Earnings Call Transcript
BARCLAYS PLC (BCS)
Earnings Call Transcript - BCS Q1 2023
C.S. Venkatakrishnan, Group Chief Executive
Good morning. Thank you for joining us on today's call. Let me start by saying how pleased I'm with our first quarter's performance for 2023. This was a record quarter of profitability for the bank. We generated 11.3 pence of earnings per share, which is well above the 8.4 pence of EPS in the first quarter of 2022, and our profit before tax of £2.6 billion for this quarter is up 16% year-on-year. We grew income by 11% or £741 million year-on-year, to £7.2 billion. This has demonstrated the broad-based and high quality sources of income, which we have across the Group's businesses. Supporting this income momentum, we maintained our focus on costs and our disciplined approach to investment, resulting in a cost to income ratio of 57%. We have delivered a 15% return on tangible equity, with all three of our operating businesses generating a double-digit return. And what this means is that we are very confident of being above 10% for the full-year RoTE, in line with our group target. I'm especially proud that we delivered this strong performance while supporting our customers and clients through what has been a challenging environment for the banking sector globally. As you think about these results, I would like to emphasize three factors, which I think have driven it. The first factor is our risk management approach, developed over a number of quarters and years, which has helped to underpin this performance. The second is a series of disciplined investments over recent years, which have helped to drive top-line growth. And third, our approach to capital management which continues to support attractive shareholder returns. Let me begin first with the risk management. We have highlighted before that we have intentionally positioned the Group's balance sheet to protect against downside risk in a volatile macro-economic and market environment. This risk management has shown itself in different ways. In our Markets business to begin with, we have maintained a defensive risk profile since the start of 2022 and managed our risk well and adroitly throughout. In interest rate risk in our banking book, we have successfully positioned ourselves for rising rates and minimized the capital impacts from the large moves in interest rates which we have experienced. In our credit portfolios, we have maintained robust coverage ratios and limited our risk appetite in specific products and sectors, and added first loss protection to our portfolios where appropriate. Now the U.K., coming to liquidity, has not experienced liquidity concerns that we've witnessed elsewhere in the world. At Barclays, our customer-led liquidity deposit strategy over many years has laid the foundation for a highly liquid, diverse, and stable funding base which we have today. All of these deliberate actions over a long period of time have proven their value in a quarter like this one. We were able to operate normally in a volatile environment and deliver strong returns to our shareholders. The second big factor is investments. As we turn to investments, you will see that they are behind the income growth that we see in today's results. In our Markets business, our consistent investment in our platform has driven significant growth year-on-year in financing income, including prime and market share gains over several years. This has contributed to the Corporate & Investment Bank delivering its second highest quarterly income on record, just shy of £4 billion, and a 15.2% return on tangible equity. In our U.S. Cards business, our Gap partnership is performing well and we also grew cards balances organically across our other partner portfolios, while credit continued to normalize in line with our expectations. This growth in U.S. Cards, along with 15% year-on-year AUM growth in our Private Bank, have helped to drive 47% higher income in our Consumer Cards and Payments business with a 10.5% return on tangible equity. Now as we have mentioned previously, we plan to consolidate our U.K. Wealth business with our Private Bank in this second quarter of 2023. This will enable us to operate a more efficient, competitive and customer-focused Private Banking and Wealth business from a unified platform. We will update you on this important step in due course. And lastly, turning to our U.K. Consumer business, Barclays U.K. Investment in our transformation program is generating efficiencies and allowing rates tailwinds to drive strong profitability while maintaining a cost to income ratio of 56% and generating a RoTE of 20%. Our positive momentum in Barclays U.K. is reflected in the increase in active Barclays app customers, growing to 10.7 million users by the end of the first quarter of 2023, which is up 8% year-on-year. In other areas, we are laying the foundation for our future, such as our investments in support of our strategic priority to capture opportunities from the transition to a low carbon economy. In fact, this quarter, Barclays helped Nextracker, the leading provider of intelligent, integrated solar tracking and software solutions, raise $730 million through an initial public offering. This was the first major renewable energy IPO since 2021. And the third point is Capital. On Capital, the £500 million share buyback, which we announced earlier this year, along with other capital items that we have highlighted, have brought our CET1 ratio to 13.6% as expected, around the mid-point of our target range. Our profits delivered 53 basis points of CET1 ratio in the quarter, supporting further capital distributions for our shareholders over the coming year. This remains a key focus for the bank. When we consider our capital allocation, we are carefully balancing capital returns with the disciplined investments about which I just spoke to you, which are driving improved returns for shareholders. So in summary, we have delivered a very strong quarter for the first quarter of 2023. It's a very strong performance. We generated a 15% RoTE, with double-digit returns across all of our operating businesses. Our risk management and robust liquidity have helped insulate Barclays from recent events in the industry and enabled us to continue to support our customers and clients. Our investments are delivering growth and improved returns, and we remain committed to returning capital to our shareholders. With that, thank you for listening, and I'll hand over to Anna to take you through the financials in more detail.
