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Edited Transcript of BARC.L earnings conference call or presentation 28-Jul-17 8:30am GMT

Half Year 2017 Barclays PLC Earnings Call

London Jun 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Barclays PLC earnings conference call or presentation Friday, July 28, 2017 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* James Edward Staley

Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director

* Tushar Morzaria

Barclays PLC - Group Finance Director & Executive Director

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Conference Call Participants

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* Andrew Philip Coombs

Citigroup Inc, Research Division - Director

* Christopher Cant

Autonomous Research LLP - Partner, United Kingdom and Irish Banks

* Christopher Robert Manners

Morgan Stanley, Research Division - Former Equity Analyst

* Claire Kane

Crédit Suisse AG, Research Division - Research Analyst

* Edward Hugo Anson Firth

Keefe, Bruyette & Woods Limited, Research Division - Analyst

* Fahed Irshad Kunwar

Redburn (Europe) Limited, Research Division - Research Analyst

* Jonathan Richard Kuczynski Pierce

Exane BNP Paribas, Research Division - Former Analyst of Banks

* Martin Leitgeb

Goldman Sachs Group Inc., Research Division - Analyst

* Michael Francis Helsby

BofA Merrill Lynch, Research Division - Former MD & Co-Head of European Banks

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Presentation

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Operator [1]

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Welcome to the Barclays Half Year 2017 Results Analyst and Investor Conference Call.

I will now hand you over to Jes Staley, Group Chief Executive; and Tushar Morzaria, Group Finance Director.

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [2]

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Good morning, everyone, and thanks for joining the second quarter earnings call.

Before I hand over to Tushar to take you through the numbers in depth, I first want to provide you with some thoughts on what was a very important quarter for us in terms of the execution of our strategy, and second, give you a sense of our priorities for the group going forward.

The last 3 months saw us complete 2 key planks of the strategy we set out in March of 2016, and both were achieved ahead of schedule. First off, on the 1st of June, we sold roughly 34% of our shareholding in Barclays Africa. This represented the largest secondary offer ever executed in the continent. Having reduced our stake in the business to effectively just under 15%, we have applied for and expect to achieve full regulatory deconsolidation in respect of Africa by 2018. However, while we await that formal approval, we were pleased to be very recently granted permission to apply proportional consolidation in respect of Africa to a level of just over 23%. This means that our capital has benefited by 47 basis points from the transaction, which coupled with organic capital generation in the quarter, means we are reporting a 13.1% CET1 capital ratio today. That is, of course, at our end-state target of around 13%. We will realize a further 26 basis points of the CET1 accretion in due course, half of which is expected to come through later in 2017 as we move down to a 15% regulatory ownership level and the rest on formal regulatory deconsolidation. Beyond this capital benefit, at a stroke, we have radically simplified our business, removing significant complexity and taking a major step towards our future as a balanced and diversified transatlantic bank. It was a very difficult decision to exit the African franchise given our long association with the continent, but it was the right call for the group, and I am pleased that we were able to achieve our objectives well within the 2 to 3 years we had allowed for the sale.

I'm also glad that Barclays will retain an interest in the business through our minority shareholding, and we wish Maria Ramos and all of her colleagues every success for the future.

The second major milestone delivered in the quarter was the completion of the accelerated rundown of Barclays' Non-Core unit as of June 30. Looking back, in just 3 years, we have eliminated GBP 95 billion of risk-weighted assets. We've sold more than 20 businesses. We've exited literally hundreds of thousands of derivative trades. We've closed operations in a dozen countries, and we returned about GBP 6.5 billion of equity to the core and we primarily reduced Barclays' cost base by over GBP 2 billion per annum. Accelerating the rundown of Non-Core has required hard choices and consumed a significant amount of management energy and focus. But be in no doubt that in doing so, we have enhanced shareholder value in the group by bringing forward the date when we can all benefit from the full earnings power of Barclays. Now at just GBP 23 billion of risk-weighted assets, the residual Non-Core asset no longer require a dedicated unit to manage their continued rundown, so we will fold them back into the core of the group. Tushar will give you more detail on that exercise, including the distribution of risk-weighted assets and their impact on business unit performance. As I have flagged before, however, this is the last quarter in which we will report Non-Core numbers. In the future, there will only be one statement of our financial performance, and that will be on a statutory basis covering the group and our business units of Barclays U.K. and Barclays International so that investors can see with absolute clarity what we are delivering. That move is an important step in the normalization of Barclays. And it's made possible because the completion of the Africa exit and the accelerated rundown of the Non-Core assets collectively mark the end of the restructuring of the Barclays Group. This restructuring has been a tremendous undertaking, but as a result, what you see today is the reshaped business, a simplified and diversified transatlantic consumer, corporate and investment bank, 2 strong business units in Barclays U.K. and Barclays International, underpinned by an efficient, effective and innovative service company. What we have now is our geographic footprint for the future. What we have now are the business lines that we will be in going forward, with our performance driven by some 81,000 people rather than 141,000 as it was when I started here in 2015. The completion of our restructuring and the strength of our capital base today with our CET1 ratio standing at 13.1% means that we can now turn our full attention and all of our organizational energy towards what matters most to our shareholders, improving group returns. That goal, driving our returns up to an acceptable and sustainable level, is the #1 priority with this management.

Looking to the charges associated with the Africa disposal and PPI, we produced a group RoTE in the first half of 2017 of 8.1%. While that is more than twice the returns posted last year, on a comparable basis, it is still below our cost of capital, and therefore, we've got more to do. Our current returns target is to converge group returns with core returns. As we have now closed the Non-Core unit, it is appropriate to move on from that and establish a new goal for the group. So today, we are formally setting a target of achieving a greater than 10% group return on tangible equity over time. We have 3 principal levers, which underpin our confidence in delivering that target. The first lever, and perhaps the most obvious, is that many of the costs of our restructuring will fall away over the next 2 years. Costs from our Non-Core businesses and assets will reduce. Then costs associated with the setup of the U.K. rank and spank will disappear by the end of next year. And there will be an end to restructuring costs associated with the broader reshaping of the company, including the headwind from the compensation change we implemented late last year. Collectively, these savings will amount to roughly GBP 1 billion by 2019. The work to achieve these savings is largely done or in flight. We need now to maintain discipline and focus to ensure that our returns benefit fully from these reductions in costs.

The second lever is our plans to improve the returns in our Corporate and Investment Bank. We've done a lot of work over the past 2 years repositioning that business to a much better balanced, low-volatility model focused on client intermediation and on building strength in origination. You could see the fruits of that effort in the performance reported this morning, with strong numbers from credit on the market size and impressive performance in underwriting, in particular, driving a 3% increase in income in the first half. I'm also pleased that we continue to make significant share gains in the Investment Bank. In banking, we finished the quarter at the highest global fee share in 4 years at 4.7%, ranking sixth. In debt capital markets, we ranked fourth globally, up 110 basis points from the end of 2016, our highest share for 3 years now. This was helped by the strongest performance in over 3 years and leveraged finance where we finished second with a 7.4% share. And in our home market here in the U.K., we finished June ranked #1 in banking fees with a 10.3% share. But today, the CIB is delivering a return on tangible equity once the impact of Non-Core reabsorption and the bank levy are accounted for, which is still below the cost of capital and a drag, therefore, to group returns given its relative equity consumption. So we need to get that number to double digits over time, and we will do this in 2 principal ways. The first is through the redeployment of capital within the Corporate and the Investment Bank and improvements in wholesale funding cost. Since combining the loan books of the businesses in March of 2016, we have worked hard to evaluate returns on our overall client relationships. What we found is that while the majority of the GBP 90 billion loan book support client relationships, which earn a return greater than our cost of capital, a sizable proportion of the book currently does not. But our intention is that by 2019, we will have proactively reallocated the lion's share of risk-weighted assets of these lowest-returning parts of the portfolio to the higher returning CIB clients and products. In particular, we will look to reallocate a significant proportion of those risk-weighted assets to higher returning parts of the markets business, which are currently capital constrained. I want to state clearly at this point that the work undertaken between 2014 and '16 to reshape, resize and reposition the Corporate and Investment Bank at Barclays was necessary and are net positive for the business. We have seen significant improvement in those parts of the business which are capital-light such as M&A and underwriting over the past couple of years, but it is a fact that we have seen some weaker performance, as others have, in the parts of our business which are more capital-intensive. It's become clear that part of the reason for that past year performance is because, in aggregate, we have pulled back a little too far in terms of risk-weighted assets in our markets business.

