Barclays PLC (NYSE:BCS) Q2 2022 Earnings Conference Call July 28, 2022 4:30 AM ET
Company Participants
C. S. Venkatakrishnan – Group Chief Executive
Anna Cross – Group Finance Director
Conference Call Participants
Robin Down – HSBC
Joseph Dickerson – Jefferies
Omar Keenan – Credit Suisse
Rob Noble – Deutsche Bank
Jonathan Pierce – Numis
Martin Leitgeb – Goldman Sachs
Chris Cant – Autonomous
Edward Firth – KBW
Guy Stebbings – BNP Paribas Exane
Rohith Rajan – Bank of America Merrill Lynch
Operator
Welcome to Barclays Half Year 2022 Results, Analysts and Investor Conference Call. I will now hand you over to C. S. Venkatakrishnan, Group Chief Executive and Anna Cross, Group Finance Director.
C. S. Venkatakrishnan
Good morning, everyone. I am pleased to be able to report strong financial results for the first half of 2022 for Barclays. Our profit before tax was £3.7 billion, leading to an Attributable Profit of £2.5 billion. This came after absorbing net impact of around £580 million over the half-year, relating to the over-issuance of securities under our US shelf registration statements. The Group income was £13.2 billion. Excluding the income benefit from hedging arrangements related to managing the impact of the over-issuance, Group income was £12.4 billion, which is up 10% year-on-year.
Our Statutory Group Return on Tangible Equity was 10.1%. We continue to focus on costs, particularly given inflationary pressures. We are also focused on the readiness of our balance sheet to withstand macroeconomic challenges. We remain mindful that we need to continue to support customers and clients through a more than uncertain economic period.
We remain well capitalized, with a CET1 ratio of 13.6%. This is comfortably within our target range of 13-14%. It remains one of my key priorities to target the return of excess capital to shareholders. I am pleased to announce a half year dividend of 2.25p per share, as well as an intention to initiate a further share buyback of up to £0.5 billion. This is in addition to the £1 billion share buyback which we announced at Full Year, and which we have nearly completed.
Before Anna and I go into more details on earnings, let me provide a brief update with respect to the over-issuance of securities under our US shelf registration statements. We are making good progress to resolve this matter. We have agreed the terms of the rescission offer for affected customers, which we announced on 25 July and which will be effective on 1 August. We continue to engage positively and constructively with the Securities and Exchange Commission, as we have done since we discovered and reported this item to them. In addition to an internal review, I have commissioned a counsel-led external review of the over-issuance matter. This will report to the Board shortly. We will consider all its findings carefully and take appropriate actions in response.
Anna will cover the financial impact in more depth, but we expect total first half impact, net of tax, to be around £580 million, including an estimated monetary penalty. We have made considerable progress improving our controls since 2016, so the fact that this over-issuance matter occurred in the first place is particularly disappointing. The necessity of a strong controls culture has never been clearer, and we will strive ceaselessly to improve it.
Returning now to our performance, I would like to mention one or two highlights from the second quarter. Profitability was strong, with Q2 profit before tax of £1.5 billion. Return on Tangible Equity was 8.7%. This includes double digit returns in our consumer businesses, Barclays UK and Consumer, Cards, and Payments. Returns in the Corporate and Investment Bank were impacted by the elevated litigation and conduct charges this quarter. I am particularly pleased that we saw continued income growth across all three of our operating businesses.
Income in Barclays UK was up 6%, Consumer Cards and Payments was up 29% and the Corporate and Investment Bank was up 10%, excluding the impact of over-issuance. CIB income also included a particularly strong performance in FICC, which was up 52% year-on-year in US dollars. Across Barclays, the first half oncome was up 17% year-on-year. Excluding the income from hedging arrangements related to the over-issuance, income was up 10%. The drivers of this growth are varied, illustrating how our diversification strategy is working for the Group. It operates at all level, geographically; in terms of customer type; and in the revenue streams within each of our individual businesses.
For instance, Barclays UK has seen an increase in transaction-based revenues, as well as a tailwind from rising interest rates. In Consumer Cards and Payments, we have benefited from balance growth in our US cards portfolio, as well as a pick-up in Payments transactions activity. In the Corporate and Investment Bank, Global Markets income grew across the half-year, offsetting a slower period for Banking. This is the result of the investments we have made in our client offering and in the digitization of our trading platforms, allowing us to support our clients during a period of heightened volatility.
We have also benefitted from growing client wallet share in Global Markets, while the interest rate environment has helped the Corporate Bank. As a result, Barclays has been able to demonstrate steady revenue progress, even in an uncertain economic and markets environment.
Our focus remains on supporting our customers and clients through this period of economic uncertainty. The market remains volatile in interest rates, equity prices and credit spreads. There is anticipation of a change in the real economy which we have not yet seen. We remain alert to signs of weakness, although we start from historic low levels of unemployment and credit distress. Barclays is prepared to navigate this uncertainty I am confident that Barclays’ diversification and balance sheet readiness puts the Group in a good position.
We are alert to the pressure that the rising cost of living is having on our customers and colleagues. We have adopted a range of measures to help them, and we will look to do more. Each month, we assess millions of customer accounts and proactively contact anyone who might be showing signs of financial difficulty. Our frontline staff are trained to support vulnerable customers, including those struggling financially.
Customers can also use the Barclays app for financial assistance services, including access to an affordability assessment and more manageable repayment options. We are mindful of the impact on colleagues as well of this rising cost of living. We recently increased pay for 35,000 of UK-based staff in customer facing, branch and junior support roles, providing a £1,200 increase to their annual pensionable salaries. We have taken steps to manage our balance sheet conservatively. Our lending criteria remain careful, and we have recently reviewed and updated our affordability models in light of current circumstances.
We are supporting our clients to manage their risk, and monitoring customer behavior as we keep an eye on inflationary pressures in the market. As I have already outlined, we also continue to see the benefits of diversification. Finally, we are maintaining robust credit card coverage ratios as balances rise. We maintain Group balance sheet provisions of £6.0 billion, including post-model adjustments of £1.3 billion. At Year End, I outlined our three strategic priorities for the bank. These were to deliver next- generation consumer finance, sustainably grow our CIB and capture opportunities as the world transitions to low-carbon.
Across the first six months of this year, we have continued to invest in these priorities. This includes two major investments in our consumer franchise, which will deliver higher yielding balances and access to new customers. The first was our acquisition of the Gap US credit card portfolio. This completed at the end of the second quarter, adding 10 million accounts and doubled our US footprint. It will help us diversify our US cards business into retail from its historic weighting to travel, and it represents a significant expansion of our online platform. The second was our acquisition of specialist mortgage lender in the UK called Kensington Mortgages, this acquisition is subject to regulatory approval. This will give us access to the specialist residential mortgage market in the UK.
