Barclays delivered an encouraging performance in the first half of 2011. Our universal banking model provides diversification by business line, product, geography and funding source, and has again been a source of strength in volatile financial markets. Adjusted Group profit before tax increased 24% to £3,678m (2010: £2,963m). Net operating income, excluding own credit, increased 6% to £13,413m (2010: £12,650m) as the continued improvement in impairment more than offset a 3% fall in total income, excluding own credit, to £15,241m.
We set out at our recent Investor Seminar our plans to deliver 13% return on equity by 2013. The results we are reporting today demonstrate the steady progress we are making on delivering against that goal, despite economic and regulatory uncertainties, by focusing on our core execution priorities of Capital, Returns, Income Growth and Citizenship.
Capital
We continue to strengthen our capital position and our net asset value. Our Core Tier 1 ratio stood at 11.0% at the end of June, up from 10.8% at the year end. Net asset value per share also increased 6p to 423p since the year end and has increased by 9p over the second quarter.
Our Core Tier 1 ratio has now doubled from 5.6% since the end of 2008 and a significant proportion of this increase has been as a result of the sustained profitability of Barclays over this period. We will continue to generate internally any additional capital that we will be required to hold to meet regulatory change over the coming years.
We have also maintained strong liquidity, with a surplus liquidity pool, of £145bn, which protects us from funding stress, a Basel III Liquidity Coverage Ratio up to 86% from 80% at the year end and a Basel III Net Stable Funding Ratio of 96%, up from 94% at the year end. We have pre-financed all our wholesale term funding which matures in 2011. Our adjusted gross leverage is consistent at 20x.
In July we passed the European Banking Authority’s (EBA) Stress Test. Our EBA-defined CT1 ratio was 7.3%, significantly above the 5% minimum level set by the EBA. We achieved this result without the benefit of our shareholding in BlackRock, which is a further source of capital strength at a time of stress. We have provided further information in this Interim Results Announcement on our Eurozone exposures, the majority of which relate to our retail and corporate banking businesses in Spain, Italy and Portugal, in order to increase market understanding of our positions which we believe are appropriately marked and many of which are secured.
Our financial strength presents a rock solid foundation for our business in times of economic uncertainty.
Returns
Our commitment is to deliver a 13% return on equity by 2013. We reaffirmed this at our recent Investor Seminar and provided further detail then on a business by business basis of how we propose to achieve this. So what progress have we made over the first half? In aggregate our adjusted return on average shareholders’ equity improved to 9.1% (2010: 6.9%) and our adjusted return on average tangible shareholders’ equity improved to 10.9% (2010: 8.4%).
Retail and Business Banking
We are focused on creating happy customers and positive operating jaws, in other words income growing faster than costs, in order to deliver returns on equity of 13-15% by 2013. We have set aside £1bn as a provision to enable us to resolve outstanding Payment Protection Insurance (PPI) complaints and are moving quickly to clear this issue in a transparent and efficient manner. In UK Retail and Business Banking, we are executing end-to-end customer process simplification with the goal of reducing complaints by between 20% and 50% per process by 2013. Our customer satisfaction shows encouraging trends. We closed our branch-based financial planning business as we could not see a path to adequate returns for this business in the UK. In Spain, we substantially strengthened our management team and reached agreement with labour unions and the Government to restructure our network and cost base which will see a 20% reduction in the branch network and a 16% reduction in headcount. In Europe RBB, we broke even in June before restructuring. Our European business has a way to go before reaching our target return thresholds but we are taking the tough decisions that will put this on track. In Barclaycard we acquired the Egg consumer card assets and MBNA corporate card portfolio in the UK. And in Africa RBB we are integrating the operational management of Absa and Barclays activities in the rest of the African continent to position ourselves better to take advantage of the economic growth opportunities which we expect in Africa in the years to come.
Corporate and Investment Banking
The development of Barclays Capital into a full service and truly global investment bank is almost complete and in the first half we were able to reduce operating expenses. We are targeting 15% return on average equity in 2013 on Basel 3 basis. Euromoney magazine named Barclays Capital its Global Investment Bank of the Year for 2011 for the first time as clients and commentators recognise the success of this transformation. While the overall business environment for investment banking services is not as strong as we would like, Barclays Capital is on track to compete as a global top 3 player in each of the major categories in which it operates and is adapting well to regulatory change. The reduction of legacy assets by £6.0bn over the half, with assets sold at or above marks in most cases, is encouraging. At Barclays Corporate, where we are targeting an 11% return on average equity in aggregate and 14% in the UK by 2013, we have turned the corner in our international businesses. The sale of Barclays Bank Russia is well advanced and we have taken a charge in the first half in anticipation of this completing shortly. Impairment in Spain is reducing as a result of the decisive and early action we took in 2010 to address the weakness of the economy and we continue to manage our risks in Spain and Portugal very carefully given current economic weakness. Our UK business has been resilient even in the face of lack of business confidence. We are on track to break even in Barclays Corporate for the full year, with substantial improvements expected thereafter.
Wealth and Investment Management
We set out in detail our ongoing plans for Barclays Wealth at our recent Investor Seminar. Over the half we continued to invest in the Gamma plan as we build out our banking staff and technology platforms. We continue to grow client assets and are on track to deliver our target returns on equity of 17-18% by 2013. We remain happy with our investment in BlackRock.
