Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q1 2022
C.S. Venkatakrishnan, Group Chief Executive
Good morning. I am pleased to report a strong first quarter for 2022 for Barclays. Our strategy is delivering and we saw income growth in all three of our main operating businesses. Group income was up 10% to £6.5 billion for this quarter. Profit before tax was £2.2 billion, and group return on tangible equity was 11.5%. This comes after absorbing an increase in costs. And that increase was driven in particular by the remediation of a legacy portfolio, as well as an over issuance of securities in the U.S., something which I will talk about in a moment. Our group income has benefited from broadly improved performance in our consumer businesses, Barclays UK and consumer costs and payments, assisted by rising rates. Global markets has also performed well as we helped clients navigate the volatility of the first quarter, both before and after the appalling invasion of Ukraine. Unsecured lending balances remain well below pre-pandemic levels and impairment was £141 million for the quarter. We remain well capitalized with a CET1 ratio of 13.8% comfortably within our target range of 13% to 14%. Before Anna and I continue talking about the highlights of our quarterly performance, let me start by addressing two matters. The first is the over issuance of securities in the U.S., and the second is our exposure to Russia. As part of our structured products business, Barclays is a frequent issuer of structured notes and exchange traded notes in the U.S. as well as elsewhere. In March, we identified that the Securities offered and sold under our U.S. shelf registration statement had exceeded the registered amount for a period of about a year. As a result, we will be conducting a recession offer to eligible purchasers of these affected securities. Details of this will be published in due course. The quantum of the pretax loss due to this recession is about £500 million. Anna will take you through the impact on our financial statement, including the allocation of these losses between 2021 and the first quarter of 2022. This situation was entirely avoidable, and I'm deeply disappointed that it occurred. The necessity of a strong controls culture has never been clearer to me. In fact, we have made considerable progress in improving our controls since 2016. And so the fact that this happened is particularly upsetting. I have commissioned an external review of the matter with oversight from the Board. This review will focus on what happened, how it could have happened, and where accountability lies. At the same time, I take some comfort from our response and our ability to absorb this issue financially. The matter was escalated immediately both internally and to our regulators, with whom we are cooperating constructively. To date, we have not found any evidence of intentional misconduct. Having reviewed all our other issuance programs, we note that they are all within applicable limits. However, the fact that this over issuance occurred reflects a weakness in our control environment. We are taking steps to address this and enhancing the internal controls in relation to our debt securities issuance activities as an extra safeguard. Due to our ongoing discussions with the SEC concerning the impact of this issue, we are delaying the execution of our stock buyback until these discussions have concluded. This is not a question of whether we will proceed with this buyback but when we will proceed. Our capital position is strong, as reflected in the results we have just received, and we expect to be in a position to proceed with the buyback towards the end of the second quarter. Let me now turn to Russia. We have been witnessing a horrific human tragedy unfolding in Ukraine over the last few months. The human elements of the conflict is what we feel first and foremost. We have also been dealing with the market repercussions. Barclays has no onshore presence in Ukraine or in Russia, following our exit there some years ago. The exposure we do have to Russia is principally through the facilitation of client activities in the corporate and investment bank. We reduced this exposure significantly over the quarter and have managed to control it carefully. We know that we need to remain vigilant to protect the group from second and third order risks, including cyber threats. We are working closely with governments and regulators around the world to comply with sanctions. Now, turning to some highlights of the quarter, I want to mention the strong performance of our markets franchise. Global Markets income has been notably higher since 2020, driven by various external marketplace factors and our strategic decisions. The franchise is benefiting from the ongoing growth of the global capital markets themselves, and our margins have also improved with the increased market volatility since the onset of the COVID-19 pandemic. We have benefited from competitor exits in certain product areas where we've invested, including in our equity prime financing business. Many drivers of our success result from our business positioning, investments in client offerings, and digitization of our platforms. As I mentioned previously, we've taken steps to diversify our income streams, improving performance consistency during changing market conditions. We've grown our financing income by about 40% from 2018 to the end of 2021, and in the first quarter of 2022, that income growth continued with an increase of around 10% compared to the previous quarter. Our global market business is strengthening. However, growth will not always be linear; our relative performance will vary by quarter. For example, in Q4 of 2021 we underperformed competitors, while in Q1 of 2022 our performance was particularly strong. This performance is influenced by the businesses we engage, the strength of client interactions, and unique opportunities. In Q1 of 2022, all these factors contributed to increased revenue. Our business mix means we have limited direct exposure to Russia and the commodities market, and we actively manage our existing exposures. Q1 also saw increased trading activity initiated by rising interest rates in January and February, which continued after the invasion of Ukraine. Thanks to our strong client franchise, we could assist many clients in managing their risks and exposures during this period, responding to rising rates and fluctuating equity prices, and helped several key clients with significant currency and debt exposures related to Russia. In summary, our past investments in this business are yielding results, positioning us to serve our clients when they need us most. Regarding the economic environment, rising interest rates are leading to higher net interest margins for the bank. We're starting to see benefits from rising base rates flowing to our consumer businesses. However, both the UK and U.S. economies, while forecasted to grow over the next three years, face risks from rising inflation. On the positive side, unemployment in the UK and U.S. remains low. We remain focused on the impact of inflation on our customers and clients. Many are facing challenging conditions this year due to inflation, particularly from supply chain issues and increased energy costs. We will support those banking with us to navigate these difficult times and will continue to support the broader economy as we did during the COVID crisis. We remain focused on our three strategic priorities: delivering next-generation digitized consumer financial services, producing sustainable growth in the corporate and investment bank, and capturing opportunities as we transition to a low-carbon economy. Across our Barclays UK and consumer costs and payments businesses, we continue to invest in digital capabilities to enable our customers to transact and interact online. We're developing more cost-effective infrastructure, leveraging consumer data better, and investing to grow our payments business. In wholesale banking, we are focused on sustaining our position as the sixth-ranked global investment bank. This will allow us to continue capitalizing on growth opportunities in capital markets and assist our clients in managing risks, as evidenced by our results this quarter. As mentioned, we've also sought to diversify our income in the corporate and investment bank, including investments in more consistent financing businesses in global markets, along with targeting growth in transaction banking and our corporate banking services in Europe. Our third priority is to recognize opportunities in climate-related financing and to harness them; we want Barclays to benefit as we assist our customers and clients in transitioning their operations toward reduced carbon emissions. Supporting this transition is a central aspect of our strategy to achieve net-zero emissions by 2050. We are making progress toward our target of facilitating £100 billion in green financing by 2030, having already achieved over £65 billion. We also recently announced updates to our climate strategy targets and progress, including steps to reduce our financed emissions. We've set 2030 reduction targets for four of the highest emitting sectors in our portfolio and have tightened our policies on thermally produced coal financing. In line with our commitment to involve shareholders in climate decisions, we will offer them a vote on our climate strategy, targets, and progress at our Annual General Meeting next week. In conclusion, we had a strong quarter, notwithstanding the disappointing issue of over issuance of securities in the U.S. We maintained a double-digit group return on tangible equity, a consistent aspect of our performance throughout 2021. I am confident in our ability to sustain this and we continue to target a return on tangible equity exceeding 10% in 2022. As previously mentioned, we will be proceeding with our planned £1 billion share buyback program and anticipate being ready to do so by the end of the second quarter. Thank you and now I will turn it over to Anna.