As the Barclays mobile app turns 10 years old, it is rewarding to see that more than 10 million customers are now using the app. Last year we added over 100 features and customer experience enhancements to help our customers to manage their money in an accessible and easy way. This year will be no different and we have already introduced a number of new features to the app. For example, our new Async chat function means we are seeing customers resolve around 40% of their queries through self-service options.
We continue to invest in our Corporate and Investment Bank to maintain our ranking of number 6 for both Global Markets and Banking. In Global Markets, our client wallet share continues to increase. Between 2018 and 2021, we grew our share by 105 basis points, making us a Top 5 gainer for the period and the only non- US bank in that group. We also continued to see good momentum in leading client revenues in to first half of this year.
Finally, we are expanding our sustainable finance product offering. During the half-year, we acted as lead manager on Austria’s inaugural €4 billion Green Bond, as well as the world’s first Green sovereign inflation-linked bond transaction for the French Republic. This continues to cement our position as a leading primary dealer in European government bonds. We have also completed a further £700 million with the Green Home Mortgages this year in the UK, meaning that we have now completed £1.7 billion since 2018.
We made good progress to advance our ESG agenda in 2022 and more detail of which is available on our dedicated presentation online. I was particularly pleased that the publication of our climate strategy, targets and progress, our so called Say on Climate, received support from shareholders at our Annual General Meeting which we held in May of this year.
So, in conclusion, Barclays has had a strong first half of the year. We maintain the double-digit ROTE that was a feature of our performance throughout 2021, and we continue to target a statutory ROTE greater than 10% for 2022. We have seen broad-based income growth across all our main operating businesses, underlining the value of the investments which we are making to grow Barclays and deliver attractive returns. And we are continuing to return excess capital to shareholders. I am pleased to have been able to announce a half-year dividend of 2.25p per share and an intention to initiate a further buyback of up to £0.5 billion of our other franchise. And this will continue to be a priority for me as Group Chief Executive. While I am very pleased with the performance we have shown, I am conscious that we live in unusually uncertain times. This drives our conservative approach to managing our balance sheet, our robust provisions, and our watchful stance on continued weakness in the economy.
So with that, thank you very much and let me now hand over to Anna.
Anna Cross
Thank you, Venkat, and good morning everyone. For half one, our broad-based income growth partially offset the increase in costs, which reflected an elevated level of litigation & conduct charges. Impairment remains low, reflecting the quality of our books and level of provisioning. As a result, we were able to report an EPS of 14.8p, generating a statutory RoTE for the half of 10.1%. Today, I want to focus on three themes. Our continued revenue momentum, our focus on costs given inflationary pressures, and our readiness for any macroeconomic deterioration.
Before I do that, I will give you a short update on our progress on the over-issuance of securities under our US shelf registration statements. We flagged previously that the cost of the rescission offer in relation to the over-issuance would be sensitive to equity market movements, but also that we had hedging arrangements in place to mitigate the impact substantially. Whilst the net impact post-tax on the Q2 income statement is £176 million, the gross impacts on the income and cost lines are significant, as markets have fallen sharply in Q2 The hedging income is £758 million and is in Equities in CIB, and the increase in the estimated cost of rescission is £984 million within litigation & conduct costs. We have announced that the rescission offer will complete in Q3. Whilst there may be some movement in the final gross effects, we don’t expect material changes to the net impact. We have also progressed our discussions with the SEC in relation to a potential monetary penalty, and we’ve taken a charge of £165 million in Q2 in anticipation of this, giving a total net impact on Q2 of £341 million from the over-issuance.
In Q2, we achieved a statutory RoTE of 8.7%. Income was up 24%, or 10% excluding the hedging arrangements, while operating costs, which exclude L&C, were up just 3%. So the operating jaws were significantly positive. Total costs reflected both the further over-issuance provisions, and a charge of £165 million relating to settlements in principle in respect of industry-wide devices investigations. The CET1 ratio ended the quarter at 13.6%, and that’s depressed by a 19 bps temporary effect of holding the hedge RWAs. This remains above the mid-point of our target range, and we are announcing a further share buyback of up to £500 million and a half year dividend of 2.25p per share.
TNAV increased 3p in the quarter to 297p per share, as the 6.4p of EPS outweighed the net movement in other reserves. I’m now going to focus on the three themes of revenue momentum, cost management and our readiness for any macroeconomic deterioration, before I summarize the Q2 results of the individual businesses. Q2 continued the broad-based income momentum of Q1 and this slide highlights some key drivers. First, loans and advances have grown year-on-year by 14% overall, and matched by deposit growth of 14%. Second, increased economic activity has driven transactional fees across consumer and corporate businesses.
Third, whilst the market environment for primary issuance remains challenging, that same environment has driven high levels of client activity across both financing and trading in the markets businesses. Finally, we have a tailwind from rising interest rates, which impact product margins across our franchises, and increase the gross income from the structural hedge. We flagged the latter in Q1, and are benefiting from the recent increase in the structural hedge and the roll into higher long rates, with Q2 gross hedge income of £501 million, an increase of £123 million on Q1.
Q2 income growth was 10% excluding the over-issuance hedging. In the CIB, our diversification helped to generate 10% growth in income, excluding the benefit of the hedging arrangements. The stand out performance was Markets where income increased 31% in sterling. FICC revenues were up 71%, reflecting increased client flow in Credit and Macro. Bid/offer spreads remain attractive, and we have managed risk well. As in Q1, we have helped our clients reposition themselves in a volatile rate environment.
Equities revenues were down year-on-year excluding the over-issuance hedging. However, we don’t judge success on single quarters, and we are happy with the continued development of our franchise in trading and financing, and increases in institutional client wallet share over recent years. Investment banking fees were down 37% year-on-year, reflecting primary market conditions. Advisory was up 8%, and the deal pipeline remains strong. Corporate income was up 24%, with strong growth in Transaction Banking more than offsetting the Corporate Lending income expense.
The latter reflected marks we took on specific leverage finance deals and the cost of macro hedges, as we prudently manage our leveraged finance pipeline. Income in CCP increased 29%, reflecting growth across all three constituent parts. In international cards, income was up 34%. US net balances grew by $6.1 billion year-on-year, including $3.3 billion from the Gap back book, and significant organic growth, continuing the momentum in the business
In payments, transactions turnover was up 10% year-on-year, driving income growth of 35%, which was 10% up on Q1. Barclays UK grew income by 6%, predominantly in personal banking, where continued deposit growth, and a strong tailwind from rate rises, are offsetting very competitive mortgage margins. Barclaycard balances were broadly flat year-on-year, and marginally up quarter-on-quarter, as we managed the income/risk trade off carefully, given the economic outlook.
