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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, good morning. Welcome to the First Quarter 2022 Results Presentation. The conference must not be recorded for publication or broadcast. [Operator Instructions]
At this time, it's my pleasure to hand over to Sarah Mackey, UBS Investor Relations. Please go ahead, madam.
Good morning, and welcome, everyone. Before we start, I would like to draw your attention to our cautionary statement slide at the back of today's results presentation. Please also refer to the risk factors in our 2021 annual report, together with additional disclosures in our SEC filings.
On Slide 2, you can see our agenda for today. It's now my pleasure to hand over to Ralph Hamers, Group CEO.
Thank you, Sarah. Good morning, everyone. The first quarter of '22 was dominated by extraordinary geopolitical macro events as a result of Russia's invasion of Ukraine. And during these turbulent times, we've remained focused on 3 key priorities: executing our strategic plans, serving our clients and managing risk. We once again proved the benefits of our global scale and the power of our ecosystem for investing, and we're working hard to enhance it every day.
Our clients had to navigate a challenging and complex environment, as you can well understand. So our focus was to really stay close to them and advise them on their portfolios and risk management. At the same time, we prudently managed our own risk by working together across the businesses and the control functions, we further reduced our exposure to Russia.
Our focus on clients and risk management resulted in another strong quarter financially, and it highlighted the resilience of our diversified business. We have and will continue to execute on our strategy regardless of the market volatility.
On Slide 4, you can see some of the milestones that we have achieved so far this year and in an environment of higher rates, higher inflation, higher volatility, it's more important than ever to ensure that portfolios are well diversified, including exposure to alternatives.
And during the last quarter, our wealth management clients committed $8 billion to private markets. Our U.S. clients continue to value our seamless offering for separately managed accounts we saw another $7.5 billion of inflows in the first quarter. Sustainability, as you can well imagine, remains important for our clients, for us as well. And this quarter, we launched a number of sustainable finance products. For example, a new climate transition fund in collaboration with Aon. And in Switzerland, we now also offer mortgages with preferential interest rates if the proceeds are used to improve energy efficiency of buildings.
Our clients are at the center of our strategy, so we're particularly proud to have been named #1 in client satisfaction across U.S. wealth management firms in the JD Power survey. But also in the latest Euromoney Private Banking survey, we received 192 awards, including Best Wealth Management in Asia Pacific, Best Wealth Manager in Western Europe as well as the Best Wealth Manager in Sustainable Investing Globally. And we were awarded currency derivatives House of The Year in '22 Risk Awards. So accolades from many different institutions for how we're doing.
We're also continuously evolving our mobile applications, making it even easier for our clients to stay connected with us. More than half of our personal clients in Switzerland are active mobile banking now. We process more than 3x as many mobile logins as we do desktop logins. So you see also that trend here moving away from desktop to mobile.
To make us even better in delivering our client promise, we're driving cultural change across the firm. Earlier this month, 10,000 colleagues became part of Agile@UBS, our Agile way of working. We're removing silos, bringing different types of expertise together in teams. We continue also to support hybrid working. For example, in the U.S., we launched an industry-leading approach to flexible working that will provide employees in eligible roles with the opportunity to work 100% remotely. And that's in addition to the 2/3 of employees who we've already enabled to work in hybrid models.
Now in short, we're continuing to focus on our strategic imperatives, as you can see. One of those is also sustainability core to our ecosystem, part of our purpose, a strategic focus as well, especially in these volatile times where we should not forget about this. And you'll see an update on this on Slide 5.
On the people side, we're supporting the people in Ukraine and those who have fled the country. Clients and employees can donate towards relief efforts through the Optimus Foundation. Together with XTX Markets, we have committed to match those donations. So far, a total amount of around $30 million is raised and with our goal to reach up to $50 million. So still going to a higher number here, but we have $30 million raised to now.
We also advanced on our priority to address wealth inequality. For example, we introduced an inclusive investing group in the U.S., and that team specialized in helping clients promote diversity and inclusive growth through their investments.
On the planet side, as you may well remember, we had our AGM earlier this month, our shareholders voted in favor of our client road map across the different scopes. We've also received valuable feedback there. So we will stay engaged with shareholders, as we further evolve our targets and methodologies that we apply.
One way in which will evolve our climate reporting is by disclosing emissions based on the Partnership for Carbon Accounting Financials, PCAF, in short, this standard should also help us expand our Scope 3 disclosures over time.
We also became a founding member of Carbonplace, an innovative trading platform being developed to create a truly scalable voluntary carbon market, and we joined the Green Software Foundation as a steering member to help us achieve net zero emissions from our own operations. So you see it's been another important quarter also from a sustainability agenda perspective.