Our conclusion is that we have enough capital overall in the CIB today but that is not currently deployed optimally. The reallocation program we have instituted is intended to address that. Allied to that effort is a confidence that wholesale funding costs for the CIB are expected to fall incrementally over the next 3 years, driven very much by revised issuance assumptions and improvement in funding spreads. For example, over the next few years, there are expensive legacy debt instruments that either mature or, subject to regulatory consents, are redeemable. These represent opportunities to reduce wholesale funding costs. And we will also now aim to issue less MREL in the medium term, driven by lower group risk-weighted assets after the successful Barclays Africa sell-down.

Second, we're going to stay focused on improving the cost efficiency of our Corporate and Investment Bank to create capacity for strategic investments, particularly in technology. You've already seen some of this cost discipline in the London real estate exit we announced last year, but I will say more on this when I deal with group expenses shortly. The returns benefits from the combination of these elements, capital reallocation within the CIB, reduced wholesale funding cost and an optimized expense line, has the capacity to drive Corporate and Investment Bank returns to double digits based on where we are today. CIB management are wholly focused on executing on these priorities and at pace.

The third lever of our overall plan to get group returns to greater than 10% is a continued focus on cost efficiency and operational effectiveness. We are committing to achieving a group cost-to-income ratio of less than 60% over time. In the second quarter, that ratio stood at 67%, excluding the PPI charge. The GBP 1 billion of savings I referred to earlier will take us a very long way towards our sub-60% target. But beyond that, we have multiple major initiatives already underway across Barclays, which will help us to get there as well as to create headroom for more investment. The foundation of the effort is in our service company. This is the hub within which we deliver group-wide operations, technology and functional services in a unified approach that is massively simplifying and standardizing our processes and creating synergies in shared services. One example of that among many is how we had integrated no fewer than 10 separate fraud handling departments, each with different approaches and resources, into just one. This has reduced duplication of efforts and costs while, at the same time, delivering a consistent and improved experience to our customers and clients. The group also continues to invest in innovation to ensure we are at the forefront of next-generation products and services in banking. Our mobile banking app continues to be recognized as the U.K. market leader, and we're excited to be the first U.K. bank to enable voice payments for our customers with the launch of Siri payments next month. iMessage payments are now live, allowing iOS end users to send and receive money between friends easily via iMessage. And the recent deployment of a contactless cash feature on Android phones allows a customer to withdraw up to GBP 100 simply by tapping their Android device on an assisted service counter at a Barclays branch. This innovation agenda enhances the customer and client experience, making it simpler, faster and more cost effective to do business with Barclays.

We're also working hard to modernize our technology architecture, and I have talked repeatedly about why I regard it as a crucial competitive advantage for any bank hoping to prosper today. That does mean some upfront investment as we increase automation, ramp up the use of the cloud, simplify the platforms for data, improve resilience and security for customers and clients and deploy innovative technologies. What it leads to are structurally reduced costs over time and permanent efficiency gains across all businesses and functions. A great example of this will be implemented from next month when we begin the migration of 90,000 small and medium enterprise customers to our new acquiring platform, which we dubbed bPay. bPay delivers a new single billing and settlement platform in new merchant on-boarding solution and a new case management and agent servicing desktop to our Barclaycard business solutions customers around the world. It is more resilient and can integrate directly with the clients on systems. The rollout of bPay will see us replace about 80% of the back-office domain in our merchant-acquiring business and will retire 14 separate legacy systems in the second half of 2018, some of which have been around for 30 years. The efficiency and effectiveness gains from a program like this, which has been 3 years in development, are obvious. As we drive technological modernization, we are then able to optimize the workforce to align the standard processes and simpler ways of working. In particular, we see a Barclays Group with far fewer expenses to third-party consultants and contractors.

Finally, we have embarked on a major initiative to reshape our real estate footprint as a company. We are currently spread across too many sites and in too many locations for the size and strategy of our business today. Over time, we will concentrate our people and equipment in a smaller number of strategic locations which will lead to fewer real estate, IT equipment, data center and management costs. One good example of where we're delivering on this approach is our recent acquisition of a campus in Whippany, New Jersey, where we will bring together the majority of our back-office operations and functions currently located across multiple sites in Manhattan, and we'll do this by the end of 2019. We expect all of this to not only drive savings, which in turn will help to improve returns, but also to create headroom for reinvestment in attractive growth areas for the bank because we do have strong opportunities for growth in Barclays.

Take US Cards, for example, where we are now the ninth largest issuer by balances and one of the fastest-growing businesses amongst the top 10. We have 24 very profitable partnerships with leading brands like American Airlines, Apple and the NFL. And today, I'm proud to announce that we have signed a deal with Uber to provide an innovative co-branded credit card to their customers later this year. The cards and payments business has very exciting potential and we'll want to get after that.

In Barclays U.K., we also see opportunities for top line growth. We have 24 million customers in the U.K. and most of them currently have just 1 or 2 products with us. Our strategy for growth is to deepen relationships with as many of these clients as possible, and Ashok and his team had exciting plans to do just that.

When I took over as Group CEO of Barclays, the things that needed to be done to get the bank to the right place to realize its potential were fairly clear. First was to reset the bank strategy, which we did in March of 2016. Alongside that, we need to recruit and organize the best possible management team for the business, both at the executive level and the next tier below. And we did that through the winter, spring and summer of last year.

Next, we needed to execute the strategy, which we have done successfully, culminating in our exit from Africa and the closure of a Non-Core unit in this quarter. We had to get our capital position to a much stronger place to 150 to 200 basis points above the regulatory minimum. And we've met that target with our 13.1% CET1 ratio print today. And we needed to continue to prioritize strengthening our culture and controls, which we've attended to.

With all of that accomplished and while still working to put our remaining conduct issues behind us, our single-minded focus now as a management team is on improving group returns. At the full year results announcement early next year, we will provide an updated capital management policy for the group, and I very much look forward to sharing that plan with you.

With that, let me thank you for your time and hand you over to Tushar.

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [3]

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Thanks, Jes. Our results announcement presents the H1 financial performance on a statutory basis, which is the way Jes and I now manage the businesses. To help you understand the Q2 business performance and trends, I thought it would be hopeful to highlight material items and other items of interest, which I set out on the next slide. There are 2 material items in Q2 this year, which are the GBP 700 million for PPI and GBP 1.6 billion in losses relating to the Africa sell-down. It's worth stressing that these Africa losses don't change the overall capital ratio accretion expected from the sell-down. As a reminder, in Q2 '16, there was a GBP 615 million gain from the sale of our share in Visa Europe, the charge of GBP 400 million to PPI and GBP 292 million of own credit in Head Office income. The latter now goes to reserves in according with IFRS9. When I run through the underlying performance of our businesses, I'll exclude these items, although we have shown the statutory numbers in the tables on the following slide.