Anna Cross, Chief Finance Director
Thank you, Venkat. Good morning, everyone. You'll have seen our announcement about the over issuance of securities in the U.S. a few weeks ago. At the time, we expected the Q1 results to reflect circa £0.5 billion litigation and conduct costs pretax in respect of this. Following subsequent discussions with regulators, we have apportioned £0.2 billion of these estimated costs for 2021. We also have £0.2 billion of customer remediation relating to a legacy partner finance portfolio in CCP, which we weren't expecting at the time of our full year results. I'll highlight the effect these charges have on Q1, as we go through the presentation. I'll start with a summary of our Q1 performance. Overall, we continue to focus on delivery of our three targets. For RoTE, the cost income ratio and CET1. RoTE for the quarter was 11.5%, despite the impact of the litigation and conduct costs, with both Barclays International and Barclays UK delivering double-digit returns. Our cost income ratio was 63%, elevated by the level of L&C costs in the quarter. However, operating costs were broadly flat against income growth of 10%, demonstrating the operating leverage of the businesses and our cost discipline. The CET1 ratio ended the quarter at 13.8% comfortably above the midpoint of our target range. This capital print includes the impact of the £1 billion share buyback program announced with full year results. Overall, we delivered a PBT of £2.2 billion and 8.4p of EPS. I'm going to focus on income, cost and impairment trends across the group before I briefly summarize the results of the individual businesses. Income was 10% higher than Q1 2021, with all the businesses contributing. CIB delivered growth of 10%, demonstrating the diversification within the CIB and its ability to deliver attractive returns in a variety of macroeconomic environments. Markets income increased 26%, this reflects the high level of activity by our clients as we help them reposition in the light of geopolitical uncertainty and rising rates. FICC revenues were up 37%, reflecting increased volumes and attractive bid-offer spreads in volatile markets. Equities revenues were £1 billion, up 13% year-on-year with particular strength in derivatives. Quarterly comparisons of market income are affected by various factors, and our Q1 year-on-year increase does benefit from our business mix. But as we look at the development of our markets income over multiple quarters, we are pleased with the development of our franchises on a trend basis. One example is financing activities, which performed well within FICC and equities with increased balances and healthy spreads. Balances in equity prime were up 14% year-on-year, evidencing our successful expansion of that business over the last few years. Investment banking fees were down 25% year-on-year, reflecting lower primary issuance volumes particularly in equity capital markets. Debt capital markets income was down just 8%, outperforming the market, whilst advisory was up and the deal pipeline remains strong. Income in CCP increased 10%, reflecting growth across all three constituent parts. In international cards, U.S. balances grew by 13% or $2.6 billion year-on-year, although there was, of course, a seasonal decline during Q1. Given this, we are confident of delivering balance and income growth in 2022, both organically and with the acquisition of the GAAP portfolio, which is due to complete towards the end of Q2. However, the income effect of this balance growth will be dampened by the J-curve effect, particularly from customer acquisition in growing portfolios like American Airlines and JetBlue. In the payments business, despite Omicron-related restrictions in January, transactions turnover was up 17% year-on-year, contributing to an increase in income of 44%. The private bank franchise is developing well with income up 20% year-on-year as client balances continue to grow in both banking and investment products. Barclays UK grew income by 5%, predominantly driven by Personal Banking, where income was up 11% year-on-year. This reflected the strong origination of mortgages throughout 2021, which continued into Q1 2022 with a further £1 billion of net balance growth. Whilst the mortgage market is always very competitive, Personal Banking margins have increased overall due to the impact of rising rates on deposit income. Barclays Cards UK income fell by 12% year-on-year. Although spend levels have increased by 35%, balances were down year-on-year and fell £0.3 billion in Q1 because of seasonality and elevated repayment rates. We do expect Q1 to be the low point for UK Card balances with spend recovery generating some growth in lending balances from here. Although recovery in interest-earning balances is expected to remain slower. Finally, to pull out some key income themes across the group. Loans and advances have grown year-on-year by 7%, more than matched by deposit growth of 10%. Whilst the market environment for primary issuance has been challenging, that same environment has driven high levels of client activity across both financing and trading in the CIB markets business. Increased economic activity has driven transactional fees across consumer and corporate businesses. And lastly, of course, there is a tailwind from rising interest rates, which impact product margins across our franchises, but also income from the structural hedge. We expect this effect to be more meaningful in coming quarters, and you'll find our usual slide on sensitivity to rate increases in the appendix. Looking now at costs. The cost performance this quarter is, of course, dominated by the L&C charges. We manage our statutory costs, and we're not going to adjust all our performance metrics to exclude L&C. However, we do view this quarter's L&C as exceptional, so we focus particularly on the trends in operational costs. These were broadly flat as we exercised good cost discipline and delivered strong positive jaws. Base costs, which exclude structural cost actions and performance costs, were up by £0.6 billion, mainly due to the £0.5 billion increase in L&C. The Q1 allocation of costs relating to the over issuance of £0.3 billion is charged to the CIB, and the £0.2 billion relating to our legacy partner finance portfolio is in CCP. Looking now at the cost trajectory for the year. When we set our guidance for base costs for the year, we didn't anticipate L&C costs of £0.5 billion in Q1. There has also been some increase in expectation for inflation, and the dollar has strengthened further since full year results. So we have seen some increase in our outlook for all-in costs for the year. Efficiency and cost discipline remain crucial, and we continue to seek to balance capacity creation with investment for growth. We are reviewing expenditure plans and the like of the expected cost of L&C for the year and the impact of both inflation and FX and may postpone some investment programs. As we mentioned at full year, based on current plans, we would expect structural cost actions to be materially lower than last year's total of £0.6 billion. You will appreciate that there are a number of moving parts this early in the year, but I'm currently comfortable with the published market consensus of around £15 billion for all-in costs this year. Moving on to impairment. We reported a modest charge of £0.1 billion for the quarter. This is Stage 3 impairment relating to net charge-offs and some expected migrations through