Now as mentioned before, the market backdrop was dominated by the war in Ukraine and the subsequent sanctions against Russia. But even before the war, markets were volatile. Lower growth expectations dampened investor sentiment, especially in China. Inflation was already fueling fears of tighter monetary policy. And in this environment, our ecosystem continue to grow. And you can see that on Slide 6.
Our clients turn to us for advice, execution and liquidity. And this is a true reflection of their confidence in our stability, our global reach, but also our knowledge, our local knowledge, our sector knowledge. And we intensified our client engagements and provided more insight through our Chief Investment Office research that covered topics ranging around the war to inflation to interest rates and more.
And just to give you a bit of an idea as to how close we stay to our clients, our CIO hosted over 1,000 dedicated events, reaching more than 100,000 clients and prospects advising as to how to deal with the currency situation. And that proactive outreach, research and advice gave our clients guidance in their investment decisions. We saw $19 billion inflows into fee-generating assets and that's a 5% annualized growth rate and the bulk of these were in mandates.
In addition, we saw strong inflows in our asset management capabilities. We continued to see growth across our hedge fund business as well. The [ fastest ] products, separately managed accounts and sustainable investments with net new money, excluding money market at $14 billion. Our personal banking clients in Switzerland also continue to put their money to work in investment products. Inflows were $1 billion in the quarter. and that's a 16% annualized growth rate. And the majority of these inflows were also into mandates, where sustainable investing is a major driver of growth.
Our institutional clients had many opportunities to trade as well. Volatile markets drove trading volumes, especially in EMEA. Our clients were particularly active in equity derivatives and foreign exchange, where we were able to facilitate high volumes, manage risk, provide access to liquidity, and all this resulted in the highest global markets revenues on record.
So to conclude, throughout these complex times, our clients continue to keep their trust in us. And one of the reasons is that they value -- that the value is being a source of stability, seeing our strong capital position and our strong control environment, they see that as important assets to work with us.
And on Slide 7, we give you an update on Russia. So being a strong partner for our clients also means managing our own risk proactively. And as you can see on the right-hand side here, we significantly reduced our already low exposure to Russia during this quarter. We're focused on complying with all applicable sanctions as the situation rapidly evolves. Now this diligent risk management, combined with our global diversification made us more resilient. Our clients turned, as indicated, for advice through these challenging times. These times gives challenges but also opportunities. We remain disciplined on cost, and this led to a strong worldwide financial results, as you can see on Slide 8.
Operating income was up 8% versus a year ago, making this the seventh consecutive quarter of year-on-year growth. Positive operating leverage meant pretax profit was up 19%, and net profit was up 17%. Return on CET1 capital reached 19%. Our cost-to-income ratio decreased over 3 percentage points to 70.7%. We also repurchased $1.7 billion of shares in the quarter, and we're well on track to buy back around $5 billion by the end of the year. So we captured the opportunities to drive the growth on both top and bottom lines. And as we do that, we're executing our strategic plans as well as our vision to convene the global ecosystem for investing.
And with that, I'll hand over to Kirt, who will take us through our numbers before we get into Q&A.
Thank you, Ralph. Good morning, everyone. At $2.1 billion, we delivered the best net profit for first quarter since 2007. This translates to a 19% return on CET1 capital and a 16% return on tangible equity. PBT was $2.7 billion, up 19%. Net credit loss expenses were $18 million. We made some updates to our scenarios and weightings to reflect the current environment, and we continue to imply -- apply a management overlay given ongoing macroeconomic uncertainty. As of March, the total overlay was $204 million, a $20 million reduction from 4Q '21.
Turning to expenses. We remain disciplined in the quarter, managing to keep our expenses, excluding variable and FA compensation, currency effects and litigation, in line with our full year guidance of increasing around 2%. This helped us to deliver a cost-to-income ratio of 70.7%, which we achieved while continuing to invest for growth and while absorbing some inflationary pressure, notably on salaries.
Moving to our businesses. GWM PBT was down 7% to $1.3 billion despite double-digit growth in EMEA and Switzerland. Positive top line contributions from all regions outside of APAC supported 1% higher operating income that was more than offset by higher operating expenses. Revenue growth in the U.S. led to higher financial advisory compensation, which, together with an increase in litigation provisions, drove costs higher by 5%.
Net new fee-generating assets were $19 billion in the quarter, an annualized growth rate of more than 5%. All regions contributed positively with the highest net inflows from the Americas. This quarter's net new fee-generating assets were mostly driven by net mandate sales of $21 billion. We also continued strong momentum in private markets, where the clients committed $8 billion in the first quarter, as Ralph mentioned earlier.
Net new lending in the quarter was $0.5 billion as continued positive momentum in the Americas and Switzerland, partially offset by deleveraging in APAC and EMEA.
