Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q2 2023
Operator, Operator
Welcome to Barclays Half Year 2023 Results Analyst and Investor Conference Call. I will now hand over to C.S. Venkatakrishnan, Group Chief Executive; and Anna Cross, Chief Finance Director.
C.S. Venkatakrishnan, Group Chief Executive
Good morning. Thank you for joining Anna and me on today's call. Let me start by saying we continue to deliver a consistent strong performance quarter-on-quarter. In particular, our second quarter results show resilience against a mixed macroeconomic backdrop and against the viewed market activity. This performance again demonstrates the stability and strength of the franchise, which we have built over many years. We generated GBP 6.3 billion in income in the second quarter of 2023, up 6% year-on-year, excluding last year's impact from the over-issuance of securities. This growth reflects the diverse sources of income, which we have built across the group. Our focus on cost discipline delivered a cost-to-income ratio of 63% for this quarter, putting us on track to meet our guidance of low 60s in 2023. Our deliberate and prudent approach to risk management over many years is providing protection against macroeconomic uncertainty. As a result, our credit performance continues to be in line with our expectations. Together, these foundations have generated a profit before tax for the bank of GBP 2 billion in the second quarter, earnings per share of 8.6p and a return on tangible equity of 11.4%. This second quarter performance means that we have delivered for the first half of 2023. Income, which is up 9% year-on-year, again, excluding the over-issuance. And a return on tangible equity for the first half, 13.2%, again, in line with our target of above 10% for the year. Despite the mixed macroeconomic backdrop, we continue to invest thoughtfully where we see opportunities to build competitive advantage and to service our customers and clients more effectively. In Investment Banking, building on our strength in the U.S., we are growing our market share in the U.K. and in Europe, and we have risen to #1 ranking in fee share in the U.K and a #2 position in Germany for the second quarter of 2023 as well as our sixth position globally. While announced volumes have been muted, client consideration of M&A alternatives remains active in anticipation of improved market conditions, and we have been deeply engaged in a full range of risk transfer activity. For example, Barclays was the exclusive provider of financing for Ares’ $3.6 billion deal with PacWest Bancorp in the last quarter. We're also seeing continued momentum in financing income within our Markets business and maintain our top-tier rankings in businesses such as credit trading. Despite lower client activity in markets and banking across the street, I'm particularly pleased with the growing strength of our client franchise. Over several years, our client-centric markets business has targeted a greater share of flow revenue from our top 100 clients. As a result, our income from these clients is up over 10% for the first half of 2023. In the consumer bank in the U.S., we have built upon the succession of our partnership with GAP and announced a new long-term collaboration with Breeze Airways, an airline startup from a co-founder of JetBlue. We also continued to make good progress in financing the transition to a low-carbon economy. We recently provided approximately GBP 100 million in loans to support Moray West offshore wind farm, a development that is expected to supply up to half of the electricity for Scotland. And recently, we extended our popular Greener Home Rewards Scheme in the U.K. to help support more of our mortgage customers with financing energy efficiency improvements to their houses. As I have said in the past, shareholder distributions are a key focus for the bank. Our reported CET1 ratio at 30th of June was 13.8%, up 20 basis points from the first quarter and solidly within our target of 13% to 14% for the bank. Core to this is our consistently strong balance sheet and the capital generation capacity of our franchise. We are therefore announcing an increased capital return to shareholders with a 20% growth in our half-year dividend to 2.7p per share. We are also pleased to announce a share buyback of GBP 750 million, which is an increase on the GBP 500 million we announced at year-end and completed in the first half. Over the past 12 months, our combined dividends and buybacks, including those announced today represent a yield of about 10% at current share price levels. And our buyback programs have in aggregate reduced our share count of shares in issue by over 10% since 2020. And so to reiterate, capital and shareholder distributions are a key focus for us going forward. As we have described for more than 18 months now, inflation and higher interest rates in developed economies have changed both client and customer behavior. We have continued to position Barclays accordingly, which is driving the consistency and stability in our results. I will briefly describe our approach and Anna will elaborate on these points shortly. First, we have taken a prudent approach to credit risk management and our balance sheet, maintaining strong capital and liquidity metrics over the long term. In particular, we continue to balance carefully our credit exposure with the provision of lending and liquidity. Our customers are cautious, but they remain resilient. We have provided incremental and tailored support while also ensuring that it is simple and convenient for them to access the right product to meet their needs. We understand the impact of inflation and high-interest rates on our customers, and we want to help them. For our U.K. mortgage customers, we are providing options to switch to interest-only mortgages for six months or extensions of their mortgage term where appropriate. We are also enabling customers approaching the end of a fixed-rate mortgage deal to lock in a new rate up to six months in advance. Of those customers who have made their mortgage rate switch application directly to us, over one-third have done so using the Barclays app. On the savings side, we provide a range of instant access and fixed savings products, which allow our customers to select the right rates for their savings goals. For those customers who rely on instant access to savings, we recently increased the rate on our everyday saver by 50 basis points. In addition, since its launch in September last year, our Rainy-Day Saver account, which pays 5% up to GBP 5,000, has proven popular with customers. Over 435,000 accounts have been opened as of the end of June this year, of which 95% were opened digitally. We also regularly conduct outreach to highlight where a better savings product might be available to customers, and we have seen some significant shifts in behavior as a consequence. As interest rates rise, our customers become increasingly sensitive to their impact. And as a result, we have issued further guidance on our Barclays U.K. net interest margin, which Anna will address shortly. Finally, we have also continued to exercise cost discipline against this backdrop by capturing efficiency savings to manage inflation and by being thoughtful and careful about how we invest in our businesses. Anna will cover costs in more detail, but suffice it to say that we have delivered on our cost guidance this quarter and remain committed to driving a lower cost-to-income ratio over time. So in summary, we remain very confident of meeting our targets for the full year. Our targets are anchored on a greater than 10% return on tangible equity. I reiterate that this remains a floor, not the extent of our ambition. We are managing the bank well and generating a consistently strong statutory performance across the range of different economic scenarios and market scenarios which we have been experiencing. This quarter represents another important step towards demonstrating value for our shareholders. We have increased shareholder distributions and remain committed to doing so going forward. And we do this while continuing to support our customers and our clients. With that, thank you for listening. I'll hand over now to Anna to take you through the financials in more detail.