Income Growth
Our ability to generate income growth is dependent on the strength of our franchises. There are three businesses within the Barclays portfolio that are world class and operate in the top tier of their respective industries, namely UK Retail and Business Banking, Barclaycard and Barclays Capital. Each of these businesses has proven scale, leading technology and deep relationships with their customers and clients. These businesses are generating good returns in a tough economic environment that clearly demonstrates the value of these franchises.
We also have two businesses that stand on the threshold of the top tier. Barclays Wealth and Barclays Africa have great opportunities to build on their current positions. In Africa we are integrating the operational management of Absa and Barclays Africa to take full advantage of the people, technology and product expertise that exist in these businesses and our African franchises as a whole delivered income growth of 8% in the first half of 2011. In Barclays Wealth we continue to invest to build a leading reputation for performance and client service, and increase our scale. Income growth in the first half was 12% here following growth of 18% for 2010. Over the next two to three years we think these businesses will assume global top tier positions.
We have more work to do in Barclays Corporate outside the UK and in our Europe Retail and Business Bank. We believe that in both cases we have the foundations of good businesses with strong client and customer franchises. We have taken decisive action in order to improve performance which I have already referred to. These results demonstrate that our efforts are starting to pay off, but we acknowledge there is still more hard work required.
Before turning to our Citizenship performance, I want to address the overall economic and regulatory environment which will influence our revenue and impairment performance going forward.
Macroeconomic Environment
Market uncertainty about the outlook for sovereign debt in some Eurozone countries and in the US will only be allayed by decisive leadership. We have said consistently that we support efforts to deleverage the public sector in the UK and elsewhere and believe that the private sector must take up the mantle of supporting growth.
To play their full role as a catalyst for growth, banks need a clear regulatory framework within which to operate.
Together, resolution of the developed world sovereign debt crisis and a speedy conclusion of the bank regulatory reform agenda will give businesses the confidence that many currently lack to invest and grow. We note the actions of our clients: for example, the current account balances of our UK small business customers have grown 41% since the start of the year as many retain cash rather than invest.
We support efforts to reduce public sector deficits and to produce a stronger regulatory framework for banks. We continue to work with our clients, governments and regulators to support economic growth and job creation, and to deliver a safer financial system, despite the current uncertainty. The strength of corporate balance sheets and the cash that companies currently hold bodes well for economic activity and jobs once certainty is achieved, and confidence is restored. I believe that economic growth can be delivered in developed markets even as governments cut spending.
Regulation
Obtaining regulatory certainty is critically important in order for us to make long term investment and risk decisions in each of our businesses. During the first half of the year the Independent Commission on Banking (ICB) issued its Interim Report, including preliminary recommendations for the ring fencing of UK retail banking activities. We continue to engage proactively and constructively with the ICB, regulators and UK Government to ensure a rational and carefully evaluated set of reforms emerge that help to improve the safety of the banking system so that taxpayers are never again called upon to rescue banks, without imposing unnecessary costs or leaving the UK financial sector disadvantaged competitively relative to banks based elsewhere.
Since the end of the first half, the Financial Stability Board (FSB) has produced guidelines for globally systemically important financial institutions (GSIFIs) and recommendations for bail-in regimes and the EU has published draft regulations and directives that will introduce the Basel III framework into EU law. We continue to engage constructively with international regulators as policy proposals are developed ahead of the scheduled G20 meeting in November.
We are also engaged in the Dodd-Frank Act rule writing process in the US and expect to see continued progress over the second half of the year.
A final regulatory outcome will provide a clearer backdrop against which we can judge how much we continue to invest in our business and in the broader promotion of economic growth, versus how much we retain in higher levels of capital, or distribute to shareholders by way of a dividend. Our current dividend policy in the meantime must remain conservative though we are mindful of the importance of progressive, and affordable, increases.
Citizenship
As the Chief Executive of Barclays I have, on a number of occasions, explained the importance of citizenship and why I believe it is at the very heart of how we make decisions and manage the organisation in the interests of all stakeholders.
During the first half we supported almost 52,000 business start ups in the UK. Consistent with the objectives of Project Merlin, we remain open for business. In extending £20bn of new lending to UK businesses in the first six months of 2011 we have met the commitments we made to the UK Government regarding the extension of credit to the UK economy. We remain determined to continue to do so going forward.
You saw us take definitive action on behalf of customers relating to PPI redress in the UK. We have now drawn a line under this issue. Above all, we will continue to put customers first in all our businesses.
Barclays employs over 145,000 people globally including more than 55,000 in the UK. During the first half of this year we helped 1,300 young people experience the working world for the first time through paid internships and industrial placements.
Over 45,000 Barclays colleagues participated in Community Investment Programmes in the first half of the year, up by more than a third for the same period last year. Their combined efforts resulted in over 150,000 hours of volunteering and £9m in fundraising.
Conclusion
We are working hard to deliver against our 2013 return targets and our execution priorities. We have made good progress in the first half in delivering against these in a difficult operating environment and we remain completely focused on maintaining this momentum. I would like to pay tribute to my colleagues around the world and thank them for their unrelenting focus in helping us to deliver against our goals.
Bob Diamond, Chief Executive
Group Finance Director’s Review
Group Performance
Barclays delivered adjusted profit before tax of £3,678m in the first half of 2011, an increase of 24% on 2010, after excluding movements on own credit, loss on acquisitions and disposals, and provision for Payment Protection Insurance (PPI) redress. Including these items, profit before tax was £2,644m (2010: £3,947m).
We have published our results on a statutory and adjusted basis because we viewed a number of items as one-off and want to demonstrate the trends in our operating performance.