Moving to income. Recurring net fee income grew 7% year-on-year, mostly driven by net new fee-generating asset momentum over the last year, notably from our SMA initiative in the U.S. and from discretionary mandates in other regions, along with inflows into alternatives. Sequentially, recurring fee income was down 3% as the effect of negative market performance and the lower day count more than offset revenue tailwind from NNFGA.
As a reminder, client billing on mandates is calculated based on average daily balances in the Americas and based on prior month end balances in other regions. Net interest income increased 14% year-over-year with higher deposit margins and volumes as well as growth in lending balances. Sequentially, NII was up 2%, in line with our guidance. Transaction-based income decreased 19% versus an exceptional 1Q '21. These results were reflective of the challenging geopolitical and macro backdrop that Ralph already described which affected risk taking, especially in APAC, where transaction revenues decreased by around 40%. Despite these factors, we saw continued very strong momentum in alternatives in private markets.
Entering the second quarter, clients have generally remained cautious with activity levels reflective of continuing geopolitical and macro uncertainty. Looking ahead, we anticipate this to persist, especially in Asia, given the added effects of COVID-related lockdowns. This will likely affect both transaction and recurring revenues. Given that markets -- that market is now factoring in additional rate hikes in the U.S., we expect to more than offset these headwinds, assuming markets remain flattish with higher NII over the course of the year.
For the remainder of 2022, we anticipate an increase of around $1 billion NII year-on-year based on current forward curves and quarter end balance sheet. The majority of this increase will materialize in the second half of 2022. In the second quarter, we could see around 15% growth sequentially.
We continue to see very strong business momentum in P&C in good cost control, driving PBT up 10% to CHF 395 million. Operating income increased 3% with CHF 112 million increase from transaction, recurring and net interest income. This was partly offset by a CHF 16 million valuation loss compared with a CHF 26 million gain in 1Q '21, along with credit loss expenses of CHF 21 million gain compared with a CHF 22 million gain credit loss release in 1Q '21.
Costs were down 1% benefiting from branch closures in 1Q '21, partly offset by increased tech costs as we continue to execute our digital strategy. The cost-to-income ratio was 58%, a 5 percentage point improvement year-on-year. Transaction-based income increased 25% to a record level of higher revenues from credit card and foreign exchange transaction, also reflected an increase in travel, leisure spending by clients.
Recurring net fee income was up 15% to an all-time high, primarily on higher revenues from mandate custody, investment fund and account fees. Continued momentum in recurring fees was helped by CHF 2.8 billion gain of net new investment product inflows over the past 12 months. NII increased by 5% year-on-year, mostly as a result of deposit optimization measures.
For the quarter, Personal Banking net new investment product flows was a record CHF 1 billion, an annualized growth rate of 16%. In Asset Management, PBT was down 23% from a particularly strong 1Q '21. Net management fees were up 3% as flows over the last 12 months supported continued net new run rate fee momentum. Performance fees were down against an exceptionally good 1Q '21.
Invested assets were 5% lower sequentially, reflecting lower market performance in adverse currency effects. Net new money, excluding money markets, was $14 billion for the quarter, including $2 billion in alternatives with inflows across all distribution channels. Costs were down 2%, helping to keep asset management's cost-to-income ratio just below 70% for the quarter.
The IB's PBT increased to $929 million, delivering a return on attributed equity of 28%. Global Markets delivered its highest quarter on record, up 59% year-on-year. Excluding the loss on the default of a prime brokerage client in 1Q '21, Global Markets revenues increased by 4%, primarily driven by higher income from equity derivatives, rates and foreign exchange products.
Global Banking revenues were down 30% to $550 million in the first quarter outperforming the global fee pools across advisories, ECM, DCM and LCM. Concerns about inflation in the monetary policy response, along with Russia's invasion of Ukraine, weighed on investor sentiment. Capital markets revenues decreased 41% on subdued issuance and deal flow, especially in equity capital markets. Advisory income was 3% lower versus a very strong 1Q '21. Operating expenses were up 6% as variable compensation increased as a result of higher revenues. The cost-to-income ratio was 68%.
As of end March, our CET1 capital ratio was 14.3%, and our CET1 leverage ratio was 4.16%. RWA increased by $10 billion sequentially. Credit and counterparty credit risk increased due to higher client activity and market-driven movements and derivatives in the IB and GWM, as well as higher lending activities in GWM and P&C. Market risk RWA increased by $3 billion on higher average regulatory and stress VaR from market moves across asset classes.
Operational risk RWA increased by $2.1 billion in the quarter, reflecting the court decision in the French cross-border matter in December last year. A further $2 billion will be reflected in the second quarter of 2022, bringing the risk -- RWA increase related to this matter to $4.1 billion.
We continue to aim to buy back around $5 billion during 2022. As of the 22nd of April, we had repurchased $2.1 billion in shares, of which $1.7 billion in the first quarter. Together with around $400 million of dividend accruals, this represents almost 100% of our 1Q net profit.
