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Good evening, ladies and gentlemen. A very warm welcome to EFG's Full Year 2022 Results Presentation today in Zurich. As usual, we will have presentations by both the CEO, Giorgio Pradelli; and the CFO and Deputy CEO, Dimitris Politis, both here in the room, as usual, we will start with the individual presentations. And then afterwards, we have enough time for Q&A. As usual, I point out the disclaimer in the presentation as being read. And without any further delay, I hand over to Giorgio. Thank you...
Thank you, Jens, and good morning, everyone. Also from my side, a warm welcome to everybody who we see in the room here in Zurich in person. In this beautiful day here in Zurich and a warm welcome also to everyone who is following the presentation from home or from the office remotely via webcast. I must say that today, we are very pleased to be here to present this set of results. I would say in confidence that actually we are quite excited, but they told me not to be too euphoric. So, we say that we are very, very pleased. Now before we go into the presentation, I would like to make 3 key points that we will articulate throughout the presentation further on. First of all, I think everybody will agree that 2022 was an extraordinary year. And for sure, it developed in different ways that we thought about a year ago. 2022 was also an extraordinary year for EFG, but in positive terms, and we delivered a very strong performance. Second key point, the key message that I would like to bring across is that we concluded successfully our 2019 and 2022 strategic plan, and we have achieved all our targets that we have set 4 years ago despite the volatile times that we have seen over the last few years. And the final -- the third point is that we are now closing this chapter. We are now looking forward to 2025. We have announced in this room the 2025 strategic plan, and we enter this new planning cycle in a position of strength, and we are confident that we will achieve our targets with the discipline and consistency that we have done over the last 4 years. Now let me give the context of the 2022 performance and the key highlights. On Page 4, -- we show that actually 2022 was a very strong year for EFG. We continued our positive business development trajectory. We have delivered for the 15th consecutive quarter of positive NNA. And this growth over the last 4 years, we could translate this growth over the last 4 years in increasing and accelerating profitability. We have a record underlying net profit of almost EUR 250 million, which increased by almost 50% year-on-year. This, in turn, allowed us to increase the return on tangible equity to 16.4%. And obviously, with this increasing and accelerating profitability, we were able to distribute a higher dividend by 25% or JPY 45 45 per share. As anticipated, and I am now on Page 5. 2022 marked the successful completion of our 2019-2022 strategic plan and underscores the resilience and agility of EFG business model. You can see on the left-hand side that we have achieved all the targets that we have set ourselves and presented in this room actually 4 years ago at a time when nobody could foresee the unprecedented events that we all lived through the last few years. And I think it's also interesting to take a step back and look in community in aggregate what we have achieved over this period. In terms of net new assets, we have generated EUR 26.6 billion, which I would say is a strong performance. This growth was translated into underlying net profitability of almost EUR 640 million, and this allowed us to create value for all our stakeholders and in particular, for our shareholders who received EUR 469 million in dividends and share buybacks. Obviously, we are very pleased about these figures. We are very pleased about the numbers. They clearly showed that we have delivered. But probably, I think as a management team, we are even more proud of what is behind these numbers. And what is behind these numbers is a consistent execution of a radical transformation of our bank and a derisking of our bank. And I think that we have done this, focusing mainly on 2 elements. First of all, the last 4 years, as we have said many times, have been unprecedented and volatile and it was extremely important for us to be close to our clients. We want to be the trusted and independent adviser to our clients and our clients need us in difficult times. And I think we are very proud and we are very grateful to our clients for their trust. The second element was to execute, as I was saying the transformation under the strategy of simplicity. We have been trying to reduce complexity and simplify our business increasing efficiency, increasing operating leverage, and this has delivered the increase in profitability and return to shareholders to see that. So, with this, Again, I would like to thank all our colleagues across geographies and across function for the contribution that they have done in the successful delivery of this strategic plan over the last 4 years. With this, I'll pause here and hand over to Dimitris, our CFO and Deputy CEO, for an in-depth presentation of our 2022 financial performance. Mitris...
Thank you very much, Giorgo, and welcome from my side as well to this presentation of the 2022 results. Clearly, it is the end of a period. It is the end of our strategic cycle. Before I go into the numbers, I'd just like to say that as the CFO, it's a great feeling to have to present the set of numbers. It's -- we were joking before it definitely like my life a bit easier in terms of communication. But the reality is also what Giorgio said. I'm really proud to be part of the team that managed to deliver this performance. I'm very honored and privileged to be able to share with you the financial aspects of what we've done because as Giorgio said, this comes through a lot of work and a lot of combined work and a great team of people working at EFG. Now Page 7. Page 7 gives you the highlights of 2022. NNA EUR 4.2 billion with an annual growth rate of 2.4%. Clearly, we had deleveraging from clients that went against us in this EUR 4.2 billion in this growth. But the name of the game has been consistency and I'll come back to that just showing also the progress that we've had over the last 4 years. AUM at EUR 143 billion. Clearly, this also incorporates the disposal of our Spanish subsidiary, which is about EUR 12 billion, which happened in mid-2022. And we clearly had the negative impact from markets and from currencies within the year. Revenue margin. Revenue margin increased to 81 basis points for the year, coming from 71 basis points in 2021. That's plus 10 basis points year-on-year. I think more importantly, the revenue margin in the second half of the year was 91 basis points, so another 10 basis points up, which is a very good tailwind going into 2023. And we have hired 58 CROs over the course of the last 12 months. In terms of profitability, Giorgio gave you the number, the headline number is EUR 249 million of underlying net profit in 2022. It's almost 50% up year-on-year. And this came through our continuous efforts to create operating leverage. This year, revenues were up 6.4%. Costs were practically flat year-on-year, and this is what has been driving the increase in profitability. IFRS net profit came at EUR 202 million has been impacted by the final settlement we have reached in one of our long-standing litigations that we have talked about in this room and in other rooms over the last 5, 7 years already. We are very happy to put it behind us, and we're looking forward without significant legacy issues at this point. Costs, underlying cost/income, 75%, 75.4%. It's almost 5 percentage