Income excluding own credit, decreased 3% to £15,241m (2010: £15,730m). Retail and Business Banking (RBB) income increased by 3% to £6,697m, despite slow economic growth in RBB’s major markets. Barclays Capital reported an 11% decrease in total income excluding own credit to £6,263m (2010: £7,061m). This decrease reflected lower contributions from the Fixed Income and Commodities businesses, partially offset by improved performance in Currencies, Equities and Prime Services, and Investment Banking.
Impairment charges across the Group against loans and advances, available for sale assets and reverse repurchase agreements improved 41% to £1,828m (2010: £3,080m). Impairment charges as a proportion of Group loans and advances as at 30 June 2011 improved to 74bps, compared to 118bps for the full year 2010.
Net operating income was flat at £13,502m (2010: £13,501m) with particularly strong increases for RBB (up 14% to £5,390m), Barclays Corporate (up 90% to £857m) and Barclays Wealth (up 14% to £829m) offset by Barclays Capital (down 15% to £6,463m).
Operating expenses, excluding the £1,000m provision for PPI redress, increased 1% to £9,829m (2010: £9,720m) reflecting an increase in restructuring costs to £216m (2010: £93m). Operating expenses in Barclays Capital decreased 3% to £4,073m. Operating expenses in RBB, excluding provision for PPI redress, increased 9% to £3,973m, principally reflecting restructuring, goodwill impairment and non-recurrence of a 2010 pension credit. Operating expenses in Barclays Corporate were broadly flat at £839m, while the 17% increase in Barclays Wealth to £740m reflected investment spend, including Project Gamma.
As a result, the Group’s adjusted cost: net operating income ratio decreased to 73% (2010: 77%). At Barclays Capital the cost: net operating income (excluding own credit) ratio was 64% (2010: 62%), within our 60-65% planning range, and the compensation: income (excluding own credit) ratio was 45% (2010: 42%).
Adjusted return on average shareholders’ equity improved to 9.1% (2010: 6.9%) and adjusted return on average tangible shareholders’ equity improved to 10.9% (2010: 8.4%). Statutory return on average shareholders’ equity was 5.9% (2010: 9.8%) and statutory return on average tangible shareholders’ equity was 7.1% (2010: 12.0%).
Business Performance
Retail and Business Banking
Adjusted profit before tax for RBB rose 33% to £1,446m (2010: £1,086m) and rose 26% relative to the second half of 2010 £1,149m. Statutory profit before tax decreased 63% to £446m (2010: £1,219m).
There was exceptionally strong reduction in impairment in both UK and Barclaycard driven by focused credit risk management and card balance repayments in the US, and also strong reductions in Europe and Africa, leading to an overall reduction in impairment of 27% to £1,307m (2010: £1,800m). This in turn drove a very strong improvement in the risk adjusted net interest income margin.
Operating expenses in RBB increased 36% due to the provision of £1,000m for PPI redress. Excluding this provision, restructuring charges in Europe of £129m, goodwill impairment in Barclaycard of £47m and one-off pension credits of £200m in 2010, operating expenses were slightly down and operating jaws were positive.
RBB made good progress toward its overall 13% return on equity commitment with both UK and Barclaycard adjusted returns on equity (excluding the effects of the PPI provision) already exceeding the hurdle rate of 13%. Returns on equity for Africa and Europe remain on track to achieve the 13% threshold by 2013 and 2015 respectively. The adjusted return on average equity for RBB as a whole was 10% (2010: 9%).
Business Performance
Corporate and Investment Banking
Adjusted profit before tax for Corporate and Investment Banking rose 7% to £2,327m (2010: £2,172m) and rose 47% relative to the second half of 2010 (£1,586m). Statutory profit before tax decreased 22% to £2,352m (2010: £3,023m).
Barclays Capital adjusted profit before tax reduced 9% to £2,310m (2010: £2,549m). Including an own credit gain of £89m (2010: gain of £851m), profit before tax was £2,399m (2010: £3,400m). Total income excluding own credit was £6,263m, down 11% (2010: £7,061m). Fixed Income, Currency and Commodities (FICC) income of £3,916m declined 20%, reflecting lower contributions from the Fixed Income and Commodities businesses, partially offset by improved performance in Currencies. Equities and Prime Services income of £1,108m increased 5%, with growth in derivatives and equity financing. Investment Banking income of £1,132m increased 11%, driven by equity underwriting.
There was a net impairment release of £111m (2010: charge of £309m), including a £223m impairment release relating to Protium, prior to consolidation, offset by charges primarily relating to leveraged finance. Operating expenses decreased 3%. Excluding the impact of own credit, cost to net operating income was 64% and compensation to income was 45%. Adjusted return on average equity was 15% (2010: 14%).
Total income excluding own credit in the second quarter of 2011 was £2,897m, down 14% on the first quarter of 2011, reflecting lower activity levels. FICC income declined 22% and Investment Banking decreased 15% following a very strong first quarter in equity and debt underwriting. Equities and Prime Services income increased 3%.
Barclays Corporate adjusted profit before tax was £17m (2010: loss of £377m), excluding a provision for the expected loss on disposal of Barclays Bank Russia of £64m. Including this provision the loss before tax was £47m. Profits increased in the UK and losses were reduced significantly in both Europe and Rest of the World. Income increased 5%, reflecting improvement in net interest income and a reduction in writedowns of venture capital investments. Impairment charges improved 35% to £614m (2010: £949m), driven by improvements in Spain where the charge decreased to £299m (2010: £553m). In the UK and Rest of the World operations, impairment charges also improved. Operating expenses grew 1% to £839m (2010: £829m). Adjusted return on average equity was 0%, an improvement on the negative return of 11% for the first half of 2010.