Before we move to Q&A, I would like to sincerely thank everyone here at UBS, our shareholders and analysts, my colleagues at the Group Executive Board and the Board of Directors. It has been a great privilege to be UBS' CFO for 26 quarters.
Maybe I can add to that, Kirt, I think on behalf of all the colleagues here at UBS and also the audience here today, I think, still open for questions later, but I'd like to thank you for what you have done for UBS as a CFO, what you have done here in these quarterly result meetings as well making sure that we were all very well prepared. We could give the answers they can ask. And it'll be very disciplined, make sure that there's a real discipline there. And thank you for your support over the last almost 2 years to me as a real wing man. So I'm sure there's going to be -- there is a smooth transition in place already with Sarah, but we'll miss you. So thank you very much, Kirt.
Over to the audience and with Kian, I guess, is the first one.
[Operator Instructions] The first question is from Kian Abouhossein from JPMorgan.
And first of all, thank you for all your support, Kirt, and all the best in your future endeavors.
So coming to the question. The first question is regarding wealth management. In regarding -- in respect to Asia Pacific, can you talk a little bit about the ongoing trends? You mentioned continued slowdown with lockdown, et cetera. Can you talk a little bit about the trends that you're seeing on the revenue line, unwinding net new money flows, transactions, how should we think about that through the year?
And in that context, you clearly talk about the offsets to the $1 billion in NII. Can you talk about the deposit beta and how we should think about that progression on a relative basis? You mentioned second half, mainly, but also through the second quarter, if I may.
The second question relates to more around the issue of cost. I just wanted to see if you could reiterate the guidance on costs ex variable, if that still stands considering the environment that you operate in terms of inflation?
Okay. I'm sure Kirt is going to fill in on a couple of things. I'll take the first one on cost there as your last question. But it is an important factor that you all feel comfortable around that. So on the cost side, clearly, there is inflation. There is some upward pressure that we see as well coming through more in the U.S., a bit in Asia, and across the investment bank, we see cost pressure coming up around salaries. But I think the -- one of the good things about UBS is that we are globally very well diversified with a large part of our cost base actually here in Switzerland, which for once helps us from that perspective. It's probably not the cheapest place to operate a bank from, but there's certainly a place where inflation is low and is manageable at this moment in time as well, and that's what we expect to continue. So that helps us in terms of managing our costs globally.
Secondly, as you know, we launched 1.5 years ago, already a cost savings program of $1 billion. We delivered $200 million of it last year. We are planning and on our way to execute to deliver $400 million here as well. So we feel comfortable with still guiding a 2% cost increase, ex litigation, ex foreign exchange and ex variable comp depending on the market -- how the markets develops. And we are committed to the cost-to-income ratio of 70% to 73% there. So that's the one on cost.
On Asia Pacific, on the numbers side, Kirt can give you more. What we see is actually a similar sentiment with clients from last quarter. So muted appetite to invest a bit of a wait-and-see pattern in terms of active investments. Positive net new fee-generating assets also this quarter. So basically, UBS as a firm, the stability, the quality of our advice does attract money also with Asian clients. So we still see the inflows. We have seen certainly also continuous deleveraging as well, third quarter in a row. So those are kind of the patterns.
And clearly, there are so many factors in the world at this moment that make investors sideline some of the ammunition for it to come back quickly into the market. So that I truly think that the moment China opens up and there's less strict lockdowns that there is going to be more confidence and money of that will come back. Furthermore -- for the numbers specific numbers, maybe, Kirt, you can add?
Yes. Thank you, Ralph. So Kian, I would just add apart from the transaction revenue just related to client sentiment and also just recall that overall Asian markets, of course, have performed poorly relative to other regions. And we started to see, of course, declines, particularly in China equities last year in the third quarter with the launch of common prosperity. So also, we're seeing impacts on recurring revenue. And clearly, that's going to continue depending on movements that we see going forward overall in Asian markets.
Regarding the $1 billion in NII progression in terms of the pattern of beta, wouldn't be surprising to you. What we expect is betas overall, our beta overall will be lower as we see the front end of the increases in interest rates. And as this progresses and we start to get into particularly to 2023, we would expect our beta to rise. And we've obviously built that into the outlook, the -- around the $1 billion that we mentioned that we expect in the upcoming 3 quarters. I would also highlight since it was part of your Asian question. Clearly, we will see that benefit in Asia Pacific, although as well, that will be partly offset by the fact that we've now seen deleveraging 3 quarters in a row. So clearly, that impacts our revenue in APAC.
The next question is from Andrew Coombs from Citi.
Two questions just staying on the same theme, I guess. And also I echo the comments to Kirt as well, best for the future.