the impairment stages as economic activity recovers. Delinquency rates in the businesses are stable at low levels with 30-day arrears in UK cards up 1% and U.S. cards up 1.6%. Whilst we are seeing some recovery year-on-year in unsecured lending, balances are well below pre-pandemic levels. We are tracking customer and client behavior very carefully, including patterns of spending in order to identify early signs of pressure from affordability. So far, we haven't seen any particular worrying indicators, but we have specifically considered affordability risks and have broadly maintained coverage levels with UK cards at 12.8% and U.S. cards at 10.4%. Further details on coverage ratios are included in the appendix. Turning now to the performance of our business. The UK income increased 5%, while costs decreased 3%, reflecting lower operational costs plus efficiency savings, partially offset by increased investment spend. We have started to implement the cost actions we reflected in the Q4 result, but it will be a while before we see the full expected benefit given the timing and payback. The BUK RoTE was 15.6%, and we're feeling good about the momentum in the business. Finally, a few words on forward margin expectations for the UK. The NIM for the quarter was 262 basis points, up 13 basis points on Q4, principally reflecting the effect of rate rises. There is still a lot of variables. But given the pass-through on the initial rate rises and the expectation of further rises, we're increasing our NIM guidance for the full year to 270 to 280 bps. That assumes the U.K. base rate reaches 1.75% by the end of the year. Turning now to Barclays International. BI income increased 10% to £4.8 billion, while costs increased as a result of the conduct and litigation charges. Despite this, strong business performance delivered a RoTE of 14.8%. I'll go into more detail on the next two slides, beginning with the CIB. Income was up 10% to £3.9 billion. Excluding L&C, operating costs increased by just 2%, delivering strong positive jaws. In total, costs increased by 19%, reflecting the Q1 portion of the provision relating to the over issuance. There was a £33 million net impairment release, reflecting an improved view of the watch list. Overall, the CIB generated a RoTE for the quarter of 17.1% despite the L&C charge, which impacted the RoTE by around 3 percentage points. Turning now to Consumer Cards and Payments. Income in CCP increased 10%, reflecting growth across international cards, payments and the private bank. The increase in costs was largely due to the L&C charge of close to £200 million. There was also an increase in investment and marketing spend relating to the expansion of the business, including preparations for the GAAP partnership. The impairment charge was £134 million, reflecting the flow-through to delinquency in U.S. cards. The RoTE was minus 1.5%. But excluding the L&C charge, the RoTE would have been in double digits. Turning now to head office. The income of £23 million included a one-off gain from the sale and leaseback of UK data centers of £86 million. Costs were broadly in line with the usual run rate and the loss before tax for the quarter was £73 million. Before I move to capital, a quick summary of our liquidity and funding. We remain highly liquid and well-funded with a liquidity coverage ratio of 159% and a loan-to-deposit ratio of 68%. Moving on to capital. The CET1 ratio ended the quarter at 13.8%, comfortably within our target range of 13% to 14%. In our full year results, we flagged the effect of the announced buyback program and the regulatory changes, which took effect on 1 January. These two elements reduced the year-end ratio on a pro forma basis to 13.9%. The apportionment to Q4, a part of the charge relating to the over issuance, doesn't affect the headline year-end ratio. However, there was a further 19 basis points impact from the Q1 charges relating to the over issuance and associated RWA moves and a 6 bps headwind from the fair value reserve movements, principally caused by the higher rate environment. We would expect circa 12 bps of the over issuance impact to reverse when the related hedges are no longer required. Underlying capital generation was strong with 51 bps accretion from profit. This was partially offset by increased RWA deployment as we would expect in Q1. Looking at our capital requirements. Our MDA hurdle is 11% so we have comfortable headroom at current levels. There are a couple of factors affecting the ratio over the balance of the year that I want to mention. Firstly, our recent disposal of Absa shares adds around 10 basis points to the capital ratio in Q2. Secondly, we expect to go into the triennial pension valuation as at September 30 in a surplus position, both from an IFRS and a funding point of view. Given the recent announcement from the PRA on structured contributions, we expect to unwind £1.25 billion of contributions in Q4, which would otherwise have been spread over 2023, 2024 and 2025 from a capital point of view. Absa and other impacts from the triennial, this could bring forward around 30 basis points reduction in the ratio. I would note, however, that given the surplus position of the fund, the element of our Pillar 2A requirement for pension risk may reduce. Going forward, we are confident in the organic capital generation of the group. We announced with our annual results in February that we would be launching a £1 billion buyback. In view of our ongoing discussions with the SEC concerning the impact on last year's 20-F following the over issuance of U.S. securities, which we announced on 28th of March, we are delaying the execution of the buyback until we have concluded these matters. To be clear, this isn't a question of whether we will be proceeding with a buyback, but when. And we expect to be in a position to start towards the end of Q2. As we've said previously, the Board considers capital distributions regularly throughout the year. It isn't just a matter for annual discussion as you saw in 2021. Finally, on leverage, our spot leverage ratio was 5%, and the average U.K. leverage was 4.8%. So to recap, we reported statutory earnings per share of 8.4p for Q1 and generated an 11.5% RoTE despite the litigation and conduct charges. The business performance is robust, and we're focused on delivering our target of double-digit RoTE this year and on a sustainable basis going forward. We have an income tailwind from expected balance growth and rate rises in the consumer businesses, and the CIB franchise is in good shape after an excellent Q1 performance. Given the £0.5 billion of litigation and conduct in Q1 '22, the increase in expectations for inflation and the strengthening of the dollar, we have seen some increase in our outlook for costs for this year, but we'll continue to review our expenditure plans and it's early in the year. But overall, we're comfortable with the current consensus of around £15 billion for all-in costs. Reflecting macroeconomic uncertainty, we have maintained strong coverage ratios and expect the run rate for impairment to be below the pre-pandemic levels over the coming quarters. Our capital ratio remains strong despite the Q1 L&C charges, and we remain confident of delivering attractive capital returns to shareholders whilst also investing for future growth. Thank you. And we will now take your questions. And as usual, I would ask that you limit yourself to two per person so we get a chance to get around to everyone.