Anna Cross, Group Finance Director
Thank you, Venkat, and good morning everyone. Q1 was another quarter of consistent delivery, with a statutory return on tangible equity of 15%. Whilst Q1 is usually strong for returns, as Venkat mentioned, we are confident of achieving our RoTE target of above 10% for the year. The cost income ratio was 57%, better than our guidance of low 60s for the year, reflecting Q1 income seasonality. The loan loss ratio was 52 basis points within our 50 basis points to 60 basis points guidance for 2023. Our highly liquid and stable balance sheet positions us well to pursue our returns objectives, with a CET1 ratio of 13.6%, a conservative loan to deposit ratio, and a liquidity coverage ratio of 163%. Our 15% return reflects income growth of £741 million year-on-year to £7.2 billion, while total costs were flat at £4.1 billion. Within that, operating costs increased £523 million, offsetting the decrease in Litigation and Conduct. Profit before impairment was up 31%. As we expected, impairment increased £383 million, against a low comparator, resulting in a 16% increase in profit before tax overall to £2.6 billion. Earnings per share were 11.3 pence, partially offset by the 5 pence full-year dividend, driving the increase of 6 pence intangible net asset value in the quarter to 301 pence per share. I'm now going to emphasize key drivers of our returns; income, costs, and risk management. First, Q1 again demonstrated our broad-based income momentum. We are benefiting from the rate environment and also seeing the results of our targeted investment initiatives. Second, as we invest, we are maintaining cost discipline, driving cost efficiency to mitigate inflation, whilst directing investment into areas which we expect to generate attractive returns for shareholders. And third, we continue to manage risk tightly, which along with our prudent balance sheet positioning and liquidity management, underpins our delivery against targets in this environment. Starting with income on slide 8. Income increased 11% year-on-year with growth across the Group, partly from margin expansion, but also from client activity and selective growth in the balance sheet. Barclays U.K. grew 19%, mainly from net interest income. Consumer, Cards & Payments increased 47%, including the effect of the stronger U.S. dollar, driven mainly by U.S. cards, and also growth in both Payments and the Private Bank. CIB reported its second best quarter on record with income up £38 million at just under £4 billion, including some benefit from the U.S. dollar strength. We are particularly pleased with the quality and diverse sources of strong income growth, which we'll look at on slide 9. The £741 million increase mainly reflected growth in net interest income from several businesses across the Group. In Barclays U.K., NII grew £279 million, reflecting broadly stable balances and a stronger margin. In Consumer Cards & Payments, income growth of £420 million reflected the significant U.S. Cards balance growth, up 30% and improvement in margin. CIB income was broadly flat despite a reduction of around £370 million in intermediation income in markets. The financing income in markets increased by around £160 million to just over £800 million. This reflects the investment we have made in that area over the last few years, as we mentioned at full-year, and also benefits from inflation. Whilst this revenue stream is relatively more stable, it will be subject to fluctuations and seasonality from quarter-to-quarter, as client demand is impacted by the market environment, where spreads and inflation are expected to moderate. Transaction Banking contributed over £300 million of growth, mainly net interest income from higher margins, including the structural hedge, plus some year-on-year growth in deposit balances. Transactional activity drove some fee income growth across both the Consumer and Corporate businesses. We've illustrated on Slide 10 why we remain confident about the momentum in net interest income from the roll of the structural hedge. You can see the quarterly build in gross income from the hedge, to £773 million in Q1. Although swap rates have moderated from Q4, reinvestment rates are still well above the yield of about 1% on hedges, which mature this year. So the build in gross hedge income is expected to continue, and two-thirds of this accrues to BUK. We reduced the size of the hedge marginally again in Q1, reflecting the deposit migration to interest-bearing accounts, particularly in corporate, as expected. In total, we have over £50 billion maturing in 2023 and expect to reinvest the majority of that. Turning now to costs on Slide 11. Total costs were broadly flat year-on-year at £4.1 billion, and our Group cost-income ratio was 57%. Operating costs, excluding litigation and conduct, which was immaterial this quarter, increased by £0.5 billion. £0.1 billion of this came from FX moves, with around 30% of Group costs in U.S. dollars. Efficiencies generated by previous cost actions broadly offset the effect of inflation to date. The increase also reflected disciplined investment to drive returns and generate further efficiency savings. The 30% U.S. Cards balance growth, including the Gap acquisition, along with further marketing and partner spend and FX moves, drove the £170 million increase in Consumer Cards & Payments. The CIB increase of around £280 million included a £40 million increase in European levies, which are a Q1 event, and FX impacts of approximately £60 million. We have also invested selectively in a number of CIB initiatives to support both the income momentum you see in our current performance and to improve resilience and controls. These include technology platform enhancements, to generate income and to deliver better client experience. For example, we have improved our financing platforms, supporting the growth in that area, and improved e-trading systems and developed a unified interface for corporate clients. We have also invested selectively in front office talent. In Barclays U.K., our focus is on transformation, as we automate and digitize our customer service models. The efficiency savings we've referenced previously are more than offsetting inflation and helping to fund the continued investment in digitization and product simplification, to improve our service for customers. Turning to the cost outlook. Our cost guidance for the year is unchanged and we continue to target a Group cost-income ratio in the low 60s. Litigation and conduct is expected to be lower year-on-year, resulting in some reduction in total costs. To give some color on the expected phasing of costs through the year, we currently expect Q1 to be the high point for Group operating costs in 2023, based on current FX rates, but with different dynamics by business. We expect CIB quarterly operating costs also to be lower than the Q1 level. Moving on to impairment on Slide 12. We haven't changed the baseline macroeconomic variables for modelled impairment from the full-year, but they are more severe than for Q1 last year. Our total impairment allowance at the quarter-end was £6.3 billion, a slight increase from £6.2 billion at full-year, driven by a normalization in customer behavior. At the end of the quarter we retained post-model adjustments for economic uncertainty of £0.3 billion. On Slide 13, we've shown key coverage and delinquency metrics for our two largest unsecured books, U.K. and U.S. Cards. U.K. Cards balances have reduced by around 40% since 2019. We continue to see high repayment rates in U.K. cards across the credit spectrum, and arrears rates remain stable and low. The coverage ratio is 7.7% in U.K. cards, slightly up on the year-end, with 21.6% coverage of Stage 2 balances. By contrast we've continued to grow U.S. cards. Delinquency rates have picked up a little, as we continue to see normalization of credit behaviors. However, they remain below pre-pandemic levels. As we grow, we are maintaining strong coverage levels, with an increase from 8.1% at year-end to 8.9% overall, and higher coverage ratios at Stage 2 and Stage 3. The resulting impairment charge for the quarter was £524 million, compared to the very low charge