Business Performance
Wealth and Investment Management
Adjusted profit before tax for Wealth and Investment Management, excluding losses on disposal of shares in BlackRock, Inc., rose 10% to £139m (2010: £126m) and rose 34% relative to the second half of 2010 (£104m). Statutory profit before tax decreased 36% to £81m (2010: £126m).
Barclays Wealth profit before tax decreased 7% to £88m (2010: £95m), reflecting strong income growth offset by increased investment in the growth of the business. Income increased 12% to £848m (2010: £757m) from strong growth in both net interest income, and fee and commission income. Operating expenses increased 17%, reflecting investment spend and related restructuring to support the Wealth investment programme including Project Gamma expenditure of £44m (2010: £33m). Total client assets increased 3% to £169.5bn (31 December 2010: £163.9bn). Return on average equity was 10% (2010: 10%).
Investment Management reported an adjusted profit before tax of £51m (2010: £31m), excluding £58m loss (2010: £nil) on disposal of shares in BlackRock, Inc. to maintain the Group’s strategic holding below 20%. This result principally reflected dividend income from the Group’s available for sale holding in BlackRock, Inc. which now stands at 19.7%. The loss before tax for the period was £7m (2010: profit of £31m).
The value of the holding as at 30 June 2011 was £0.8bn below the value at acquisition (31 December 2010: £0.9bn). This reduction has been reflected in the available for sale reserve and the Group’s Core Tier 1 ratio. Further assessment will be undertaken in the second half to consider whether any continued shortfall compared with the value at acquisition should, subject to any significant mitigating factors, be recognised in the income statement for 2011.
Business Performance
Head Office Functions and Other Operations
Head Office Functions and Other Operations loss before tax was £235m (2010: loss £421m). Operating expenses decreased by £192m to £198m (2010: £390m), reflecting non-recurrence of a provision of £194m in relation to US economic sanctions. Income was flat at £37m loss (2010: loss £36m).
The impact of the UK bank levy, for which legislation was enacted in July 2011, has not been reflected in these results in accordance with generally accepted accounting principles. The total cost for 2011 is expected to be in the range of £350m- £400m.
Balance Sheet and Capital Management
Shareholders’ Equity
Shareholders’ equity, including non-controlling interests, at 30 June 2011 was £62.0bn (31 December 2010: £62.3bn). Excluding non-controlling interests, shareholders’ equity was £51.6bn (2010: £50.9bn). Profit after tax of £2.0bn and positive available for sale movements were broadly balanced by negative currency translation, dividends paid and the redemption of Reserve Capital Instruments. Net asset value per share increased to 423p (31 December 2010: 417p). Net tangible asset value per share increased to 353p (31 December 2010: 346p).
Balance Sheet
Total assets were flat at £1,493bn (31 December 2010: £1,490bn), reflecting fluctuations in normal trading. This included reductions in gross interest rate derivative assets, reverse repurchase agreements and other similar secured lending, and a decrease in cash at central banks offset by increases in loans and advances (primarily in relation to settlement balances), available for sale investments and trading portfolio assets. The consolidation of Protium resulted in a reduction of loans and advances with the underlying assets now classified in trading portfolio assets and financial assets designated at fair value. Assets contributing to adjusted gross leverage increased 1% to £1,061bn (2010: £1,053bn).
Capital Management
At 30 June 2011, the Group’s Core Tier 1 ratio on a Basel II basis was 11.0% (31 December 2010: 10.8%). Retained profit excluding the impact of PPI redress contributed to a 44bps increase in Core Tier 1 ratio, more than sufficient to absorb the impact of the PPI provision and other movements. Risk weighted assets decreased to £395bn (31 December 2010: £398bn), largely as a result of foreign exchange movements. Excluding the impact of foreign exchange, risk weighted asset reductions from the sell down of legacy assets in Barclays Capital were off-set by increases as a result of the Egg acquisition and regulatory methodology changes implemented through the period.
The Group’s Core Tier 1 ratio at the end of 2011 is expected to be impacted by an estimated £40bn increase of risk weighted assets as a result of the introduction of Basel 2.5 market risk RWA calculations.
Liquidity and Funding
The Group liquidity and funding position remains strong.
Basel III guidelines propose two new liquidity metrics: the Liquidity Coverage Ratio (LCR), which measures short term liquidity stress, and the Net Stable Funding Ratio (NSFR), which measures the stability of long term structural funding. As at 30 June 2011, the LCR was estimated at 86% (31 December 2010: 80%) and the NSFR was estimated at 96% (31 December 2010: 94%).
Barclays raised £19bn wholesale term debt in the first half of the year across a variety of products and geographies. Term funding raised over the past 18 months has re-financed all wholesale term debt maturities for 2010 and 2011, funded strategic balance sheet growth and further extended the duration of our liabilities.
The liquidity pool held by the Group decreased slightly to £145bn at 30 June 2011, of which £132bn was invested in FSA- eligible assets. This reduction was the result of managing down short term deposits, with no effect on liquidity strength as reflected in the higher LCR. The cost of the liquidity pool decreased to approximately £300m for the first six months of 2011 compared to approximately £900m for the twelve months of 2010. Barclays will continue to optimise the liquidity pool within the parameters of the Group’s Liquidity Risk Framework and in anticipation of the final Basel III standards.