Looking now at costs. We manage our statutory costs, including litigation & conduct charges, but the gross impact of the over-issuance risks obscuring our underlying cost control. In this inflationary environment, we are particularly focused on operating leverage. To that end, it’s helpful to start by looking at the cost income ratio excluding the effect of the over-issuance charges, which showed positive underlying jaws. Income growth excluding the hedging arrangements improved the ratio by 4.4%. Given our dollar profitability, FX also improved the ratio, as did the reduction in structural cost actions. This gives us the headroom to invest in the business, and absorb inflation and other L&C charges. Together these factors reduced the ratio to 62%, two percentage points better year-on-year. The net effect of the over-issuance took the ratio back to 69%, but we do view the level of L&C in half one as exceptional, and are encouraged by the trend in the underlying cost income ratio. We continue to face inflationary pressure, but seek to manage the cost investments with efficiency savings, and remember that inflation does have a positive effect on nominal income.
Overall, we continue to target a cost income ratio of below 60% over the medium term. We’ll look at the cost trajectory in more detail on the next couple of slides. The chart on the left shows that the rise in half one costs was mainly attributable to the increase in L&C charges, excluding which, costs were up just 2%. We reduced structural cost actions significantly, while increasing investment spend within base costs, which were up by 8% excluding L&C.
We’ve shown on the right hand side some of the factors behind this increase of £0.5 billion, of which £0.3 billion was the result of inflation and FX movements. However, I would also highlight the deliberate increase in investment spend, which is partly funded by a further increase in efficiency savings. As you would expect, they are closely aligned with the 3 strategic priorities Venkat has highlighted, including Gap, and areas of the CIB where we see sustainable growth opportunities.
Of course, it also reflects the business growth we are enjoying already, and enhanced technology, cybersecurity and fraud detection. Looking next at our updated cost flightpath. On the left you can see our cost progression by quarter, split by business. Q2 costs excluding L&C were up 3% year-on-year, focused on investment for growth in CCP and CIB. The strength of the dollar, combined with the increased L&C charges are the main factors behind our updated cost guidance. At Q1, our guidance for statutory costs was around £15 billion for the year. This assumed a dollar rate of $1.31 to £1. We were also not anticipating this level of L&C in Q2, although we are pleased to have made progress in resolving these matters.
I would highlight that a strong dollar is a net profit tailwind and that the additional rescission costs are substantially offset in income. Assuming an average dollar rate of $1.23 for the second half, we now expect total operating expenses of around £16.7 billion for 2022.
I’m not going to give absolute cost guidance for 2023. We will continue to manage the trade-off between cost efficiencies and investments, and we would expect L&C to be materially lower next year. Of course, the full year effect of inflationary pressure will be a headwind in 2023, but I would also remind you that we are investing in future income growth, for example with the Gap partnership and the proposed Kensington acquisition.
Moving on to impairment. The net charge for the quarter was £200 million, compared to a release last year. A lot of factors feed into this net charge, so I want to focus first on our risk experience and the quality of our portfolios. Delinquency rates in the businesses remain stable at low levels, with 30-day arrears in UK cards at 1.0% and in US cards at 1.4%. We continue to track customer and client behavior very carefully, given heightened concerns over an affordability crisis, in order to identify early warning signs. We have not yet seen worrying indicators, and payment rates continue to be high, as customers have reacted rationally to the economic environment. As a result, card balances in both the UK and US are down on pre-pandemic levels on a local currency basis, although the latter have started to grow again this quarter, and we believe that the quality of these books is higher than before the pandemic.
As a result, despite the macroeconomic uncertainty, we are comfortable with our coverage levels, with UK cards for example at 10.9% and US cards at 8.4%. Our total impairment allowance was £6.0 billion at the end of the quarter, of which £1.3 billion represents post-model adjustments, or PMAs, as shown on the next slide. The macroeconomic variables, or MEVs, we have used at Q2 for modelled impairment are based on consensus forecasts. However, we are conscious of concerns that there could be further downside credit risk.
Therefore, we are retaining significant PMAs, totaling £1.3 billion. As an illustration, I would also point out that when we model impairment using the MEVs for the downside one scenario, the implied increase in modelled impairment is £0.5 billion which is significantly less than the PMAs for economic uncertainty we are still holding. Taken together with our coverage ratios, this supports our expectation that we will continue to have quarterly impairment charges below the pre-pandemic levels in coming quarters. The 6% growth in BUK income was accompanied by broadly flat costs, delivering strong positive jaws.
The BUK RoTE was 18.4% and we’re feeling positive about momentum in the business. Before I go onto Barclays International, a few words on margin expectations for BUK. The NIM for the quarter was 271 bps, up 9 bps on Q1, as we saw benefits from rate rises. The expectation for further rises has increased since Q1, so despite the pressure on mortgage margins and the expectation of higher pass-through on later rate rises, we’re upgrading our guidance for the full year to a range of 280 bps to 290 bps, and we’re now assuming a base rate of 2.5% by year end.
Costs and income for Barclays International included the elevated L&C charge for the quarter, and the income from the hedging arrangements related to the over-issuance. Despite the negative net effect from these, strong performance across the businesses delivered a RoTE of 8.4%. I’ll go into more detail on the next two slides, beginning with the CIB. Income excluding the hedging arrangements was up 10%, and was up 35% on a statutory basis. Excluding L&C, operating costs increased by 15%, driven by investment in talent, systems and technology to support income growth initiatives, and the impact of inflation. Overall the CIB generated a RoTE for the quarter of 7.1%, and without the effects of the over-issuance, this would have been 11.4%.
Turning now to Consumer, Cards & Payments. Income in CCP increased 29%, reflecting growth across International Cards, Payments and the Private Bank. Costs increased by 11%, delivering strong positive jaws. The impairment charge was £144 million, compared to a small release last year. This reflected an increase in US card balances, including the acquisition of the Gap portfolio in late June. The RoTE was 17.8%.
Turning now to Head Office. The income expense of £132 million included a £42 million loss on sale from the partial disposal of our stake in Absa, and the loss before tax for the quarter was £180 million. Before I move onto capital, a quick summary of our liquidity and funding.
We remain highly liquid and well-funded, with a Liquidity Coverage Ratio of 156% and a Loan to Deposit Ratio of 70%. Finishing with capital. The CET1 ratio ended the quarter at 13.6%, comfortably within our target range of 13-14%. Our capital generation from underlying profits was strong, contributing 42 bps. This excludes the effect of the over-issuance, which we’ve called out separately on the bridge. The net reduction from 13.8% in the quarter was the result of a number of factors. Over time, increases in interest rates are a tailwind to profitability, but in the quarter, the effect on reserves caused a headwind of 17 bps, principally through the fair value effect on bond holdings.
