a significant economic uncertainty PMA, which has increased slightly to £2.1 billion in the quarter, as shown in the table. As I mentioned, this still gives us materially higher coverage ratios than pre-pandemic across wholesale and unsecured consumer lending, as you can see on the next slide. Unsecured balances haven't increased materially in Q2 and are still down by 28% year-on-year. Despite the impairment release, coverage was still 10.2%, well above the 8.1% pre-pandemic level. The wholesale coverage ended the quarter at 1.1%, also well up on the pre-pandemic level. Coverage on home loans was maintained as the book grew by £12 billion since the start of last year. With these levels of coverage, the lower unsecured balances, and improved macroeconomic outlook, we expect the quarterly impairment charge to remain below historical levels in the coming quarters. Turning now to the U.K. The year-on-year comparison for Q2 was dominated by the large impairment release compared to the charge taken last year. Income also improved year-on-year, but the outlook remains challenging. The income growth overall was 11%, primarily due to the non-repeat of prior year COVID-19 cost support actions plus increased mortgage balances and improved margins. These were partially offset by the lower unsecured lending balances. As we showed on the earlier slide, card balances reduced a further £0.3 billion in Q2 through the quarter at £9.6 billion, a decline of 26% year-on-year. We expect some increase in aggregate card balances in the second half of the year, but the spend recovery will take time to feed in through to interest-earning balances that drive net interest income growth. This contrasts with mortgage balances, which again grew strongly with a net increase of £3.3 billion in Q2. Mortgage pricing continues to be attractive, although we expect some erosion of margins over the coming quarters. Mortgages should remain a positive factor for net interest income but will dilute the NIM. NIM for the quarter was 255 basis points, broadly flat on Q1. Our current outlook for full-year NIM is now at the top end of the 240 to 250 basis points range we mentioned at Q1, but with NIM reducing in Q3 and Q4 due to the mix effect from continued growth in mortgages and the level of interest-earning card balances. Costs increased 7%, reflecting investment spend in higher operational and customer service costs, in part due to ongoing financial assistance, partially offset by efficiency savings. Impairment for the quarter was a release of £0.5 billion, reflecting the improved MEVs, low levels of delinquency, and reduced unsecured exposures.

Jes Staley, CEO

I want to emphasize that many of the cost initiatives and structural cost changes are focused on the consumer businesses as we transition to a more digital platform. As spending improves and consumers bounce back, I believe the revenue growth in our established business will exceed costs. Although we don't want to specify an exact timeline, it seems the consumer business has a strong potential to help us achieve our desired cost-to-income ratio. Ultimately, what’s most crucial for us is to achieve that 10% return on tangible equity.

Tushar Morzaria, CFO

In terms of the base cost and where we go from here, I guess a few things on this. First and foremost, the cost discipline is important to us. It's important to us because we want to grow our top line and we want to create the capacity to allow investment to sort of lean in, if you like, to the beginning of the cycle. So discipline around our efficiency measures and productivity measures are really important. You've seen this morning we've guided to base costs for this year being in the region of £12 billion subject to the usual caveats around currency rates and what have you. I think for next year, well, before I go into next, I think also when I look at consensus for this year, our published consensus of around £14.4 billion, that probably feels about right to me. When I look at all of the other sort of components there, we're sort of sitting here in the second half of the year where I think we may end up on performance costs and the balance of structural cost actions that we'd like to do. So hopefully, that gives you some sense of what this year will shape up. In terms of next year, for base costs, I think as we sit here now, I think a reasonable planning assumption is a similar level for base costs year-on-year, so about £12 billion. I think that will give us the right framework to continue to create capacity to continue to invest in some of the more exciting sort of growth opportunities that we have.