First question just on Asia deleveraging. I know you talked about Asia investors still being a bit in wait-and-see mode, but do you think the bulk of the deleveraging is now done, so from here, would you expect Asia to return -- the Asia part of GWM to turn back to loan growth? And then the second question on interest rate sensitivity. Previously, you gave guidance based on the NII uplift on the forward curve. Forward curve obviously continues to steepen. So any additional commentary you can provide there both on 2022 and also 2023 in terms of implication for net interest income.
Okay. Maybe on deleveraging. So what we're seeing in deleveraging in Asia is basically actively managing together with our clients, the lending facilities that we have in order to support our investments. So how the market develops with the development of the markets, you may either see maybe more leverage again going forward or less leverage, it's more or less determined by the markets and how we ensure that the loan to values in our facilities stay managed. On top of that, I do think that if you look at our strategy for growth in Asia, one of those initiatives called the Global Family and institutional wealth approach is one that is certainly also a focus on the real higher end of the wealth band family offices in Asia. So you could expect some more leverage being extended in that segment, but in small steps because clearly, I think we should also make sure that we stay prudent in what we do.
So leverage is more driven by markets and our prudent risk management together with our clients. And clearly, there is -- if the markets go back up, you could see the leverage going back up as well. And on top of that, then the global the Global Family and institutional wealth initiative that over time, will provide -- is expected to provide more leverage also into the Asian region. Kirt?
Yes. Thank you. Just one other comment related to lending APAC. I think as you know, that's the region where we have the highest leverage penetration. So our Asian clients do tend to like to use leverage as part of their investment strategy. But also you see actually, therefore, sharper deleveraging when they turn negative, but you also see sharper pickup when they turn positive, and that's the pattern we would expect to see going forward.
Overall, in interest -- not sure I got completely your question, but just -- we guided last quarter that we expected around $750 million, $700 million actually pertaining to GWM, CHF 50 million to P&C. We indicated now that we're at just around CHF 1 billion. There's another roughly around CHF 100 million in P&C. So you also have seen, of course, an increase in the P&C effects as forward curves that moved on from when we last guided. And also, as we mentioned, this is based on static balance sheet. So any movements you might see in terms of balance sheet inflows or outflows, both on the lending and the deposit side, of course, will have an impact overall on what we expect.
You mentioned guidance around 2023, we haven't provided any. But I think just if rates hold, obviously, what you would expect is quarter-on-quarter as we get into the first quarter next year in the second quarter, you should see increases just because of the pattern of rates and what we expect to see through the course of this year.
The next question is from Magdalena Stoklosa from Morgan Stanley.
I think, of course, before the questions, well, Kirt, also from us as well thank you very much for our partnership over the years and for bearing with us at times and all the best of luck in whatever the future brings. . And the -- I've got 2 questions for you this morning. One is about the net new money because, of course -- sorry, sorry, net new -- and net new fee generating assets. We've got very strong inflows this quarter. And I just wondered if you could give us a sense of kind of what's driving the inflows. I assume they are kind of much more adviser-led from the perspective of the channel whether they're existing accounts or new accounts. Could you just kind of give us a sense where the -- how the kind of $19 billion got generated? And my second question, I suppose, is on the -- going back to the NII because you give us -- you've given us the $1 billion guidance and you kind of slightly avoided the topic of the deposit betas and whether by any chance that number? Or what would have to happen for that number to be slightly higher, particularly when we look at your kind of 100 basis points kind of parallel shift disclosure.
Yes. So on the net new fee-generating assets, I think that's -- actually, it's more or less existing clients, where we do see a further demand for mandates. So you see that a large part of the net new fee-generating assets is moving into the managed business, which is what we advise. So that's good.
If you look at the more geographic developments, we still saw positive net new fee generating assets in Asia Pacific, but the largest growth is -- continues to be in the Americas there.
And then maybe as to specific products, as we have indicated, the alternative product is a very important product there. There's still demand for sustainability with clients coming through as well. So that's -- those are basically the flavors that do quite well at this moment in time.
Yes, maybe I could add a couple of comments. I think within that, you saw the continued momentum in SMAs. And there, we do believe that we're certainly taking share overall in SMAs since we implemented and executed that initiative.
And also in terms of some of the patterns like if you look at alternatives, there's been movement into credit as well as real estate. And as you might expect, there's also been movement more movement into fixed income versus equities overall, if you look at the patterns of investment across mandates' funds and alternatives.
On the NII side, I'm not exactly sure, you had mentioned our 100 basis points math that we put out in our report. I would just highlight, of course, you've seen that number come down, and that will continue to come down as interest rates go up because you do see a compression in the upside as we see higher interest rates.