Dividends
It is our policy to declare and pay dividends on a quarterly basis. We will pay an interim cash dividend for the second quarter of 2011 of 1p per share on 9 September 2011 giving a declared dividend for the first half of 2011 of 2p per share.
Outlook
While the performance of our capital markets business in July has been impacted by current market conditions, our other businesses have performed in aggregate ahead of their run rate for the first 6 months of the year.
We will continue to maintain the Group’s strong capital, leverage and liquidity positions in anticipation of the new regulatory requirements for the banking industry.
We set out at our recent Investor Seminar our plans to deliver 13% return on equity by 2013. The results we are reporting today demonstrate the steady progress we are making on delivering against that goal, despite economic and regulatory uncertainties, by focusing on our core execution priorities of Capital, Returns, Income Growth and Citizenship.
Capital
We continue to strengthen our capital position and our net asset value. Our Core Tier 1 ratio stood at 11.0% at the end of June, up from 10.8% at the year end. Net asset value per share also increased 6p to 423p since the year end and has increased by 9p over the second quarter.
Our Core Tier 1 ratio has now doubled from 5.6% since the end of 2008 and a significant proportion of this increase has been as a result of the sustained profitability of Barclays over this period. We will continue to generate internally any additional capital that we will be required to hold to meet regulatory change over the coming years.
We have also maintained strong liquidity, with a surplus liquidity pool, of £145bn, which protects us from funding stress, a Basel III Liquidity Coverage Ratio up to 86% from 80% at the year end and a Basel III Net Stable Funding Ratio of 96%, up from 94% at the year end. We have pre-financed all our wholesale term funding which matures in 2011. Our adjusted gross leverage is consistent at 20x.
In July we passed the European Banking Authority’s (EBA) Stress Test. Our EBA-defined CT1 ratio was 7.3%, significantly above the 5% minimum level set by the EBA. We achieved this result without the benefit of our shareholding in BlackRock, which is a further source of capital strength at a time of stress. We have provided further information in this Interim Results Announcement on our Eurozone exposures, the majority of which relate to our retail and corporate banking businesses in Spain, Italy and Portugal, in order to increase market understanding of our positions which we believe are appropriately marked and many of which are secured.
Our financial strength presents a rock solid foundation for our business in times of economic uncertainty.
Returns
Our commitment is to deliver a 13% return on equity by 2013. We reaffirmed this at our recent Investor Seminar and provided further detail then on a business by business basis of how we propose to achieve this. So what progress have we made over the first half? In aggregate our adjusted return on average shareholders’ equity improved to 9.1% (2010: 6.9%) and our adjusted return on average tangible shareholders’ equity improved to 10.9% (2010: 8.4%).
Retail and Business Banking
We are focused on creating happy customers and positive operating jaws, in other words income growing faster than costs, in order to deliver returns on equity of 13-15% by 2013. We have set aside £1bn as a provision to enable us to resolve outstanding Payment Protection Insurance (PPI) complaints and are moving quickly to clear this issue in a transparent and efficient manner. In UK Retail and Business Banking, we are executing end-to-end customer process simplification with the goal of reducing complaints by between 20% and 50% per process by 2013. Our customer satisfaction shows encouraging trends. We closed our branch-based financial planning business as we could not see a path to adequate returns for this business in the UK. In Spain, we substantially strengthened our management team and reached agreement with labour unions and the Government to restructure our network and cost base which will see a 20% reduction in the branch network and a 16% reduction in headcount. In Europe RBB, we broke even in June before restructuring. Our European business has a way to go before reaching our target return thresholds but we are taking the tough decisions that will put this on track. In Barclaycard we acquired the Egg consumer card assets and MBNA corporate card portfolio in the UK. And in Africa RBB we are integrating the operational management of Absa and Barclays activities in the rest of the African continent to position ourselves better to take advantage of the economic growth opportunities which we expect in Africa in the years to come.
Corporate and Investment Banking
The development of Barclays Capital into a full service and truly global investment bank is almost complete and in the first half we were able to reduce operating expenses. We are targeting 15% return on average equity in 2013 on Basel 3 basis. Euromoney magazine named Barclays Capital its Global Investment Bank of the Year for 2011 for the first time as clients and commentators recognise the success of this transformation. While the overall business environment for investment banking services is not as strong as we would like, Barclays Capital is on track to compete as a global top 3 player in each of the major categories in which it operates and is adapting well to regulatory change. The reduction of legacy assets by £6.0bn over the half, with assets sold at or above marks in most cases, is encouraging. At Barclays Corporate, where we are targeting an 11% return on average equity in aggregate and 14% in the UK by 2013, we have turned the corner in our international businesses. The sale of Barclays Bank Russia is well advanced and we have taken a charge in the first half in anticipation of this completing shortly. Impairment in Spain is reducing as a result of the decisive and early action we took in 2010 to address the weakness of the economy and we continue to manage our risks in Spain and Portugal very carefully given current economic weakness. Our UK business has been resilient even in the face of lack of business confidence. We are on track to break even in Barclays Corporate for the full year, with substantial improvements expected thereafter.
Wealth and Investment Management
We set out in detail our ongoing plans for Barclays Wealth at our recent Investor Seminar. Over the half we continued to invest in the Gamma plan as we build out our banking staff and technology platforms. We continue to grow client assets and are on track to deliver our target returns on equity of 17-18% by 2013. We remain happy with our investment in BlackRock.