points better than what it was in 2021. And in terms of capital, clearly, a very strong capital position. We have announced in December that we would be reclassifying portfolios into hold to collect. This reclassification became effective 1st of January 2023. So, following that reclassification, core Tier 1 is at 16.6%. Total capital ratio is at 20.5%. And even more importantly, our gross capital generation now exceed 300 basis points. So, we create 3% of capital every year, simply by our own profitability. On a net basis, so after risk-weighted assets and after dividend, the net production of capital is at 180 basis points and that very strong capital position, that significant growth that we've had in underlying profitability -- and the capital generation that it comes with allows us to have a proposal of EUR 0.45 for the dividend, which is an increase of 25% compared to last year. Now on Page 8, I'm highlighting the 2 key objectives that we had over the last 4 years. So, one was clearly to improve profitability and the second one was to derisk the legacy issues. The way it's worded on the page is that we have a strong improvement in underlying profitability, which is what you see on the left, so the 48% growth in underlying profit. Maybe a better word is step change. It's not just significant. It's a new base. It's 50% up year-on-year, and this is all recurring underlying profitability. The second point is about derisking. Clearly, we are taking a hit in the second half of the year. It's about -- the second half impacts about EUR 24 million net of tax of an additional provision to settle. We believe that is very appropriate given where we are. You'll have more information in the press release, and there's some more disclosure in the annual report, if you would like to see more disclosure. But in reality, what this does is it allows us to have a loss in our books of $120 million on a risk, which could potentially worst case be $270 million and increasing over time. So, for us, it was the right time to put it behind us. We are looking forward now without having significant impacts from legacy topics also because over the last 4 years, we have managed to derisk our life insurance portfolio. And you'll see that in 2022, the contribution of the -- in the P&L of that life insurance portfolio has been pretty much flat at $1.8 million. So, following those 2 developments, both in life insurance and in the Taiwanese case, we will discontinue reporting underlying P&L versus non-underlying P&L, and we will simplify our financial reporting effective 1st of January 2023. I will skip the next 2 pages, which include all the financials on an annual basis and on a semester basis, and we'll move to Page 11. And for the next couple of pages, I would just like to take the time to show you the journey that we've had over the last 4 years. So, consistency in increasing our AUM through NNA, you'll see that we had a growth rate of 4%, going up to 5.5% 2020 and 2021 and 2.4% in this challenging year of 2022. On average, the CAGR for the 4 years has been 4.7%, which is pretty much in the middle of the range of the 4% to 6% that we had as a target from our previous strategy cycle plan. In terms of operating leverage, you will see the bottom, the cost-to-income ratio has decreased by about 10 percentage points, has gone down from 85% to 75%. And clearly, the trend is in the -- very much in the right direction. And on the right-hand side, you'll see what has been the impact in terms of bottom line. Everything has doubled since 2019. If you look back to 2018 and the net profit, it has tripled from -- in terms of where we -- what we posted in 2018 as IFRS net profit. And we have reached the -- a return on tangible equity of 16.5% and a return on equity of 11.5% for the consolidated performance. Now the next page, Page 12 gives you a bit of a visual also on all the targets. We clearly achieved all the targets that we set. We are very proud to have delivered on these targets. Clearly, in times which have been quite volatile, as we said before, like when we were presenting in 2019, nobody expected COVID, nobody expected award in Europe. So, we had to manage our performance through the angle of what was happening in the macro environment. For me, what is more important in that page is not, again, not looking back. We've had a very good run in the last 4 years. We have built a very solid foundation. And the idea of the next plan for the next 3 years is evolution rather than revolution. So, we're building on this very strong track record of recovery, and we would like to have our performance in 2022 as really the base for what we're going to be delivered in the next 3 years. So, this step change is very important for us to be able to grow our business and further increase our profitability going forward. Page 13. You've seen it before. It was in the Investor Day presentation in October. It's just an idea of how the bank has managed itself during the course of the last 3 years. And clearly, the macro trends and the external shocks that we've seen have been quite different. It is all about agility. If you look at the first block, which is between 2019 and 2020, we actually had a decrease in revenues. How did we react? We actually managed to reduce costs even more. And through that, we managed to increase profitability. In the following year, conditions were very different. Like we were increasing revenues substantially by EUR 71 million, and we were modest in increasing costs. So again, we managed to increase profitability. And this year or 2022, it's again about being modest and being cost efficient and making sure that we create operating leverage. And this is the EUR 76 million increase in revenue with cost pretty much being flat. And sales cost is pretty much the name of the game in our industry. On Page 14, you'll see our performance. So, it's the 10 basis points down in cost-to-income ratio. But I think more importantly is if you look at the bottom left of the page, you will see the actual numbers that we posted. So, our underlying operating expenses have actually gone down over the last 4 years, our number of FTEs have also gone down throughout the last 3 years. We are becoming more efficient in our operations despite increasing the size of operations and expanding in new offices like we've done very successfully, like in Dubai, in Portugal and in other locations. So, I think that the performance management aspect in the culture is clearly part of our -- of the way that we do our everyday job because cost management is an everyday job. We have monitoring mechanisms, both our performance, frontline, back-office support functions. We have strict monitoring of general admin expenses, and we have allocated the responsibility, and we also have incentives for people to make sure that we operate in a cost-efficient way. Now on Page 15, I'll just go back to 2022. This is the picture of the AUM for 2022. I started with EUR 172 billion, EUR 4.2 billion of NNA, disposal of EUR 11.9 billion, almost the entirety is in Spain and the negative impacts from market currencies brings the total to EUR 143 billion at year-end. If you look at the right-hand side, it is positive to see that new CROs and new business initiatives have been continuing to deliver NNA. Clearly, the existing CROs have been the -- the part of the business has been hit by the deleveraging that we had during the course of the year. But excluding the deleveraging, they would also be delivering a significant amount of NNA for the bank. Page 16 is the usual page on delivery by region. Continental Europe has been leading the NNA growth in 2022. Switzerland has also been delivering a substantial amount of net new assets in absolute terms