Anna Cross, Chief Finance Director
Thank you, Venkat, and good morning, everyone. Starting with performance highlights on Slide 7. Our return on tangible equity for the quarter was 11.4%, broadly in line with Q2 last year, resulting in a 13.2% return for the first half. This is in line with our expectations, and we are very confident of achieving our RoTE target of above 10% for the year. This takes into account business trends and income and our latest view on impairment; I'll come back to each of these. We guided to cost in Q2 being lower than Q1 and have delivered. The cost/income ratio was 63% for the quarter and 60% for the half, and we continue to guide to low 60s for the full year. Although we are still guiding to a loan loss rate of 50 to 60 basis points for the full year, we continue to see limited signs of stress across our portfolios. This quarter, the loan loss rate was 37 basis points. This reflects the prudent positioning of our balance sheet, as Venkat mentioned, and we believe our risk management discipline will limit credit risk downside for us if the global economy slows. Our liquid and stable balance sheet positions us well to pursue our returns objectives and return capital to shareholders. Accordingly, we are paying a half-year dividend of 2.7p and have announced a further buyback of GBP 750 million to start immediately, which is a total return of 7.5p per share for the first half. There was no effect this quarter from the over-issuance of securities, which did impact litigation and conduct costs and income for Q2 last year. To provide a more meaningful comparison, we have excluded these impacts from the comparators in this presentation. On this base, income was up 6% on a strong Q2 last year, whilst operating costs, which exclude litigation and conduct, were also up 6%. Litigation and conduct was GBP 33 million this quarter, and profit before impairment was up 12%. The impairment charge increased to GBP 372 million against a low comparator and in line with our expectations, resulting in profit before tax increasing to GBP 2 billion and earnings per share to 8.6p. The tangible net asset value accretion from earnings was more than offset by negative reserve movements, mainly reflecting further rate rises, reducing TNAV by 10 in the quarter to 291 per share. I'm now going to cover the key drivers of our returns, income, costs, and risk management, starting with income on Slide 9. Total income increased 6% or around GBP 335 million year-on-year, reflecting our diverse sources of income. Barclays U.K. income grew 14% with tailwinds from higher rates year-on-year and from the structural hedge, partially offset by lower product margins. Consumer, cards, and payments increased 18%, driven mainly by U.S. card balances. CIB was down 3% year-on-year at GBP 3.2 billion. The strength in corporate lending and transaction banking income and stability in financing income in markets partially offset the impact of market conditions, which were less favorable for intermediation income and for deal flow in banking. So we benefited, again, from our diverse business model within the CIB. Looking at the group as a whole, if you compare our revenue in this quarter with four years ago, you can see that we have grown income by around GBP 400 million in both the CIB and across our consumer businesses. Turning now to costs on Slide 10. Total costs were GBP 4 billion, up 2% year-on-year. Our cost/income ratio improved from 65% in Q2 last year to 63%, an increase of 57% at Q1 as we expected, and this is factored into our unchanged low 60s guidance for the full year. We delivered lower operating costs in Q2 versus Q1 at both the Group level and in CIB, in line with our guidance, and we continue to expect Q1 to be the high point for quarterly operating costs this year, again for Group and CIB. We are focused on capturing cost efficiencies across the group. For example, in Barclays U.K., we are investing in transformation to improve service for our customers by automating, digitizing, and simplifying our offering, whilst also driving a lower cost-to-income ratio over time. CC&P operating costs were up GBP 96 million year-on-year, reflecting growth in our U.S. Card portfolio, including the acquisition of Gap towards the end of Q2 last year and the U.K. wealth transfer from BUK during the quarter. And CIB operating costs were up GBP 114 million year-on-year as we continue to invest selectively in our clients' franchise through technology enhancements, talent, and in improved resilience and controls. Moving on to credit on Slide 11. We have maintained our long-standing prudent approach to provisioning and continue to hold strong coverage levels. Our impairment allowance at the quarter end was GBP 6.1 billion, a slight decrease from GBP 6.3 billion at Q1. We updated the baseline macroeconomic variables for modeled impairment for the full year notably with some reduction in forecast unemployment in the U.K. and U.S. However, these remain more severe than the forecast used at Q2 last year. And at the end of the quarter, we retained post-model adjustments for economic uncertainty of GBP 0.3 billion. Our guidance for a loan loss rate in the 50 basis points to 60 basis points range allows for some potential credit deterioration and seasonal effects. The GBP 372 million charge translated into a loan loss rate of 37 basis points. Looking in more detail by business on Slide 12, the Barclays U.K. charge of GBP 95 million reflects the lower balances and a lower risk book of unsecured lending compared to before the pandemic as well as our prudent positioning in mortgage lending. There is some increase in the provision against mortgages, and I'll come back to why we remain comfortable with our credit risk here despite the significant rise in interest rates. As expected, the majority of the charge is again in Consumer Cards and Payments and U.S. Cards in particular. It reflects the normalization of delinquencies with a seasoning effect as balances grow, and this includes the Gap acquisition, which is performing as we expected. The next three slides illustrate why we are confident in our provisioning and our prudent approach to risk. On Slide 13, we've shown key coverage and delinquency metrics for our two largest unsecured books, U.K. and U.S. Cards. Repayment rates in U.K. cards remain high across the credit spectrum and arrears rates remain stable and very low by historical standards. Overall, we are confident that the credit quality of our U.K. card book has improved since 2019. We've continued to grow U.S. cards in an appropriate and controlled way that is consistent with the opportunities we see there. As we expected, delinquencies at all FICO levels have been increasing, but our risk mix has improved with our average FICO for the book strengthening slightly since the end of 2019 to over 750, and this includes Gap. In addition, the proportion of the book better than a FICO of 660 is now 89% compared to 86% at the end of 2019. As we grow, we maintained strong coverage levels across both U.K. and U.S. cards, notably, Stage 2 coverage of around 18% and 33%, respectively. Moving on to the mortgage book on Slide 14. There are a number of factors that contribute to our comfort in the higher rate environment. First, we have applied strict affordability tests since 2013, using rates above current levels. Second, looking at the profile for refinancing, the proportion of the book on 5-year and over initial fixed rates has increased materially since 2019 from 33% to 51%. This shift delays a potential increase in rates for many borrowers, allowing them more time to mitigate the impact. Fixed rate maturities in half 2 totaled GBP 17 billion. And as you can see from the chart, a significant proportion of these borrowers have locked in rates ahead of the end of their fixed rate terms. So our mortgage customers are taking thoughtful and appropriate actions. Third, and as a credit backstop, the book is conservatively positioned from a collateral point of view with balanced weighted loan-to-value of 52.8%. Only 2% of mortgages, which are refinancing over the next two years have LTVs in excess of 85%. Given the market-wide focus on commercial real estate, we also wanted to share more detail on the portfolio to highlight our position. As we have followed a prudent lending policy here for over 