Income Growth
Our ability to generate income growth is dependent on the strength of our franchises. There are three businesses within the Barclays portfolio that are world class and operate in the top tier of their respective industries, namely UK Retail and Business Banking, Barclaycard and Barclays Capital. Each of these businesses has proven scale, leading technology and deep relationships with their customers and clients. These businesses are generating good returns in a tough economic environment that clearly demonstrates the value of these franchises.
We also have two businesses that stand on the threshold of the top tier. Barclays Wealth and Barclays Africa have great opportunities to build on their current positions. In Africa we are integrating the operational management of Absa and Barclays Africa to take full advantage of the people, technology and product expertise that exist in these businesses and our African franchises as a whole delivered income growth of 8% in the first half of 2011. In Barclays Wealth we continue to invest to build a leading reputation for performance and client service, and increase our scale. Income growth in the first half was 12% here following growth of 18% for 2010. Over the next two to three years we think these businesses will assume global top tier positions.
We have more work to do in Barclays Corporate outside the UK and in our Europe Retail and Business Bank. We believe that in both cases we have the foundations of good businesses with strong client and customer franchises. We have taken decisive action in order to improve performance which I have already referred to. These results demonstrate that our efforts are starting to pay off, but we acknowledge there is still more hard work required.
Before turning to our Citizenship performance, I want to address the overall economic and regulatory environment which will influence our revenue and impairment performance going forward.
Macroeconomic Environment
Market uncertainty about the outlook for sovereign debt in some Eurozone countries and in the US will only be allayed by decisive leadership. We have said consistently that we support efforts to deleverage the public sector in the UK and elsewhere and believe that the private sector must take up the mantle of supporting growth.
To play their full role as a catalyst for growth, banks need a clear regulatory framework within which to operate.
Together, resolution of the developed world sovereign debt crisis and a speedy conclusion of the bank regulatory reform agenda will give businesses the confidence that many currently lack to invest and grow. We note the actions of our clients: for example, the current account balances of our UK small business customers have grown 41% since the start of the year as many retain cash rather than invest.
We support efforts to reduce public sector deficits and to produce a stronger regulatory framework for banks. We continue to work with our clients, governments and regulators to support economic growth and job creation, and to deliver a safer financial system, despite the current uncertainty. The strength of corporate balance sheets and the cash that companies currently hold bodes well for economic activity and jobs once certainty is achieved, and confidence is restored. I believe that economic growth can be delivered in developed markets even as governments cut spending.
Regulation
Obtaining regulatory certainty is critically important in order for us to make long term investment and risk decisions in each of our businesses. During the first half of the year the Independent Commission on Banking (ICB) issued its Interim Report, including preliminary recommendations for the ring fencing of UK retail banking activities. We continue to engage proactively and constructively with the ICB, regulators and UK Government to ensure a rational and carefully evaluated set of reforms emerge that help to improve the safety of the banking system so that taxpayers are never again called upon to rescue banks, without imposing unnecessary costs or leaving the UK financial sector disadvantaged competitively relative to banks based elsewhere.
Since the end of the first half, the Financial Stability Board (FSB) has produced guidelines for globally systemically important financial institutions (GSIFIs) and recommendations for bail-in regimes and the EU has published draft regulations and directives that will introduce the Basel III framework into EU law. We continue to engage constructively with international regulators as policy proposals are developed ahead of the scheduled G20 meeting in November.
We are also engaged in the Dodd-Frank Act rule writing process in the US and expect to see continued progress over the second half of the year.
A final regulatory outcome will provide a clearer backdrop against which we can judge how much we continue to invest in our business and in the broader promotion of economic growth, versus how much we retain in higher levels of capital, or distribute to shareholders by way of a dividend. Our current dividend policy in the meantime must remain conservative though we are mindful of the importance of progressive, and affordable, increases.
Citizenship
As the Chief Executive of Barclays I have, on a number of occasions, explained the importance of citizenship and why I believe it is at the very heart of how we make decisions and manage the organisation in the interests of all stakeholders.
During the first half we supported almost 52,000 business start ups in the UK. Consistent with the objectives of Project Merlin, we remain open for business. In extending £20bn of new lending to UK businesses in the first six months of 2011 we have met the commitments we made to the UK Government regarding the extension of credit to the UK economy. We remain determined to continue to do so going forward.
You saw us take definitive action on behalf of customers relating to PPI redress in the UK. We have now drawn a line under this issue. Above all, we will continue to put customers first in all our businesses.
Barclays employs over 145,000 people globally including more than 55,000 in the UK. During the first half of this year we helped 1,300 young people experience the working world for the first time through paid internships and industrial placements.
Over 45,000 Barclays colleagues participated in Community Investment Programmes in the first half of the year, up by more than a third for the same period last year. Their combined efforts resulted in over 150,000 hours of volunteering and £9m in fundraising.
Conclusion
We are working hard to deliver against our 2013 return targets and our execution priorities. We have made good progress in the first half in delivering against these in a difficult operating environment and we remain completely focused on maintaining this momentum. I would like to pay tribute to my colleagues around the world and thank them for their unrelenting focus in helping us to deliver against our goals.
Bob Diamond, Chief Executive
Group Finance Director’s Review
Group Performance
Barclays delivered adjusted profit before tax of £3,678m in the first half of 2011, an increase of 24% on 2010, after excluding movements on own credit, loss on acquisitions and disposals, and provision for Payment Protection Insurance (PPI) redress. Including these items, profit before tax was £2,644m (2010: £3,947m).
We have published our results on a statutory and adjusted basis because we viewed a number of items as one-off and want to demonstrate the trends in our operating performance.