with EUR 1.4 billion. Asia Pacific and Latin America has been positive. And U.K. and our FCM fund business has also been negative. All in, it's a EUR 4.2 billion NNA for the year. And excluding the deleveraging, which is what you see on the right-hand side, so excluding loans, we would have a EUR 5.2 billion increase in net new assets. Next page, Page 17 is about the evolution of CROs. So, we've hired signed or approved 58 CROs in 2022. As you will see, we continue doing performance management. So, our CROs have remained flat. So going from EUR 440 million to EUR 436 million. This excludes, of course, Spain, which got deconsolidated in half year 2022. And that also excludes some partners, which has also been stable. We are continuing to attract strong CROs. CROs with sizable portfolios. We have clearly a unique business model that is attractive to certain ambitious and growing CROs. And we are clearly working on improving on the productivity of our CROs. And you'll see that our AUM per CRO, which is the bottom right chart, is now at EUR 313 million per CRO. Page 18 is about revenues. I don't think it's going to be a surprise to tell you that clearly, NII has been a very strong driver in terms of improving the revenues. You'll see that increased 58% year-on-year, and it was at 26 basis points of margin for 2022 on average. Commission income is subdued. It's a combination of lower nominal AUMs from the market correction, lower client activity when it comes to the brokerage side of the business and also the fact that we deconsolidated our Spanish operation half way through the year. So, on a like-for-like basis, the drop is not 17% on a like-for-like basis, a drop is more like 12.5% because of the technical input from the deconsolidation of Spain half year through 2022. What is very interesting is that with the lack of client activity in bonds and equities, which creates the broker side of the commission income, our CROs have been very active in figuring other areas where they see more appetite for client activity. So, we've seen a lot more activity in currencies. We've seen more activity in precious metals in 2022. And this has been the main driver of the increase in net other income. And if you do the math, there is a substitution, if you wish, of margin between one category and the other category. And I think that this is also a testament of the entrepreneurial side of our CROs trying to figure out what is the best way to provide good advice to the client to make sure that the client can take advantage of volatile markets. Mandate penetration has been resilient in the 56% of AUM, excluding loans, -- and at the bottom of the page on the right-hand side, you also see how the revenue margin has evolved over the last 4 semesters and 81 basis points, which is the average of the year is an average that shows that a very different picture in the first half. First half was 73 basis points. In the second half of the year, it is at 91 basis points, which is a very good dynamic entering into 2023. Page 19 on costs, flat year-on-year, 0 increase in personnel expenses and plus 2% year-on-year on G&A expenses. Clearly, disciplined cost management approach, successful conclusion of all the footprint projects as well, which makes our operations simpler. The personnel expenses are flat year-on-year. I think what you'll see is that the contribution or the element of variable compensation is higher on a like-for-like basis compared to last year. Clearly, that is driven from higher revenues and higher profits. And the admin expenses are marginally up, mostly impacted from new investments that we have been making throughout 2022. Page 20, a very strong balance sheet. Balance sheet is up by 3%, mostly on deposits growing. The liquidity coverage ratio is at 205% and the loan-to-deposit ratios of 44%. As you will see, like we have over EUR 20 billion of excess liquidity on the balance sheet, which is a very good way to make sure that we can grow our business going forward. And on Page 21, about capital. We are currently, we probably have the strongest core regulatory capital position that we've had in recent years. You'll see that in 2021, core Tier 1 ratio was 15.8%. By the way, all these figures are reported under IFRS. We switched to IFRS reporting or IFRS-based reporting for capital ratios on the 1st of January 2022. So going from 15.8%, we closed the year at 14.7%. And then following the reclassification of the hole to collect portfolio 1st of January 2023. We are looking at a core Tier 1 of 16.6% and a total capital ratio of 20.5%. Risk-weighted assets have gone down. The reason they have gone down is that the nominal amount of loans has gone down partly through deleveraging and partly because of currency translation differences. But clearly, the credit risk part of risk-weighted assets has reduced. And we have been active in managing our overall capital. We bought 7.7 million shares through our buyback program in 2022. We redeemed the remaining Tier 2 notes, which was about $200 million in April 2022. This is on the back of issuing EUR 400 million of Tier 1 in 2021. And clearly, with these figures, we are looking to quite a substantial amount of excess capital, which is available to us. either for M&A or for distribution to our shareholders. The Board also decided to continue the share buyback program for up to 3 million shares up until the end of April. And the scope of the -- or the purpose of the buyback is to buy shares for equity incentive plans. Page 22 is the bridge for on capital. You will see that on the left-hand side, we have this 3.2% or 320 basis points of organic capital generation. This is from organic profitability. If you take into account the risk-weighted assets and dividend, the net capital generation is 180 basis points. Clearly, we had some non-underlying P&L. We had a benefit from the disposal of our Spanish operations. We did some buyback. All in all, you will see that at the end of the day, again, we are at a very strong 16.6% core Tier 1 ratio and 20.5% total capital ratio. As a reminder, the minimum that we have set ourselves for the next planning cycle when it comes to core Tier 1 is 12%. So, we are about 4.5 percentage points above our minimum set by management in terms of the core capital. Now I guess this is the last page that we will ever talk about the 2019-2022 financial performance. So, turning the page to the next cycle and literally turning the page to Page 23. There you have our financial targets for the next strategic cycle. As we said before, its evolution is not the revolution. So again, 4% to 6% growth in net new assets, a revenue margin of 85 basis points in 2025, cost-to-income ratio of 69% in 2025 and a return on tangible equity of 15% to 18% in 2025, with a minimum floor in core Tier 1 of 12% and a target dividend payout of 50% of profit. I think that we are very confident that this is the right set of targets for EFG. And what we've seen in the last couple of months is that the team is very excited to -- for this new strategic cycle in terms of delivering again on the promises. We are clearly already almost 2 months into 2023. So, I think 2022 is a bit in the back burner, just for us who are presenting the results. Everybody is looking forward to '23 and beyond. And the 2 main lines are sustaining the business growth as we did in the last cycle and increasing our operating leverage to make sure that we improve on the profitability. And our Board will also be proposing to the AGM a new long-term incentive plan. This is coming in April to further align the interest of employees with shareholders and some more information about the plan on Page 40. Thank you all very much, and I'll pass the word to Giorgio for his closing remarks...