of £141 million last year. This charge translated into a loan loss ratio of 52 basis points, and we are reiterating our guidance of 50 basis points to 60 basis points for 2023, reflecting the expected normalization in credit. The Barclays U.K. charge of £113 million reflects both the lower level of unsecured lending compared to pre-pandemic and benign credit performance. The bulk of the charge is in Consumer Cards & Payments, and U.S. Cards in particular. This reflects the continuing normalization of delinquencies, plus some seasonality following holiday expenditure. Continuing balance growth with a seasoning effect as balances grow post-pandemic is also contributing to the increase. This was particularly the case for Gap, where balances were Stage 1 at the point of acquisition; as some balances have migrated to Stage 2, we have seen impairment increase as expected. Turning now to the performance of each business, beginning with Barclays U.K. on Slide 15. Profit before tax increased 27% and return on tangible equity was 20%. Income grew 19% to £2 billion, with costs up 9%, reducing the cost-income ratio by a further five percentage points to 56%. Net interest margin was 318 basis points, up 8 basis points on Q4, as we benefitted further from the roll of the structural hedge and the lagged effect from recent base rate rises. These impacts continued to be moderated, as we expected by product margin impacts, notably in mortgages, and also from migration of deposits into higher rate products during the quarter. As we indicated at the full-year results, overall we still expect the NIM to build over the year, though more gradually than we saw from Q4 to Q1 and we continue to guide to a Barclays U.K. NIM above 320 basis points for the year as a whole. There were no incremental headwinds from the treasury effects we highlighted in Q4, and we expect a modest reversal of these over the rest of the year, supporting the margin progression. Looking next at Consumer Cards & Payments on slide 16. The return on tangible equity was 10.5%. Income increased 47%, reflecting growth across International Cards, Payments, and the Private Bank. U.S. Cards balances grew 30% to $28.5 billion, including $3.3 billion from the acquisition of the Gap book plus organic growth. Total costs were down 3%, reflecting the non-recurrence of the significant litigation and conduct charge last year. Excluding this, operating costs were up 29% reflecting continuing growth across the businesses and still delivering positive jaws. Overall, the cost-income ratio improved to 58%. As I discussed earlier, the increase in impairment was in line with our expectations and overall loan loss rate guidance. Looking next at the CIB on Slide 17. Return on tangible equity was 15.2%, while CIB income was broadly flat, against a very strong comparator. Markets had a standout first quarter in 2022, so income down 8% is a creditable performance, with FICC continuing to perform strongly up 9%. This was offset by equities, reflecting lower volatility compared to prior years, which impacted intermediation income, and derivatives in particular. As I mentioned, we continued to see good growth in financing. Investment Banking fees were down 7%, reflecting the lower industry fee pool, although within this advisory fees were up 15%. Our deal pipeline remains strong, and we would expect that to drive improved fee income as rates and market conditions stabilize. As I mentioned earlier, Transaction Banking was another strong performance, up 68% year-on-year to £786 million. Total costs decreased 2%, reflecting non-recurrence of the significant litigation and conduct charge last Q1. Excluding this, operating costs increased 15%. Overall we're pleased with the continuing development of this franchise. There's a slide in the appendix on the Head Office result, which was a loss before tax of £84 million. Turning now to capital and liquidity on Slide 18. We have consistently maintained strong capital and liquidity levels, as illustrated on this slide. We ended this quarter with a CET1 ratio at 13.6%, which is in the middle of our target range of 13%, 14%. Our liquidity pool ended the quarter at £333 billion, with a liquidity coverage ratio of 163%, and a net stable funding ratio of 139%, both substantially ahead of the regulatory requirements of 100%. Looking in more detail at capital, as we flagged at the year end, three items reduced the CET1 ratio by around 40 basis points. The reduction in IFRS9 transitional relief, the completion of the Kensington acquisition, and the recently completed £500 million buyback announced in February. Our capital generation from profits was strong, contributing 53 basis points in the quarter, of which 10 basis points was applied to the dividend accrual. The expected increase in RWAs amounted to 21 basis points, as we invested in opportunities in the Markets businesses, supporting our strong income performance. We ended the quarter at 13.6% and our MDA is now 11.4%; so our target range of 13%, 14% gives comfortable headroom. Looking forward, we expect strong organic capital generation to support increased returns to shareholders and further business growth in line with our three strategic priorities. Recent events in the sector have increased the market's focus on deposit funding. At Barclays, we have grown deposit balances substantially ahead of loan volumes for many years. As shown on Slide 20, we have seen an overall increase in deposits of £10 billion, or 2% this quarter to £556 billion. This increase has been driven by international term-deposits in treasury. These are mainly from corporates, and reflect the flight to quality in the market. Excluding these, underlying customer deposits across the businesses are down just 1% in the quarter. This is consistent with previous Q1 experience, and is largely as a result of expected seasonal effects, including payment of tax bills in January, and some FX moves. Of total group deposits, 41% are insured, with over 70% of U.K. retail, and over 90% of U.S. consumer deposits covered. Our franchise deposit strategy means we have remained highly liquid through the quarter and have a liquidity coverage ratio of 163%, well ahead of the regulatory requirements, and equivalent to a surplus of £122 billion. The liquidity pool of £333 billion is held 82% in cash, with the risk in the residual debt securities tightly managed. We have invested in liquidity management over many years and our approach focuses not just on the LCR, but also on a set of internal stress metrics that apply conservative stresses to our balance sheet in multiple scenarios, across various time horizons. So, to recap and summarize the outlook on slide 22. We delivered earnings of 11.3 pence per share in Q1, and generated a 15% return on tangible equity. Whilst Q1 tends to be a seasonally strong quarter for returns, we are confident of achieving our target of above 10% for the year. We have broad-based and high-quality income momentum from the investments we have made in CIB and in growing CCP, while the rate environment and structural hedge also continue to drive income. We will balance this investment with cost efficiency, given inflationary pressures, and we expect the litigation and conduct charges to be lower than in 2022. Whilst we expect operating costs, which exclude litigation and conduct, to be higher year-on-year, we currently expect Q1 to be the high point for quarterly operating costs in 2023, based on current FX rates. The cost income ratio for the quarter was 57%, and we expect to deliver a statutory cost income ratio in the low 60s this year, as we progress towards our target of below 60%. We remain focused on risk management in readiness for potential deterioration in the macroeconomic environment. We expect an increase in the impairment charge this year, as we grow U.S. Cards in particular, and have seen an increase in the charge there in Q1, as expected. We continue to guide to a loan loss ratio in the range of 50 basis points to 60 basis points for the full-year. Our capital ratio remains strong at 13.6%, and we expect to deliver attractive capital returns to shareholders balanced with disciplined investments to drive returns.