Impairment charges across the Group against loans and advances, available for sale assets and reverse repurchase agreements improved 41% to £1,828m (2010: £3,080m). Impairment charges as a proportion of Group loans and advances as at 30 June 2011 improved to 74bps, compared to 118bps for the full year 2010.
Net operating income was flat at £13,502m (2010: £13,501m) with particularly strong increases for RBB (up 14% to £5,390m), Barclays Corporate (up 90% to £857m) and Barclays Wealth (up 14% to £829m) offset by Barclays Capital (down 15% to £6,463m).
Operating expenses, excluding the £1,000m provision for PPI redress, increased 1% to £9,829m (2010: £9,720m) reflecting an increase in restructuring costs to £216m (2010: £93m). Operating expenses in Barclays Capital decreased 3% to £4,073m. Operating expenses in RBB, excluding provision for PPI redress, increased 9% to £3,973m, principally reflecting restructuring, goodwill impairment and non-recurrence of a 2010 pension credit. Operating expenses in Barclays Corporate were broadly flat at £839m, while the 17% increase in Barclays Wealth to £740m reflected investment spend, including Project Gamma.
As a result, the Group’s adjusted cost: net operating income ratio decreased to 73% (2010: 77%). At Barclays Capital the cost: net operating income (excluding own credit) ratio was 64% (2010: 62%), within our 60-65% planning range, and the compensation: income (excluding own credit) ratio was 45% (2010: 42%).
Adjusted return on average shareholders’ equity improved to 9.1% (2010: 6.9%) and adjusted return on average tangible shareholders’ equity improved to 10.9% (2010: 8.4%). Statutory return on average shareholders’ equity was 5.9% (2010: 9.8%) and statutory return on average tangible shareholders’ equity was 7.1% (2010: 12.0%).
Business Performance
Retail and Business Banking
Adjusted profit before tax for RBB rose 33% to £1,446m (2010: £1,086m) and rose 26% relative to the second half of 2010 £1,149m. Statutory profit before tax decreased 63% to £446m (2010: £1,219m).
There was exceptionally strong reduction in impairment in both UK and Barclaycard driven by focused credit risk management and card balance repayments in the US, and also strong reductions in Europe and Africa, leading to an overall reduction in impairment of 27% to £1,307m (2010: £1,800m). This in turn drove a very strong improvement in the risk adjusted net interest income margin.
Operating expenses in RBB increased 36% due to the provision of £1,000m for PPI redress. Excluding this provision, restructuring charges in Europe of £129m, goodwill impairment in Barclaycard of £47m and one-off pension credits of £200m in 2010, operating expenses were slightly down and operating jaws were positive.
RBB made good progress toward its overall 13% return on equity commitment with both UK and Barclaycard adjusted returns on equity (excluding the effects of the PPI provision) already exceeding the hurdle rate of 13%. Returns on equity for Africa and Europe remain on track to achieve the 13% threshold by 2013 and 2015 respectively. The adjusted return on average equity for RBB as a whole was 10% (2010: 9%).
Business Performance
Corporate and Investment Banking
Adjusted profit before tax for Corporate and Investment Banking rose 7% to £2,327m (2010: £2,172m) and rose 47% relative to the second half of 2010 (£1,586m). Statutory profit before tax decreased 22% to £2,352m (2010: £3,023m).
Barclays Capital adjusted profit before tax reduced 9% to £2,310m (2010: £2,549m). Including an own credit gain of £89m (2010: gain of £851m), profit before tax was £2,399m (2010: £3,400m). Total income excluding own credit was £6,263m, down 11% (2010: £7,061m). Fixed Income, Currency and Commodities (FICC) income of £3,916m declined 20%, reflecting lower contributions from the Fixed Income and Commodities businesses, partially offset by improved performance in Currencies. Equities and Prime Services income of £1,108m increased 5%, with growth in derivatives and equity financing. Investment Banking income of £1,132m increased 11%, driven by equity underwriting.
There was a net impairment release of £111m (2010: charge of £309m), including a £223m impairment release relating to Protium, prior to consolidation, offset by charges primarily relating to leveraged finance. Operating expenses decreased 3%. Excluding the impact of own credit, cost to net operating income was 64% and compensation to income was 45%. Adjusted return on average equity was 15% (2010: 14%).
Total income excluding own credit in the second quarter of 2011 was £2,897m, down 14% on the first quarter of 2011, reflecting lower activity levels. FICC income declined 22% and Investment Banking decreased 15% following a very strong first quarter in equity and debt underwriting. Equities and Prime Services income increased 3%.
Barclays Corporate adjusted profit before tax was £17m (2010: loss of £377m), excluding a provision for the expected loss on disposal of Barclays Bank Russia of £64m. Including this provision the loss before tax was £47m. Profits increased in the UK and losses were reduced significantly in both Europe and Rest of the World. Income increased 5%, reflecting improvement in net interest income and a reduction in writedowns of venture capital investments. Impairment charges improved 35% to £614m (2010: £949m), driven by improvements in Spain where the charge decreased to £299m (2010: £553m). In the UK and Rest of the World operations, impairment charges also improved. Operating expenses grew 1% to £839m (2010: £829m). Adjusted return on average equity was 0%, an improvement on the negative return of 11% for the first half of 2010.
Business Performance
Wealth and Investment Management
Adjusted profit before tax for Wealth and Investment Management, excluding losses on disposal of shares in BlackRock, Inc., rose 10% to £139m (2010: £126m) and rose 34% relative to the second half of 2010 (£104m). Statutory profit before tax decreased 36% to £81m (2010: £126m).