Thank you, Dimitris, and -- let us look a bit forward. Let us look at the strategic priorities going forward. I always like to start with this page, Page 25 because it gives a perspective over 10 years, and it shows where we are coming from and shows where we want to go. If in the planning cycle 2019, 2022, it was all about reigniting the growth, the sustainable and profitable growth after the integration and the acquisition of the previous period I think for the next cycle, 2023, 2025 is going to be all about sustaining this profitable growth and achieving scale. Obviously, as Dimitris has said, is going to be an evolution rather than a revolution but EFG evolutions can be quite fast. So, it's going to be a fast evolution. Now Page 26, you have seen this page already in October. It encapsulates somehow what our strategic priorities and the levers that we want to activate starting basically now for the next 3 years. And again, I'd like to emphasize is we are entering into this strategic cycle in a position of strength, and we are very well placed to create value for all our stakeholders. Now since it is an evolution, I think that we need to, again, continue to do what we have been doing well over the last 4 years. And I always like to point out that we have a very strong foundation of our business. I think this is extremely important in volatile times to be resilient and to have a very solid and, as I say, sometimes solid and liquid balance sheet and strong compliance and risk management framework to avoid incidents along the way. Now what we have been doing very well, I mentioned it earlier, and we will continue to do so is to focus on our clients. We are client-centric. We don't have any other purpose, but to, as we say in our purpose statement to empower entrepreneurial minds, our clients and our colleagues to create value for today and for the future. So, for us, this is a must to be close to our clients to deliver the best possible service. I think that our client relationship officers deliver a service to clients, which is second to none and to deliver the best possible solutions. And we will continue Dimitris said, financial services is about efficiencies, about productivity. We will continue to simplify our business model and our business in general. Now what we can do to accelerate, we will continue in this evolution and this fast evolution to transform the bank. We think that content innovation is key, is key for our clients, but it's also key to improve our competitive market position. And I think that this year, in particular, but also in the next 3 years, we are going to see an acceleration in the digital -- in the deployment of our digital capabilities. I think that probably next year, we will announce a lot of what we are planning to do. We are very excited about that. And at the end of the day, this is about improving the experience of our clients of our client relationship officers and in general of all our colleagues.Now we are in a people's business. And people for us is the most important asset out there, there is a very strong competition to attract and develop talent. We will continue to invest in our people to empower our people. And I think that what -- if there is one element that I would say was the root cause of the success of the last 4 years was the people of EFG and the culture of EFG and the performance culture. Obviously, at the end of the day, we want to create value. We want to deliver a consistent financial performance, which, as you see here, is translated in NNA growth and EPS growth. Now Dimitris already emphasized again what are the targets for the next 3 years. They are here on the right-hand side. I would like to point out again that our business model is capital-light and very diversified and has managed to deliver value and strong results throughout the cycle. And in terms of our strategic priority, I think that in this concept of evolution, we will continue to do what we have done well, as I said, to focus on the growth momentum. This will improve the operating leverage and profitability. And in turn, this will continue to improve our dividend distributions and capital returns to shareholders. But as I said, we will continue in this transformation of our business. In particular, I emphasize again the digital acceleration, and we will drive our performance based on a robust and compliance risk framework. Now -- we are convinced, I am convinced that with these ingredients and with this strategic positioning, we will set the course for a continued long-term success. I thank you for -- for your attention, and I now hand over to Jens for the Q&A. Thank you.
Thank you, Giorgio. Thank you, Dimitris, for your very insightful presentations as ever. We will start the session with Q&A. Can we maybe start in the room first and then we move to the telephone lines. So, any questions in the room? I think we start with Daniele here. possible. Thank you
It's Daniel Brupbacher from UBS. Firstly, on the gross margin, the 91%, -- can you tell us what the -- the trend was in Q3 versus Q4. And then probably whether this level has sustained going into 2023 now. And within the gross margin, obviously, there is a lot of moving parts, and you mentioned the NII. Can you remind us how that works from a compensation point of view because NII clearly has a treasury element and how much of that is compensable revenues and then basically hitting the comp line. So that's question number one. And then secondly, on Slide 17, the hiring dynamic and the numbers there, I think you mentioned 58 million for the full year. In H1, if I remember correct, it was $39 million. So, there was a bit of a sequential slowdown. Is that just seasonality? Or should we be aware of anything else? And can you talk about the hiring ambitions probably for 2023? Thank you.
I'll take the first one on the margin. You're right to say that the -- in terms of the way that the rates have been coming in, clearly, they have been coming in more towards the end of the year. So, your Q4 margin is higher by the Q3 margin, but the difference there is not as substantial as between half 1 or half 2. So, you would be looking at Q3 plus 2, 3 basis points, Q4 plus 2, 3 basis points because clearly, the big impact starting off was the dollar and the dollars already started moving upwards in May, April, May of 2022. The run rate that we have for January is at or at the levels that we have for the second half of the year. So again, you should not expect another 10 basis points, if that's the case. So, I think things are normalizing. And don't forget that we always also have some substitution from clients who are in noninterest-bearing accounts that now we are paying interest. So, this is also damping a bit how the margin works. Overall, I think the other point to say is that given the structure of the balance sheet, the way it is now, if we have 100 basis points on all currencies on an annual basis, we're looking at another $90 million to $100 million of incremental revenue. But again, that is everything else being equal, it is not like reality is a bit more complicated.