Operator, Operator
Our first question today comes from Omar Keenan from Credit Suisse. Please go ahead, Omar. Your line is now open.
Omar Keenan, Analyst
Good morning everybody. Congratulations on a great set of numbers. I've got two questions. If we look at Barclays' businesses, clearly, there's been a tailwind from higher interest rates, but also, as you mentioned, there has been a market share and investment story over some time, which does imply that structurally, the RoTE potential has improved. However, the RoTE hurdle is unchanged. So I just wanted an updated thinking from you on that RoTE hurdle. Do you think greater than 10% adequately reflects Barclays' cost of equity? And if not, I was just hoping to explore your thinking on what you think the barriers are to giving a more challenging hurdle? And if you think it does need to be fine-tuned, whether you're considering any Investor Days in the future to do that. And my next question is just on capital generation. So historically, Q1 has been the trough for capital generation. Can I just check, it sounds like that's expected to be the case this year. And are there any specific headwinds on capital that you called out? And conceptually, it does seem that the interim buyback has not been larger than the full-year buyback. Is that something that is applied as a rule? Or is there no particular constraints on what interim buyback can be relative to the full-year? Thank you.
C.S. Venkatakrishnan, Group Chief Executive
Thank you, Omar. This is Venkat. I'll address the first question and then Anna will handle the second. You're correct that our businesses have achieved strong double-digit returns across the board. This demonstrates the quality and breadth of performance throughout the group, thanks to the investments we've made over the years. The 15% RoTE for the first quarter is a significant indicator of our ambition, with our target being above 10%. This means that 10% is our minimum expectation, not our maximum, and it doesn't capture the full extent of our goals. Given this strong start, we feel confident that we will meet our target of exceeding 10%.
Anna Cross, Group Finance Director
Yes, sure. Omar, you're right. We said that in the past. Typically, it is what we expect that Q1 is a lower point in our capital generation and trajectory for the year just because of seasonality. Obviously, all of that is prior to any distribution or buyback. Equally, we'll come back and consider that buyback when we come back to the half year. That's the cadence that we've established. We don't have hard and fast rules. And we'll look both at our expected capital print at that point in time, but also our expectations of capital generation in the second half when we do so. Thank you. Can we go to the next question, please?
Operator, Operator
The next question is from Jason Napier from UBS. Please go ahead, Jason. Your line is now open.
Jason Napier, Analyst
Good morning. Thank you for taking my questions. First, Anna, while it's not a significant issue within the Group context, I would like to discuss the loan loss charge in Barclays U.K. for Cards. The Stage 2 and 3 balances have declined. You mentioned an increase in transactors within the book, and unemployment hasn’t increased. I'm curious if there was a preemptive aspect to that charge or if this represents the usual run rate before we see a noticeable economic slowdown. Now, Venkat, regarding Barclays' implied cost of equity, which is over 20%, some companies in this situation have opted not to expand their balance sheets, like Unicredit and StanChart, and potentially focus on larger buybacks instead. I recognize it’s easier to manage a bank when revenues are rising, and the cost structure is fixed per volume increase. Could you clarify whether the bank's valuation influences your growth strategy? How much do you anticipate RWAs will grow considering the current share price and market conditions? Thank you.
Anna Cross, Group Finance Director
Thanks, Jason. Our impairment charge in the first quarter, both for the Group and for the individual businesses, is as we expected it to be. And what's really driving that charge, Jason, is two things. The first is that the cards book is 40% lower than it was pre-pandemic. So you need to take that into account when you're comparing this to what I would describe as the historic growth rate for BUK. The second thing is that the credit environment and credit behavior is actually benign. So we're seeing very conservative behavior from our customers. They're repaying at extremely high levels. They're managing their volumes very carefully, and you're seeing that come through in a low impairment print. Clearly, as the economy recovers, we might see that rise. But we would also expect to see credit card income rise at the same time because, obviously, those two things are strongly linked, but not a surprise to us. Venkat?
C.S. Venkatakrishnan, Group Chief Executive
Yes, so Jason, thank you. It's a good question. What I would say when you look at this quarter's results if you see the benefit of the investments, which we've made not just in terms of the profits of the revenues we've produced, but the stability in our metrics of capital. And what you see is that we are running our business for the long-term. And when you run that business for the long-term, you obviously hope that the stock price will ultimately recognize the value of those businesses. And so what we are aiming to do is to create a series of a set of businesses, operate them well, run them efficiently, manage our risks well and produce numbers. Some quarters will be better than others, but we hope we could do this kind of thing very steadily. And then that will be recognized and reflected in the stock price. Capital return is an important part of that strategy, just as investment is an important part of our strategy. And we take our capital return very, very seriously, and we will balance it with the investment needs of an ongoing business that we expect to be successful.