Operator, Operator
Our first question comes from Jonathan Pierce from Numis. Your line is now open, please go ahead.
Jonathan Pierce, Analyst
I've got two questions. The first one is just a numerical one. The hedge income looks like it could be pushing sort of £2 billion by the time we get towards the end of the year. So can I just invite you to maybe tell us how much of that is actually in Barclays UK as opposed to CIB, please, that would help? The second question is a much broader one on these buybacks. Thanks for the clarity that it's a question of when, not if. But could you maybe just set out for us in a bit more detail what exactly needs to be done in the coming weeks to get the £1 billion going? Is it purely the refiling of these 20-S? So is there anything that's more out of your control that we should be thinking about? And sorry, just a supplementary to that and just maybe jumping the gun a bit. But capital accretion over the rest of the year, organically, they should be pretty good as it often is in the last nine months. I'm just wondering whether you think there's any scope, given what's happened in the last couple of months, for the buyback to be topped up later this year, which I think may have been your intention at the full year results. Thanks.
Anna Cross, Chief Finance Director
Okay. Thanks, Jonathan. I will take both of those. In terms of the structural hedge income, approximately 60% of it sits in the UK, so hopefully, that's quite straightforward. And in relation to the other matter, so as a UK matter, we have concluded and agreed with our auditor and the UK regulators that there is no need for us to refile either BB plc or B plc in the UK. We are still in ongoing discussions with the SEC in relation to a requirement to potentially or possibly refile B plc, and we have concluded that we will refill BB plc. So you're right, it relates directly to that. And until we've concluded that, we have decided, so it's a Barclays’ decision, that we will delay the commencement of the buyback. What I would say, Jonathan, is that we're well progressed in our preparation. And in fact, the basis of that restatement is what we've actually printed today with a reattribution to FY '21, and we've got really constructive discussions with the SEC. So that's why we've positioned it as we have as a when rather than an if. And you're right, we're really pleased with the capital print in the first quarter, and we feel like there's momentum in the business and actually across all three businesses. So we'll continue to consider our distribution plans for the rest of the year, but we would expect to accrete capital. We've guided today that we are still continuing to target double digits. So that's about 150 basis points, and we've delivered 51 from AP in the first quarter. So it does feel like the momentum is there, but it's something that we'll discuss with the Board. Typically, we discuss that throughout the year. It isn't just a matter for the year-end. You saw that last year, and I wouldn't believe it would be different this year.
Jonathan Pierce, Analyst
Thank you. That's really helpful. So just to be clear then, once these 20-S 1 or 2 have been refiled, the buyback will start, we're not waiting to see what the SEC is going to do with regards to potential fines or remedial action and control function, it's literally just the 20-S?
Anna Cross, Chief Finance Director
Correct.
Operator, Operator
Our next question comes from Joseph Dickerson from Jefferies. Your line is now open, please go ahead.
Joseph Dickerson, Analyst
Hi, good morning. Thank you for taking my question. Just a question on the provisioning. I guess if I look at the card coverage in the UK that's at 13%, I mean this is like almost an adverse outcome in a stress test. What's driving that level of conservatism given where we are on the unemployment rate and household indebtedness and so forth? And more broadly, do you think that you're taking enough risk in unsecured? So two topics on unsecured. And then also on the same thing in the same area, could you just comment in terms of what you're seeing in terms of some of the higher frequency spend data? I mean your own monthly Barclay card survey shows areas such as non-essential spending are up like 17% on March of 2019. At some point, you think some of this is going to turn into revolving balances, particularly as travel picks up. Is that a correct assumption?
Anna Cross, Chief Finance Director
Yes. Thanks, Joe. I'll take the provisioning. I'm sure that Venkat will have a view on risk and then I'll revert back on the high frequency data. So when we were at the year-end, we were cautious and I mean we are cautious about a few things. We were clearly cautious because we were at what would appear to be the Omicron variant. We were cautious also about impending inflationary and affordability pressures. I would say that since the year-end, our concerns about COVID have abated somewhat. But the tragic events in Ukraine and the ongoing impact of inflation around the world and how that plays into affordability that's probably changed that concern a little. So we've been cautious, Joe, and that's why we've maintained coverage. You're right, unemployment forecasts are low. But the way I think about unemployment is we use it in the models as a shorthand for disposable income. So even though unemployment forecasts are low, it is absolutely certain that the affordability pressure is out there. And therefore, we will see some pressure on monthly disposable income, and that's why we've taken the position that we have. Venkat what about the risk position?
C.S. Venkatakrishnan, Group Chief Executive
Joe, you’re absolutely right and that first of all credit conditions otherwise are reasonably benign. Obviously with this inflation cost of living pressure and interest rate rises consequently coming from central banks, there is a greater chance today than there was even three or four months ago that growth gets affected and employment gets affected later on this year. Having said all of that, especially in unsecured, I would characterize this as a demand problem and not a supply problem. We have abundant risk appetite to lend unsecured, both in the UK and in the U.S. Obviously, we will do it where it's affordable to our customers and where it makes sense from a creditor's point of view. But credit risk is benign. So we are very much open for business, I'd like to say. And I think what you're seeing is a demand issue. And we are also anticipating in the UK that as discretionary spending or non-essential spending rises into the summer with holidays, that we will see balanced growth. I think the UK is a little behind the U.S. in that.