30 years, this is not an area of concern for Barclays. As you can see on Slide 15, commercial real estate as a proportion of our customer loan book is around GBP 17 billion or just under 5%, which is below the industry average. It is diversified across segments and the weighted loan-to-value of 49% provides significant headroom for a potential stress in prices. No individual segment has an LTV of higher than 58%. We know the office component has received particular attention and this is just GBP 1.9 billion. Turning now to the performance of each business in the quarter, beginning with Barclays U.K. on Slide 16. Profit before tax increased 25% and the return on tangible equity was just over 20%. Income grew 14% to GBP 2 billion, with costs down 1%, improving the cost/income ratio by 9 percentage points year-on-year to 55%. We expect to improve this further as the benefits from our transformation program feeds through. The net interest margin was 322 bps, up 4 bps on Q1, in line with our expectations, and this would have been 2 bps higher without the transfer of U.K. wealth to consumer cards and payments. The moving parts are set out in the bridge on the slide. We benefited from the steady roll of the structural hedge, which again added 13 bps as in each of the last few quarters and from some lagged effect from previous bank rate rises. There was also a 6 bps increase from the reversal of some of the treasury headwinds, which we called out at full year. These positive impacts were moderated by both mortgages margins and the developing deposit dynamics. On the next slide, I'll cover how we see NIM evolving from here. Our customers are cautious and resilient, and we see benefits in our credit performance, but this also affects our income outlook. Three recent macroeconomic developments have prompted customers to change their behavior and us to revise product pricing. First, inflation is expected to be more persistent; second, base rates are forecast to peak at higher levels; and third, swap rates increased further during Q2, increasing mortgage pricing. In this environment, our customers are behaving rationally and have started to use surplus deposit balances to manage their finances more actively. For instance, business banking customers are drawing down on deposit balances for use in their businesses and to pay down debt. In Personal Banking, over one-quarter of our customers with mortgages have been making excess repayments, reducing their loans ahead of potential remortgaging. And throughout the book, customers are seeking higher yields for their savings and we have changed our pricing in response. Accordingly, we now expect the BUK NIM to be below 320 bps for the full year 2023. Our current view is around 315 bps, which reflects our expectation for customers to hold lower deposit balances, changes in deposit pricing, and the 2 basis points impact from the transfer of U.K. wealth. Of course, the precise outcome will be sensitive to a number of inputs, notably the level and mix of deposits and other macroeconomic factors, including inflation and rates. At the same time, the high swap rates are providing a tailwind to future years from the structural hedge as we lock in fixed receipts at meaningfully higher rates, which I'll cover on the next slide. Slide 18 illustrates the importance of the hedge to the level and visibility of our future net interest income. Swap rates increased sharply during Q2 to around 5%, and reinvestment rates are materially above the yield of 1% on hedges maturing this year. As a result, gross hedge income is increasing and over 90% of the GBP 3.6 billion expected for this year was already locked in by the half year. We have a further GBP 50 billion to GBP 60 billion maturing in each of 2024 and '25, at yields between 1% and 2%. The precise level of reinvestment will depend to an extent on customer behavior, but the building effect of the hedge roll gives us confidence that gross income from the hedge will grow strongly in 2024 and 2025. I would remind you that around two-thirds of the benefit is in BUK, where the hedge has contributed 13 bps of incremental NIM in each of the last few quarters. Looking next at Consumer Cards and Payments on Slide 19. The return on tangible equity was 11.8%. Income increased GBP 195 million or 18%, reflecting growth mainly in international cards and the transfer of U.K. Wealth. Period-end U.S. card balances grew organically by 12% to $29.5 billion and average balances were up 27% year-on-year as the GAP acquisition was completed late in Q2 last year. We delivered positive operating jaws despite operating costs, which exclude litigation and conduct, being up 14%, reflecting continuing growth across the businesses. Both income and costs included around GBP 35 million from the transfer of U.K. Wealth. As I discussed earlier, the increase in impairment was in line with our expectations. We've included a summary in the appendix on the wealth transfer. The combination with the private bank creates the top five U.K. wealth management business, and we believe we can develop the business more effectively as a single entity. Looking next at the CIB on Slide 20. Return on tangible equity was 10%, while income was down 3%, a resilient performance against a very strong prior year comparator, reflecting our diversification within the CIB. Corporate lending and transaction banking increased strongly year-on-year to over GBP 900 million. Markets, which was down 20%, reflected lower market volatility impacting intermediation income, but there was some offset from financing income, which grew 9%. As I mentioned last quarter, we are benefiting from the effects of higher inflation and financing. Investment banking fees were down 15%, reflecting a lower industry fee pool. Cost decreased 2%, but operating costs, which exclude all litigation and conduct, increased 6%. As I mentioned earlier, this reflected selective investments in our client franchise. Turning now to capital and liquidity. As you can see on Slide 21, we continue to maintain strong capital funding and liquidity. Looking in more detail, beginning with capital. Our capital generation profits was again strong, contributing 39 bps in the quarter, of which 8 bps was applied to the increased dividend accrual. Taking into account the GBP 750 million buyback we have announced, our CET1 ratio would be 13.6% and in our target range of 13% to 14%. Our MDA has increased in July from 11.4% to 11.8%, and we remain comfortable with our target range. Looking forward, we expect strong organic capital generation supporting attractive returns to shareholders. We have grown deposits substantially ahead of loan volumes for many years and have a low loan-to-deposit ratio of 72%. As shown on Slide 23, we have seen a stable level of deposits overall this quarter at GBP 555 billion. This reflects an increase in international deposits and treasury offset by some decline in retail and business banking deposits, in line with the market trends we discussed earlier. We are comfortable with the stability of the group's overall deposit funding base and our diversified sources of deposit funding. Our franchise deposit strategy means we remain highly liquid, based on both our internal stress framework and our liquidity coverage ratio well ahead of regulatory requirements. The liquidity pool of GBP 331 billion is held 80% in cash, with the risk in the residual debt securities tightly managed. So to recap and summarize the outlook on Slide 25. We delivered earnings of 8.6p per share in Q2 and generated an 11.4% return on tangible equity and are very confident of achieving our target of above 10% for the year, underpinned by our diversified sources of earnings. The cost/income ratio for the quarter was 63%, and we expect to deliver a statutory ratio in the low 60s this year. We remain focused on risk management, and while we expect an increase in impairment year-on-year as we grow U.S. cards in particular, we are confident of delivering a loan loss rates within our guidance range of 50 bps to 60 bps for the full year. Our capital ratio remained strong at 13.8%, and we expect to deliver attractive capital returns to shareholders followed with selective investments to drive profitability. 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 today comes from Joseph Dickerson from Jefferies.