Anna Cross, Group Finance Director
Jason, why don't I take that? I mean, really it depends on the opportunities that we have in front of us. But you can see that we're doing it in a very disciplined way. We expected to deploy RWAs into markets in the first quarter, and that's what we've done. So where we see opportunities, we will obviously pursue them, but only in a very disciplined way, very focused on returns to shareholders. Both returns are in RoTE terms, but our ability to distribute capital.
Operator, Operator
Our next question comes from Joseph Dickerson from Jefferies. Please go ahead, Joseph. Your line is now open.
Joseph Dickerson, Analyst
Hi, good morning. Thank you for taking my questions. I have a quick one regarding your Slide 10 on hedge income. It’s interesting because if you assume an average swap rate of 375 in Q1 compared to the yield, there appears to be a gap of around £7 billion. This is significant, especially when the market anticipates that your revenues in the U.K. bank will only increase by about £300 million and £25 million in 2023. I wouldn’t think that if rates remain steady, mortgage pricing and deposit mix shifts would account for most of that. I’m curious about your thoughts on this as it seems there’s still a considerable momentum behind hedge repricing, with the caveat of swap rate fluctuations, yet we are currently above 375.
Anna Cross, Group Finance Director
Thanks, Joe. Why don't I take that question? We've shown this slide for some time on what it's useful. And I think what it highlights is that we have got structural hedge momentum, and we've seen that actually fairly repeatedly over the last few quarters. And you've seen that, particularly in our BUK NIM bridge. And it's one of the reasons that we are calling out that we still expect our BUK NIM to continue to rise in the current environment despite the product dynamics that you call out. And it really underpins the guidance that we've given you already of a greater than 320 NIM. So it's as we expected it to be Joe and fairly consistent over the last few quarters.
Joseph Dickerson, Analyst
Yes, thanks. It's just very impressive when you look at, I think it's Page 21 or so of the release, where you look at the net number being £1.7 billion. I mean it's a rather extraordinary gap. So it just seems to me that the market is missing something on that, normal caveats notwithstanding.
Anna Cross, Group Finance Director
Okay. Thank you. Do you have another question? Or shall we?
Operator, Operator
Our next question is from Rohith Chandra-Rajan from Bank of America. Please go ahead. Your line is now open.
Rohith Chandra-Rajan, Analyst
Hi, thank you very much and good morning. I have a couple of questions regarding CIB revenues and costs. Firstly, congratulations on a particularly strong performance in CIB revenues. That’s impressive considering the tough comparisons from the previous year. I would like to know about the trends on the corporate side, especially since lending improved quarter-on-quarter, which I assume is due to fewer marks. However, Transaction Banking was a bit weaker quarter-on-quarter. Could you clarify what happened in the first quarter and how we should view these two revenue lines for the rest of the year? For the second part on costs, you mentioned that Q1 is the peak for both CIB and group costs. Specifically for CIB, is this mainly related to the compensation accrual and possibly the SRF contribution in the first quarter? Or should we also consider the timing of investment spending or cost savings as we move further into the year? In conclusion, while the revenue performance was strong, the CIB still experienced a 14% drop in jaws in Q1. How should we consider that for the entire year? More broadly, how are you managing costs and revenues in that business?
Anna Cross, Group Finance Director
Okay. Thanks, Rohith. It felt like there were about 10 questions in there, but I'll try and remember them all. So just on the first one on corporate lending. Remember, there are a few things in there. There's corporate lending itself, then there's the cost of our first loss protection, there's a leverage loan mark, and there's also the cost of the hedges against our leverage pipeline. So the quarter-on-quarter movement that you see is really caused by two of those. You're right; it's the marks. So we've taken no material marks this quarter. The second point, though, is if you recall from the full-year, we said that we managed down our leverage loan pipeline. We've continued to do that again in Q1. And therefore, the scale of those hedges, it's smaller and therefore, the costs are smaller. And that's really what's moving that line. On the Transaction Banking side, the reduction in income is coming from a couple of things; largely you'll see that the balances are broadly stable. But remember, during the quarter, actually what happens in Transaction Banking typically as we see corporate dividends being paid in the first quarter. So the average balance tends to dip down and then grow towards the back end of the quarter. And also remember, you've got fewer business days within Q1. So you've got 90 business days versus 92, I think. So that has an impact on any kind of banking income. Taking all of that together and going forward, I think we expect our CIB NIM, which we very rarely talk about, to be broadly flat for the year. And the reason I say that is you've obviously got deposit migration going on within Transaction Banking. But we feel like that's very well progressed. And on the other side, you've actually got quite helpful asset mix going on within corporate because in the current environment, there's slightly higher levels of both trade and sales finance, which are slightly higher margins. So overall, that NIM is pretty stable. And with an expanding franchise, we think that's useful for the future. On the CIB cost point, this is largely a seasonality point. So you're right; we accrued compensation costs in line with revenue and returns on the CIB. So you're seeing a higher level there. You're also seeing the SRS, so the European levy, which is a Q1 event, but is higher year-on-year and in scale terms is about £90 million. And you're seeing a fairly consistent run rate in terms of investment that's underpinning the growth that Venkat said. So that's why we're saying we expect it to sort of tick down from here. We're very focused on returns in that business. You can see that the cost-income ratio at 55% is actually better, I think, than the market expected despite that increase in cost. So it's very deliberate on our part. And of course, we start to deliver positive in this business. But at this point in the cycle, we're in an investment phase. But hopefully, that gives you a bit more color.
Rohith Chandra-Rajan, Analyst
Yes, very helpful. Thank you very much.
Anna Cross, Group Finance Director
Thank you. Next question, please.