And so that should give you a little bit of an idea of incremental sensitivity if we were to see interest rates increase there, I think there's a couple of effects, as the higher the interest rates, the more of the time. Of course, we generally see higher betas, but also, we also see outflows from deposits and movement into money markets and into other opportunities with at least some level of interest.
And can I just follow up on the alternative side. When you see -- because, of course, you've also kind of shown almost $8 billion of the commitments. How do you assess your kind of capabilities internal versus partnerships within your broad alternatives business?
Yes, it's a good question. Clearly, we have our own capabilities as well within asset management. We have O'Connor's developing specific funds. We have real estate capabilities in asset management as well, multi-asset capabilities as well. But for more private equity-like businesses, we clearly also look at external partners.
That's the whole concept of the ecosystem, right? So it's for us very important that the market sees that we are the largest market for private money globally and that we are very attractive as an ecosystem for also third parties to come to and distribute their product. And therefore, we're open. And we're open to third-party products there as well. So whoever is a player that we can curate on to the platform and have attractive opportunities for us to advise to our clients, we do so. And on the private equity side, there is many steps to be taken there also to join forces with external parties.
The next question is from Stefan Stalmann from Autonomous Research.
And also from my side, Kirt, thank you very much for the help over the years and all the best going forward.
I have 2 questions, please. The first relates to Russia and Russian clients. I was wondering if you could tell us how much of your invested assets actually relate to Russian clients? I saw what you write on Page 4 of the Q1 report, the 0.7%, but I'm not sure if that captures all Russian clients or only a subset.
And the second question on the investment bank. So $2.7 billion, almost $2.7 billion of Global Markets revenue is obviously quite impressive. I was wondering if you can give us some rough sense of how that was distributed months or by month, in particular, how much of it has actually come in March?
And maybe also whether the month-on-month spread during the first quarter this year was very different from what it would have been typically in a normal first quarter?
Yes. So just maybe the Russian client question. And so we did -- and you're right, Stefan, I think there's a lot of confusion around scope of Russian clients when people come out with disclosures. And so we wanted to ensure that we were very, very clear on how we derived it. Firstly, what we did is we took the total clients that are in scope of the European and the Swiss ordinance regarding maximum overall deposit and outflows and inflows of $100,000. We actually think that, that is a very, very broad scope to start with. And on that basis, we looked at the total invested assets that those clients hold with us, and that led to the 0.7%. And of course, the conclusion there is well as the largest global wealth manager, naturally we have a Russian business.
But if you think about this in the context of our overall wealth management business, it is not significant at all. It doesn't impact at all our ability to generate growth momentum and also to meet the targets that we've laid out what we see going forward.
Then turning to the IB overall in the market's revenue, I would say that this quarter was a bit unusual, usually in a typical first quarter. Seasonality would actually drive January is substantially the best month of the quarter and often 1 of our best months of the year. And we saw some of that play in, but it was unusual because we -- actually more broader geopolitical and market factors were in play as we went throughout the quarter. And I would say we saw a pretty good even distribution throughout the 3 months in terms of overall generation of markets revenue. And as we've highlighted, certainly, equities, equities, derivatives, in particular, along with rates and FX were what drove the very good quarter that we had.
Great. Could I maybe just follow up on the Russian aspect, please? So if I understand you correctly, you're saying that the EEA and Swiss rules are very all-encompassing. So that would also include sanctions imposed by the U.S. and the U.K.?
Absolutely, it would include a far greater population than just where sanctions were imposed. In fact, when you look at that population, and we would identify within that there still are certain client segments that might be susceptible to further sanctions, but also there's a large part of that population where we don't believe that there's any likely sanction exposure. So it's a pretty broad definition.
It's a small part of our term invested assets, and we've been pretty conservative at applying the definitions here and the EU and the Swiss are the most strict in their approach to this.
And we've also been very proactive in how we've actually looked to reduce our overall business, not just with clients already sanctioned, but also we've looked at populations that have higher risk. We've been proactive with those populations.
The next question is from Jeremy Sigee from BNP Paribas.
And best wishes to Kirt from me as well. Two questions, please. One on capital. Thank you for Slide 23, which is very helpful. I just wanted to ask how some of those factors play forward, you've obviously told us that there's more op risk coming. I just wondered if you expect more RWA inflation in sort of the near term from some of the other drivers from market risk or from credit risk modeling. I don't know how your models work, whether there's a lag effect and there's more inflation still to come through.
And I guess sort of wrapping that up as well, whether you're, I guess, still comfortable with the $370 billion 2024 RWA guidance. So any help on that would be great.
And then my second question was really just a very small question just on the timing flows. The net new money flows in the quarter was at a fairly steady pace. And I guess what I'm really asking is kind of the exit rate. Are we in an environment where that kind of flow run rate continues? Or are we in something more subdued given the uncertainties in the world?