Joseph Dickerson, Analyst
I just had a question, firstly, on rate sensitivity because I can't find any tables or disclosure in today's releases. I guess are you now approaching as regards base rates a position whereby the bank is liability sensitive? Or how should we think about rate sensitivity going forward? And then secondly, can you discuss your strategy with some of the European consumer businesses, such as the German consumer business? I think there have been some press headlines about the disposal of that business. That would actually have a relatively significant contribution to capital present really gain on it, not game-changing, but certainly would free up another, call it, GBP 750 million or GBP 1 billion of capital, if you were disposed of it. So I guess how are you thinking about those peripheral consumer businesses that you still have?
Anna Cross, Chief Finance Director
Thanks for your questions. So I'll cover the first one and then hand across to Venkat. So you're exactly right. What we are saying is that given where base rates have now got to, we expect further rate rises from here would have no impact on our net interest margin; if that, it might be even slightly negative. And that's simply because, as we've said for some time, the higher rates go, the higher the pass-through will be. Don't forget though that this higher rate environment also impacts the yield curve, and we are seeing that benefit come through and get locked into on our structural hedge. Venkat, do you want to take the second question?
C.S. Venkatakrishnan, Group Chief Executive
Yes. Thank you, Anna. So Joe, yes, we are looking to sell the German credit card business. It's a nice business, but it's not really been core to our overall consumer footprint. There will be a modest RWA release when that happens. But it is small in the context of the bank. I mean, it's something, but it's small. Yes.
Operator, Operator
The next question is from Jason Napier from UBS.
Jason Napier, Analyst
Just to start off, I guess, first one, a lot of the investors that I talked to would like to see Barclays. We care about the sort of risk-weighted asset growth that it envisages for the CIB, like many of them would like to see no growth in that division at all or perhaps some kind of constraint around the share it represents in the group. I just wanted your views on that desire. And then secondly, just looking at Barclays U.K., the division has a better income to loan tally than almost anyone else in the sector, but its cost-to-income ratio is 10% above Lloyd's and 13% above NatWest. You must have done loads of sorts of internal work in the past. Can you talk about what it is about the cost structure of that business that makes it so much less efficient than the major peers that we look at?
C.S. Venkatakrishnan, Group Chief Executive
Jason, I'll take the first question and pass the second one to Anna. Regarding the first question, I've been quite clear that our investment bank has been a significant success. Five years ago, there were doubts about whether we should have one and if it would perform well. We have demonstrated that having an investment bank is essential for us. It serves as a valuable diversifying business, and we excel in this area. We rank as the top European investment bank and are effectively penetrating the markets. However, I also recognize that with approximately 60% to 70% of our operations, it's increasingly important to focus on growing the parts of the bank outside of the investment bank for better overall balance in the future. That being said, within the investment bank, there are still several attractive return on tangible equity businesses, such as financing and prime services, in which we have been investing significantly. To address your main concern, we agree that we need to enhance our return on tangible equity and increase the share of fee-based and capital-light businesses in our overall product offering.
Anna Cross, Chief Finance Director
Yes, we've given this a lot of thought, and I would attribute it to a couple of factors. The risk appetite is a significant factor, particularly regarding liquidity and credit risk. You may know that Barclays U.K. has a lower loan-to-deposit ratio compared to some of its competitors, and we manage our credit very carefully within Barclays U.K. as well as across the group. This is part of the group's overall risk strategy, and we have global opportunities to manage various types of risk. Risk management is critical for us. Additionally, the cost base is also a crucial element, which is what the transformation at Barclays U.K. aims to address. We are very focused on cost efficiency and are making substantial efforts to enhance our physical and digital presence, which benefits our customers. Currently, we are reinvesting the gains from this transformation to accelerate progress. Over time, we expect the cost-income ratio of the business to improve. I hope this provides some clarity on our approach. Next question, please.
Operator, Operator
The next question comes from Jonathan Pierce from Numis.
Jonathan Pierce, Analyst
I've got two. The first is on the hedge. Thanks for the extra disclosure on the hedge maturities in 2024, 2025, particularly the scale of them. But I wondered if you could be a bit more precise on the yields that these things are coming off because you've got GBP 100 billion to GBP 120 billion in maturities over those 2 years makes a big difference if the average yield on the maturities of 1% versus 2%. The range could be as wide as GBP 1 billion or so. I'm also just a supplementary to that, wondering where all the hedges that were written in 2020 when the 5-year swap rate was close to 0. When are those coming off? And I thought there'd be a bunch of those in 2025. The second question is a more broader one on distributions. In particular, going forward, the sort of split of the free capital generation that goes towards dividends versus buybacks. I mean, we can all understand you want to do a lot of buybacks over the next few years at this rating. The consensus dividend payout ratio is about 27%, I think, over the next 2 or 3 years. And as an argument, I suppose, the payout ratio could be a bit higher than that. I mean ultimately, cash in pocket today is just as important as enhanced cash and pocket in a few years' time. So thoughts around the distribution split between dividends and buybacks moving forward would be great.