The over-issuance had an overall impact of 17 bps in the quarter, from the net loss of £34 million, including the estimated SEC monetary penalty, and the temporary increase in RWAs associated with the hedging arrangements. Other factors increasing RWAs were £2 billion for the Gap portfolio, and investment in business growth, particularly in CIB. There was a £9 billion RWA increase from FX movements. This had little effect on the ratio, due to its positive effect on the currency translation reserve. We’ve shown on the right-hand side the effects of the further share buyback, which will come off capital in Q3, and the removal of the RWAs on the over-issuance hedging arrangements, which together would be a small net positive.
Looking at our capital requirements. Our MDA hurdle is 10.9%, so we have comfortable headroom at current levels. The Bank of England expects the introduction of the counter-cyclical buffer at year-end to be followed by a further increase in July next year. This would take our MDA to 11.9%, assuming no offset from reductions in Pillar 2a requirements. Going forward, we remain confident in the organic capital generation of the Group and our capital ratio target range remains 13% to 14%. Finally, on leverage, our spot leverage ratio was 5.1%, and the average UK leverage was 4.7%.
So, to summarize, we reported statutory earnings per share of 6.4p for Q2, and generated an 8.7% RoTE, despite elevated litigation & conduct charges in the quarter. We’ve made considerable progress against resolving the over-issuance of securities in the US, and we have confidence in the continued revenue momentum across all of our businesses. We are well provisioned in readiness for potential deterioration in the macroeconomic environment, and expect the run rate for impairment to be below pre-pandemic levels in the coming quarters. We are particularly focused on the cost trajectory, given inflationary pressures. Given FX movements and the Q2 L&C charges, we have update our cost guidance for the year to around £16.7 billion. Overall the business performance is robust and we’re focused on delivering our target of double-digit RoTE this year, and on a sustainable basis going forward.
Our capital ratio remains strong, and we are confident of being able to invest for future growth and delivering attractive capital returns to shareholders. As a result, we have announced a half year dividend of 2.25p and a further share buyback of up to £500 million which we expect to begin shortly, following completion of the current buyback of £1 billion.
Thank you, and we will now take your questions, and as usual I would ask that you limit yourself to two per person, so we get a chance to get around to everyone.
Question-and-Answer Session
Operator
[Operator Instructions]
Thank you. Our first question is from Robin Down from HSBC.
Robin Down
Good morning. I suspect you’re going to get a raft of questions on margins and costs. So I’ll kind of leave that to others. But my two questions the first one, you’ve kindly given us the FX impact on the cost base around kind of £300 million. I was wondering whether or not you would be prepared to give us the revenue equivalent number or failing that whether you’d give us some sort of indication as to whether if we use the kind of broad 75p cost income ratio of the International Bank whether that would be a good way of getting a current proxy for the revenue benefit that would match up against that FX cost movement.
And then the second question, just probably taking a bit of a step back and broader question is still going for greater than 10% RoTE target for this year, despite the additional mitigation hits coming through in Q2. When I look at consensus, I think it’s at around 8.3% for this year, there’s a really substantial gap between where you are and where consensus is. So can I just clarify, make sure that you’re not excluding anything from that 10% RoTE calculation? And secondly, when you look at consensus, are there particular lines that you look at? And you think, yes, the analysts have got that completely wrong. Obviously, you’re giving us a cost base, but it’s not around costs. But we’re about are you looking at it? So taxes are the revenue lines? Is that the impairment lines, a combination of the three? Thank you.
Anna Cross
Thank you, Robin. So I’ll take both of those then I’ll hand to Venkat. And you’re not the first person to ask us for this FX impact. I’m not going to throw out a number on this call. It’s something that we’re very conscious of in the context of the movement and the dollar. So it’s something that we’ll certainly consider for future quarters. So I hear you and understand that you would want to — understand that point. On your second one. You’re right, we continue to guide for greater than 10% for this year, and ongoing. And the key difference that we see is really around revenue momentum. So we’ve seen 10% in the first half. And it’s very, very broad based, Robin. So we’re looking at our recovery in our consumer businesses, both in the UK, and in the US. We’re all also seeing a recovery in our businesses that are actually geared to the nominal economy like Transaction Banking and payments. And whilst we may see some moderation and volatility we’re pleased with a market share gains that we’ve made across markets. And if that volatility were to dissipate, then we would expect primary assurance to come back. So it feels like the key difference between ourselves and the outside world is really around revenue.
Of course, we also do think that impairment will remain lower than pre-pandemic. And again, that’s another piece of guidance that we’ve given. So from our perspective, we remain confident in that flight path. Venkat –?
C. S. Venkatakrishnan
Yes, I would like to emphasize what Anna just said. We talk about having built a diversified business and continuing to do so. And sometimes what that means is, if something does relatively less well, something else offsets it. In this quarter, unusually, what you’re seeing across all four lines of business, is a sense of revenue, strength and momentum, which we think for the shorter term will carry forward. So you’re seeing this top line growth end market. And you’re seeing a top — even adjusting for the security operations, you’re seeing top line growth in cost and payments as Anna said and in our UK retail bank. If there’s any place where there’s been diversification, meaning something offsetting something else, it’s within between — within the corporate and investment bank with the backing numbers have clearly fallen off, but then more than offset by what’s going on in markets. So I think you should get a sense of confidence in the way the business has been performing in the first half of this year.
Operator
Our next question is from Joseph Dickerson from Jefferies.
Joseph Dickerson
Hi, last time I checked on from Jeffries not Societe Generale. But fair enough. All right. Well, I’m happy to ask in French if you want. But anyway, how do you think about? How are you thinking about the cost trajectory for 2023 because you’ve had quite a lot of noise in the 2022 base, whether it was the LMC charges that won’t recur and possibly higher investment spend around Gap, and so forth. Because it’s interesting on your comments on the broad based revenue momentum, it seems like you’ll have a sustainably higher base going into 2023. And when I look at the 2023 numbers, the consensus pretax looks a little light because it doesn’t really embed any revenue growth. I’m just wondering your thoughts around, you’ve talked about some of the momentum on the top line, but just how should we think about what drops out of the cost base next year? Thanks.
Anna Cross
Okay. Thanks, Joe. So you can see what we’ve done in the first half. So income growth of 2% operating sorry, income growth of 10% operating cost growth of 2%. So, hopefully that helps you understand that our real focus here is operating leverage. And whilst it guided the costs up in this year, you’ll see that the moving parts are actually FX, which are net P&L positive and LMC, which is largely offset in the income line. If I take that into next year, I’m not going to guide you, at this point in time, specifically on costs, because there are too many moving parts and too many decisions, however, let me help you understand how we think about it. Inflation effects are obviously building. Those inflation effects, however, also impact our income line, whether that be through the transactional businesses and payments and corporate or even into the consumer businesses. But that’s definitely a headwind.