The other income and cost items of interest have been listed, including gains on the sale of our share in VocaLink and of our Japan JV, to make it easy for you to adjust for them if you wish to do so. Our group Q2 statutory results were impacted significantly by these 2 material items, together with another quarter of significant Non-Core losses as we successfully drove down RWAs to GBP 23 billion, ahead of the unit's closure on the 1st of July. Our sell-down of 33.7% of BAGL, generated a loss on sale of GBP 1.4 billion, largely the recycling of currency translation reserves through the income statement and also GBP 206 million from further impairment of the stake. We still estimate about 73 basis points of capital ratio accretion from the Africa sell-down and 47 basis points accretion in this quarter and a further 26 basis points of ratio accretion expected in the future. Group RoTE, excluding these material items, was 7.2%, which represents good progress towards the target Jes referred to of group returns in excess of 10% over time. Of course, we've got some benefit from currency moves year-on-year, particularly the 10% decline in sterling against the dollar, which is a tailwind to the income but a headwind on the cost line. Underlying income was flat year-on-year with increases in BUK and BI, offset by higher negative income in Non-Core as we accelerated the derivatives rundown ahead of closure. Other net income was GBP 241 million, driven by the GBP 109 million gain from VocaLink and the GBP 76 million from our Japan JV.

Impairments increased 8% to GBP 527 million, largely in Consumer, Cards and Payments, although you will see that current delinquency trends in both our U.S. and U.K. credit card businesses are stable.

Underlying costs, excluding the charges for PPI, fell 2% to GBP 3.4 billion as the reduction in Non-Core costs outweighed the currency and other headwinds. This resulted in a group cost-income ratio of 67% on this basis. The GBP 700 million charge for PPI primarily reflects higher-than-expected complaints flow over recent months. This resulted in a residual provision on 30th of June of GBP 2.1 billion, and that's our best estimate of future expected interest, tracking in the latest data that we have. In addition to the PPI charge, there are a number of items in group cost this year, which we expect to fall away over the next 2 years, as you heard from Jes, helping us to get closer to our group cost-income ratio target of less than 60%. We generated significant capital ratio accretion of 60 basis points in the quarter with 47 basis points from the BAGL sell-down and 13 basis points from other sources. Net profits and other actions more than offset the headwinds from the PPI charge and pension contributions to deliver a ratio of 13.1%, which is then our end-state target of around 13%. RWA is reduced to GBP 327 billion, primarily reflecting proportional regulatory consolidation of BAGL and the Non-Core rundown ahead of closure. TNAV fell 8p in the quarter to 284p due to reserve movements.

The Core business delivered close to double-digit underlying returns on an average tangible equity base that was over GBP 4 billion higher year-on-year. Core income increased 2%, excluding the Visa gains and own credit from last year's number, with 2% growth in Barclays U.K. and 1% growth in Barclays International, helped by currency moves. Impairments increased GBP 38 million to GBP 500 million. Q2 delinquency trends are reassuring, but we are keeping a close watch on all credit metrics. Underlying costs, excluding the PPI charges, increased 7%, reflecting currency headwinds, the follow-on effects of the compensation award changes introduced in Q4 and investment in business growth.

Turning now to a slide that will be familiar to you, highlighting Core returns for the last time. You can see again our track record of maintaining around double-digit returns, excluding the bank levy and material items while increasing the equity allocated to the Core from GBP 36 billion to almost GBP 45 billion over the last couple of years. Now that the Non-Core has been closed, our ambition is for the group to deliver an RoTE of greater than 10% over time.

Looking now at Barclays U.K. The underlying RoTE for Barclays U.K. for the quarter was 19.1% with profits broadly flat year-on-year, excluding the Visa gain of GBP 151 million prior year -- from prior year income and charges for PPI in both years. Underlying income increased 2% year-on-year, with an improved NIM of 370 basis points, driving an NII increase of 4%. We previously guided to NIM for the full year of around 360 basis points. We do still expect some NIM -- some decline in NIM in the second half of the year but now expect NIM for the year to be above 360 basis points for the 30th of June perimeter. The absorption into BUK of close to GBP 20 billion of loans from our ESHLA portfolio in H2 will dilute the full year NIM by around 20 basis points. We've been encouraged by the strong growth in deposits as part of our ring-fencing plans in Q1. We made some deposits into BI from BUK. Excluding this shift, deposits were up 3% year-on-year with strong current account retention, consistent with the trend we've seen over the last 2 years.

In mortgages, we've had another strong quarter of applications, the highest since 2008, up from what was a strong Q1. This positions us well to grow our flow share going forward. There continues to be pressure on mortgage margins, but this business still generates attractive returns for us. Impairment has remained stable at GBP 220 million, with improved delinquency rates in the U.K. cards portfolio versus Q2 2016. We remain comfortable with our risk appetite and impairment trends and the results announcement and appendix for these slides contain more information on impairment trends across our key portfolios. Underlying costs increased by 3%, with efficiency savings offset by investment in technology and cyber resilience and the cost to set up the U.K. ring-fenced bank. This resulted in a cost-income ratio of 53%, which we plan to take to below 50%.

Our strategic focus on innovation and automation and our market-leading position in digital banking, we have seen an increase of around 1/3 in digital payments and transfers over 2 years should create further opportunities for structural cost reductions in Barclays U.K. A key strategic priority for us is to leverage our digital capability and data analytics to drive down structural costs as well as opportunities to grow both NII and fee income. Contactless transactions reached an all-time high in June with a total of 91 million transactions completed with a value of GBP 847 million, which was a 133% increase compared with last year. As you may know, we recently launched digital and secured lending to our business customers, building on the success with personal customers. We continue to add functionality to our mobile banking app, which has seen a 19% year-on-year growth in active users, now at just under 6 million customers.

Turning now to Barclays International. Barclays International has delivered a resilient performance this quarter with an RoTE of 12.4% and profits flat at GBP 1.3 billion, excluding the prior year Visa gain with an encouraging performance from our banking operations in CIB and continued investment in growth in US Cards. Underlying income increased 1%, which reflected a strengthening of the U.S. dollar and euro versus sterling, both across a number of business lines but a weaker performance from markets in CIB. Costs increased by 9%, including currency headwinds, which delivered a cost-income ratio of 63%.

Looking now at more detail at Corporate and Investment Bank, where Jes has already described how we see the franchise today and how we are planning to drive returns. The CIB delivered an RoTE of 11.1% for the quarter. Income was down 2% with good performances in banking, up 2%; and credit, up 10%; and a significant improvement in Equities, up 12%, offset by lower income in macro. Within banking, fees were up 8%. Corporate lending was down 11% year-on-year, while Transactional banking increased 4% due to high deposit balances. Other net income was GBP 116 million, principally the GBP 109 million in VocaLink gains. Cost rose by 5%, primarily due to currency headwinds and the change in compensation awards, which I mentioned earlier. The conservative wholesale risk positioning is demonstrated in the Q2 impairment release of GBP 1 million, with no repeat of the oil and gas charges taken in the prior year. The RoTE of 11.1% is encouraging, but that would've been 9.3% excluding the VocaLink gain. And the reabsorption of Non-Core assets will, of course, dilute H2 returns. So we still have work to do to get to double digits but are pleased with our market share developments and are confident of getting there over time using the levers Jes outlined earlier.

Moving on to Consumer, Cards and Payments. Consumer, Cards and Payments delivered returns of 19.4% in Q2 with continued business growth where profit's down by 5%, excluding last year's Visa gain. Excluding the profit on sale of the Japan JV, RoTE would have been 15%. U.S. loans and advances grew by 7% with a benefit from currency moves, and this drove a 9% increase in underlying income. Costs increased by 23% and the impact of currency headwinds and investment in business growth, notably the relaunch of the American Airlines rewards program, which we expect to generate income going forward. Impairments are up year-on-year, reflecting business growth and the portfolio mix plus currency headwinds. Following the Q1 asset sale and the new volumes coming through on the high-quality American Airlines deal, we expect the portfolio mix to continue to shift lower on the risk spectrum over time. As you can see on the slide in the appendix, the delinquency trends are stable from Q1 to Q2. However, we are keeping a close watch in all credit metrics for signs of any deterioration, particularly in recent vintages.