Anna Cross, Chief Finance Director
I completely agree with that, Joe. And if we look at our high-frequency spend data, we can see purchases up in credit cards. In the UK, we can see actually payment volumes up when we look at our payments business, payment volumes are or the turnover is 17% up year-on-year. And actually, when we look back to 2019, which is the last year pre-COVID, our purchase volumes are up versus that as well. So there's definitely a recovery in spending. We continue to see elevated levels of repayment in cards in both the UK and the U.S., actually, which is probably some reflection both of consumer confidence and the large liability balances that we've seen accrete through the COVID period. So I think that will probably form a little bit of a dampening on growth. But essentially, what is happening is what we expected to happen, which is we're seeing purchases as a strong lead indicator, expect to see balanced growth from here and actually lending growth will probably follow that. Okay.
Joseph Dickerson, Analyst
That’s very clear. Thank you both.
Operator, Operator
Our next question comes from Rohith Chandra-Rajan from Bank of America. Your line is now open, please go ahead.
Rohith Chandra-Rajan, Analyst
Good morning. I have a couple of questions. First, regarding the Corporate and Investment Banking (CIB), congratulations on a strong quarter in Q1. However, as Venkat mentioned, the CIB performance isn’t always linear. What market conditions are you considering that will support the 10% return on tangible equity for the full year, especially for the CIB? Additionally, regarding the controls review, is this focused specifically on the Structured Products business or is it broader? My second question is about cost expectations. Can you provide more detail on the £600 million to £700 million increase compared to previous guidance? Specifically, how much of this is due to incremental litigation and conduct, inflation, performance-related factors, and foreign exchange? Any clarification would be appreciated. Thank you.
C.S. Venkatakrishnan, Group Chief Executive
Thanks, Rohith. I will start with the Corporate and Investment Banking segment, and then Anna will discuss costs. I believe the market will remain volatile, with fluctuations in interest rates, credit stress, and equities. I certainly hope we won't experience a severe shock like we did with the Russian invasion of Ukraine in late February. Instead, I liken it to the environment we had from January until then, which seems to characterize the current situation now that the shock has diminished. This environment is marked by increased volatility, and I think investors, clients, and corporations will need to adjust their portfolios to navigate this volatility and reevaluate their risk profiles, which is challenging. More generally, we are starting to see some deal activity return to the market. For instance, the acquisition of Twitter by Elon Musk, in which we served as an advisor, has been noted to have unique factors. However, we view it as a sign of an uptick in deal activity, which will benefit the banking sector. Regarding the controls review, the focus is mainly on this specific incident. From what we've observed, there was no intentional misconduct, and the matter appears to be relatively isolated. Nevertheless, I take control and risk management culture very seriously, and I feel disappointed when unexpected issues arise. We will do everything necessary to prevent such surprises in the future. If that requires us to examine other aspects internally, we will do so. It is crucial to maintain a no-surprise culture and learn from these events. Now, I will hand it over to Anna to discuss costs.
Anna Cross, Chief Finance Director
Okay. Thanks, Rohith. Yes, you're correct. We've guided to £15 billion all-in cost this morning. I want to be clear that, that is a statutory number. So the movement that you are seeing is predominantly around L&C, about £500 million, I would say, and that's really what's changed here. And we're clearly disappointed by that. Let me help you understand how I think about costs. I think of it permanently as us working across three different factors. The first is what we invest to underpin the growth of the business. The second is how we drive efficiency programs through the business. And then the third is how we are managing headwinds from inflation and indeed from FX. What's different again is that the pressures around that third element are certainly higher than they were, although I'd remind you that whilst FX might be a headwind to cost, it's a tailwind for the P&L overall. Typically, what we try and do is bring the net impact of those three as quite the handsome growth can drop to the bottom line. That is harder in the current environment, which is why we've given that guidance around all-in. We do have levers, though. And you've seen us be really disciplined in the first quarter. So whilst we've got revenue growth of 10%, we've got operating cost growth of 1% and we got positive jaws in all three of the businesses. So you should expect us to continue to be thoughtful and disciplined.
Rohith Chandra-Rajan, Analyst
Thank you. Could I just follow up on that, Anna, in terms of the levers? I mean, presumably, that inflationary pressure builds as we go into next year. So I think you talked about the potential deferral of investment spend. Would that be the key lever that you pull to manage a more inflationary environment for a year or two?
Anna Cross, Chief Finance Director
Yes, there are a few strategies we can implement. We will prioritize investments that are strategically important for the business while potentially delaying decisions on less critical ones. Additionally, we aim to drive efficiency more aggressively. For instance, we initiated our UK transformation in the fourth quarter of 2021, but its full impact won't be felt until 2023 due to the timing of those investments. Furthermore, we will consider the timing and scope of any necessary cost actions, which we have indicated will be significantly lower year-on-year. As we proceed with these actions, we will carefully evaluate the returns for the business. So, we will focus on these three strategies.
Operator, Operator
Our next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead.
Alvaro Serrano, Analyst
Good morning. I have a couple of questions. Regarding the truck notes issue and the regulatory review, aside from the refining aspect, what do you see as the possible range of outcomes? Specifically, if they require you to enhance controls, could this be a significant source of cost inflation that we need to consider? Additionally, I have a question about consumer trends, particularly in the U.K., but any insights about the U.S. would also be appreciated. It seems that balances aren’t increasing yet, and with the rise in utility bills expected to continue later this year, I’m curious about your confidence in growth. What fuels that confidence, and how does the current travel rebound support it despite the pressures on consumers? I’m particularly interested in your thoughts on demand and balance growth in the coming quarters.