Maybe in terms of the second part of the question about how much, if I understand correctly, how much will translate into variable compensation or not. Obviously, we follow and we've been following this now for almost 10 years, fund transfer pricing between the areas of the bank. And clearly, there is a part that is, let's say, the remit of the private bank and the client relationship officers. And obviously, there, you have the usual model another part, which is obviously related to treasury and how to invest excess liquidity that obviously attracts a different, let's say, compensation model. In terms of the iron and CRO, if I understand the last question, I would say that last year was an okay year with 58%. As you recall, we have signaled in October that our target for the next 3 years is between 50 and 70 CROs in a gross manner. And the objective is to ensure that, obviously, we take bigger teams, more seasoned teams. And as you have seen, we have increased or we have maintained stable, which in a year like last year, I think, is a major achievement, the 313 AUM million, of AUM per CRO, which I think is an important objective. So, all in all, the pipelines are good across geographies. is a top priority for the top management team, all the regional business heads and the Head of Private Banking. And I think we are very excited that I think also with this set of results is going to be much easier to attract new talent to EFG...
Thomas Paul AWP. I just wanted to ask about the mood of your clients that in the press release it's -- last year, it was quite deleveraging and risk aversion. Could you say a little bit how this evolved now in the first month or so? Is there more risk appetite? Is there some re-leveraging?
Well, we can say that, obviously, last year -- I mean, last year, we had several events that all concur to make sure that in many quarters, we had risk off by clients. And obviously, when there is risk off and clients become more cautious, they close their positions to reduce exposure. We have seen that, obviously, in the second quarter or the end of the first quarter, second quarter following the war in Europe. We have seen that, obviously, after the market had a major dislocation in the equity and bond markets. And we have seen also a bit of that when we -- in the fourth quarter, we had a recovery of the market. Some clients decided to close the exposure when the markets were coming were coming up. Now I think from what we can see, the visibility at the beginning of the year is still not great. But what we can see is that the markets and the clients have stabilized somewhat. But I think it is premature to talk about re-leveraging to be very honest. Obviously, we will see how the year will develop. And if the stability will set in, I'm sure that some risk on will come. But as you know, you have seen yesterday, I mean, it is still very, very volatile and unstable...
Thank you. So, we then move on to the first question from the phone. Can we please have the first question on the mobile one.
The first question comes from Nicholas Herman from Citigroup.
Yes. Good morning, can you hear me okay? Yes, Nicolas... Yes. I just want to say congrats on largely delivering the less than 75% cost income target last year despite what was without a tough operating environment. Three questions from -- for me, please. One on capital, one on other income and one on fees. And go with me, sorry, the first one is a little bit of a multi there are some questions within that. But I guess, look, your CET1 ratio is now -- or pro forma for the reclassification of $16.6 million. That looks at about GBP 140 million to GBP 150 million of surplus versus your 15% or 12% in versus your 50% minimum target, which is, I guess, is for M&A. So, the question is why not do a buyback? Can we read into that, that you do expect to do a transaction in the coming months? And then can you also remind us, please, what kind of transactions are you looking for types of business, regional mix, return criteria? So that's the first bucket. Moving to other income. I'd like to dig in to ask a little bit please you saw 18 basis points of other revenue margin in the second half -- you reported 13 basis points in Q3. So that suggests like a low mid-20s in Q4. It looks like that status was driven by fair value gains, but there was also a genuine uptick in trading to, which seems a little bit unexpected because your peers have all seen lower trading. So just curious what -- you guys can you give us a kind of why that actually is? Were there any particularly lumpy trades? And I guess you can suggest that this is a substitution effect or do you think we can indeed extrapolate this going forward? And then the final question, quickly on recurring fees. It looks like your recurring fee margin declined in 2022 versus 2021, -- is that driven by a shift of products into lower-margin products? And as part of that, how to think about the path to the 65% to 70% mandate penetration? Is that more back ended? Or is it a ground up from here? So, a lot of -- a few questions there, but that's okay.
So, to start with your first question on capital, as you say, following the reclassification. So as of 1st of January, our capital ratio core is 16.6%, gives us of available capital for acquisitions. You asked about the buyback. We have a buyback in place. As you know, our free float is not that extensive, given the structure of our shareholding. So, we cannot really utilize a buyback in the best way or in the way that some other companies might be using it in terms of reducing their capital and through that, increasing the performance of the stock to the benefit of the shareholders. We have a limited buyback. We did almost 8 million shares in 2022. We will continue for the next couple of months as the Board has decided, I think that for us, this available capital is really the firepower that we need to be able to very quickly move and do acquisitions. Now I don't know, Giorgo, if you want to say anything about the criteria of the acquisitions, we discussed them in October again. But...
Yes. I think, Nick, I mean, we discussed acquisitions several times. Obviously, we are open for that. And in terms of the criteria, criteria had been mentioned last October in the presentation, and they have been always the same. I think for us, the critical point is to have add-on acquisitions where we can acquire market share in strategic markets, so we can realize synergies. This is for us extremely important. The second key criterion is that we have a very strong culture fit. Otherwise, it would not be a successful acquisition. And in terms of -- you mentioned the metrics in terms of, let's say, the return metrics, we need to have clearly an acquisition that is value accretive. For example, we have indicated a return on investment over 10% by year 3. This has been our framework over the last years. And clearly now, depending on how the consolidation in the market will evolve, we are ready for that.
Now to your second question about net other income really the trend that we see in net other income or what is driving net other income year-on-year is clearly increase in client activity in currencies and client activity in precious metals. This has been the key driver for the increase in [ NRI ]. We can discuss if you as offline like quarter, last quarter versus third quarter or first half versus second half, clearly, the trading portfolio did not deliver exactly the same way in the first half versus the second half. But this is -- for me, is more noise rather than the underlying trend, which is clients substituting their activity. And I think this is what you referred, if I caught it correct because I couldn't hear you very well on the substitution point. But what is happening is we are seeing clients moving their activity from bond trading and from equity trading, which was part of the commission business into trading of other instruments like currencies because they believe that these are a better way of positioning themselves under the current environment where there is a lot more volatility on the rates, for instance, and on the valuation of the stock. So, we've seen that sub substitution between different products. And again, this is also, as I said earlier, part of the entrepreneurial approach of our CROs to be able to make the best possible decision and give the best possible advice to their clients depending on market conditions.