Payments profits in merchant acquiring are up 9% year-on-year to more than GBP 61 billion. As Jes mentioned, we're very excited about the growth potential in payments and in US Cards. I want to briefly cover Head Office, given some of the onetime moves in the quarter and the significant own credit income last year. Profit before tax was GBP 122 million, reflecting the recycling of a currency translation reserve loss of GBP 180 million relating to Egypt through other net income. This compared to a profit of GBP 257 million last year, which included GBP 292 million benefit from own credit. As I've mentioned, since the start of the year, own credit is now taken through reserves, consistent with IFRS9.

Turning now to Non-Core. We closed the Non-Core unit on the 1st of July with GBP 23 billion of RWAs, just comfortably ahead of our guidance for GBP 25 billion. The loss before tax in the quarter was GBP 406 million, significantly down year-on-year but up on the prior quarter as we push through our actions to reduce RWAs ahead of closure. Loss before tax of GBP 647 million for the first half was consistent with the guidance we gave at Q1. Income for the quarter reduced to an expense of GBP 456 million, driven by exit cost and derivatives where we reduced RWAs by a further GBP 3 billion. We're also pleased with the sale of Egypt, which delivered a gain of GBP 189 million included in other net income. Although that was offset at the group level by the currency loss recycled in Head Office, the sale delivered a GBP 1 billion RWA reduction and 10 basis points CET1 ratio accretion. Operating costs reduced to GBP 127 million, driven by business sales and lower restructuring costs.

Looking at more detail as to what happens after closure, and in particular, with the remaining RWA that have been allocated and the P&L trajectory. We're still on track for our previous guidance for a loss before tax in the region of GBP 1 billion for the full year. This implies a loss for the second half in the range of GBP 300 million to GBP 400 million for the operations absorbed into the Core businesses. Losses are expected to reduce over time, and I'll cover how we see the cost reduction fitting into the overall group cost trajectory shortly.

This slide shows where we expect RWA to be absorbed by BI, and specifically the CIB, by BUK and by Head Office, which takes the assets in RWAs fortunately to its own natural home and also where that H2 loss is expected to arise. You can see more detail on this slide in the appendix, including incremental equity allocations as of 30th of June and a rough estimate of the returns drag on BUK and BI H2 results. The precise effect depends, to some extent, on the H2 outturn for the current business parameters. But I hope these numbers help you model -- will help you model the effects of Non-Core closure going forward.

Turning now to costs. Over the past 3 years, Barclays has taken out approximately GBP 1.5 billion on average each year from its cost base. As you know, last year, we switched to a group cost-income ratio target of below 60%, towards which we are making good progress with a group cost-income ratio of 67% for Q2, excluding the PPI charge. Our cost program encompasses 2 key parts: costs that are expected to fall out of the cost base naturally and strategic cost savings, driven by ServCo to create capacity for reinvestment in our technology, digital and business growth. We anticipate around GBP 1 billion of the first type of cost to be eliminated by the end of 2019, as Jes mentioned. These cover around GBP 700 million of items such as structural reform costs and the headwinds from the change in deferred compensation implemented in Q4 2016, plus a significant reduction in the Non-Core cost base from the GBP 500 million or so expected this year. At June 30, we reached a key milestone. Our CET1 ratio of 13.1% is our end-state target of around 13%. We have 60 basis points of accretion in the quarter, despite the headwinds totaling 27 basis points from the PPI charge and pension contributions. The BAGL sell-down delivered 47 basis points of accretion in the quarter, while the Egypt sale added a further 10 basis points. Profits, excluding the impacts of the BAGL sell-down and PPI, added around 30 basis points in the quarter. So in the first 6 months of 2017, we generated around 65 basis points of capital ratio accretion from underlying profits, demonstrating the capital-generative nature of our businesses.

In terms of the capital flight path from here, we see capacity in the future for capital returns to shareholders. I'll be in a position to say more on this at the full year results when we will outline an updated capital management framework, including our dividend policy beyond the 3p, which we intend to pay for 2017.

Looking at the main tailwinds and headwinds going forward. I've mentioned the strong capital generation expected from our businesses. We expect a further 26 basis points from Africa with part coming by year-end when we expect to apply proportional regulatory consolidation at the 14.9% ownership level and the remainder when we achieve full regulatory deconsolidation, which we expect by the end of 2018. Pensions are a headwind overall, but following the recent agreement with the pension trustees set out in today's announcement, a lesser headwind over the next 4 years but under previous deficit reduction schedule. So I've highlighted our reduction of around 25 basis points through 2020, so in effect as a tailwind versus previous expectations. Over subsequent years, of course, we have increased deficit reduction contributions, but these are subject to another tri-annual valuation in 2019.

Regarding IFRS9, there's still a lot of work to do ahead of implementation, but we expect to be in a position to give you an estimate on the effect on our CET1 ratio later in the year. Our expectation is the CET1 impact will be transitioned in over the next 5 years. And if the dynamic transitional proposals are adopted, the effect on CET1 in 2018 will be immaterial, and we expect the fully loaded impact to be very manageable within our capital plan. So overall, we expect to be able to meet our end-state capital ratio of around 13%, including the effect of remaining conduct and litigation items, which we are working to put behind us, and that target level does assume the introduction of a U.K. countercyclical buffer. There's been a lot of discussion on the capital requirements for the group's G-SIFIs following the implementation of structural reform, where there are a number of details still to be resolved. We continue to expect the capital ratio of Barclays U.K. and Barclays Bank PLC post ring-fencing is be broadly similar to each other and to the group based on what we noted out. With our strength in capital position, we're now able to devote increased management focus to driving group returns higher.

So to recap, the benefits of our diversification by customer, product and geography continue to show through. Non-Core has been closed at 1st of July with RWAs of GBP 23 billion, ahead of guidance, and this will result in a reduced drag on group returns from these activities going forward. We completed the sell-down of Africa, delivering 47 basis points of capital ratio accretion, contributing to a CET1 ratio of 13.1%, up 60 basis points in the quarter despite the significant PPI charge. We're on track to deliver group cost-income ratio target of below 60%, and this is not just through cost cutting. We have the capacity to invest in growth opportunities where returns are attractive to drive group returns forward. Our group returns reached 7.2% in the quarter, excluding the U.K. PPI and Africa sell-down effects, reinforcing our confidence in reaching our new group returns target of over 10%.

Thank you. Now Jes and I will take your questions. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question from the telephone line today comes from the line of Claire Kane of Crédit Suisse.

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Claire Kane, Crédit Suisse AG, Research Division - Research Analyst [2]

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My first question is on the PIB return target. I think it's fair to say that expectations are low for returns going forward. And if you could perhaps give us an insight into where you expect to reinvest this GBP 23 billion of RWA from the loan book and how you are measuring the incremental return hurdle rate revenue to risk-weighted asset basis? And then my second question is on the cost outlook. So I think on Slide 26, your shading implies that the 2019 cost base will be lower than 2017, which is broadly in line with where consensus is already, and consensus does have your cost-income ratio in 2019 below the 60% target, but the returns on tangible equity only around 8%. So just wondering whether you could talk through where you think consensus is wrong or whether you think that cost-income ratio needs to come in maturity below 60%?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [3]

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Thanks, Claire. Why don't I ask Jes to talk about CIB returns and the recycling of risk-weighted assets from parts of the loan book, and I'll cover the cost base and your 2019 question.