Jes Staley, CEO

Yes. Maybe just stress, one way to think about it, the way I think about it is in the consumer businesses, your revenues have a lower level of volatility than in Investment Bank. But your cost basis also has a lower level of volatility. In any way, your costs and consumer business are more fixed. There’s operating leverage to that. And as we see the U.S. and U.K. consumer businesses recover at the end of this year and then into next year, I think you’ll see a pretty significant improvement in the cost:income ratio in the consumer business. In the wholesale businesses, I think your revenues do have higher volatility, but your cost line also, because of the variable compensation, gives you greater variability to your cost line. And we have demonstrated over the last number of years and as well digested inside of the bank that the accrual of variable compensation at Barclays will start with the reflection of the profitability of the wholesale business overall. Profitability goes up, accrual is up, profitability becomes under pressure. We will try to secure profitability by taking down the accrual of variable compensation. So I would not straight line the variable compensation we’ve identified in the first half of this year. If we see revenues slack off some, you’ll see the accruals slack off.

Tushar Morzaria, CFO

In terms of unsecured balances, we've made a comment, you probably haven't got to it yet, because it's sort of within our results announcement. I'm sure you'll sort of get to it over the next few days. But you'll notice our commentary there says it sort of stabilized. So yes, if you like, the reductions were in the earlier part of the quarter, and it sort of stabilized as the quarter went further on, if that's a bit of a help to you guys.

Jes Staley, CEO

Yes. It’s a good question. First, obviously, the Board and management are keenly focused on our stock price and the market value of the bank for our shareholders, obviously, therefore, it’s important to the board and to management. I’ll just step back a little bit. Six years ago, we embarked on a pretty extensive restructuring of the bank. We reduced the headcount of Barclays over a 1.5-year period by 55,000 people. Things like exiting retail banking from France to Italy to Spain, getting out of the Africa footprint that we had, to reducing the investment banking footprint much more to the developed markets as opposed to the emerging markets. Those are very expensive restructuring. That is behind us. And the bank has a strategy that we set for ourselves in 2016, and we’re going to stick with that. And it is now delivering. You see it in the profit levels that we’re delivering now, in the level of capital we’ve got. And now we’re beginning to return the excess capital that the bank is beginning to generate. We also, as we were doing the restructuring, had to go through things like PPI charges, which were extensive settlements around capital raises with Qatar, et cetera. All of that is also behind us. So we have the profitability target of the 10% RoTE. I think you’re right. If you look at the execution of profitability today versus other competitors in Europe, I think there’s a lot of room to move in the stock. It has moved a lot over the last 12-month period, but we think there’s a lot of runway in front of us. We keep running the bank as profitably as we are, and it will land where it needs to land.

Tushar Morzaria, CFO

In terms of our base costs and future direction, I want to emphasize the importance of cost discipline. This is crucial for us as we aim to grow our revenue and build capacity for investment at the start of the cycle. Discipline in our efficiency and productivity measures is vital. We have indicated that base costs for this year are expected to be around £12 billion, keeping in mind the usual caveats regarding currency rates. Regarding structural cost actions this year, it is likely that they will be more focused on the U.K. bank, and we will provide updates as the year progresses. As for performance costs, I want to be cautious about revenue expectations. Returns are a priority for us, and we try to strike a balance between shareholder and employee rewards. This is not a simple formula; we consider various factors, including the businesses generating those returns, the competitive landscape, and our investment areas. However, the foundation will focus on returns. Concerning provisions and coverage, we believe we need management overlays that will be assessed as the economy adjusts to the post-pandemic landscape and as government support is withdrawn. We will evaluate what's necessary going forward, but it's important to remember that the situation looks different now compared to before the crisis.

Jes Staley, CEO

Maybe just to add, between the £700 million buyback already executed in April, now the £500 million announcement, so the £1.2 billion of buybacks. And it’s really a – Barclays hasn’t engaged in the buyback program in many years. So this is a new thing. And I don’t think it’s a one-off. With the level of profitability that we’re generating and the capital levels that we have, if we have shareholders that are willing to sell stock at a discount to book value, we’re happy to buy it.