On efficiency, however, you’ll see also, in the half, we’ve shown you what we’ve driven in efficiency. And I would remind you that in our 2021 results, we actually took two charges around real estate and around the UK transformation that we said, we believed would start to benefit from the back end of ’22 and into ‘23. FX will be what it will be, at the moment, it’s a net benefit to the P&L but a headwind and the cost line in isolation. The income momentum though here is really important because it gives us the opportunity to invest selectively whether that be in the three strategic priorities that Venkat have taken us through, or alternatively, in structural cost actions which we’ve done episodically in the past, when we do it, we tend to have an eye on returns.
But if I just goes through business by business, in the UK, we’ve given you NIM guidance for the current year, that should indicate to you the momentum that we think that business has on the exit. You can see from the half year that we’re controlling costs, and we set off our transformation program last year. And of course, much of the income benefit that’s coming through in the UK, is coming from the structural hedge now, which obviously doesn’t have a marginal cost associated with it. In CCP, you’re right, what we’ve seen as a cost build ahead of any associated income. That’s not just Gap, because obviously we’ve had costs a Gap but the balances came in at the very end of the quarter. So we not seen that benefit yet. But it’s also true of the organic growth in the business, where as we started post COVID, there’s obviously the J curve effect. And also within CCP, although it’s much smaller, don’t forget about payments, which is geared to the nominal economy. And the marginal cost, again, of extending that business is not significant.
The hard one is the CIB. And I’ve said before markets, we’ve seen a share of wallet increase. But also buoyed up by volatility there may be offset with banking if that volatility drops off. But here, don’t forget the momentum that we’ve got in our corporate business, particularly on Transaction Banking, which is geared again to nominal economic activity in the business, and is an accrual franchise business.
We will invest selectively in the CIB. And as we do so you’d expect us to do so in a way that helps us underpin the diversification that Venkat talked about. So hopefully, that’s helpful in terms of building blocks, Joe, we’re very focused on operating leverage, as you would expect with the income momentum that we have, but also on returns. And just to remind you of that 10% and we’ll use all the levers that we have in order to manage that 10% return for the business bank. Venkat, would you add anything?
C. S. Venkatakrishnan
So just one piece of detail within all of that was, of course, I completely agree with the thesis and strongly endorsed the thesis Anna laid out. Within markets, there’s a part of it which comes from trading, which will be — which is amplified by higher volatility. And volatility goes down, as Anna says, hopefully the banking market picks up. But also within the markets business. There’s a substantial growth we’ve had over many years in our financing businesses, both in equities and fixed income. And I think as rates are rising and spreads are widening, there is more scope looking forward for revenue gains from Fixed Income financing where we have a leading market share. And that part of it recovers so even if volatility dampens at higher levels of rate, there are parts of the markets business that will continue to do well, I hope.
Operator
Our next question is from Omar Keenan from Credit Suisse.
Omar Keenan
Good morning, everybody. Thank you for taking the questions. I’ve got two questions, please. One on capital, and one on consumer cards and payments. So if I start off with capital, and I look at the quarter one ratio. So if I take off the 40 bps for Kensington and pensions, and add 20 bps for the rollout of the hedge, then it looks like the ratio is around 13.2 today, and I see the buyback program that was announced they clearly expresses your confidence in the capital position. But I was hoping you could give us your thoughts around the sensitivity of the ratio to rating migration. If we have a weaker economic environment next year, perhaps with lower house prices, or will corporates that have some right to migration, then if you could give us the idea of the sensitivity of the ratio to that that will be really helpful.
And my second question is on consumer cards and payments. Well, the results was very strong in the quarter and understand the drivers behind the NII. But if I look at the other income, and annualized that, that seems like quite an interesting number relative to our consensus. Can you give us any spare about whether all of that figure is retiring? And we can take it forward? Thank you.
Anna Cross
Okay, Omar why don’t I take that. So you’re right in the sort of latter quarters of the year, we are expecting a pension headwind, just to remind you that is timing, it’s always been in our capital flight path. It’s a timing event, essentially pulling it forward into the current year. And on Kensington, we expect that to be around 12 basis points, and the buyback at roughly 15 and going in the opposite direction, of course, we’ve got the roll off of the hedges associated with the rescission offer and that’s about 20 basis points and more than offsets, the buyback that we’ve announced for the half year. I mean, our position as we look at the end ratio of 13.6%. We’re very confident in their capital generation of the businesses. I go back to what I said before about income momentum. The impact that we’ve had in the quarter from the rescission offer itself, we would not expect to repeat some of the volatility in the ratio has been sorry, some of the drawdown in the ratio has also been driven by volatility in RWA, and also business growth that we’re seeing in the income beat.
So we’re very comfortable with the ratio at 13.3 and that’s why we’ve announced the buyback, just to remind you, generating greater than 10% RoTE is equivalent to 150 basis points of capital generation. We are confident in continuing to do that. And we’ll deploy that across maintaining an appropriate ratio, investing in the business and returning capital to shareholders, as we’ve done in Q2. Just picking up on your CC&P comments what we’re seeing in CC&T is not only balanced bills, but we’re also seeing increased purchase activity in the US. That doesn’t always translate through to balance bills because customers are being cautious in the current environment and they’re repaying at very high rates, but it does mean that we are generating interchange income, which is what you’re seeing coming through there. So to the extent that we see a continuation of that buoyant purchase activity, which in part is driven by nominal economic activity, so inflation is a bit of a tailwind. And we would expect that to continue.
Omar Keenan
Thank you. Are there any comments that you can make around the sensitivity to rate your migration in RWA? If we have a weaker economic environment next year?
Anna Cross
Yes, I mean, we’re very mindful of it, Omar. I wouldn’t give you a sensitivity here. And at this point in time we do, we’re actually seeing quite the opposite. We’re seeing an improvement in quality. So if you look at RWA tables, we were actually seeing things dressed back the other way. Clearly, if we see a downturn in the economy, then we will see some RWA inflation. But that’s not reflected either in the macroeconomic variables that we’re using as consensus nor indeed, in what we actually experienced in the real effects coming through. So delinquencies are low, the watch lists are very low. So yes, you’re right. It could be a factor, but it’s not something that we are seeing at this point in time.
Omar Keenan
Okay, great, thank you. And the £464 million, we can analyze that number. There’s nothing exceptional in there.
Anna Cross
In terms of the other income. And the only thing I would call out, Omar, is FX. So just be mindful of that. So obviously, the underlying driver is purchase activity, which is obviously driven by that the increased number of customers that we have, you should analyze that, but the FX will be what it will be.
Operator
Our next question is from Rob Noble from Deutsche Bank.