Anna Cross, Chief Finance Director
Thank you, Jonathan. Regarding Slide 18, it indicates a significant increase in yield from fiscal year 2022 to 2023, with our income rising from GBP 2.2 billion to an anticipated GBP 3.6 billion this year. To address your question about future yield, it's challenging to provide an exact figure on the maturing yield as it affects how much we can include in calculations. However, I would estimate that we're likely at the lower end for 2024 and within the range for 2025. Typically, these are around 5-year swaps, so we expect to see benefits from the 2020 vintage starting in 2025. In terms of our strategy, we aim for a progressive dividend, which is why we increased the dividend by 20% year-on-year at the half year. This reflects our confidence in consistently distributing capital, and we also plan to occasionally supplement this with buybacks, especially considering the current valuation of the bank. Currently, we have a distribution of around GBP 1.2 billion at the half year, amounting to 5% of our current market cap. This should emphasize our commitment to returning capital to shareholders through both dividends and buybacks.
Jonathan Pierce, Analyst
Okay. That's helpful. So just quickly come back on the hedge point. In 2025, it sounds like you're saying the average yield to maybe around the midpoint, about 1% to 2% range. If you've been bar the stuff that was put on during the pandemic, which was obviously fair that if you've been putting a hedge on typically at 5 years rolling, why is the yield on the stuff coming off in 2025 at that level when the 5-year swap rate was pretty close to 0 in 2025?
Anna Cross, Chief Finance Director
There is a blend in, Jonathan. We can take you through it in a bit more detail. So there will be a large part of the 2020 vintage, but they're not all 5 years. So we can take it through to it with you in a bit more detail at the start of the year.
Operator, Operator
Our next question comes from Guy Stebbings from BNP Paribas.
Guy Stebbings, Analyst
The first point is regarding deposits. In the U.K., it seems they experienced inflows of about 4 billion to 5 billion GBP in the quarter, which likely includes some outflows from current accounts and interest-bearing accounts, as well as inflows into time deposits. It would be helpful to understand the changes in the mix of deposits, both at Box U.K. and at the group level. Looking ahead, it appears you expect the current levels to continue, while one of your competitors mentioned that their experience in the third quarter has been slightly better than in May or June, noting that fewer base rate changes have resulted in less motivation for customers to move their money. I'm curious if you share this perspective, as it seems like you might be adopting a more cautious approach. Regarding the Corporate Investment Banking segment, we've grown accustomed to top-line growth and market share increases for some time. This quarter was a bit weaker, and I’m wondering if you have any insights on this. Do you feel there's a need to adjust your strategy given you have a review process underway, or do you believe this is primarily a one-off situation with potential for improvement ahead?
Anna Cross, Chief Finance Director
So we don't disclose the split of our deposits. But when we look at our peers who've reported thus far, the trends that we've experienced don't look markedly different. And actually, what we're saying at this point in time is the migration behavior is broadly as we expected it to be. What we're seeing is that customers are holding a lower level of deposits and they're doing that for very positive and proactive reasons. We think that the approach for that behavior is three things: Firstly, rates have risen beyond the level that any of us expected. Secondly, inflation is much higher and more persistent than we expected; and thirdly, mortgage rates are obviously higher than they have been at any point other than a brief period in the third quarter of last year. So our customers are sensitive to these higher levels of interest rates, but not actually in the way that consensus is assuming; it's manifesting itself and then using their deposits proactively to manage their financial position, and we're seeing the benefit of that in our impairment. So we said in the scripted comments that over one-quarter of our customers are using that excess deposits to pay down their mortgages in advance of a fixed rate change. We think that's the right thing for them to do. And while it will impact on income, it's also going to impact our impairment. Because those three factors of rates, inflation, and indeed mortgage rates, we expect to persist, we also expect this deposit behavior to persist into the third quarter. And really, that underpins much of the guidance that we've given you around the forward path for BUK from here. Hopefully, that gives you some clarity on how we are thinking about it. Venkat, do you want to pick up the second?
C.S. Venkatakrishnan, Group Chief Executive
On the CIB, I see this situation as important to clarify. Since the last quarter, we have experienced similar challenges in fixed income, equities, and banking as our U.S. peers. In fixed income, we saw a slight decline, but we had a strong performance in the second quarter of 2022. Securitized products, an area of growth for us, performed very well, which benefitted banks with significant securitized product operations. Meanwhile, the volatility in equities was somewhat subdued, impacting our derivatives-heavy business. Overall, banking has maintained a steady performance. Our market share ranking in the U.K. and Germany remains robust. Taking a longer-term perspective, we are focused on increasing market share with our largest client, which remains a key objective. We are performing well in both markets and banking. Additionally, our transaction banking and corporate banking sectors have been exceptionally strong, driven by transaction volumes, interest rates, and solid fee income. Ultimately, this combination results in a CIB with double-digit ROTE and consistent gains in market share.
Operator, Operator
The next question comes from Alvaro Serrano from Morgan Stanley.
Alvaro Serrano, Analyst
I have a couple of follow-up questions. Anna, you mentioned that the deposit balances are significantly impacting the structural heads and margin guidance in the U.K., with a reduction of around GBP 4 billion. Is that the expected run rate of deposit reduction for the next few quarters? Additionally, while the level of rates is important, it seems clients are also focused on their mortgage rollovers, which might extend the impact beyond just rate changes. Would you agree that the GBP 4 billion run rate is more related to the level of rates and their movements? The second question is also a follow-up on the strategic review. Venkat, you've highlighted the need to balance the business more outside of the investment bank. It seems that U.S. cards are a key growth area, especially since there's limited room for expansion in the U.K. However, growing in the cards and payments sector is capital-intensive, and some global peers are actually scaling back. Is the plan to invest more capital to expand in the U.S., or is there also an opportunity to reallocate capital from the investment bank to diversify the business?