Yes. Thank you, Jeremy. In terms of RWA, yes, we already guided on op risk. Also for the remainder of the year for the additional 3 quarters, we do expect further increases that are known in terms of model changes that have been encouraged by FINMA, shall we say. And we expect those to be around $8 billion for the remainder of the year. Away from that, obviously, it's going to be driven by business volumes.
If you look at the market risk RWA increase we saw, because of [ Reagan ] stress VaR, certainly if market volatility subsides, we would expect to see a reduction in that $3 billion that I referenced. Now how -- I wasn't sure about your 2024 question, but -- what we did, we updated our guidance in the fourth quarter. So perhaps you're referring to the impact of adopting Basel III finalization of $20 billion, there's no effect there that still would be our estimate at that $20 billion and still what we would expect subject, of course, very importantly to any FINMA discretion.
The '24 number is a combination of the strategy and the growth we anticipated, first Basel.
That's Basel. So we would still be in line with the...
No change there. There's no change.
No change there. Yes.
So the $370 million is fine. That's really what I was asking yes.
Yes.
And then your second question on flows. So actually, the overall net new fee-generating asset flows over the 3 months were pretty well equally distributed. And so we continue to see good positive flows in March.
The next question is from Amit Goel from Barclays.
And also to echo my thoughts and thanks for Kirt help you've provided and good luck for the future. So 2 questions. One, a further follow-up on the Russia, the other on lending. I just wanted to get a sense on the $100 million kind of firm-wide P&L impact, just how to think about that in terms of what drives that? And I guess I noticed it seems like about $5 billion of reclassification of fee-generating assets relating to Russia, but just trying to get a sense of how to think about that going forward. And then secondly, with regards to the lending. I'm also just curious in terms of the lending margins, so what you're seeing there and whether the margins have been stable or steady or whether there has been a little bit of contraction in particular in APAC, with the declining volumes?
Yes, Amit, thank you. So the $100 million there, and this is a little bit of a line which you see with the $0.6 billion and the $0.4 billion. The $100 million overall is mostly related to derivative and settlements that were impacted and interfered with from the sanctions and where we have either taken wind-down costs or we've taken provisions in terms of remaining exposure to receivables we might have, for example, with our nostro banks. There's a very small portion of that, that was CLE related. And therefore, the vast majority is in the IB.
I think in terms of the net new fee-generating assets, what we mentioned is our -- that $19.4 billion excludes some outflow that we saw with Russian clients as a consequence of the sanctions. So we haven't mentioned what that number is. But you could just -- just to ensure that you're aware that there were some adjustments. And we can't say what that impact might be going forward. It's a bit unknown. It really just depends on of course, the direction of any future new sanctions that we might see.
Now regarding lending margins, our margins overall and our Wealth Management business have held up reasonably well. And I think when you see in Asia Pacific with the deleveraging, there's really not -- there's not any pressure on margins just because of the supply-demand dynamics.
Now there is an exception. We are seeing pressure on mortgage margins in Switzerland. And particularly from the Cantonal Banks, where there's an awful lot of pressure to continue to lend and get exposure, particularly for long-duration interest rates, given the fact that deposits have grown quite a bit, so that is an area that we're monitoring closely. And you've seen us in the past, we will actually give up market share and volume in favor of margin. And so we'll continue to manage that in a responsible way, but that's an area we're watching closely.
This is the pressure in Switzerland, which is the new production pressure. It is not tainting our book, the margin on the books. So from a revenue projection perspective, it is not meaningful.
Yes, absolutely. And it's in our first -- it didn't affect the first quarter.
Got it. Just to check, I mean, on the kind of Russia-related outflow. The derivation I did was just the $68 billion AUM change, the $19.4 billion net new money and the $82.3 billion, the other reduction, which is how I got that is there potentially other changes as well?
Yes. So I think in addition to that, you also have -- you have market moves, you have foreign currency translation, which also was adverse during the quarter. And then you had the net new fee generating assets. And away from that, there's also a net new money impact, which you can assume was greater than net new fee generating. So you have to factor that in as well. And then you have the reclass.
The next question is from Adam Terelak from Mediobanca.
All the best to Kirt.
I want to return to NII. On the guidance, the $1 billion, I just want to make sure we've got apples with apples here. Because in the full year guide, I think you were talking about some balance sheet impacts. Clearly, I think FX has reduced the loan book. So are we saying that sensitivity is probably -- or the delta on sensitivity to rates is probably slightly higher than the difference between the 2 numbers given and that the balance sheet is slightly smaller, and we have to adjust for that? And then on top of that $1 billion, do we then have to layer through any additional balance sheet growth. So it's static as at Q1 balance sheet.