Maybe on the last question, which was about recurring fees, I would say, Nick, that we do not disclose the breakdown between recurring fees and transactional fees, et cetera. I think that actually last year, and this has been a trend over the last 4 years, actually, the recurring fees have improved in relative terms in basis point terms because we have been doing a repricing exercise, and we have been focusing on more high-value and high-margin products over the last 4 years. Now clearly, what you see is a drop on the net commission income, but the drop of net commission income is driven mainly if not solely, by the drop of the transactional element of the net commission income. So, what we saw and we have seen it throughout the year is that the level of activity and the transactional, let's say, buyers of the clients reduce dramatically when the markets obviously were in turmoil. As Dimitris was saying, on the other hand, if -- and again, I'd like to point out because I think the point is important on Page 18, if you add up the net commission income and the net other income, in 2021, the aggregate margin was 55 basis points. In 2022, it was 54 basis points because as Dimitris mentioned, while on the equities and bonds, the transactional activity reduced very significantly on the effects, it increased dramatically. So, there has been a compensation there. But coming back to the original point, the recurring fees are on a trend on an upward trend and will continue. This is part of a strategy of content innovation. And you're right to say that our penetration was 57% last year in 2021 is now down 1 percentage points. This is obviously because cash, which, by the way, if you look in the appendix, cash increase dramatically was 21% of our total AUM now it's 25%. So obviously, cash doesn't decrease in value while the mandates, decreasing value. So that 1 percentage point is due to the fact that there has been this drop in value by the mandates. Now our target, as you know, we have announced it in October is 65% to 70%, which I would say is quite ambitious. And obviously, we have a plan for the next 3 years to ensure that we increase significantly both advisory mandates and discretionary mandates.
If I could just have a quick follow-up on the capital. So, it's a fair point on the buyback. I should have said capital return. But I guess the question remains that now that you are generating organically more than 300 basis points of capital per year. And I don't know if there's going to be a hole to power effect as well after the reclassification. But regardless, with that GBP 400 million of surplus versus your 12%, you obviously said that anything also above 15% is eligible for distribution subject to M&A. I guess why -- again, just to reiterate the question, is it fair to say then that you are seeing opportunities in the market right now? Otherwise, you would have returned it? Or was it a case if you want to keep that forward, the majority of the plan? In which case, at what point in the plan would you then consider in returning capital above the 15%. Are we now talking 24 2025, the back end of the plan? Or is it just how to think about that, please?
Thank you, Nick. Look, let me put it this way. This is a very nice problem to have. Okay? We have a lot of excess capital. We have been very public in the market that we would like to do transactions. Unfortunately, the last 3, 4 years, the actual number of transactions in the market has been the lowest that I've seen it ever, and we are looking forward to more transactions coming to market, and we would like to be very well placed to do those transactions. So, I think the timing of what will happen in terms of transaction or return, I wouldn't like to speculate at this point. But again, I love to be in this position where we have, you say, about EUR 400 million of excess capital above the 12% minimum for us to be able to take advantage of a possible acquisition in the future.
Maybe, Nick, a comment about timing, right? I mean we are entering now the new strategic planning. Obviously, the management team is very focused on delivering short-term targets, but we have also a vision over the next 3 years. So I would say that we are going to look and assess as Dimitri said, the situation in the next quarter. So don't expect that something is going to happen in the next quarter or the next 2 quarters. We have now another 3-year period and another 3-year strategic plan to deliver, and we will look at that as we have done with a medium term. I never say long term, medium-term vision.
Thank you... Can we have the next question on the phone...
Your next question comes from Adam Terelak from Mediobanca. _
I had a couple on NII and then capital. On NII, I just want to get a sense of what you're seeing on deposits so far and what your thoughts are on deposit migration into next year. Unlike other banks, I think your deposit volumes have held up pretty well and whether you're seeing big competition at the margin there? And what that really means for your NII from here, clearly, the exit rate is very, very strong. But how do you think -- how should we think about that 3 further euro hike and dollar hikes this year and how we should think about the liability side in terms of the sustainability of your NII and your gross margin exit rate, which is clearly very, very strong. A follow-up on that point as well, excess liquidity in dollars. Is that still being placed at the SMB virus swap -- if so, what sort of volume is that? And how much revenue is there in other income that is actually related to interest rate levels rather than kind of some of the FX trading that you're talking about? Just some color on the swap income would be great. And then finally, just a quick point on the dividend payout. Is that pre or post the AT1 coupon for the minimum payout. So, you think about that pre-AT1? That would be very helpful.
So, I'll take the first question on NII. As you said, we have seen significant migration of our client base from nonremunerated accounts to remunerated accounts. If you look at our accounts, there is disclosure, there's a breakdown of deposits between the interest-bearing and the noninterest-bearing. There's about PLN 8 billion of movement between the end of 2021 and the end of 2022. The majority of that EUR 8 billion happened starting in, call it, May of 2022. So, it was a second half event. We have been seeing a slowdown in that conversion. The majority of the conversion was on our dollar deposits. Clearly now, dollar deposits in number terms are above 4%, 4% even in the short term. So, it is clear that clients want to be remunerated. We've seen a smaller conversion on the other currencies also clearly because the nominal compensation is smaller for the other currencies. I do expect it to continue to some extent. What we're seeing is that the rate of that transformation has been decreasing in the last 2, 3 months. Also, like, for instance, on the dollar side, we don't see big changes. On the euro, there is a bit more coming in. I think that the -- what gives us more comfort than what we had before is if I look at the combination of that conversion and the expectation on the rates, I don't see -- I see one compensating the other quite a bit, at least in the short term. So I think on that side, the visibility is a bit better than what we had back in October or in July when we were discussing the same topics again. Now... Yes.