Anna Cross, Chief Finance Director
So the disclosure that we've given you on the structural hedge is actually for the group as a whole. We've included it in that Barclays U.K. section just because of the impact and the link it has to Barclays U.K. NIM. But that reduction in the hedge that you're seeing quarter-on-quarter actually relates to our corporate business as it has done in prior quarters. And really, what we're doing there is I think we've described before the way we build the hedge we identify the rate insensitive balances and then we maintain a buffer when we put the hedge together. What we're doing in corporate is we are very conservatively maintaining that platform in the current environment. Again, I think we've spoken before about the fact that our corporate businesses or our corporate clients were really very proactive in moving their deposits and really it's a continuation of that previous story. Today, we haven't actually changed the role of our hedge within the retail book. Of course, we are very focused on that every single month. But I'd just remind you that because of the way that we roll this hedge very mechanically, we have the opportunity every month to reassess it and pause or reduce the size of the roll. So we've got plenty of room and plenty of time to adjust it. But to date, in retail, we have not had the need to do that. And secondly, the pickup in this hedge in '24 and '25, we would expect to be pretty strong, simply given the amount that we got maturing indeed the yield on that maturing level. So that will impact the U.K. will also impact the broader bank, but that's what you should read from Page 18 as opposed to any specific concern about the level of BUK deposits. Venkat, do you want to pick up the second point?
C.S. Venkatakrishnan, Group Chief Executive
Yes, Alvaro, thank you for the question. One perspective to consider is the distinction between CIB and non-CIB, with a focus on increasing the proportion of fee-paying, relatively capital-light businesses. There are a few within the CIB, such as transaction banking and our financing business, but many opportunities lie outside of it as well. We plan to maintain our emphasis on fee-paying, capital-light ventures. Additionally, while we aim to grow our cards business, we also seek to enhance capital efficiency within it, investing time in this area. Our goal is not just to grow at the current risk-weighted asset density but to achieve growth in a more efficient manner. Overall, expect us to increase our focus on fee-paying and relatively capital-light businesses.
Operator, Operator
The next question comes from Christopher Cant from Autonomous.
Christopher Cant, Analyst
You mentioned the investment J curves in the CC&P segment over the past couple of years, but it seems like the revenue growth has slowed down a bit in the second quarter. Can you elaborate on what’s happening there and why revenues faced some challenges? Additionally, reflecting on previous questions regarding investor sentiments around recent strategic developments, if you plan to invest outside of the CIB into some of those CC&P segments, would you consider offering more transparency? It’s a bit of an unconventional division with various components, and we don’t fully understand the economics of those segments. While you've shared revenue figures, we don’t have insight into the rest of the P&L. Would you consider providing that information to help investors feel more confident about growth prospects? I also have a follow-up regarding deposit trends. You’ve updated us on the NIM guidance. Have you noticed an increase in turning out behavior during June and July, particularly in response to the high swap rates? You have mentioned different factors affecting the NIM guidance, but I’m especially interested in what you’ve observed concerning turnover. This also ties into the amount of hedge maturities you will be able to reinvest in 2024 and 2025.
Anna Cross, Chief Finance Director
So let me start your first question, which was about the quarter-on-quarter movement in CC&P. This is largely about U.S. card. I wouldn't link it directly to J curves or anything specific around the momentum in that business. There are some small FX impacts. There's also a little bit of seasonality in there. We typically expect slightly higher income in Q1 and Q4 just because of the patterns of holiday spending in the U.S. I think the other point though, just to note, is that we have seen an improvement in risk performance I would say, real risk performance quarter-on-quarter. And that's coming from a couple of things. It's from the stabilization of the delinquency trends. It's also from the fact that Gap is now fully embedded and is seasoning out and performing well in line with our expectations. So we're seeing that in the impairment line, as you can see that we also see it in the income line because it impacts these. So overall, very happy with it. It's going in the right long-term direction. This is a business that we want to grow as Venkat said. So I wouldn't read too much into the quarter-on-quarter movement. On your particular point around presentation, we hear you. Actually, there are two important businesses within CC&P, and we are quite reflective about how we might think about and present those in the future. U.S. cards is obviously one of them. We'd also call out Wealth and Private Banking, which we've now brought together into a single division. So we'll reflect on that and update you in prior subsequent quarters, but we are very thoughtful about it. And then to your second question, we're not seeing any real difference in deposit trends following the exit of Q2. It's been fairly consistent actually through Q2 and into Q3 so far. As I said, the trends that we're observing, we don't believe are different to those of the industry. The one that’s a bit different from our expectations does this use to sort of more current account deposits, I would say, simply customers proactively managing their financial situation. So I wouldn't call out any specific impact on the hedge.
C.S. Venkatakrishnan, Group Chief Executive
And finally, just step in for a second, Chris. And you and some of the previous questions have focused rightly on sort of where we want to grow, what the balance is with the investment? Equally, I hope it's clear that not just how we're thinking about avenues of growth, but we really value doing it in such a way that creates returns for our shareholders. And we want to prioritize that. And so that's a big part behind continuing with the dividend program and the buyback program at GBP 750 million. So it is a balancing act, and I just didn't want you to miss the other side of the balance, which is what we've been returning to shareholders.
Operator, Operator
The next question comes from Benjamin Toms from RBC.
Benjamin Toms, Analyst
Firstly, regarding mortgage spread compression, we are facing significant headwinds in net interest margin this quarter. However, if we examine the available data, it seems that these headwinds may lessen in the second half of the year as the mortgage spread rolling off our books decreases. The pressure is expected to return in 2024, but to a lesser degree than what we are currently experiencing. Is that an accurate way to understand the shape of these headwinds? Secondly, on the structural hedge phase, while the additional exposure is indeed beneficial, the key question revolves around the total gross income for 2024 and 2025, which hasn't been disclosed but has been characterized as strong. Looking at the latest market pricing, it appears that the potential tailwinds could result in approximately an additional GBP 1 billion in revenues for 2024, and another GBP 1 billion in 2025. Can you provide some insight on whether that estimation is reasonable?