Tushar Morzaria, CFO

In terms of unsecured lending balances, we expect some increase in aggregate card balances in the second half of the year, but the spend recovery will take time to feed in through to interest-earning balances that drive net interest income growth. This contrasts with mortgage balances, which again grew strongly with a net increase of £3.3 billion in Q2. Mortgage pricing continues to be attractive, although we expect some erosion of margins over the coming quarters. Mortgages should remain a positive factor for net interest income but will dilute the NIM.

Operator, Operator

Your first telephone question today is from Joseph Dickerson of Jefferies.

Joseph Dickerson, Analyst

Good set of results here. The liquidity pool is now around £291 billion, which is up about 9% in the first half. You have three-quarters of that in cash and deposits with central banks. Do you see an opportunity to diversify that portfolio a bit more into bonds and other securities to try to achieve a yield pickup, as it must be quite a drag for you? That's my first question. The second question relates to your cost-to-income ratio target of 60% over time. How would you define "over time"? I believe consensus expectations are still above that level in 2022 and 2023. I was just wondering what year you might expect to reach that target based on your plans.

Tushar Morzaria, CFO

Thank you, Joe. I'll address both questions, and then Jes can provide additional insights if needed. We monitor the liquidity pool closely, with a lot of the increase attributed to our deposit base, which stands at approximately £0.5 trillion. It's remarkable how much money has remained with us, especially considering the low deposit rates compared to central bank rates. Therefore, I wouldn't characterize it as a disadvantage. We continually explore strategies to enhance performance and consider various high-quality securities for collateral when necessary. Our treasury team has successfully generated a satisfactory yield from this liquidity. Regarding your second question about the cost:income ratio, returns are our top priority, and we are pleased with our ability to achieve decent returns. The cost:income ratio reflects the relationship between income and costs. Currently, our consumer businesses are operating at a cost:income ratio in the 70% range, which is higher than we would prefer due to their income levels. We've discussed reductions in secured balances and the impact of a lower rate environment, but we're optimistic about the consumer outlook. We are seeing positive signs: mortgage balances are increasing significantly, spending levels have returned to pre-COVID levels, and there has been growth in U.S. card balances, although they are not yet yielding interest. As income in consumer businesses rises, we expect the cost:income ratio to decline. In the Corporate and Investment Bank, maintaining cost controls is crucial, and we're operating in the low 50s. We won't set a specific timeline since various factors influence this. However, we've always aimed for a 10% return for the group, which we anticipate achieving this year and hopefully every year as we adjust to a post-pandemic environment. This outlook is likely to align with a cost:income ratio around 60%, given our business mix.

Jes Staley, CEO

I think in the U.S. side, the indications that we have would lead you to believe as we do that the U.S. consumer is returning to their historic use of credit card and receivables. I think the credit card industry does have the characteristics of interchange fees in the U.S. as well as the robust reward programs, and we’re seeing a much more rapid recovery in balances there. And also, you may have noted our own initiatives, whether it’s the renewal of JetBlue or the work that we’ve done with a couple of major retailers. So I think you should look forward to the U.S. card business recovering to historic levels in terms of activity. In the U.K., I think it’s a slightly different story. I think the U.K. consumer has demonstrated a little bit more focus on the balance sheet than preserving an income level. And the focus of that, we do think that there is a degree of a shift from unsecured borrowing to secured borrowing. Our credit card receivables are also up £3 billion year-over-year. Our mortgage portfolio was up £3 billion just in the second quarter alone. So that movement from unsecured to secured, I think, is real. And then on top of that, I think you’ll see increased activity in terms of deployment of sale financing as Tushar alluded to. And the work that we’re doing between our merchant and acquiring businesses, our small business banking businesses and our consumers in terms of our technology platform, I think positions us extremely well to capture that point-of-sale financing that has a growth.