C.S. Venkatakrishnan, Group Chief Executive
Thanks, Alvaro. I’ll start with the structured note side, and then Anna will discuss consumer balances. First, regarding the cost estimate we've provided, this reflects our best assessment at the moment, primarily associated with the recession offer and the related financial risks that we've hedged. As for our controls, it's too early for a definitive conclusion. We're conducting an external review and, from what we've observed, there doesn't seem to be any intent to misconduct; it appears to be an isolated incident. Internally, as I mentioned earlier, surprises are unwelcome. When they occur, I prefer to adopt a broader perspective. We've invested considerable time and resources in enhancing the controlled culture of our bank since 2016, and we've made significant strides. When looking at the financial risks and other challenges the industry has faced in recent years, there are several issues we've successfully avoided. I feel proud of what we've achieved. Of course, we haven’t reached perfection; otherwise, this situation wouldn't have arisen. However, I take some comfort in our accomplishments thus far and remain committed to assessing everything following such incidents. My hope and expectation are that this is a very specific matter.
Anna Cross, Chief Finance Director
Okay. Alvaro, I'll take the question on cards balances in the UK and the U.S. They all are different. So let me draw that out. So in the UK, we are still confident. The reason for that is because of the trajectory and purchase activity that we see. And you're right, the mix within that, we might expect to tend towards travel as we head into the summer. I think the other thing just to remember is that as we went into COVID, we were risk off. We were conservative. We were cautious as we went into COVID. And therefore, as we step back in, the response is not an immediate one. It takes a while for those customers to join us, to start to borrow and so on. So I think we would hope that we'll see balances grow over time from stepping back into that market, but it's not instantaneous, there is a delay. I think that's what we're seeing now. I think the other thing I would just say is it is our intention over time that we will reshape that business, and you're seeing evidence of us doing that now. So ensuring that we've got products that are focused on spend, not lend. So our Avios product launched in February. Too early to talk about specific numbers, but we're pleased with how that's going. So I think the cards business of the future isn't going to be a replica of the cards business of the past for quite a few reasons. Venkat?
C.S. Venkatakrishnan, Group Chief Executive
Yes. And Martin, thanks for the question. Look, with our competitors, we take them extremely seriously. We respect them. They are all strong professional banks, and many of them are bigger than us. What I'll say to you is market share gains sort of come in two ways. One is if competitors exit a particular area, which has happened with certain products and certain banks. And then the second is more sustainably, how you continue to deal with your clients, the services you provide, the investments you make and your capabilities and the continuity which you have in strategy and client facilitation. We have been on this journey for a number of years with a consistent investment, a consistent approach to the strategy. Our footprint has remained relatively consistent, which is concentrated in the U.S. and Europe and in Asia, building it out slowly based in trading centers in Hong Kong, Singapore and India, and serving China on an offshore basis. There are things which we do. There are things which we don't do. What we do, we try to do really well. And we try to offer enough to customers and deal with them in enough product that they keep coming back to us. So I'm very hopeful that with the team which we have and the investments we make and the consistency in that strategy, that we'll continue to get customers coming back to us, leading, I believe, to market share.
Operator, Operator
Our next question comes from Chris Cant from Autonomous. Please go ahead.
Chris Cant, Analyst
Good morning. And thank you for taking my questions. If I could just come back on the shelf issuance problem. First, could you explain in a bit more detail what you've done to size the potential impacts here in terms of the provision you've taken? Presumably, these instruments change hands several times. Do you have any obligation to compensate previous owners of the instruments or just the current holders? I note that in today's release, you've indicated an unquantifiable contingent liability on a subset of the ETN. So when do you think you'll be in a position to quantify that potential risk? And then secondly, is there a risk of some regulatory fine here? I appreciate that you've indicated this was basically an unintentional error. It's not sort of a risk culture issue. But you have lost your well-seasoned issuer status in the U.S. in 2017 then paid a fine. So I guess you're already on the Northeast step, for lack of a better term. Could that be a factor in how the regulator views the recent over-issuance problem? Thank you.
Anna Cross, Chief Finance Director
Okay. Thanks. Chris. What we've put in the financial statements this time is our best estimate at this stage. And you're right, it's focused on the structured notes rather than the ETNs. But we're just calling out that within the £15 billion, the ETNs are £2 billion of that over issuance. I can't go into detail on the way we've constructed the provision. What I would say is that there are differences in the products and the way that the products trade in the market, the underlying the reason why we have treated them in a different way and in the way that we called it out. So we are not able to determine if or what any liability would be with the ETNs, whereas with the equity structured notes, they performed differently in the market, and therefore, that's relatively clear. And as it relates to further discussions with the regulator, Venkat, you want to take that?
C.S. Venkatakrishnan, Group Chief Executive
Yes. I think the broad framework on this, and obviously, we can't forecast exactly what will happen, but I think the two to three things importantly to keep in mind. Number one is we seek at all times to have frank, open, harmonious relationships with our regulators. In that way, this issue has been escalated immediately to them was escalated immediately to them. We have regular discussions, and we're working constructively to resolve it. We have not, in the external review found any evidence yet of internal misconduct, any sign of internal misconduct. I think all those are contributory. But the ultimate outcome is our hope is to resolve this matter appropriately, offering the right remedies on the law to those who have been affected and working constructively with our regulators in the matter.
Operator, Operator
Our next question comes from Omar Keenan from Credit Suisse. Your line is now open.
Omar Keenan, Analyst
Good morning, everybody. Thank you very much for taking the question. I've got one market question and one Barclays UK NIM/structural hedge question. So just on markets. So you talked about improved margins from historically low levels, an environment of business and volatility. And I understand that picture for FICC, and I can see that '22 is likely to be quite good for the franchise relative to last year, especially given the normalization of rates we had last year. But what I'm trying to understand is how you think the equities business will behave specifically and how volatility dependent do you think Barclays equity franchises versus how directional it is? I'm just trying to understand the likelihood of those businesses performing together as they did in the first quarter. And then my second question is just on the Barclays UK NIM guidance. Could you just give us some color around the specific assumptions behind the revised NIM guidance? I think if we think about the number of Bank of England rate hikes that are now in the base, I think it's probably around 35 to 40 bps on average, something like that. Is that fair? And just on a question related to the structural hedge. I just wonder how much you're thinking about how to manage the structural hedge given the shape of the yield curve and what you're expecting from interest rates. I'm just wondering if the bias is going to be for yields to head up whether you'd be tempted to shorten the duration a bit without suffering on yield to increase your year two to year four rate sensitivity.