Rob Noble
Good morning. And thanks for taking my questions. Can you give us a breakdown of the impairment charge that you took in the quarter? Was the day one impacted the Gap portfolio, the impact of the economic outlook changes in any change in the PMAs. And what then what the underlying charge actually is, and also helped me it was to mark against the leveraged finance portfolio in the CIP.
And then secondly, you issue quite a couple of high possibility, what is this quarter? So what’s the plan for issuance over the next 18-months from 81 — those rates rise? You’d expect the coupon cost of your 81 portfolio to rise as well. Thank you.
Anna Cross
Okay. Thanks, Rob. I’ll take both of those, looks like you sneaked into three, actually, but we’ll let that go. So, in terms of impairment we’re not going to talk about impairment associated with any particular partner in the US. However, what I would say is that the PMAs are completely unchanged from the prior quarter, we’ve maintained our £1.3 billion. So what you’re seeing flowing through is the underlying charge, which is elevated in part by that Gap portfolio. We’ve disclosed to you the scale of the portfolio, so I’m sure you would be able to put together some estimates around that. And in relation to the marks, and we haven’t disclosed the marks. That’s not something that we have done or will do. However, here’s how I would think about it. The marks are included in the corporate lending line. Last quarter, we talked to you about the fact that the impact of the hedges against the syndicate portfolio. We’ve increased those hedges and the cost of those hedges had also increased. So you saw a step down into Q1. That’s continued to happen in the second quarter, so given the risk in the environment, those hedge costs remain high. And we are hedging a higher proportion of the portfolio. And then the other thing that’s going on in there is the marks. So hopefully that will help you compare the two quarter numbers. And just remember, there’s two things going on in there. There’s the marks, plus the increase in the hedge.
And then the last point, I would say, around the 81, we are a programmatic issuer, we’d expect to issue around £9 billion in the year. And we look across our full stack. We look at one tier two, senior, and we’ll continue to do that and half two. And the two that we did in the quarter did have a higher headline rates. But remember that the underlying swap cost, or the underlying swap costs is something that we hedge. So what you should be focused on is actually the margin. So net on those transactions. And that is not higher than the portfolio that we’re actually carrying as a whole. So I wouldn’t think about it as markedly different from what we’re already holding.
Operator
Our next question is from Jonathan Pierce from Numis.
Jonathan Pierce
Hello, Anna, just one please. And it’s just affect my math on something. That structural hedge revenue in the second quarter, I think it is slide 35, or something shot up even more than I was expecting is up about £120 million. I think on Q1. Historically, you’ve told us that 60% of that falls into Barclays UK. So that would be about £70 million, if that’s right. But the Barclays UK NII only went up 50 there about. Obviously, you got more headwinds, but you’ve obviously got the base rate increases on the on hedge deposits in Barclays UK as well. So is that math still right that 60% of the structural hedge is falling into Barclays UK or something odd happened in the second quarter where more of it has gone into CIB. Thank you.
Anna Cross
So the structural hedge income did go up significantly. That’s not just the ongoing rolling of the hedge. But it’s also the fact that we’ve extended the hedge, Jonathan, so we put on an additional £18 billion in the quarter. And obviously, that’s gone straight in at current rates. So it has quite an impact, quite an eye catching impact. We are talking there about the gross income on the hedge within Barclays UK, yes, we do see 60% of the benefit flowing into there. So I’m not quite sure how your math is working, but perhaps we can help you with that offline.
Jonathan Pierce
Yes, I mean, it was just simply 60% of the 120 improvement would be about £70 million in Barclays UK. Barclays UK NII didn’t go up by £70 million, went by £50 million. I mean, I guess the new hedge fund, you’ve got the swap cost against that. So you’re not getting the full 2.5% five year rate. You got inflation like you had, but still very surprised at the NII Barclays UK, only went up by 50, I am just wondering if there is other thing going on?
Anna Cross
Well, I mean, I guess the other thing to think about in that Jonathan is the impact of mortgage margins. So it’s not just the savings rates and the structural hedge that are going on, you’ve got mortgage margins, which continue to be extremely competitive. And we’re also seeing I guess impacts on other smaller products, maybe like business banking cards, et cetera, et cetera. So, you right in isolation, but don’t forget about the other product impact.
Operator
Our next question is from Martin Leitgeb from Goldman Sachs.
Martin Leitgeb
Yes, good morning. Could I just ask, firstly, on the outlook for credit card balances, both in the U.K. and in the U.S., obviously, a strong progression quarter-on-quarter. And I was just wondering how you think about the kind of opposing outlook in terms of one coming out of dynamic restrictions, which should be supportive of card balance and secondly, obviously, heading into to, I believe on economic slowdown. How do you see the prospect credit card growth, both in the U.S. and the U.K. as we head into 2023?
And secondly, I was wondering on mortgages in the U.K. You mentioned pricing remains competitive. Have you noticed any reasonable change over recent months in terms of peer group behavior? Is pricing stabilizing, improving? Thank you.
Anna Cross
Okay, thanks, Martin. So in terms of UK cards, we guided at Q1, that we would expect that to be the low point of UK card balances. That’s broadly what we’ve seen. And there are a few behavioral factors and they’re going to consider, first, the purchase activity, both in quantum and type is up. So we are seeing the return of the kinds of purchases that we were looking for, for example, like travel. But customer repayment rates remain very elevated, but very rational in the current environment, and probably speaks to that offsetting impact from economic uncertainty that you’re talking about. We’ve also seen some growth in promotional balances. So we are participating in the 0% balance transfer market, but we’re doing so with a real eye on sustainable returns. So you won’t see us at the top of those tables, we’re very conscious on returns as we participate there. And what you will notice in our cards income over time, is what we’ve mentioned before about launching additional products that work that are more focused on spend versus lend. So I think once you’ve seen balances stabilized, the nature of those balances is changing quite considerably.
Looking forward, I think we’d probably expect repayment rates to remain elevated given the uncertainty. And I think that the increase in sort of customer spending is probably going to be more muted than perhaps we might have expected six or nine months ago. So I think what you’re going to see is probably a little bit of muted growth on those cards balances in the UK. As relates to mortgage pricing, and we’ve seen mortgage pricing continue to pick up as a headline matter in response to rising swaps. There is always a lag, but it has broadly trapped those swap rates with that lag. What really matters, though, is the difference between front book and back book margins. And front book margins, I would say broadly across the industry are below the portfolio margins. So I would say that front book rates are delivering an attractive return for us. So we’re still very pleased with the market. But just the arithmetical effects on the overall portfolio will be net negative between here and the year as we would expect. And that’s all included in our full year NIM guidance, which you’ll note that we’ve upgraded today to be between 2.80% and 2.90%. So whilst there’s a mortgage drag, there is obviously the opposite impact of that in liability margins, and of course, the structural hedge.
Operator
Our next question is from Chris Cant from Autonomous.