Anna Cross, Chief Finance Director
Thank you, Ben. So you're right about mortgage margins at the moment. The mortgage market is very competitive, very focused on refinancing. That means that spreads remain attractively thin. We don't see that changing much through 2023. Remember, we know exactly who is maturing this year and what rate they're on. And in fact, in the disclosure that we've given you is that many of them have already refixed already. So we've got a very good view about what the forward impact of that is. We would expect it to be much less, probably largely neutral actually in 2024 because what we're really seeing at the moment is the vintage written in 2021, which was on much wider margins and on 2-year fixes; it's that's rolling off, really. So by the time we get into 2024, we'd expect the impact of mortgage compression to be much more neutral. And in many respects, the margin story for 2024 is much simpler, which leads me to your second question. It's a bit early to give very precise guidance around 2024. What I would say though is the following: Given the scale of maturities that we have and the yield on those maturities, we would expect a strong pickup. And clearly, we would expect that to mitigate any continued depositor behavior that we see through 2024. So I would expect it to provide a stabilizing effect as we go into 2024, noting again that mortgages will be broadly neutral and actually base rates, we would expect to be broadly neutral. So it's really a much simpler picture in margin terms in '24.
Operator, Operator
The next question comes from Adam Terelak from Mediobanca.
Adam Terelak, Analyst
I want to dig into NIM into 2024. I know you just mentioned the hedge. Can you give us a sense of the deposit assumptions in this year's guide? And then how much the deposits might be able to move further beyond '23 and into '24? So I'm just trying to think about what the kind of the volume of deposit repricing opposite that hedge benefit you're talking about could be the kind of scale of the 2024 NIM from the 3.15% you're expecting this year? And then a question on completely different topics. U.S. regulation, they got a new look on that Basel III finalization might look like. How does that impact your U.S. IHC, how does impact your card growth plans there? Because I know the minute capital ratios between your U.K. business and international franchises are fairly well balanced. Does that change if you're going to see material risk-weighted inflation on the U.S. regulations? And does that change your greater plans?
Anna Cross, Chief Finance Director
So let me talk about our deposit assumptions for 2023 first. So as I said, in Q2, we've seen that sort of increased proactivity from our customers. We expect that to continue into Q4 into Q3 rather. And by the time we get to Q4, normally what happens is we actually see a build of deposits in Q4 because people stand up on their way into the holiday period. We're not assuming that this year, but we are assuming the movement in deposits will somewhat stabilize in the fourth quarter. So that's our version of that seasonal effect in this forecast. So what we're expecting in NIM term is for the NIM to step down in Q3 and then be a bit more stable into Q4. And remember, we've got really good visibility on the hedge. So of the GBP 3.6 billion in gross income this year, we've already locked in GBP 3.3 billion of it. We know who our mortgage customers are and when they're going to refinance. So really, what we're doing here is answering three questions. The first is, what happens if and when base rates go up again? And we are clearly saying that we expect that to not have a positive impact on NIM; it might actually be slightly negative. And that's because at these rates and beyond, we'd expect pass-through to be high. The second question we have is around deposits, and I'll just told you what we think. Sets down again in Q3, somewhat stable thereafter into Q4. The third and really important question is, what do we expect to happen to unsecured lending? In the current environment and given the proactivity that we see from our customers, we are not assuming that that is going to grow. You're seeing some headline growth, but that's not interest-earning growth. Now as I say, this is having some downward pressure on our BUK NIM, but it is also impacting the impairment, and we are seeing very strong low levels of impairments coming through in BUK. Hopefully, that gives you a bit more clarity.
Adam Terelak, Analyst
Can you say anything on deposit migration in '24 and changes in mix beyond 4Q? Or is it two crystal balls?
Anna Cross, Chief Finance Director
So, too early to tell, as I noted before. All I would say is that given the strong pickup in the structural hedge, we would expect those two things to be offsetting.
C.S. Venkatakrishnan, Group Chief Executive
So I just want to emphasize the point Anna made at the end about the relationship between them and impairment. Having spent a lifetime in credit markets, what I will say to you is the NIM you want is not the highest NIM, but the best kind of NIM. The one that balances your return with risks of credit impairment. We think we increasingly see the evidence that we've got a very good kind of NIM because what you are seeing is a reduction in it, but reduction for the right reasons. And the reasons are that people are using extra balances to pay off mortgages and reducing the impairment risk on the portfolio. So as you think through these numbers and as you think through our credit portfolio, I would urge you to keep it in mind because that's the way Anna and I think about it. And that's the way we've been targeting and developing and shaping the credit profile of this bank.
Anna Cross, Chief Finance Director
Absolutely. On your second question, Adam, which is about Basel 3.1 in the U.S., again, it's a bit early. We're expecting that guidance today. So it will take us a while to work our way through that. We've guided to the overall expected impact from Basel 3.1. And of course, we'll update you on that as these rules become clearer and more final.
Operator, Operator
Next question comes from Rohith Chandra-Rajan from Bank of America.
Rohith Chandra-Rajan, Analyst
I had a couple on CIB, please, if that's all right. The first one was just on transaction banking, where there was clearly a very strong revenue trend last year as rates were all rising. And that's come down slightly over the past couple of quarters. So is transaction banking now, is that margin piece done, and this is now a kind of volume-driven revenue line? That would be the first one. And then just on cost management in CIB. So costs have been coming down, but they've not kept pace with the revenue trends. I was just wondering how we should think about the cost trajectory there going forward. Should we expect the investment spend to drop out at some point or efficiency improvements to kick in? Or is this more about market share gains and revenue growth and market recovery going forward, so the revenue line more than the cost line?