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [4]

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So the CIB RoTE was slightly under 10% and obviously where we want to get it to over our cost of capital, which is about 10%. The reality -- so we're going to keep the risk-weighted assets in the Corporate and Investment Bank flat. We're not increasing the capital allocation to the overall business. But as we look at our loan portfolio, which is about GBP 90 billion of risk-weighted assets, there's a part of that loan book which is not generating returns that we think we should get by extending credit. With that, there are some parts of the market's business where we do quite well. If you look at the profitability in Prime Services, you look at the profitability in our credit rating, and we have desks around the world that do quite well, we want to reallocate some of that risk-weighted assets to those desks. And we think that by doing that, we can have a manageable impact on our profitability. The other thing that I mentioned at the opening statement which I think shouldn't be lost is over the next 2 to 3 years, we're going to have a significant improvement in the cost of funding in the Investment Bank. We've had a lot of very expensive debt that was issued during the financial crisis, which matures and comes off. We've got securities that are redeemable. So that will also have a material impact on getting that profitability north of 10%.

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [5]

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And Claire, on the cost base, yes, I don't think that this was a cost out, which I don't think you are anyway. But we just wanted to lay out some of these, if you like, tailwinds that we have in terms of continuing to structurally reduce our cost base over the next sort of year or so. And you can see that we would expect a lot of the build costs for our ring-fencing programs and some of the costs we're incurring for Non-Cores is compensation and deferred compensation underlying just naturally go away. We would continue and Jes laid out sort of earlier in the call various opportunities where we continue to drive further efficiencies, some of which we will reinvest back. That reinvestment will be productive, not only in terms of continuing to generate further cost efficiencies but also could be productive in terms of revenues. In terms of commenting on consensus for 2019, I'm probably not going to do that. And you shouldn't take the 10% returns target as a comment on a particular year because, of course, we will be driven by the growth of broader economic environment that we will be operating. And in a cyclical industry like this, this is always difficult to predict that. But I think what we're saying is we have enough levers here of things that we can control, whether it's managing our capital base, managing our risk profile and managing our cost base. But we have a high degree of confidence that all things being equal, we'll be able to get the other company to deliver that double-digit return at the group level.

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Operator [6]

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The next question comes from the line of Michael Helsby of Bank of America Merrill Lynch.

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Michael Francis Helsby, BofA Merrill Lynch, Research Division - Former MD & Co-Head of European Banks [7]

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Tushar, I just want to follow up on that cost comment because as Claire says, that Slide 26, it does look like you're reinvesting most of the GBP 1 billion tailwind that you are identifying. So I was just wondering whether you can tell us at the moment how much of that GBP 1 billion you think you're going to be investing, i.e. what's the investment plan that you've got so we can figure out how much of it falls to the bottom line? I think -- and I appreciate you don't want to comment on consensus on 2019 for returns, but consensus has got costs falling by GBP 400 million or GBP 0.4 billion, 2017 to 2019. So if you could comment on whether you think that's in the right ballpark, that would be very useful. And I've got another question on the Investment Bank. I was wondering if -- there's a couple of parts to it, so basically the same question. I was wondering if you could just comment on what's going on in macro trading because it was very weak again and it was down on Q1. And clearly, you called out Q1 as a very weak quarter because of the U.S. rates loss. The other thing in the IB that's interesting to me is that you really are calling out the strength in leveraged finance, where you moved that business quite dramatically, I think, since Jes came into Barclays. So I was just wondering if you could comment on what the risks are in the leveraged finance business and whether you're retaining any of the exposures on the deals that you're doing or whether it's 100% distributed. And then finally, in the markets piece, actually really surprised, Jes, by your comments about having to -- or looking to reinvest capital in the markets business because last year, I think you, in the 3Q call, to a question, you specifically said that you had enough capital in the IB and that given the agency model, that, that was suffice to grow the business and to deliver the returns. So I was just wondering if you could be more specific on what Claire asked about, which bits of the markets piece now do you think are, I think you used the word staff to capital and therefore you're going to invest in?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [8]

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Yes. Thanks, Michael. Why don't I cover your question on costs and reinvestment and I'll ask Jes to talk to you about the Investment Banking questions that you laid out. Yes, around then, Michael, you're sort of really trying to get a sense of how much of that, if you like, GBP 1 billion tailwind we'd be looking to reinvest. I won't give you a precise number on that and that will sort of drive us back towards sort of a hard cost target, which is we're moving away from and looking to manage more of the efficiency of the company. But I think what you should hear from us is that, that GBP 1 billion is, if you like, capacity by doing nothing. That'd just sort of fall away through the passage of time. Of course, we'll create further capacity through many of the actions that we have going in for this company. And we hopefully gave you some color of some of the exciting opportunities that we have there. We believe that gives us plenty of capacity to reinvest back into the company while also driving the efficiency of the company close to or below 12%, 16% ratio target in good time. So think of it that way. Just don't think of it as maybe just the GBP 1 billion in terms of overall capacity. It will actually be more than GBP 1 billion just through other efficiencies. How much we reinvest, we'll sort of update you as we go along, but it's too early to sort of give precise details around that for the moment.

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Michael Francis Helsby, BofA Merrill Lynch, Research Division - Former MD & Co-Head of European Banks [9]

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Yes. And sorry, Tushar, just to push here. So do you think down GBP 400 million is a reasonable expectation at this stage given everything you know about the -- how the franchise is changing? Or are you just not going to comment?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [10]

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Yes. No, I understand you'd want to help the modeling. When I look at sort of the consensus costs that we published in for 2019, I only did a direct comment on that, but I think it's obviously directionally down. And I think in terms of direction, yes, we are going to have a lower cost base, continuing to have a lower cost base over time, somewhat driven by the tailwinds that I talked about, somewhat driven by further efficiencies you expect us to generate. And I don't know if this is probably of some of helpful to you, Michael, but offset somewhat by gross reinvestment back in, but the trend is definitely down.

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [11]

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Yes. Michael, so from my side, maybe take the leveraged finance question first. The gain in market share and moving up to second position within the industry, I think it's mostly driven by a breakthrough effort to improve our relationships with the sponsors. We've made further progress with Apollo, with Blackstone, with Silver Lake. So it's just the hard work of leveraged finance. But we are not keeping visual exposure or increasing our risk limits or doing transactions that we don't think makes sense. So it is -- it's basic blocking and tackling primarily with the sponsors. In terms of the markets business, there are very profitable areas in the market space and we have been doing quite well in places like credit. We're very pointedly saying we're not going to increase the risk-weighted assets allocated to the Corporate and Investment Bank overall, but there is a reallocation possibility from parts of our loan book to the market space where we think there are very solid returns. And I do think also the whole industry had a challenge in the macro space in the second quarter, driven by the low volatility that everybody has talked about. The trends in IB overall from advisory to underwriting, particularly debt underwriting, are I think reasonably encouraging. And as you see on Slide 7 for us, over the last 3 years, we've had a steady progression improving the profitability of that business. And so reallocating the capital to places that -- in the markets which generate higher than the cost of capital for us is prudent and makes sense. And that, combined with the significant efficiencies and funding to the CIB over the next couple of years, gives us confidence that we can get above 10%.

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Michael Francis Helsby, BofA Merrill Lynch, Research Division - Former MD & Co-Head of European Banks [12]

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Sorry, Jes, just be clear. So it's credit and Prime Services. Are they the 2 areas that you think you're going to boost the balance sheet?

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [13]

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Mike, we're not going to get that specific.

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Operator [14]

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Your next question, gentlemen, comes from the line of Jonathan Pierce of Exane BNP Paribas.