I was just going to say, does that give you a bit of upside risk for the 85 basis points in your gross margin in your planning assumption?
Look, I will say that I feel more confident about the 85 basis points in 2025 today than what I was 3 months ago or 6 months ago. I think we have better visibility than what we had. So, I think the level of comment again, as we said back in October, like for us, the priority is to make sure that we improve on what we control, which is the commission income line. The rates, people are talking about hard landing, soft landing now, no lending, which is a different scenario. Again, we do -- we clearly want to have higher rates. It's like as a bank, it's very positive. But our focus in terms of delivery is really going to be on the commission line. I think that the prospects of the net interest income line now that we have more visibility are a bit more positive than what we had 3 months ago.Now you asked a question about excess liquidity and swapping. There's no big difference in what we have been doing versus what we're doing last year or middle of the year. We don't disclose exactly what is the swap amounts, and we don't disclose exactly what is the benefit from that. And closing with your dividend payout, the payout, so the -- like clearly, we have a payout for common shares, core shareholders, which is the dividend. The 50% guidance on profitability, which is our guidance for the payout is only for normal dividends to shares. The dividend for the Tier 1 is over and above. And with the proposal that we have now, we have about EUR 130 million of dividends to be paid to core shareholders and another $20 million on top of that of dividend to be paid to Tier 1 holders in 2023.
Great. Thank you for all of that. The swap income, I know you don't want to give numbers, but is it -- I presume because rates are up the contributions at year-on-year.
Sorry, Adam, I couldn't hear you very well.
Rates are up. So, the contribution from the swap is up year-on-year, and that's potentially some sustainable income in your other income rather over and above trading benefits we're talking about...
Yes, with the rates being higher, your income would be higher, correct?
Thank you for time...
Great. I think we have another question on...
The next question comes from Daniel Regli from Credit Suisse.
First question is on capital and capital strategy. And sorry, maybe this is a little bit of a follow-up on questions which have already been asked before. But maybe this is also kind of a topic which was already discussed at the Investor Day in more detail. But can you maybe reexplain to me why you have kind of a floor of 12% versus 14% previously, while obviously, the IFRS CET1 numbers seem to be even higher than the previous numbers. And then the second question is a bit on the share buybacks. You did, obviously, the share count was historically always growing slightly. -- should we expect kind of going forward that we at least have a flat share count or even decreasing share count? Or should we expect this to continue to grow as we have seen it historically? And then also a little bit of follow-up on the NII. You were talking about EUR 90 million to EUR 100 million incremental revenues from 100 basis points rate increases on all currencies, can you maybe break this down a bit into the various currencies. So if the maturity I expect this to come from the U.S. dollar, but maybe can you be a bit more specific about the different currencies and yield curves. And then one last question, if I may. On net new assets. Can you maybe again specify a bit what was the moving parts in the NII number? What was coming from deleveraging, particularly H1 versus H2? And maybe also particularly in H2, have you seen kind of an additional benefit or tailwind from -- coming from the misery of another institute in the market .
Okay... So, starting with the capital strategy. And I'm clearly in the -- when we did the October presentation, there was Page 62, if I'm not mistaken, of that presentation where we talk about the capital-light model that we clearly have and our drive to generate organically a lot more capital, while we're also derisking. So the reason that we moved from the 14% capital ratio to the 12% capital ratio has been because over the course of the last 4 years, we have substantially derisked our legacy problems. You saw now that we've actually managed also to settle in 1 of the 2. So, it is behind us. And we said, at this point, we are willing to drop that minimum core Tier 1 from 14% to 12%. This is also on the back of the fact that we are generating so much capital organically that you don't need to have extra buffers in your capital because your operating performance is much stronger than before. So the overall thinking of the capital strategy is strong organic capital generation, make sure that you have dry powder that if you want to do acquisitions. And as Giorgio described earlier, there are specific rules around or specific thinking around what sort of acquisition targets we're talking about, which geographies, complementarity in culture and overlap geographically and some very fixed return target. So, we need to make 10% return on investment by year 3 in order for that acquisition to qualify for us as an acquisition that we would make. So, the other thing that we said, which I think that was also discussed a bit earlier was we said that if we are at the core Tier 1 above 15%, which we currently are, we will consider returning capital, but this is subject to market conditions. This is subject to M&A targets being available. So, it is a conscious decision. As Giorgio said, we are trying to build the value of the franchise in the medium term. So, the fact that we are above at this point is good because it gives us firepower to do something. It doesn't mean that we will act immediately on it in terms of returning excess to shareholders in the next 1 or 2 quarters, for instance. Second point on the share buyback. We are doing a limited buyback. We did 8 million shares in 2022. The purpose is to avoid dilution from the equity incentive plans that we have for employees. So, the idea is, as you said, we're trying to keep the number of shares in circulation pretty much flat. So, we will have new shares from incentive programs coming in. At the same time, we are doing the buyback and we try to keep the total number of figure flat so that we avoid diluting the existing shareholders from the incentive plans. And to your third question about sensitivity to interest rates, out of the $90 million to $100 million with all rates going up 100 basis points. About half of that is on the euro. And then about 1/3 of it is on the Swiss franc. So, at this point, our currency -- our NII exposure to the dollar and to the pound are really, really small. We had a much bigger exposure to the dollar at the end of 2021. But because we've seen conversion of deposits into now remunerated deposits, that exposure has reduced dramatically. So, I think that our exposure to the dollar is about 10% of that $100 million with 100 basis points. So, it's really marginal going forward.
I think the last question was about -- and what we have seen about deleveraging, I think Dimitris mentioned it earlier, it was about EUR 1 million, so excluding the deleveraging $1 billion. So, it would have been $5.2 million. And regarding obviously, what's happening in the market, I think, obviously, we are in the market, and there are certain situations, but there has been nothing, I would say, that has moved the needle dramatically.