Chris Cant
Good morning. Thanks for taking my question. Could you give us an update on the payments opportunity that you talked about at 1Q ’21, please? At that point, you said you saw a £900 million opportunity there on a three year view and just conscious of the very strong year-over-year growth you’ve seen in CC&P payments. So how much of that £900 million is now in the run rate? And has the assessment of that £900 million changed at all up or down? And then if I could ask on FX, so I mean, declined to answer an earlier question on this. You’ve got several questions. The 1Q Analyst Meeting on FX, what is the reason you feel unable to give some proper color on FX splits across your P&L to help us understand this better? Are you — Is there some competitive concern that prevents you from trying to help the market understand this? Or are you worried perhaps that we’re going to be able to pick apart the performance of the group more clearly, if we have the currency splits, I’m genuinely confused as to why you won’t provide some color or disclosure here, given the FX is something that the market is obviously trying to factor into numbers, and you’ve given us the answer for the cost line. And presumably, you want us to be able to factor FX into the revenue line. But we’re not really getting much information to help us model that out. So what is the reason you feel unable to give that kind of color, please? Thank you.
Anna Cross
Okay, thank you, Chris. I’ll take those questions. So, in terms of the payments opportunity, we’re pleased with the progress. We’re broadly on track with that target, Chris, we really — we very frequently talk about the acquiring business, that’s the one we tend to focus on. But we’re also really happy with the progress of the two other parts of that business. So don’t forget in there, there’s the corporate issuing business, which is also geared to sort of economic nominal activity through T&E, et cetera. So that’s growing nicely. And I’d also call out the sort of third strand, which is more around the value added services that we provide through payments. So for example, the ecommerce gateway that we launched in Q4, and obviously benefits from broader trends in terms of payments moving online.
So the sort of unified payment element is obviously performing well. And then obviously, the other part of it is what we see going through, for example, transactional banking, which is also performing well as corporates continue to, if you like reemerged from COVID, we’re seeing strong nominal growth, which is underpinning FX payments trade, finance, et cetera, cetera, it’s all flowing through in that line.
And on FX, I hear you, I completely understand, hopefully, you’ve taken or you’ve seen today, that we’ve made a step towards what you would like to see in that we are not just talking about FX in our costs, but actually the impact on the cost income ratio. So we will come back to, I have no doubt that you are able to analyze the individual parts of our business. And of course, we’d like to help you do that. So just bear with us. But hopefully, the CIR guidance that we’ve given on FX is also helpful to you.
Operator
Our next question is from Edward Firth from KBW.
Edward Firth
Good morning, everybody. I just had two questions. The first one on the BUK margin guidance. I mean, if I look at the bottom end of your range, I’m just, I guess, partly checking math, but it looks like we’re talking about a sort of mid-290s margin for the second half, which seems to imply that your margin is picking up in the second half or the rate of growth is picking up in the second half. And I guess that’s a surprise because a lot of the other banks are giving messages about how they expect things like deposit betas to be higher as interest rates go higher, the market for savings to be more competitive. And therefore, we should expect to see the rate of acceleration slow. So I guess my first question is why — what is it about your book that means that the margin should be accelerating in the second half, not slowing, if I’ve got my math right? So that would be question number one.
And then I’ve got a second question for Venkat. Really, it’s about the Barclays U.K. cost income ratio because it’s over 60%, which is probably a good 10% higher than any of your peers really any sort of retail and commercial bank that I can find in the U.K. And it’s really difficult externally to see why that is because you have this sort of central charging structure, which should have just dump the lower costs of them. So I guess my question for Venkat is, now you’ve had a bit of time to look at it. Are you happy with the cost income ratio at Barclays U.K.? And what’s your assessment as to why it’s so much higher than peers? And what do you think might be possible in terms of actually getting that more in line with everybody else? Thanks very much.
Anna Cross
Okay, so why don’t I take the first one. So we’ve guided up to 272 to sorry, we’d guided from 2.70% to 2.82%, it’s now 2.80% to 2.90%. So you’re right, we are expecting some momentum from here. And there are three factors in there. Obviously, I can’t comment on the mechanics within anyone else’s book, but I can tell you how we see it. And in mortgages, as I said, it’s competitive. The front book rates are lower than the back book rates, and we think we’re getting a good absolute return. So you should expect us to continue growing that. That is a net headwind. But on the other side, we’ve obviously got margin widening on liabilities. Those two nets are positive to the margin, we would expect pass-through to increase from here. We call that out before, simply because the pathway from 1% to 2% is quite different from the pathway from zero to one. So that’s absolutely included within our guidance. I think the other and the third very important factor for us is obviously, the structural hedge momentum. So we’ve extended the hedge. And what we are seeing happening in that hedge is every single month, you’ve got 160th, rolling off broadly, five years ago, right. So think 2016, 2017 type rates, and now re-fixing on the current curve, that is considerable momentum to the NIM as we see it. So bringing those three things together, that gave us the confidence to guide up to between 2.80% to 2.90%.
Edward Firth
And is it possible to — and I know this is sort of slightly fatuous question, but everybody goes on about deposit betas. I mean is it — can you give us some sort of sense as to what you might — what the sort of shift might be that you’re assuming for the second half? I was just trying to see whether you’re making similar assumptions to other people or making market different ones. I guess that’s where I’m coming from. I mean, people talk about 50%, above and below 50% pass-through into the second half. Can you give some sense as to where you might be in that spectrum?
Anna Cross
Yes. We wouldn’t give that guidance. And the reason I say that is it’s very nuanced. So it varies by business. So as we’re making those decisions, we’re making them across retail and different products within retail, we’re making them across the private bank, business banking, corporate banking. So it’s very difficult to drill it back to a single number, given the nature of our business. We’ll have an eye to our own liquidity in the competitive environment. And actually we wouldn’t talk about those things, we wouldn’t think that that was appropriate as a competitive matter to call out our commercial intentions on a call like this. So that’s why we couldn’t do it. But the thing you should focus on is that overall upgrade and then guidance. That’s the most important thing, because we’re taking all of our thinking, and we’re wrapping it into that number.
Edward Firth
Great, thank you.
C. S. Venkatakrishnan
All right. And on the question on the BUK cost income ratio, so the answer is yes, I am comfortable and there are few reasons for it. First of all, obviously, the cost income ratio has two parts cost and income. On the cost side, we are going through a multiyear transformation of our business, greater amount of digitalization more product simplification, so that investment will pay off in the future. And that investment is elevating the cost income ratio in the short term.
On the income side. Obviously, there’s a question of product mix. I think the point I would probably make on that is that we have been for, even since pre-COVID and post Brexit, a little bit more on the careful side in terms of parts of unsecured credit and lending, which will have an income effect on us. But given the broader credit risk, return trade off, I feel extremely comfortable. And you would notice that BUK RoTE in the first half has come to 17% which is sort of the nature of what it normally inhabits, the reason it inhabits during normal times. So it’s recovered back to quite nicely to where it used to be.