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Jonathan Richard Kuczynski Pierce, Exane BNP Paribas, Research Division - Former Analyst of Banks [15]

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I've got 2. The first is on the return on tangible equity target. I was just wondering what your thinking is in terms of time line there. I mean, what are the targets to current costs as of 2019 and over the sub-debt materials by end of '19? Is this a sort of exit rate '19 in the back of your minds? And maybe on top of that, can you confirm that the target is taking account of all changes when they come up surrounding IFRS9 and a change in risk weights, 3 Basel, these sorts of things?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [16]

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Yes. Is that your only question, Jonathan, or do you have a couple?

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Jonathan Richard Kuczynski Pierce, Exane BNP Paribas, Research Division - Former Analyst of Banks [17]

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No. The third is on capital and it sits -- it's a bit more detail. I mean, I was surprised that the trustee is happy for the entire U.K. retirement funds go into the non-ring-fenced bank. I mean, that's pretty positive development to think. I was wondering if you could confirm that as a result of that, the Pillar 2A charge within a ring-fenced bank shouldn't end up any higher than what we see at the group level today. And if I sort of bring it all together, a bit of a concern for us and many has been whether the combined capital requirement to the ring-fenced and non-ring-fenced bank will end up higher than the group target? I mean, given what you've done on the pension fund and given what S&P had said recently about the non-ring-fenced bank in the ratings to current ratings, are you now pretty much entirely comfortable that the sub-consolidated capital requirement issue is no longer there and there's no real threat to the overall group-level CET1 target?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [18]

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Okay, thanks, Jonathan. Why don't I take both of them? I think your line was a little bit off, but let me just make sure I got your question right. On the first one was more about the return on tangible equity and the sort of the timing of that. Are we thinking about a 2019 exit rate? Does it include all various things that might happen between now and then, for example, IFRS9? I think the short answer to your question is, we're not going to put a date on it and really goes back to control, what we can control. We are subject to the broader economic environment rate cycles and various things like that. But we do have a degree of confidence that over what we can control and, all things being equal, you should see the group returns continue to push on higher and higher. And of course, we're very keen on getting to and above 10% as soon as we can, but we won't put a date on it. It does, of course -- I think most people, when you guys have done your modeling, you probably have us getting into the sort of the mid- to high single digits just by all things being equal to the various things that they go away. And I know many people have talked about benefits of what we should be able to crystallize from the liability side of our balance sheet or whatever and that will come through over time. On your question on capital and the sort of [G-SIFI] level of capital, specifically Pillar 2A and the ring-fenced bank, I can't comment on that. Obviously, that's something that will be set by the regulators and they haven't turned on that. So I think it will be not appropriate for me to sort of comment in advance of that. But everything we see today does suggest that we think that the overall consolidated capital level and the capital levels that need to be held by the 2 main subsidiary groups will look reasonably similar. I mean, of course, it won't be totally identical because the capital stakes just formulate a different yield so I know you're very familiar with. But I think in broad terms, the 3 sort of part for the company in the overall group and the 2 subsidiary components will look quite similar. And you're right, we've been very encouraged by comments, for example, that S&P has made around the ratings of the non-ring-fenced banking groups. So I think quite consistent along and that's very much consistent with our expectations as well.

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Operator [19]

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Next question comes from the line of Andrew Coombs of Citigroup.

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Andrew Philip Coombs, Citigroup Inc, Research Division - Director [20]

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I wanted to come back to costs firstly, more specifically on this theme of cost reduction versus new investment, particularly on your IT budget. You've given a couple of slides on IT. You talked about innovation, automation driving a structural cost reduction there. And yet at the same time, for example, if I look at your U.K. detail that you provided, you talked about cost savings being offset by investment in cyber resilience and technology. So when we think about your overall IT budget, can you give us an idea of how much of your cost base that accounts for, how it splits between, one, the bank and change the bank and how that's been changing? That's the first set of questions. Second, which is on the U.K. loan losses, very similar question, but you've gone up from GBP 180 million to GBP 220 million. It's been running at GBP 180 million for a couple of quarters. The increase seems to be in consumer, yet your arrears rates on cards are going down. So could you just elaborate on the driver there?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [21]

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Yes, sure. Thanks, Andrew. On the cost reduction, particularly around the technology, I'm not going to, as I say, we haven't disclosed the detail on sort of run the bank, change the bank and those kind of components. So I won't get into those. We will probably be talking more and more about costs, and you've heard Paul Compton, our Chief Operating, has already given a sort of an insight of some of the opportunity sets we have for this company. And over time, we'll talk more about that. But generally, the name of the game here is to have a much more efficient technology stack, which will structurally lower our cost base. And it should very significantly structurally lower our cost base and that gives us capacity to reinvest. I mean, kind of areas where we'll be reinvesting back into. Some will be just because it's important that we have the best technology around, for example, cyber resilience and that will require some investment, but also back into products and services. Jes talked about, which probably doesn't get a lot of external press but I can assure you internally and the customers and clients, the switching on bPay infrastructure over the weekend is an enormous undertaking that makes a tremendous difference to the quality and efficiency to our merchant acquiring network, which we are leaders in. And that's going to give us also enhanced opportunities in terms of efficiencies of that business but also revenue opportunities as well. So I guess, Andrew, maybe that's a marker for now, but more to come. Loan loss rate, year-on-year, we're about flat. I think you're probably looking at sequential when you're looking at the slight tick-up. Now sort of when I look at this, you'll get the seasonal effects of sort of sequential quarters, the calendar effects of what we call collection days, which is a euphemism of how many business days there are in the quarter, and that can sometimes change, I'll call it, sequential impairments. But sort of underlying this, it's a relatively stable set of impairment trends that we're seeing. Delinquency rates are pretty low and stable. If anything, slightly lower than they were in prior periods, whichever one you want to measure. But there's nothing that I read into that other than just traditional seasonal effects you normally see from the first quarter, second quarter. But in the U.K. at least, it does sort of continue to feel very benign, at least for now. I would say that we're overall pretty cautious on the outlook. I've said that for a number of quarters and continue to be quite cautious on the U.K. outlook and position our business appropriately. Jes, is there anything else you want to add on that?

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [22]

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On the technology spend side, I mean, we're currently engaged in updating our entire desktop software platform to Office 365. It's a big move. We are in the process of moving the majority of our data to the cloud, which will help cyber resiliency. The product which I might [pan], Andrew, is we are very focused on the cost-income ratio of 60%, and we want to get there as soon as we can. What I would say is, once we get to that 60%, I wouldn't push it a whole lot further than that because we do have places that we want to invest in, in our technology platform and want to get on it.

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Operator [23]

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The next question comes from the line of Chris Manners of Morgan Stanley.

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Christopher Robert Manners, Morgan Stanley, Research Division - Former Equity Analyst [24]

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So 2 questions for me, if I may. The first one was just having to think about the cost-income ratio again. You're talking to a group cost-income ratio is below 50% -- sorry, below 60%. But I think you're saying Barclays U.K. should be below 50%. If we at where Consumer, Cards and Payments is at the moment, that's below 50%. So what sort of cost-income ratio that you're happy to run with in CIB? And will that mix shift from corporate lending to markets have an impact on that as well? So just where can we see CIB cost run at? And the second question, if I may, was just on margins in Barclays U.K. I guess that you're guiding to above 360. You're going to have a negative 20 bps impact from the ESHLA transfer in the second half. Maybe you could just run us through a little bit of margin dynamics. Presumably, asset pricing is still quite tough. You've got some deposit repricing. But how should we think about the underlying margin trends if we ex out the ESHLA portfolio transfer?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [25]