Excuse me, can I then quickly follow up, obviously, on Slide 15, you're showing like deleveraging having been like EUR 2.4 billion on the existing CRO. So, whilst in the total number, only about EUR 1 billion?
The deleveraging that you see on that page is the impact is double. So, the leveraging -- the reduction in loans is about EUR 1 billion. But here, what we're trying to show is if we did not have that reduction in loans, we would be EUR 1 billion up because we count loans as part of our AUM and our NNA. But we would also -- because the deleveraging goes with losing the assets that, that leveraging are invested into. So, when you -- every time you lose $1 million in alone, you lose EUR 2 million in net new assets because where that amount is invested also goes at the same time. So that is how we count and this is how we show this figure on that specific page of the presentation.
But then the U.S., the number would have been more like 6 points...
Correct. Yes, that's correct. Yes. If we did not have any deleveraging our NNA, the way we present it would be EUR 6.2 billion.
Okay. Very helpful.
[Operator Instruction] We have a follow-up question from Mr. Nicholas Herman from Citigroup.
Yes. Just a small one on going back to the ROI of deals. Just Shawn Partners, am I right that the ROI in year 3 is about 10% just over on that one.
I don't have the calculation handy return on investment for our -- I would bet that it is significantly higher than 10%. But again, Nick, maybe take it offline. We can run the calculation in year 3. The -- when we made the investment, again, we were clearly above the 10% ROI in the business plan that was presented at the time, and they are beating that business plan in Australia. So, I think that we are massively over the 10% but…
I can confirm, Nick, I mean I've been in Sydney at the end of January, and we have actually took out of the draw of the old business plan, and we are beating it toward the team in Sydney and in the rest of Australia are beating the business plan in all dimensions. Now I'm sure that offline, we can do the calculation -- we can do the calculation. But we are very, very pleased with the partnership. And I think it has been a very good investment and a very good partnership. And as you have seen some of our peers have followed...
Another question in the room, and then I think we have another question on the phone, but we'll take room first, okay.
Yes. Just on capital again. The -- so the reclassification of the fixed income portfolio, led to the almost 200 basis point increase in CET1. Is it fair to say that this is basically a front-loading of the pull to par because of the spread widening. And okay. And so, we -- basically, the way we should think about the capital ratios profits, RWA and capital returns, and that's it. And is this relevant when you -- like for the Board or even the regulator, to days -- because it's -- in a way, it's mark-to-market versus accrual accounting. Is the 14.7% even relevant because that would be below 15%, right? Do you take that into consideration? I mean we all assume these bonds pull to par and you get the money back, it's all fine unless there's a default. But are these 2 ratios both still relevant? Or is it really just the one for all the decision takers...
Look, we report both here. We provide quarterly reporting to the regulator on capital. So, whether it's 1st of January of 31st of March, in the 31st of March submission, the capital is going to be 16.6% plus/minus whatever we have in the first quarter. So, for me, the relevant number both to investors and to regulators is the figure that is going to be reported, which is going to be at this high level. As we say, it is the pull to par. And for us, the majority of the bonds that are in the portfolio are U.S. treasuries. So, if the drop of the valuation is because of interest rates, which is what happened in 2022, I think that the hold to collect is the correct way to think about it because you don't have a credit risk. Now if it was for different reasons like for credit, then it's a different discussion. So, I think that for all purposes and for all audiences, the 16.6% that we have at the 1st of January is the appropriate number to discuss...
Okay. Thank you.
We have another question on the phone, I think. Can we please...
We have a follow-up question from Daniel Regli from Credit Suisse.
Having another question from my side. And my question is also on the Shaw and Partners, and I just wondered what is kind of the mid- to longer-term strategy, whether there has anything changed? And yes, I just noted that you always kind of report these employees separately. So, is there enough no ambition to kind of more or more fully integrate on partners into the EFG operations?
Yes. Thank you for the question. No, as I said, we were in Sydney at the end of at the end of January after 3.5 years, and we had the opportunity to do a strategic review of the business. As I said, we are very pleased with the partnership. It's already 4 years, I mean time flies. So, I think it is a strategic partnership. Nothing has changed there. And actually, also in Australia, we were discussing how to grow further the business organically or inorganically. So, we will look at all the avenues to go to the next level. In terms of the reporting, the simple reason is that clearly, the Shaw and Partners business is an FA business, it's a domestic business as some drivers that are different from the international private banking business. And so to give the best possible transparency to investors and analysts, we make this difference. In terms of synergies, you can go back to the presentation of 4 years ago, we have highlighted at the time 3 types of synergies. One was to give access to the clients and investors in Australia to international markets and also to Lombard lending, for example, out of our different international booking centers. We are developing that. Clearly, the last -- during COVID times, it was very complicated to travel to and from Australia. So now this is, again, taking a renewed, let's say energy. The second area was to look at the, let's say, the Chinese diaspora, as you know, Sydney after Vancouver is the second largest city where you have Chinese national that take residents and many, obviously, are very often. So, on that, we have strong capabilities, and we are looking at that. And the third is how to basically leverage our international funds, new capital funds, for example, for institutional clients in Australia, and we have a team dedicated to that. So, the 3 strategic synergy synergetic priorities remain the same, and we are following the plan. And as I said, we are looking at all avenues to grow both organically and not organically...
Okay. Great.
I think we have no further questions on the phone. Any last-minute questions in the room. I don't think so then I would hand over for Giorgio for... Some final remarks.
Yes. First of all, I'd like to thank everyone attending the presentation for your interest, your support and your questions. And to sum up, again, I'll do a full circle. The key takeaways are, again, 2022 was a very strong year for EFG. We have successfully completed our 2019-2022 strategic plan in a challenging environment. And now we are turning the page. We're entering a new planning cycle, 2023 and 2025 in a position of strength, and we are very confident that we will be able to achieve our objectives, and we will be able to make EFG one of the best brands in international private banking and wealth management. Thank you very much.