C.S. Venkatakrishnan, Group Chief Executive
Yes. Thanks, Omar. Let me begin with the markets questions, and then both the NIM and the structural hedge, I'll turn it over to Anna to answer. On the market side, both FICC and equities, let me say two things. First on FICC, there is higher volatility on the trading side. On the equity side as well, I think there has been a period since last year, it's been slightly different things, but it's been increased volatility in the equity market since last year. At the start of the year, as you remember, it was very syncetic single stock movements, the mean stock as they call them. It has become more broad-based now with higher interest rates and greater volatility in indices. And I think one way to think about it for us is we have both a strong cash and a strong derivatives franchise, and the derivative franchise tends to benefit from increased volatility. And the one thing I'd like you to also keep in mind, both for fixed income and equity, is how much we have been making progress in what I would call financing and financing-based revenues, which are a little less subject to volatility, but are much more stable fee-like income. So obviously, equity prime has been a growth area, and we sort of called it out in our slides with 40% growth over a 4-year period ending in 2021, but even a 10% growth in the first quarter of this year. And then fixed income financing, of which we are a leading participant in the market, top three, if not top two, has been low in absolute revenues for the past number of years with rates being very low, spreads being very low, rate wall and spread wall being very low, but it's starting to pick up with widening credit spreads and higher interest rates. So I think that combination of financing revenue across equity and fixed income is something we have been strong in, we continue to invest in. And it is fee-like income. But in markets like this, I would anticipate that continues and some of it is really quite independent of market with franchise revenues.
Anna Cross, Chief Finance Director
Thanks for the question, Omar. And so Barclays UK NIM guidance, we've guided today that we expect to be between 270 and 280 bps for the year. The key assumption there is we are assuming that we exit the year with a base rate of 1.75%. And I would say the assumptions within that. Let me tell you about what I think they'll leave it all. The first is clearly that base rate move. We've seen today, I would say, a little past due or low levels of cost-through. I would expect pass-through to increase as rates continue to rise. Of course, it's difficult to call specifics. We've not been on this pathway in the UK for quite some time. But in general, I would expect pass-through rates to increase somewhat from here. The second thing is obviously the structural hedge, and I'll come back to that in a little bit more detail. But obviously, the structural hedge will increase in income terms over time, and that adds to that build in our NIM. And then there's probably one which is a bit more of a dampener, which is what we're seeing in terms of mortgage margins. The mortgage margins are definitely very competitive. And whilst we like the business and are pleased with our growth, just the mix effect will have a dampening effect on NIM, but obviously, a positive impact on NII in cash terms. The wildcard is really what happens to the cards balances. So that one is a little bit more difficult to call. The thing I'll just say about base rates before I go on to structural hedges. Whilst we're calling that we are using a 1.75% exit rate, the rises in Q3 and Q4 don't really have that much effect on 2022, both because of the timing. And obviously, we're assuming an escalated pass-through as we go on. Just coming to the structural hedge. And the structural hedge is there to dampen the volatility from interest rates in the UK NIM and indeed NIM generally across our banking products. It's not an expression of how we feel about rates. And to that extent, when we move that hedge around, typically, what we're doing is we're extending it in quantum to reflect higher deposits. We are not doing anything else. So we are not intending to change it in terms of duration at this point. It's a caterpillar. So 150 of it will reprice every month. So just to reiterate, though, taking all of those things together, we're guiding up on NIM because all of those things are net benefits to the overall income of the UK.
Omar Keenan, Analyst
That's all. If I could just ask a quick follow-up question. You've maintained your rate guidance of 275 million to indiscernible. Should we interpret that as an indication of the rate sensitivity for the next type?
Anna Cross, Chief Finance Director
That's a more general disclosure, Omar. It's difficult to be specific about any particular rate hike, and we would not do that. It's quite dynamic because of not just the timing of them, so it depends where you are on the curve, for example. But it's also because we're making multiple decisions across different businesses. It will be different in corporate versus the UK, et cetera. So don't think of it as an expression of improvement, it's a sensitivity.
Operator, Operator
Our next question comes from Ed Firth from KBW. Please go ahead. Your line is now open.
Ed Firth, Analyst
Good morning, everyone. I have two questions. The first is about credit. I understand your cautious outlook, but on Page 18, the variables for your expected loss calculations show UK GDP growth at 5.7% this year and 2.5% next year in your base case. However, it appears you have weighted the probabilities for better outcomes than that, while consensus forecasts are nearly 2% lower for this year and even less for next year. It seems you're being quite optimistic in your expected loss assumptions. Am I interpreting this correctly? How would your expected loss computation change if you aligned more closely with consensus growth expectations? My second question is for Venkat regarding broader strategy. Given the time you've spent in your role, I've noticed that Barclays' CIB business consistently exceeds expectations, often by 40% to 50%. Despite this, the market reaction seems indifferent. As the CEO, do you see any way to address this? Are you considering how to help investors recognize the value of your strong performance? Have you thought about breaking it down further to provide better visibility on stable underlying earnings? It must be frustrating for you and your team that these impressive earnings go unnoticed.
Anna Cross, Chief Finance Director
Thanks, Ed. I'll take the first question and then hand it over to Venkat. Regarding your question about our macroeconomic variables, we didn't update those in this quarter. We carried them over from Q4, which is what you're seeing. They clearly changed towards the end of the quarter, specifically the consensus changed towards that time, and we didn't adjust for that. However, we don't think it's significant. The reason I say this is that it isn't a major driver of ECL in our models. The key factor is the unemployment rate. In fact, if you look at our unemployment metrics used in the models, they are quite conservative. Much of the conservatism here relates to our post-model adjustment, which you can see in the disclosure and in the coverage ratios. That's why the Stage 2 coverage ratios are elevated, as that's where the post-model adjustment is reflected. So yes, while macroeconomic variables are important, some are more critical than others, and I would emphasize that unemployment is the one to really monitor. However, our post-model adjustments are a significant part of our non-defaulted stock levels, so we feel confident about it. Venkat?