Operator, Operator
Our next question comes from Jonathan Pierce from Numis. Please go ahead. Your line is now open.
Jonathan Pierce, Analyst
Hello, two questions, please. The first, just on the AT1. You've issued quite a lot of it over the last eight to nine months. And I guess there's an argument that you prefunded the instrument that's callable in September in the overall stat at nearly £14 billion, I think is higher than you would ordinarily look to run with. So can you talk a little bit about how you feel with regard to AT1 issuance over the rest of the year and whether specifically, you can still call that September instrument without refinancing it? The second question is just on this Barclays U.K. NIM. The 21 basis points drop in the quarter due to product margins. I mean, obviously, the hedge keeps on giving something like 13 basis points every quarter for the next few quarters, sooner or later, the bank rate elements tend to drop away. So thinking about the balance between these two, it would be helpful if you could give me a sense of how much of that 21 basis points is coming from the component part of mortgage refinancings, deposit migration. And I guess in Q1, whereas an element related to the actual losses deposits as well, that would be helpful. Thank you.
Anna Cross, Group Finance Director
Thank you, Jonathan. I’ll address both questions. Yes, we did issue two successful AT1s in the first quarter, one in the U.K. and another in Singapore. We generally maintain a surplus of AT1 in our capital structure to provide us with flexibility, particularly in managing potential FX volatility, and to make use of it in our markets business. Although the cost of AT1 is higher than Tier 2, the returns from our markets business justify that cost, making it a sound economic decision. We have a call opportunity later this year, and we will evaluate it based on the economic conditions at that time, which is our standard approach. As for the Barclays U.K. NIM, it was 318 in the quarter, an increase of eight basis points, which aligns with our expectations. The product migration is also in line with what we anticipated. While we haven't provided a breakdown by business, we noted that a significant portion is related to mortgages. The dynamics here are influenced by a portfolio effect, as many mortgages maturing this year were originated in 2021 when asset margins were wider. We've experienced some deposit migration, which falls within our expectations, and we have kept our product hedge unchanged on the retail side. Therefore, the 21 basis points is not surprising. As the year progresses, we anticipate ongoing hedge momentum, continued migration, and some modest treasury tailwinds, all leading us to confidently project a NIM greater than 320 for the year.
Jonathan Pierce, Analyst
I'm sorry, just a quick follow-on that. Do you think without the treasury movements turning into tailwinds, the U.K. NIM would still manage to creep up? In other words, will this 21 basis points ease, do you think, over the course of the year to a level more consistent with or even below the structural hedge tailwind?
Anna Cross, Group Finance Director
So I would say, yes, because they are modest treasury tailwinds. We did talk before about expecting more product compression earlier in the year than later. And that's part of the seasonal movement that we see in deposits around Q1. And I'd also encourage you just have a look at the asset margins and how they played out in 2021. That might help you. Okay. Thank you. Next question please.
Operator, Operator
Our next question is from Guy Stebbings from Exane BNP Paribas. Please go ahead. Your line is now open.
Guy Stebbings, Analyst
Hi, good morning. Thanks for taking the questions. The first one was just on your comment on the Gap portfolio and Stage migration. Could you perhaps elaborate on the dynamics on that book? I would presume the quality of that book is not quite as strong as the rest of your very good quality card portfolio. So can you maybe give us kind of the coverage ratio on that portfolio and how it compares to the rest of the book to help us gauge what stage migration or normalization of these sales might mean for impairments in the coming quarter? And then on costs, thanks for the helpful guidance on Q1 being a high point for the group and for CIB. I presume that struck off a certain revenue assumption. And if you had a really strong revenue performance, you might very understandably not hold yourself to that guidance. So could you share any more details on what those assumptions are that go into the guidance, in particular, anything on revenue or what sort of market backdrop you're assuming on the CIB? And then just one very small point of clarification. On the ESRS, I think you said it was £90 million. Is that the absolute number? So how does that compare to a normal year, if you like? Thank you.
Anna Cross, Group Finance Director
Sure, I'll address those questions. When we acquire a portfolio, we start at Stage 1. For example, when we bought Gap, it was all at Stage 1. As Gap has matured, we’ve seen a natural shift into Stage 2, meaning customers are borrowing more. We're seeing new customers coming on board, as anticipated. Even if a customer increases their credit card usage without any signs of default, they may progress to Stage 2, which is how IFRS 9 operates. This is within our expectations. Regarding the net interest margin coverage, we don't disclose individual partner ratios, such as delinquency or NIM. However, we manage each partner individually with a focus on risk-adjusted returns. Gap represents a high-quality retail portfolio, where we generally expect a higher cost of risk compared to something like an airline portfolio, but we also anticipate that NIM will be elevated. Overall, we view this as managing a risk-adjusted return, so even if impairments might rise, we also expect NIM to increase. Now, regarding the second question, yes, it's about £90 million in absolute terms under IFRS. This figure does fluctuate slightly, but it's not as predictable as the UK bank levy. Nonetheless, it has increased year-on-year, as we're discussed in our slides. Moving forward, we have a clear expectation of performance. We've provided guidance on how we foresee costs changing, which implicitly gives you some income guidance since we’ve shared our expectations for the cost-income ratio for the year. This should help you gauge the range of anticipated income at the group level. Additionally, I want to mention that the guidance is based on current FX rates and our expectations for a typical seasonal profile in CIB revenues, which is largely influenced by the performance costs behind it. I hope this clarifies things.
Operator, Operator
Our next question comes from Alvaro Serrano from Morgan Stanley. Please go ahead. Your line is now open.