Barclays Wealth profit before tax decreased 7% to £88m (2010: £95m), reflecting strong income growth offset by increased investment in the growth of the business. Income increased 12% to £848m (2010: £757m) from strong growth in both net interest income, and fee and commission income. Operating expenses increased 17%, reflecting investment spend and related restructuring to support the Wealth investment programme including Project Gamma expenditure of £44m (2010: £33m). Total client assets increased 3% to £169.5bn (31 December 2010: £163.9bn). Return on average equity was 10% (2010: 10%).
Investment Management reported an adjusted profit before tax of £51m (2010: £31m), excluding £58m loss (2010: £nil) on disposal of shares in BlackRock, Inc. to maintain the Group’s strategic holding below 20%. This result principally reflected dividend income from the Group’s available for sale holding in BlackRock, Inc. which now stands at 19.7%. The loss before tax for the period was £7m (2010: profit of £31m).
The value of the holding as at 30 June 2011 was £0.8bn below the value at acquisition (31 December 2010: £0.9bn). This reduction has been reflected in the available for sale reserve and the Group’s Core Tier 1 ratio. Further assessment will be undertaken in the second half to consider whether any continued shortfall compared with the value at acquisition should, subject to any significant mitigating factors, be recognised in the income statement for 2011.
Business Performance
Head Office Functions and Other Operations
Head Office Functions and Other Operations loss before tax was £235m (2010: loss £421m). Operating expenses decreased by £192m to £198m (2010: £390m), reflecting non-recurrence of a provision of £194m in relation to US economic sanctions. Income was flat at £37m loss (2010: loss £36m).
The impact of the UK bank levy, for which legislation was enacted in July 2011, has not been reflected in these results in accordance with generally accepted accounting principles. The total cost for 2011 is expected to be in the range of £350m- £400m.
Balance Sheet and Capital Management
Shareholders’ Equity
Shareholders’ equity, including non-controlling interests, at 30 June 2011 was £62.0bn (31 December 2010: £62.3bn). Excluding non-controlling interests, shareholders’ equity was £51.6bn (2010: £50.9bn). Profit after tax of £2.0bn and positive available for sale movements were broadly balanced by negative currency translation, dividends paid and the redemption of Reserve Capital Instruments. Net asset value per share increased to 423p (31 December 2010: 417p). Net tangible asset value per share increased to 353p (31 December 2010: 346p).
Balance Sheet
Total assets were flat at £1,493bn (31 December 2010: £1,490bn), reflecting fluctuations in normal trading. This included reductions in gross interest rate derivative assets, reverse repurchase agreements and other similar secured lending, and a decrease in cash at central banks offset by increases in loans and advances (primarily in relation to settlement balances), available for sale investments and trading portfolio assets. The consolidation of Protium resulted in a reduction of loans and advances with the underlying assets now classified in trading portfolio assets and financial assets designated at fair value. Assets contributing to adjusted gross leverage increased 1% to £1,061bn (2010: £1,053bn).
Capital Management
At 30 June 2011, the Group’s Core Tier 1 ratio on a Basel II basis was 11.0% (31 December 2010: 10.8%). Retained profit excluding the impact of PPI redress contributed to a 44bps increase in Core Tier 1 ratio, more than sufficient to absorb the impact of the PPI provision and other movements. Risk weighted assets decreased to £395bn (31 December 2010: £398bn), largely as a result of foreign exchange movements. Excluding the impact of foreign exchange, risk weighted asset reductions from the sell down of legacy assets in Barclays Capital were off-set by increases as a result of the Egg acquisition and regulatory methodology changes implemented through the period.
The Group’s Core Tier 1 ratio at the end of 2011 is expected to be impacted by an estimated £40bn increase of risk weighted assets as a result of the introduction of Basel 2.5 market risk RWA calculations.
Liquidity and Funding
The Group liquidity and funding position remains strong.
Basel III guidelines propose two new liquidity metrics: the Liquidity Coverage Ratio (LCR), which measures short term liquidity stress, and the Net Stable Funding Ratio (NSFR), which measures the stability of long term structural funding. As at 30 June 2011, the LCR was estimated at 86% (31 December 2010: 80%) and the NSFR was estimated at 96% (31 December 2010: 94%).
Barclays raised £19bn wholesale term debt in the first half of the year across a variety of products and geographies. Term funding raised over the past 18 months has re-financed all wholesale term debt maturities for 2010 and 2011, funded strategic balance sheet growth and further extended the duration of our liabilities.
The liquidity pool held by the Group decreased slightly to £145bn at 30 June 2011, of which £132bn was invested in FSA- eligible assets. This reduction was the result of managing down short term deposits, with no effect on liquidity strength as reflected in the higher LCR. The cost of the liquidity pool decreased to approximately £300m for the first six months of 2011 compared to approximately £900m for the twelve months of 2010. Barclays will continue to optimise the liquidity pool within the parameters of the Group’s Liquidity Risk Framework and in anticipation of the final Basel III standards.
Dividends
It is our policy to declare and pay dividends on a quarterly basis. We will pay an interim cash dividend for the second quarter of 2011 of 1p per share on 9 September 2011 giving a declared dividend for the first half of 2011 of 2p per share.
Outlook
While the performance of our capital markets business in July has been impacted by current market conditions, our other businesses have performed in aggregate ahead of their run rate for the first 6 months of the year.
We will continue to maintain the Group’s strong capital, leverage and liquidity positions in anticipation of the new regulatory requirements for the banking industry.