C.S. Venkatakrishnan, Group Chief Executive
Thank you for the second question, Ed. First, I'd like to address the perspective on the bank over the last five to six years. There were two inquiries about Barclays regarding the Corporate and Investment Bank (CIB). The first was whether we should have a CIB, and the second was if we would be effective at it. Regarding the necessity of a CIB, we argued in 2016 that it provided a crucial source of diversification for the bank, and events from 2020 through early 2022 have confirmed that this was indeed the case. Therefore, the question of whether we should have a CIB is settled. Additionally, we are keen to be part of what this business entails or what Barclays banking encompasses. On the second question regarding our capability in managing a CIB, I believe your positive feedback on our performance serves as evidence that this concern can also be put to rest. The broader strategy you are highlighting indicates that despite this progress, we do not seem to be receiving proper recognition in our share price. This situation has made me more patient. However, the real issue at hand is the conversion of earnings into share buybacks and capital return. Clearly, the results of this quarter have slightly delayed that goal, and consistency is key. Therefore, you can expect from us a continued focus on diversification, efforts to generate solid earnings, and a commitment to returning capital to shareholders, which will ultimately shape our success.
Ed Firth, Analyst
I have a question regarding the core recurring aspects of the business. To be honest, I have no idea what CIB revenue will be this year, and I assume that you don’t either. This uncertainty makes it challenging for investors to assign any meaningful value to it. However, there must be some underlying revenue that we can anticipate this year, which could be highlighted. Is there anything to note on that front?
C.S. Venkatakrishnan, Group Chief Executive
Yes, there is something to discuss. Let me explain in qualitative terms without getting into numbers. We've talked a lot about equity financing and fixed income financing. Equity financing is our primary business, where we have balances from investors globally who are looking to borrow against stocks or bonds, maintaining balances with us. Our prime balances have significantly increased by 40% from 2018 to 2021, with an additional 10% growth in the first quarter of this year. These are long-lasting franchise relationships, built through our investments in this business, especially as some competitors have exited, allowing us to capture more market share. Another area of the business involves capital markets, including both debt and equity capital markets, which can fluctuate each quarter. However, the overall size of the capital market is expanding, and we expect to gain a growing share of that issuance market, where we have historically excelled in debt and are becoming stronger in equity. Additionally, in trading, there's an expected baseline due to the need for portfolios to be rebalanced and for investors to take new positions. This is complemented by special situations or increased market volatility, which requires more frequent portfolio adjustments. We are currently observing some of this activity and anticipate heightened volatility this year due to rising interest rates, prompting necessary changes in fixed income and equity portfolios. While I can't predict the specifics for three years down the line, I do expect a higher level of volatility this year.
Anna Cross, Chief Finance Director
Okay, thank you. Next question, please. And the next question will be the last one for today. Thank you.
Operator, Operator
The final question we have time for today comes from Martin Leitgeb from Goldman Sachs. Please go ahead, Martin.
Martin Leitgeb, Analyst
Yes, good morning. Thank you for taking my question. And also congratulations on the strong print today. Just quickly two follow-up questions, one on UK cards and one on the CIB. And I was just wondering on the UK cards, if there's anything specifically to call out for Barclays performance, just it seems like the market share in terms of credit card balances in the UK keeps dropping lower, even though there have been comments about a year ago about your intention to lean back into the recovery and regain some of the market share last year. I was just wondering how shall we think about the card progression balances going forward. Would that be in line with market that you are roughly content kind of a market share of around 15%? Or would you also see an ambition to regain some of the market share in the UK cards? And secondly, on the CIB. I was just wondering you called out share gains in prime financing. I was just wondering if you could comment on how you see the competitive landscape evolving. Are there still opportunities out there for further share gains? Or could you actually see some of that reversing with some of the European banks pushing back in terms of revenue ambitions?
Anna Cross, Chief Finance Director
Okay. Thank you, Martin. I'll take the first and then pass to Venkat. So your question is about UK cards and Barclays’ specific performance. I think the first thing to say is that we are in cards and actually nowhere else, exactly the same. We are not targeting a specific market share. That is not part of our philosophy. Our performance, I think, reflects the fact that we did step back from risk, we actually stepped back from risk post Brexit, and we stepped back at the beginning of the pandemic. And therefore, as we step back in, the response is not an immediate one. It takes a while for those customers to join us, to start to borrow and so on. So I think we would hope that we'll see balances grow over time from stepping back into that market, but it's not instantaneous, there is a delay. I think that's what we're seeing now. I think the other thing I would just say is it is our intention over time that we will reshape that business, and you're seeing evidence of us doing that now. So ensuring that we've got products that are focused on spend, not lend. So our Avios product launched in February. Too early to talk about specific numbers, but we're pleased with how that's going. So I think the cards business of the future isn't going to be a replica of the cards business of the past for quite a few reasons. Venkat?
C.S. Venkatakrishnan, Group Chief Executive
Yes, Martin, thank you for your question. We take our competitors very seriously and respect them as they are all strong professional banks, many of which are larger than us. Market share gains can occur in two ways: one is when competitors exit certain areas, which has happened with some products and banks, and the second is through how we engage with our clients, the services we offer, the investments we make, and the continuity in our strategy and client relations. For several years, we have maintained a consistent approach to our strategy and investment. Our footprint has stayed relatively stable, mainly concentrated in the U.S., Europe, and Asia, where we are gradually expanding from trading centers in Hong Kong, Singapore, and India, while serving China on an offshore basis. We focus on what we do best and ensure we provide enough options for our customers so that they keep returning. I am optimistic that with our team, the investments we make, and the consistency of our strategy, we will continue to attract customers, which I believe will lead to an increase in market share.
Anna Cross, Chief Finance Director
Okay. Thank you, everybody. We’ll look forward to seeing many of you over the next few weeks. In the meantime, take care.