Alvaro Serrano, Analyst
Hi, good morning. I have a couple of questions. First, regarding deposits, it's encouraging to see that you experienced an increase, especially in light of varying reports from your peers. Could you elaborate on the flight to quality you mentioned? I'm curious if you can quantify that in a way similar to some U.S. firms. Looking ahead, particularly in BUK, what are your expectations for deposit trends? Do you foresee continued growth or more stability? My second question is a follow-up on markets. Anna, you indicated that you anticipate normal seasonality, and that FICC performed exceptionally well against a strong comparison. Could you provide more insight into Q1? Was a significant portion of that performance due to volatility in March, or is it a more consistent trend that supports your confidence in normal seasonal patterns? Thank you.
C.S. Venkatakrishnan, Group Chief Executive
Hi Alvaro, I'll address the questions. Firstly, regarding deposits, you are correct that we experienced an increase of over £10 billion this quarter. We observed typical seasonal behavior within the BUK deposit base, which saw a slight decline due to individuals fulfilling their tax obligations. In the broader U.K. context, there hasn't been the same cross-bank movement witnessed in the U.S. This is largely because the U.K. has not faced the deposit pressures that some large regional banks in the U.S. have encountered. In the U.S., the situation revolves around concerns with regional banks and the shift of deposits to larger money center institutions, which is not happening in the U.K. Therefore, the trends have aligned with our expectations for the first quarter and we anticipate the same seasonal pattern in the second quarter. We have observed some inflow in our treasury deposits, which are essentially corporate deposits that we consider a positive sign of confidence. In the U.K. context, this situation reflects the usual seasonal slowdown. Regarding market activity, I want to highlight that the first quarter was characterized by significant volatility in fixed income markets, both prior to and during March. Initially, interest rates began to rise, but there was a prevailing sentiment that the Fed would halt rate increases at some point. This led to a mix of bearish positions on rates and bullish trades on spreads in January, which reversed in March. Despite this volatility, I’d like to emphasize that our FICC franchise has continued to grow its market share, similar to our equities business over several quarters and years, fueled by stronger client relationships, technology investments, and talent acquisition. I expect this market share to remain stable or even increase in the upcoming quarters. It's worth noting that the first quarter was solid for us, but I want to remind you that Q2 of 2022 was a strong benchmark due to the volatility experienced post-structure in Europe, although we have not seen that in this quarter.
Alvaro Serrano, Analyst
Thank you very much.
Anna Cross, Group Finance Director
Okay, thank you. Next question please.
Operator, Operator
Our next question comes from Chris Cant from Autonomous. Please go ahead. Your line is now open, Chris.
Christopher Cant, Analyst
Good morning. Thanks for taking my question. If I could ask two, please. On the structural hedge, you said in the slide that about two-thirds of the hedge income is coming through in the U.K. But where does the other one-third get booked by business, please? And how much of that will be coming through the Transaction Banking line? I'm just trying to get a sense of how much growth we should expect there. Are you able to guide this all, please, on your expectations for revenues for the corporate lending and Transaction Banking line? I know you don't generally talk about the revenue outlook, but I would hope that those lines might be a little bit forecastable. And I think that was a source of the beat in the quarter versus consensus. So perhaps we're missing something there. And then on the BUK side of things, in terms of the mortgage book, could you give us a sense, please, of where you're writing new business today versus where the average spread on the back book is in terms of what's rolling? Thank you.
Anna Cross, Group Finance Director
Okay. Let me take those, Chris. So the majority of the rest of the structural hedge does appear in Transaction Banking. There's a little bit in the private bank. But as you can imagine, much less given its scale and also given that those are much more interest-sensitive balances. So that's where you see it going. That's in part driving the NIM in the CIB up year-on-year. And then there's another smaller part from assets, which I called out before, from the sales and trade finance side on that. In terms of corporate lending, I called out before, we've seen some movement quarter-on-quarter because we haven't taken marks because the pipeline is much lower. From here, let's see where that goes, but it's certainly much recovered on the prior quarter. We've given some guidance on this line before, but just remember the other thing that's in there is our SRT costs, so our first loss protection costs. If I take all of that together, actually, our corporate income is pretty stable. And the reason I say that is you're seeing a NIM that's stable for reasons that I said before. You're seeing good balance growth coming through. Actually, we've seen some year-on-year corporate lending growth as well. So as an outlook, it's performed. And as you say, a lot more stable than some of the other parts of the CIB. So we're pretty confident in its outlook. I think the other thing I'd just call out is we've obviously seen quite a lot of deposit migration there already. If I contrast the sort of three different deposit franchises we have, we've seen most migration in private banking, as you'd expect, a lot in corporate and probably less in personal. So hopefully, that gives you some guidance there. And in terms of BUK mortgages, we don't talk about specific margins. That's not something we ever disclose. But if you're looking for the effects of the compression, I would say mortgage margins have been relatively stable, and they're pretty consistent across the market given the very competitive nature of it. And if you were to look back at the spread over swap in '21, then you're going to see that compression effect quite clearly, I think. Hopefully, that's helpful.
Operator, Operator
Our next question comes from Edward Firth from Stifel. Please go ahead. Your line is now open.
Edward Firth, Analyst
Yes, thank you very much. Good morning everybody. Just a question for Venkat, actually. If you think of a question on the profitability of your businesses. BUK is now making around a 20% return. And I guess, if I look at your forecast or your guidance, you're going to expect that to go up from here, so probably mid-20s or even higher. That's I guess double what you're targeting for the group as a whole. And just like that business in recent years, you've been ceding market share in some of your key areas. And I wonder, at what point do you start to think that actually, that is an area now where we should be putting more capital in and start trying to gain share, particularly in things like credit cards, deposits, that type of stuff. And actually, because it would seem that, that would make logical sense, given you look at the sort of the profitability mix of the business as a whole. So that was the key question. And I guess related to that. I see that, and it may be part of the answer. BUK costs were up 9% year-on-year. Is that the sort of cost growth? It's quite punchy. Is there sort of one-off in there? Or should we be expecting that sort of cost growth for the year as a whole? Thanks very much.