Omar Keenan, Analyst

I just wanted to ask a follow-up on Joe's cost question. So you're guiding to base costs, excluding performance costs being around £12 billion. And I appreciate there's a cost income target going forward. But I wonder whether you could just help us perhaps think about that base cost in absolute terms, perhaps into 2022. In particular, I think the Barclays U.K. structural cost actions. Perhaps you could give us just a little bit more color as to what the annual cost saving potential could look like there from next year or 2023? And my second question is just on the consumer businesses. So you mentioned that spending is recovering, which is a really good sign. But interest-paying balances not yet. Just I was wondering whether you could give us some color around what you're seeing on consumer behavior. Is it more payment rates are elevated due to savings balances? Or is it particular types of spending that haven't yet recovered? And why might that tell you about when those balances should start growing?

Tushar Morzaria, CFO

Yes, thank you, Omar. I'll respond to both questions, and then Jes will provide some additional comments. Regarding base costs and our direction moving forward, cost discipline remains crucial for us as we aim to grow our top line and create the capacity for investment early in the cycle. Maintaining efficiency and productivity is essential. We have indicated that base costs for this year will be around £12 billion, subject to the usual currency fluctuations. For next year, I believe a reasonable planning assumption would be to maintain a similar base cost level of about £12 billion. This framework will allow us to invest in exciting growth opportunities, including U.S. card services and certain areas within our investment bank. As for structural cost actions, we are closely examining our U.K. bank and are prepared to accelerate its transformation where possible, aiming to reduce our overall cost base. For example, the property write-off in Q2 will yield approximately £50 million in annual savings starting from 2023. Although property write-offs can take some time to pay off due to lengthy lease agreements, they accumulate over time, and we hope to implement similar strategies in the U.K. Turning to consumer spending trends, we are currently seeing strong spend levels in both the U.S. and the U.K., with spending returning to pre-pandemic levels. In the U.K., we expect more discretionary spending, especially in travel and holidays, although current travel restrictions introduce some uncertainty. While it is difficult to precisely forecast when increased spending will translate into revolving balances, there are positive indicators. We noted a rise in consumer deposits during Q2, which is a rational response; however, as spending continues, it is likely to convert into revolving balances eventually. In the U.S., the conversion may happen sooner due to the upcoming vacation season, back-to-school shopping, Thanksgiving, and Christmas, which typically spur nondiscretionary spending. We are seeing strong account openings in U.S. cards, currently surpassing our expectations and indicating positive trends. Balances have begun to reform, primarily among full payers, which is also a favorable lead indicator. Jes, do you have anything to add regarding costs or consumer spending?

Jes Staley, CEO

Yes. I think in the U.S. side, the indications that we have would lead you to believe as we do that the U.S. consumer is returning to their historic use of credit card and receivables. I think the credit card industry does have the characteristics of interchange fees in the U.S. as well as the robust reward programs, and we’re seeing a much more rapid recovery in balances there. And also, you may have noted our own initiatives, whether it’s the renewal of JetBlue or the work that we’ve done with a couple of major retailers. So I think you should look forward to the U.S. card business recovering to historic levels in terms of activity. In the U.K., I think it’s a slightly different story. I think the U.K. consumer has demonstrated a little bit more focus on balance sheet than preserving an income level. And the focus of that, we do think that there is a degree of a shift from unsecured borrowing to secured borrowing. Our credit card receivables are also up £3 billion year-over-year. Our mortgage portfolio was up £3 billion just in the second quarter alone. So that movement from unsecured to secured, I think, is real. And then on top of that, I think you’ll see increased activity in terms of deployment of sale financing as Tushar alluded to. And the work that we’re doing between our merchant and acquiring businesses, our small business banking businesses and our consumers in terms of our technology platform, I think positions us extremely well to capture that point-of-sale financing that has growth.

Rohith Chandra-Rajan, Analyst

A couple as well, please. The first one was on capital. So I guess when you think about capital distributions in addition to the dividend, you've indicated the CET1 ratio above the target level at full year this year. But how comfortable would you be moving into the 13% to 14% target range as we hopefully get more clarity on the economic recovery late this year, early next year? So that's the first one. And the second one, sorry, coming back to costs. And this time, really, I guess, on the structural cost. So Slide 16 gives an indication of what you expect for the second half of the year. I was just wondering how we should think about those structural costs in terms of the run rate beyond 2021.