Anna Cross, Chief Finance Director
And thank you for the question, which, of course, is on another very strong NIM story for Barclays. So the one we talk about a lot is Barclays U.K., which is half of our net interest income, corporate is a quarter of it, and CC&P is the other quarter. So thanks for the question. What's happening in transaction banking is continued stability in deposits. These are very long sticky relationships with our corporate clients. We've seen earlier migration there as we would expect, that's a bit more stable now. And really, what you're seeing over the last couple of quarters is, they're both slightly odd in the data. So Q1 is relatively small in business days. Q2 has got more calendar days, but fewer business days because of the bad holidays that we have through May. So it's actually a slightly odd quarter. So we saw probably fewer fees coming through there because of the fewer business days, but higher deposit income because of the more calendar days, if you can decode all of that. But just stepping back from all of it, given that it's based on corporate relationships and given that our structural hedge also impacts this business, we see it as being pretty stable actually as an income line. And corporate lending is a much cleaner picture this quarter as well because it doesn't have any leverage loan marks in it. So that's a much closer picture to what I would expect that to be a clean quarter. On CIB costs, we've clearly been investing in our CIB for the reasons that then cuts gone through. What you're seeing at the moment is that, that cost trajectory around investments is reaching maturity really. And what you're seeing over time is the income growth whilst there might be difference this quarter to quarter, that income growth is coming through behind it. So you're seeing what were quite strict negative jaws now alleviating somewhat. I won't talk about specific quarters, Rohith, but clearly, our objective here is for this business to have strong returns and cost-income ratio is a key part of that. So we are focused on it. And you'll see that it's part of our overall story, but we don't think that our CIR is outlined with our peers. And clearly, we're seeing the benefits of the growth coming through, but very ROTE focused. Just noting we've had double-digit ROTE in this division now for 10 or 14 quarters. So we feel like we're investing in the right things. Hopefully, that helps.
Operator, Operator
The next question comes from Edward Firth from KBW.
Edward Firth, Analyst
Venkat, I wanted to return to the strategy question as I believe it's the most critical topic right now. I acknowledge the success you've mentioned regarding the CIB in the past five years, and I agree with your assessment. However, looking at the share price during that period, it has declined by 10% to 20%. This indicates that while we may agree, the broader market seems to disagree and doesn't recognize the value of your achievements. In that context, I also noted your comments about the strategic review and possibly focusing on fee income. How confident are you that this will be sufficient to begin closing the valuation gap compared to your peers? At what point do we need to consider implementing more radical changes to address this situation, especially since there is now a significant discount? For instance, Lloyd's is at roughly 0.8, 0.9, while you're at 0.5 or lower. Is there a plan in place to narrow this gap? Does that make sense?
C.S. Venkatakrishnan, Group Chief Executive
Thank you for your comments on the Corporate and Investment Bank. I'm pleased to hear you agree that we've been making progress. However, it is clear that there is still more work to be done, as indicated by the steady price to book value. There are a few key points to consider. First, the proportion of the bank's revenue, profits, and risk-weighted assets attributed to the Corporate and Investment Bank seems to be a drag on overall valuation, currently sitting at 60% to 70%. While the Corporate and Investment Bank has been successful, the rest of the bank now needs to contribute more. Both within the Corporate and Investment Bank and across the bank, we need to boost the proportion of capital-light revenue. We are implementing strategies for this, including the merger of our private banking and wealth business in the U.K. and ongoing investments in our card portfolio in the U.S. However, it's crucial that we don’t replicate last year's market surprise with our securities issuance issue. We are focused on improving internal management and efficiencies to avoid any unexpected challenges. Ultimately, we aim to operate our businesses with high levels of efficiency, which encompasses achieving scale to demonstrate that we can sustain higher returns over the long term. We are actively considering how to achieve this and will share our plans when the time is right.
Anna Cross, Chief Finance Director
Did you have another question?
Edward Firth, Analyst
One, I guess just to sort of follow-up to that. I mean I get what you say about the sort of balance of the business, but so growing organically, changing organically is not really going to change that materially in the next 5 years, I don't imagine. So unless you're going to do something really material in terms of buying some retail banking or buying a big stable banking part to rebalance it and/or sell or close down a significant part of the CIB. So the balance is not going to change materially. I mean it's been pretty much 60-40 for 7, 8 years, I would imagine.
C.S. Venkatakrishnan, Group Chief Executive
Look, I think you've got to a process in a very thoughtful, carefully deliberate way. That's what we are doing.
Anna Cross, Chief Finance Director
Can we go to the next question, please, which will be our last question for this call?
Operator, Operator
Our final question today comes from Robin Down from HSBC.
Robin Down, Analyst
Just a couple of quick ones for me. Firstly, apologies if I missed this earlier, but the webcast kept crashing it out. But can you give us any sense as to where mortgage completion margins were you in Q2? And the second question, perhaps a little bit more kind of slightly philosophical question about the structural hedge. Why are you reinvesting at the moment? Because if you reinvest in the structural hedge today, 5-year swap at kind of 4.8 on our probably after next week's base rate rise is going to be around 5.5. There's a negative spread there. And it feels like you've gone beyond hedging your current accounts and equity, and you're partially hedging now sort of deposits where you have effectively 100% deposit beta. So just philosophically, why are you reinvesting a structural hedge now? Why are you not actively looking to kind of run it down, whether it's a kind of negative to sort of near-term income.
Anna Cross, Chief Finance Director
On your first point on mortgage completions. I think we've been pretty consistent in not quoting spread. All I would say to you is that the mortgage market is extremely competitive, largely intermediated, and you wouldn't expect our spreads to be markedly different from the market as a whole. What really matters, though, in mortgages is the current churn impact that we're getting, which, as I said, we'd expect to lessen into 2024. As to your second question, on the structural hedge and the philosophy around that. So the reason that we have the structural hedges to smooth the income of our banking book businesses over time. It is not there to be an expression of where we think rates will go, either up or down. It's there to protect and smooth the income pathways on those really important banking businesses for us, whether they be in corporate or in retail. And what it's done is it led to a slower income pathway on the way up. And to the extent that we keep reinvesting in it, it will stabilize our long return income. And at any point when rates start going back then again, it will protect income on the downside. So for us, it's not an expression about how we feel on rates; it's actually an expression about how we manage our income and how we think about our risk actually in these critical franchise businesses. But thank you for the question. With that, I'd like to thank you all for your questions this morning and your continued interest in and focus on Barclays, not only for Q2 but the great questions on our longer-term strategy. If you've got further questions, please follow-up with the IR team or I will see many of you the week after next or analyst breakfast. But to everyone, I really hope you have a great summer break, and we will see you soon.
C.S. Venkatakrishnan, Group Chief Executive
Thank you.
Anna Cross, Chief Finance Director
Thank you.
Operator, Operator
Thank you. That concludes today's conference call.