C.S. Venkatakrishnan, Group Chief Executive
Thank you very much. So let me begin with the first part of it, and I'll ask Anna to talk a little about cost growth. So you're right, the profitability of the RoTE of BUK is 20%. We are not making any statement about how that would grow quarter-on-quarter. I think what you're seeing is the impact of, on the one hand, rising interest rates. On the other hand, especially when you look at the mortgage business and the NIM, we've spoken about those dynamics. So you see that all coming together and producing good numbers. I'll make two statements about just our market positioning in BUK. We aim and continue to be a sort of a full-service bank across small businesses, retail, mortgages, credit cards, everything. What you've seen is risk positioning on our side, particularly in credit cards since around Brexit, a little after that, where we have backed off from some of the longer-term balance transfer offers and sort of the two aspects of them. And you're seeing a prudent risk positioning. We will assess that as we assess all risk positioning over time depending on facts and circumstances, how the economy grows, and we will make those changes. So it's not a question of ceding or gaining market share. It's a question of just managing the risk profile of the book. And that's what you should see it as. At the same time, if you look at our Kensington mortgage acquisition from last year, what that is, is about building a capability for issuing mortgages or offering mortgages to people with complex incomes. It's something we felt we needed. And we will build that capability, and that will be part of the growth. I'll turn it to Anna for cost.
Anna Cross, Group Finance Director
Yes, so Venkat, could I just come back?
C.S. Venkatakrishnan, Group Chief Executive
Yes, go ahead.
Edward Firth, Analyst
Thanks, the credit environment appears to be quite favorable. All your forward-looking indicators indicate no decline. I'm curious about when you might start to consider this as your most profitable business. Is it time to begin competing more actively, capturing market share, and pursuing growth? Do you review this on an annual basis, or at what point might we start to see that shift?
C.S. Venkatakrishnan, Group Chief Executive
We regularly assess our positioning and the level of risk we want to take across various segments of the U.K. market. This is not an annual exercise; it occurs monthly and quarterly through risk committees, and we've been doing it since the beginning of this year. You are correct that the recent credit behavior has been quite stable. We continue to observe resilience among U.K. consumers in the face of higher energy costs, rising mortgage rates, and overall inflation. We will monitor these factors month-to-month and quarter-to-quarter to inform our decisions. We're not making annual decisions and setting them in stone; we are attentively observing the situation.
Anna Cross, Group Finance Director
Thanks, Venkat. Let me add one thing before discussing costs. As we re-enter the market, results are not always immediate. A good example is our card portfolio. We have reintroduced promotional balances and are being strategic about our positioning. However, the transfer business takes time to mature and generate interest-earning lending. There's also the aspect of rebuilding our cards portfolio, where we are investing in new fee-based products that target a different demographic. This activity signals potential growth moving forward. Now, regarding costs, BUK is undergoing a transformation, as we've mentioned before. We're focusing on generating efficiencies to counter inflation and reinvesting these savings into future changes. This involves reducing our physical footprint to fewer branches while increasing flexible locations and digitizing our processes. There are significant investments taking place, which can cause fluctuations in our cost profile. While I won't highlight anything specific from Q1, I want to clarify that it's not steady at this point. Venkat mentioned Kensington, so anticipate some integration costs from that in Q2. Afterward, you should begin to see a cost profile that reflects the ongoing transformation. Hopefully, this provides clarity on our expectations for the year and some context regarding our costs.
Operator, Operator
Okay. So thank you. So we'll go to our last question, which I think is Andy Coombs from Citi.
Andrew Coombs, Analyst
Good, good morning. Thanks for taking my questions. I'll keep it to one, actually, given I'm the last one. But just on Slide 17, I wanted to focus on the footnote around the financing revenues. So there, you talked about the 25% growth year-on-year was in part due to inflation. In a more normalized environment, you'd expect it to be around 10% growth. Can you just elaborate a bit more on that comment? You previously last quarter talked about the financing revenues being more stable and an example of where you gained market share that you think you can keep, but I was just interested in that comment specifically in the footnote, it sounds like there's an element of one-off nature in Q1 '23. So can you elaborate, please? Thank you.
Anna Cross, Group Finance Director
Thank you, Andy. Let me provide some clarity as this is a relatively new disclosure for us. We've made this disclosure a few times now. Financing for any business is influenced by balances, spreads, and seasonality. In the first quarter, we're observing continued strong growth in client balances, which reflects the investments we've discussed today. The spreads we are experiencing are influenced by the broader economic climate. For instance, in Q1, our fixed income financing business had favorable spreads due to the current level of volatility. However, we noticed a slight compression in prime as a result of a decline in the equity sector. We've specifically mentioned inflation because some positions in our fixed income financing business are tied to it. We're highlighting this to provide additional context; these are not isolated instances. In a less inflationary environment, we could anticipate these positions generating lower income. Additionally, it's important to note that this business is quite seasonal, tending to be busier in the first half of the year due to dividend season, and typically quieter in the latter half. You can observe this trend in the disclosures from some of our competitors, demonstrating considerable loan growth. I hope this helps clarify things. While it isn't a one-off, we’re emphasizing it due to its significance in that quarter. Underneath it all, we're seeing 10% growth, which we believe reflects the investments we've made, showcasing the stability of this business, especially within the markets sector in Q1.
Andrew Coombs, Analyst
It's helpful, thank you.
Anna Cross, Group Finance Director
Okay. Thank you. And with that, we will conclude today's call. Thank you very much for joining us for your questions. And I will see some of you the week after next. So thanks very much, and have a great day.
C.S. Venkatakrishnan, Group Chief Executive
Thank you.
Operator, Operator
Thank you, everyone. That concludes today's conference call.