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Yes. Chris, why don't I tackle both of them? On the cost-income ratio, you're right in that we are targeting a sub-60% ratio in our U.K. bank, feel pretty good about getting there. As you can imagine, I don't want to sort of go around publishing CIR targets of virtually every subcomponent of the group, just the large one, but I know there'll be a desire to hear from us from CIB. So -- but we're not going to give a target out. I think just -- you'll have to make your own inferences from that from the group target and the U.K. that we've called out. I do -- I know this isn't sort of hugely insightful for you, unfortunately, Chris, but you should expect the CIB cost-income ratio to continue to improve. And again, at the beginning of all the scripted comments earlier today, I think Jes talked about many of the opportunities we have to just drive that further downward. Again, just sort of the rotation between allocating, fine-tuning of capital between some of our lending activities and our markets activities, I don't think that naturally has any sort of direct cost-income ratio sort of drive this. It's more returns enhancing. So just because the returns have improved, obviously, the cost-income ratio improves, which is more of a returns-enhancing objective than cost-income ratio for the sake of that. In terms of margins, in terms of asset pricing, yes, I think it still continues to be quite a competitive market. Mortgage margins continue to be under pressure, and we do see that in our business. Our mortgage business is holding up actually very well. I think we called out on the call applications that are at very high levels, high as it's been for a number of years, probably since 2008. We haven't really changed our risk appetite there, so it's really just us continuing to prioritize the parts of the mortgage business that we continue to like towards the lower risk and the spectrum sort of sub-80% loan-to-value and even a bit lower than that tends to be our sweet spot. But asset margins do continue to be under pressure. Therefore, when I gave the sort of the margin guidance earlier, we sort of had margin of about 370 basis points on a like-for-like basis thus far. Excluding the transfer of these Non-Core ESHLA assets back into the Barclays U.K., you wouldn't expect NIM to be down from the 370 on a like-for-like basis but higher than the 360 we guided at the first quarter because I think we've done a reasonable job of, obviously, continuing to be very disciplined on the liability side of our balance sheet and on chasing asset margin down too much where it doesn't make sense for us. And then mortgage portfolio is another place where the technology investment is beginning to play off. We've ruled out a whole new technology platform for brokers across the United Kingdom to process applications for new mortgages with Barclays U.K. and that has resulted in record numbers of applications being processed in any given day. So it's another case where technology is an advantage in the business.

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [26]

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Yes, it's a very good point.

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Christopher Robert Manners, Morgan Stanley, Research Division - Former Equity Analyst [27]

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Sounds pretty encouraging, what you're saying about the application's rate. I mean, I guess, in Barclays U.K., the loan balances have been flat for the last sort of few halves at GBP 166 billion, GBP 167 billion. Does that mean we could actually see a pickup in loan growth from you guys if you got such good applications? Or are you going to continue to filter strongly, keep the balances sort of flattish but make sure that you focus on your asset quality?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [28]

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Yes, I would say very small balance sheet growth, modest. So I think it will grow, but very small, so wouldn't sort of put in too big a sort of growth in your models. Asset quality is very, very important to us. We generally are very cautious as you'd heard us say probably for a few quarters on the epay outlook and returns are already pretty high in that business. So we do want to grow that business and we'll grow that business. We're cautious about growing it. And so prudent growth on the mortgage book is what you'd expect but relatively small numbers on a net basis.

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Operator [29]

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Your next question from the telephone line is from the line of Martin Leitgeb of Goldman Sachs.

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Martin Leitgeb, Goldman Sachs Group Inc., Research Division - Analyst [30]

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I just have 2 questions, please. And the first one is whether you have any view on when the Basel IV fine work might be think finalized? Do you expect that there's a chance that this might occur later this year? And the second question is a bit more broader, I think, and it's just looking at Barclays' business model and Barclays' through now being predominantly a transatlantic bank. Obviously, the world is undergoing significant change in terms of Brexit in the U.K., the requirement of ring-fence in the U.S., the requirement to ring-fence in the U.K., which obviously affects particularly Barclays as compared to some of the other international peers and potentially equally the requirement of ring-fencing in Europe depending on what the outcome of Brexit is. And I was just wondering what you imagine would be the impact on Barclays' business model? And if there's any already any changes you notice on the underground, say, some European clients preferring having a product counterparty, which is -- which sits within the eurozone going forward and so forth?

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [31]

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Yes. No, Martin, for sure, the impact on how we've organized our business given regulatory reforms in the U.S. and in Europe has been significant. Setting up the IHC, which we did last year, was a very major lift. It's got its own Board of Directors, its own CEO, but it hasn't changed at all the nature of our business in the U.S., be it in the consumer credit card space or in the Corporate and Investment Bank. The ring-fencing in the U.K. is even greater of a lift. And over the last couple of weekends, we've been changing our Core technology platforms allowed for ServCo changes. And -- but all of that is going to have to be up and running by Easter next year. So that is also an adjustment. But again, it hasn't changed the type of business that we do up in the U.K., whether it's with small businesses or consumers or institutional clients. The ring-fencing back in the U.K., the IHC in the U.S., they're all much more significant in many ways than what we need to do with Brexit, which we announced last week in terms of expanding the extent of our bank subsidiary in Ireland. And we don't see any other things as impeding or ultimately changing the execution of our strategy to deal with clients across Europe. Now we're the largest underwriter of European sovereign debt. You don't expect that to change. We're the largest underwriter of euro debt raised by a non-European company. We don't expect that to change. We have 1,200 people across the continent. And in Europe, we have the largest credit card business in Germany. So whilst we need to make the investments to make these structural changes in our organization, I think the regulators have been pretty smart actually, and whilst they've been asking for new structural changes, they have not impeded the free flow of capital nor have they impeded the free flow of financial advice. So the strategy of being a transatlantic consumer Corporate and Investment Bank stays and we feel there's no impediment at all to execute that strategy.

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [32]

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And Martin, on your question on Basel IV, look, I don't have the inside track on the timing of it. But everything I can see from my perspective, at least at the moment, it's difficult to see anything being announced before the end of the year. But as I say, I don't have the inside track, so just take that as one person to you rather than anybody would be on the inside here.

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Operator [33]

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Next question comes from the line of Edward Firth of KBW.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [34]

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I just had 2 questions. Firstly, if I look at IB costs, it was -- it looks likes a strong performance in Q2, I think they're down almost 10%. So I just wondered, assuming some sort of broadly flat revenue outlook into the second half, is that a sort of reasonable run rate? Or was there something sort of special in that, that we should think about? So I guess that's my first question. Then second one, I'm just trying to get my head around the pensions and the whole concept of a pension deficit rising by GBP 1.9 billion and yet your contribution is going down. And so I guess, my question on that is, is it just -- I mean, the fact that you haven't made an effort to actually start closing that gap isn't quite a contrast to some of your peers. So is that simply that you don't have the capital? Or is it that you think something in the assumptions might change over the next 3 or 4 years, which will mean that when we get to 2022, the deficit actually goes down in some way?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [35]

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Yes. Thanks, David. On IB cost, there's nothing particularly one-off in the second quarter that brings the CIB cost base down. So I won't get forward guidance on another quarter or something, but there's nothing I'd call out.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [36]

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Is it broadly normal quarter?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [37]

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If anything, there was -- we had this one item we called out which increased cost actually, which is the compensation -- deferred compensation underlying from last year, but there's nothing there on the other way. In terms of pensions, yes, I mean, the way that works in the U.K. at least is that the general guidelines by the pension regulator is that companies need to have a funding for a sort of set of contributions that allows any funding gaps to be closed over 10 years. And that's what we agreed with the trustees as part of that fixed tri-annual. If you look at the sort of 10 years' worth of contributions, it actually does cause the funding gap that existed over the last time over the last tri-annual. If you were to measure that funding gap here and now this second, it's actually quite a bit lower already and none of us will know what it will be in 2019 when we have the next tri-annual. So we'll see what it is, and we'll agree the appropriate funding plan that satisfies the trustees and make sure that we continue to provide a very strong covenant as an employer and sponsor with scale. So we are pleased that we have a very constructive dialogue with the trustees. You've seen that in the last 2 tri-annuals actually. The trustees recognized that the most important thing for them is to have a very, very strong covenant with our employer. And they're very constructive when they look at the capital pressures that the company may be under and to ensure that they act very constructively within that context. And we've seen them do that for the last 2 tri-annuals, so we feel very good about that.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [38]

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Sorry, just to be clear, I think in the past, you said your Pillar 2 buffer is used to cover your pension deficit. So I guess, the GBP 1.9 billion is about 60 basis points. Is that already in the Pillar 2 buffer? Or would we expect the Pillar 2 buffer to go up next time the bank looks at it?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [39]

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So Pillar 2A component has a, for the pension, aspect to it. Now the Pillar 2A, there's no sort of magic sort of calculation that does that. What it's really trying to measure sort of qualitatively is the volatility around the pension position with regards to our capital ratio. And of course, capital ratio, it refers to the accounting measure of pension deficit, surplus when it happens to actually currently be in a surplus. So just be careful that we don't confuse the sort of the funding actuarial position of the pension scheme and the deficit reduction schedule that we publish versus the IAS 19 accounting measure of the pension surplus or deficit, which is used for capital, which happens to be in surplus today and has been in surplus for a little while now.