Tushar Morzaria, CFO

Yes. Again, why don't I kick off, and I'll ask Jes to add a couple of comments after me? Yes. Look, the target range is 13% to 14%. So you would expect at some point for us to be comfortable operating into that target range. We said for the remainder of this year, we would expect to be comfortably above there. So pretty strong capital position and plenty of capacity to continue distributions. I think part of the reason for that, there's probably 2 real reasons for that. One is, as you know, and we've called out, there are some sort of technical headwinds that come into next year. You've got software amortization reversals. You've got transitional relief on IFRS 9. You've got SACC. So a bunch of bits and pieces that you'll be aware of. And on top of that, we just see how the adjustment of the post-pandemic economy fares over the next handful of quarters, and you'd expect us to be prudent there. But it's a pretty decent capital position and plenty of capacity to continue to get capital into shareholders' hands, which is a priority for us. In terms of structural cost actions and run rate from this point on, I think we'll call these out as we go along. Think of these as sort of episodic sort of notable items, if you like, where we're doing something very specific as the real estate exit we talked about in Q2. I'll say for the rest of the year, probably a skew towards our U.K. bank, where we look for opportunities to maybe accelerate some of the transformation that we'd like to do there. That will definitely yield run rate benefit. The best guidance I can give you at the moment is we talked about our base cost of about £12 billion this year, subject to the usual sort of currency rate caveats. I think that's a decent planning assumption for next year. And what's inside there that will be is continuing efficiency programs. So if you like, our run-the-bank costs are going to be lower than that. But we would utilize that capacity to continue to lean into some of our growth areas, be it on transactional banking, be it on mortgage book that is growing really nicely. We like payments a lot, et cetera. But I think it gives you a sense of what next year's cost shape will look like.

Jes Staley, CEO

Yes. It’s a good question. You’re right. So we are directing towards a 6p dividend for the year. Our – that is both a function of the profitability of the bank, but also our intention to get back on a path of managing a progressive dividend for our shareholders. And we know that income flow, particularly for our retail investors is very important. On the other side, when you’re trading at 50% to 60% of book value, the economics just pushes you towards a buyback, which we are executing. So I’ll just sort of add those 2 commentaries.

Tushar Morzaria, CFO

But in this bridge, we separated out the effect of the reduction in IFRS 9 relief. RWAs were down more than usual at the quarter end, a reduction of about £7 billion compared to March, adding 34 basis points to the ratio. We've shown some elements of the future capital progression on the next slide. We’ve shown here a number of future headwinds to the ratio. The further buyback of up to £500 million will reduce the ratio by approximately 17 basis points. There's a pension deficit reduction contribution scheduled for Q3 with an effect of 11 basis points before tax. These factors will reduce the 15.1% ratio by close to 30 basis points. Overall, the balance of the year, we expect some further decline in the ratio as impairment on Stage 3 balances feed through to the ratio and as we see some increase in RWAs from the 30th of June level. However, we'd expect to end the year comfortably above our target range of 13% to 14%, with the software reversal, which is expected to be circa 40 basis points, plus other regulatory capital headwinds, reducing the ratio at the start of 2022. We expect RoTE for this year to be above our target of 10%, and we are focused on delivering this on a sustainable basis in the medium term. In April, we completed the £700 million buyback announced in February, and capital at the end of the quarter remained at 15.1%, comfortably above our target range of 13% to 14%. This has allowed us to declare a half year dividend of 2p per share and announced a further share buyback of up to £500 million.

Operator, Operator

Thank you, and we'll now take your questions. As Jes is in New York, and I'm in London, we'll do our best to coordinate our responses.

Jefferson McKenzie, Analyst

Can you please clarify some details about the performance of your assets in the coming quarters?