Edward Firth
Okay. When you say a multiyear investment program, what should we be thinking about then? So is your expectation that, that will end at some point, and we will see the cost income ratio improve then?
C. S. Venkatakrishnan
Yes, I mean, I think it goes into 2023, so this year and next year, and it should improve. I mean, the other part of income, which is improving for us, but improved for everybody else is of course, the effect of interest rates and so on.
Operator
Our next question is from Guy Stebbings from BNP Paribas Exane.
Guy Stebbings
Hi, good morning. I had two questions. So firstly, was on going back to costs, appreciate there’s lots of moving parts and headwinds from FX and inflation of revenue benefits, I think it’s really important or something very helpful, we get some sense of the absolute cost figure for next year accepting some of the variables may change. If we start from the £16.7 billion guidance, then annualized pretty for the current FX, I guess, would be more like £16.8 billion maybe £16.9 billion. If one that adjusts for the elevated litigation in Q2, and Q1 of circa 1.8, you end up with a clean run rate around £15 billion heading into 2023. If I look at slide 20, the other sort of ups and downs, at the bottom right hand side, you’ve got the efficiency savings as a benefit, but then business growth, selected investment spending inflation, all in the other direction. I presume those headwinds are greater than the benefit from the efficiency gains. So are we talking about under those scenarios on the current FX, et cetera, that cost next year, probably north of £15 billion, presumably must be absent FX reversals? Or am I missing something or under estimating the efficiency gains?
The second question was then just on the UK volumes, which went back within the quarter. I guess looking forward, the mortgage market is slowing a little bit, consumer spending outlook is quite uncertain, business banking activity was weak in Q2, I don’t know if that was particularly impacted by bounce back loan drag, which perhaps is less painful in future quarters. But how should we think about future quarters on total volume growth in the UK? Is Q2 a bit of an outlier? Or is flat to down? Actually something we should be so used to? Thank you.
Anna Cross
Okay. Thanks, Guy. As I said before, I’m not going to guide to specific cost numbers for next year, nor income. There’s a huge amount of potential outcomes here in terms of inflation. Obviously, inflation FX will build, but I would remind you that inflation is also positive to our income line. We did set efficiency in train from ‘21, and ‘22, which you would expect we would continue. And we just added to the numbers that we’ve already shown you. However, because of the income momentum that we have, you should expect that we will lean into growth, but we will be very selective as we do that. So as I say, given the uncertainty in the environment, I’m not going to guide now but if you just consider those factors, that’s probably the best guidance I could give you. But just don’t forget about the impact of either the investments or inflation on the income line, as well as the cost line.
In terms of the UK volumes, I guess you’re focused on the mortgage volumes as we grow our mortgage, but we are balancing three things. We’re balancing returns. We’re balancing how we feel about our franchise, and we’re also balancing operational capacity and so you’ll see us participate pretty much consistently in the market. But we will flex in and out as we’re trying to manage those three things. We’re pleased with our growth, I would say I would expect net growth across the industry to be lower, simply because this is a market more dominated by remortgage than house purchase. So we’ve definitely seen a switch there. And that’s a business that we like very much, where we tend to take a higher than normal market so that market seats, as you might see effect start flowing through. We have seen bounce back loans decline a little, that’s what we would expect, that’s obviously positive for margin as well. And then the final thing I would say, don’t forget about ESHLA, which can create some somewhat noisy impact in the BUK asset line simply because of the way we present it. But no concerns in terms of the momentum either in mortgages, cards I’ve talked about, we expect to be a bit more cautious there. And obviously, we still continue to see liability balances grow.
Guy Stebbings
Okay, thanks. That’s really helpful. Can I just check on the business bounce back loan, if that slow in terms of the drop quarter-on-quarter from here, would you expect?
Anna Cross
And well, as customers repay, we’d expect those balances to fall away, as I say, reduced balances, but they are fairly tight margins.
Operator
Our next question is from Rohith Chandra-Rajan from Bank of America.
Rohith Rajan
Hi, thank you very much. Good morning. Just on capital really, and how you think about manage it, you’ve got a number of growth initiatives like US cars, payments, KMC, and maintaining the investment bank rank. So how do you prioritize those investments in growth versus capital distributions? And then also in the middle of a CET1 target range, are you comfortable operating and doing share buybacks anywhere within that range? Or is there a particular level that you’re more focused on? Thank you.
Anna Cross
Okay, thank you, Rohith. And as we think about managing our capital, we are balancing off maintaining ourselves in that target range, with growth in the business and returning capital to shareholders. I mean, the good news is that each one of our businesses is delivering above cost of capital in terms of its return. So they are generating organic capital, business by business, and therefore we’re not having to sort of artificially move capital around for organic growth, if you like, as relates to those specific opportunities. What’s really guiding us there is the three strategic priorities that we have. So the two that we’ve announced so far, speak to the first of those strategic priorities, which is next generation consumer, which is why we are — we’ve invested in Gap already, and our intention to invest in Kensington. So I guess we’re looking to follow the strategy, you’ll equally see organic investment within the CIP which is around underpinning the sustainable growth in that CIP. You don’t see it called out with a headline because it’s organic and not inorganic, but we are balancing that investment.
And in terms of your specific about operating in the range, we closed at 13.6%, we feel good about the organic capital generation of the business, which is what’s given us the confidence in order to announce that buyback today, you’ll note that whilst we’ve announced that buyback, it is largely offset by the rollback of those RWAs from the rescission hedge which would actually nudge up the capital ratio of the cost. So I’m not going to guide specifically within that range, but the evidence from Q2 should tell you that we are happy balancing shareholder return with proactive investment in the business, be that organic or inorganic. Venkat, anything you would like to —
C. S. Venkatakrishnan
Yes, look, I think I’ve continued to emphasize that very final point that Anna made. We’ve got good top line growth across the businesses, as we said, producing a 10%, RoTE gives us 150 basis points of capital appreciation, we think that is sufficient to invest in the business, and to deal with any regulatory drift, which we might have in terms of capital rules. And to, obviously, to return capital to shareholders, we’ve demonstrated that even in this first half, and that’s the aim of the way the business is operating. So I really emphasize that getting the top line growth, which you’ve seen across the businesses, you’ve seen strong performance relative to others in many segments, including in the fixed income market. And then using that, to sort of reward our three constituents if you’d like. So on that, thank you very much, everybody.
Anna Cross
Yes, thank you, everybody. We’ll see many of you next week at the breakfast until then take care.
C. S. Venkatakrishnan
Operator
This presentation has now ended.
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