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Edward Hugo Anson Firth, Keefe, Bruyette & Woods Limited, Research Division - Analyst [40]

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So there isn't anything in the Pillar 2 for pension deficits? Sorry, I just to get my -- I thought it was...

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [41]

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No, there is. As I mentioned, there is a Pillar 2A component that measures or simplifies capital for the potential volatility in the pension surplus or deficit as measured on an IAS 19 measure. I mean, rather than sort of (inaudible). Yes, just give us a call and we're more than happy to spend more time on you on this.

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Operator [42]

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Your next question, gentlemen, is from the line of Chris Cant of Autonomous.

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Christopher Cant, Autonomous Research LLP - Partner, United Kingdom and Irish Banks [43]

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I had 2, please. If I could just follow-up the earlier questions on return on tangible and your 10% target. I appreciate you don't want to get into calling the business cycle the outcome of Brexit negotiations, but I'm not sure the market is going to give you much credit for the target unless you give us a bit more color. If I say hypothetically, we end up with a long transitional period post 2019, no hard macro shock. Provisionings broadly where consensus has it, which is sort of a gentle drift up. You've got those [RCR] maturity in 2019. In that scenario, would you hit that 10% RoTE at an exit run rate? And the second, just a point of detail, you said you're not going to increase the capital allocation to the IB. Is that the case allowing for any RWA inflation from the fundamental review of the trading book?

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [44]

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Yes, Chris. I mean, I don't want to get into sort of too many hypotheticals, but I'm trying to be helpful by if we expect the -- if we see the kind of environment they -- or sort of laying out a relatively constructive macro backdrop sort of what keep Brexit stuff going on or impairment shocks or anything like that, I think you'd expect the management team here to do everything we can to get to those kind of returns levels. But that's not a sort of a target in terms of a specific date or anything like that just to help you with the ambition and the confidence that we have around this. In terms of CIB capital allocation and sort of does it include things like fundamental review of the trading book, my sense is, fundamentally, the trading book, as an example and you may have other sort of point on this you're going to call out as well, I don't think that's going to come in for some time and I'll be sort of speculating a little bit here. But my sense is it will be beyond 2020. And I think the CIB capital allocation, as we see it certainly on a time measure that's, call it, medium term at least, as Jes called out, I don't think to expect to change materially from where we are today, if at all.

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [45]

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So yes, I would add, Chris, is -- and I look forward to getting away from Core and Non-Core. But over the last number of quarters, our Core business has been generating an RoTE of north of 10%. And that's with a capital number that's been growing quite a bit as we got to the 13.1% CET1 print. So the Core business has been generating that 10%. And so one way to think about it is if we are disciplined in eliminating our Non-Core expenses, which we, I think, we've shown that discipline over the last 1.5 years. And if we have the ability to eliminate the costs that we currently have to get endure to set up the ring-fenced bank in the U.K. and that process into the Easter of next year, those 2 issues plus as we work through change in the compensation accrual that we initiated in the fourth quarter of last year, that will eliminate a significant amount of the cost drag that's been hurting the group result, and hopefully, allow for this conversion of Core group, which gave us the confidence to put out this 10% RoTE target that we've got. We don't want to get connected to a date because neither Tushar nor I control what's going to happen with the global economy or with the markets, et cetera. But to your point, if we have reasonably stable environment from where we have been the last couple of years and we eliminate the drag that the group has had to focus just on our Core franchise, we should be able to deliver that 10% or better RoTE.

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Operator [46]

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Gentlemen, your final question today comes from the line of Fahed Kunwar of Redburn.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [47]

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Just one question really on the -- back on the Investment Bank and the impact to technology. We talked about kind of how benefiting or how technology might benefit mortgage margins. But the impact of technology on the kind of fixed income and the institutional space that you're in, in the U.S., in particular, it seems quite negative. And I had a look at the kind of front book interest rate swaps, the amount that's trading on exchange now is 3x more. If you look at what happened to cash equities when that happened, I mean, margins plummeted over the last kind of 20 years. So how do you see the impact of technology affecting that institutional fixed income business? And are we in for a kind of long period of margin decline that is hopefully offset by increased balance sheet deployment and volumes?

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [48]

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I mean, there are clearly parts of the institutional market where technology is extremely important and it is defining the economic characteristics. I mean, the most salient would probably be the cash equities business, and we'll say processing and algorithms are critical both for the cost of that business as well as the revenues and the old days of 8 1/4% spreads are gone. But in terms of the other parts of the business, particularly around credit, I don't think you're ever going to be able write an algorithm given how bespoke and idiosyncratic the credit market is. If you take someone like a Barclays, we have one stock. We have tens of thousands of CUSIPs. So there are other parts of the market that I don't think you're going to see technology supplant how those systems are currently managed. And anyhow, you should have mentioned technology and clearinghouses. In many ways, that should decrease risk and the revenues to risk return can get better. Now I -- when you talk to most buy-side people, what I hear is spreads are widening. The market is less liquid. More money is having to be paid to rebalance portfolios. And then I, quite frankly, think you eliminate the impact of the Volcker rule. And given the amount of capital that has had to be put behind investment banks today, the underlying revenue in that space is actually going up in our view. So I don't think it's as structurally impaired as you laid out.

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Fahed Irshad Kunwar, Redburn (Europe) Limited, Research Division - Research Analyst [49]

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Just to follow that up, my last question. I guess, our spread's improving on areas that require more balance sheet, whereas things that don't require balance sheet spreads are reducing. So is that why, I guess, the kind of change of focus to some extent today towards kind of more balance sheet deployment in things like credit and Prime Services? Does that have an influence in your decision to where the technology has influenced, I guess, the markets business?

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James Edward Staley, Barclays PLC - Group CEO, Interim CEO of Barclays Bank Plc & Executive Director [50]

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No, I think the rebalancing of RWA is more between the extension of credit and parts of the markets business. The parts of CIB that are very capital-like like advisory, like debt underwriting, like equity underwriting, I wouldn't see the revenues are going down at all. In fact, if you look at market volumes of debt issuance from investment grade to high yield around the globe, it's got a very strong growth path to it. And one of the advantages on the fixed income side is debt instruments have these things called maturity dates, which means they generally have to be rolled over. So you can actually predict going forward, with a fair amount of accuracy, the growth rate in the underwriting markets most of the markets that we're in.

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Tushar Morzaria, Barclays PLC - Group Finance Director & Executive Director [51]

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Okay. I think that was the last question. Thanks, everybody. I'm sure we'll see you around and about in the next few days, but thanks for joining us today.

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Operator [52]

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Thank you, ladies and gentlemen. That does now conclude today's conference call. You can now disconnect your lines.