And then on the other side of that on deposits and the cost of deposits, I hear what you're saying on deposit repricing and the pass-through. Is there a threat now -- has the threat from turning out and clients moving to term deposits increased given the sudden move we had in rates clearly at 1 year dollar rates are up about 2%. I think that's the level when in previous cycles, we saw a bit of turning out holding back NII sensitivity. So could you talk to rather than the pass-through that you can control, whether clients are thinking about shifting to term and whether that can threaten the NII development, not this quarter but in the next few quarters?
Yes. So maybe just to restate what the $1 billion is, and this is exactly consistent with how we always guide. We basically take the forwards as close to our disclosures is possible. And then we take the balance sheet as of the end of the quarter. And we did the same when we mentioned the $750 million around fourth quarter, and we apply the forwards.
And so -- and within that, of course, we determine our view on beta and what we expect, and we apply the math. But you're exactly right. It does not include any effect positive or negative of any flow generation over the remainder of the year. And as I said, that's apples-to-apples to compare the $750 million that we guided at the end of $750 million. And it is for 2Q through 4Q. So it's for the remainder of the year, naturally, there was some positive impact that we saw in the first quarter. It's roughly around $170 million. And as we said before, we expect, of course, the impact to continue to increase fairly significantly quarter-for-quarter, hence, the 15% guidance quarter-on-quarter in the second quarter, and then you can expect to see a larger impact as we go third and fourth quarter.
Now in terms of deposit repricing, you're exactly right in terms of the dynamics. And as we manage our overall book and, of course, noting that versus a very large consumer franchise, our clients do tend to be more rate sensitive. And so therefore, we manage that accordingly. So we of course have current accounts, but we also have savings accounts. And the savings accounts for us are a stable source of funding. We want to make sure that we price that in a way that we manage that funding source. And as well, we will look at clients as I think about terming out and we will think about CD and term deposit programs accordingly. And also as I mentioned, there was some outflows into money markets, and we would expect that to continue as well.
And in terms of the assumption on terming out, is that similar to previous cycles? Or any kind of comment on the speeds we might see at this time?
Well, I would just say as the interest rate increases is steepened, obviously, the -- you would expect to see clients more prone to looking to term out. And we would adjust our modeling accordingly.
The next question is from Anke Reingen from RBC.
And as well, thank you, Kirt and all the best. Two questions, please. The first is a follow-up question on capital. The 10 bps hit you saw in Q1 for -- in the OCI, should we expect, I mean, corresponding to your NII guidance of further ahead to capital in Q2 based on the current forward curve?
And then secondly, on the fee generating asset margin that hold up quite well and in Q1 versus Q4. And I just wanted to understand ex NII moves, should we expect some more margin pressure given you talk about shifts into more fixed income versus equities? Or do you think that trend underlying sees that pressure given also the strong growth in SMA?
Yes. In terms of the capital impact, so where that's derived from its high-quality liquid assets by and large that we're holding in the U.S. in our banking subsidiary, it's around $9 billion, and it's a mix of treasuries and mortgage-backed securities. And it gets -- it impacts capital to the extent that we have life to date to overall losses that flow through CET1.
Having said that, if we were to reduce that portfolio or we saw interest rates reverse, we actually would see that impact also reverse. So going forward, we continue to be exposed to interest rate increases.
So if we saw further moves in the curves, this is mostly longer-dated curves, just because of the structure. Our weighted average maturity is around 5 years. And just to note as well that the average overall rating of those assets are the upper end of AA. So they're very, very high quality.
Now in terms of fee generating assets margins overall, I think, as you observed, you have seen some stability in that margin over the last couple of quarters. But just to note that going forward, that margin is going to continue to be impacted by overall mix of products and investments that we place with our clients as well as the trends that we've talked about before in terms of any further move into more ultra mix versus high net worth. And then we have our SMA initiative, which has also had an impact on margin.
But importantly, we don't manage the business for margin. We manage the business for PBT growth. So for us, what's critical is we continue to see very positive run rate momentum from all the net new fee-generating asset inflows that we see.
The next question is from Flora Bocahut from Jefferies.
First of all, all the best, of course, to Kirt for the future from my side as well. Two questions I wanted to ask you. The first is regarding the RWA move that we saw this quarter. So going back to capital here. The slide you provided at the end of the presentation is very useful. I just wanted to get back to the $7.7 billion increase in RWA this quarter from asset side and other movements. This is obviously a lot more than what we normally see. So just wanted to see if you could elaborate on this. What's been the driver? Is it mainly business growth? And how much of this do you think could be reversed in the coming quarters, say, if volatility would reduce in market, for example? The second question is regarding the client behavior, excluding APAC. So really focusing here on the U.S. and Europe, what you saw in April, whatever you can tell us whether you are seeing also some kind of slowdown in the willingness of your U.S. and European customers to invest, to borrow. But I mean, post Q1, so in the month that just finished, if that's possible.
Maybe I can start with the last one, Flora, which is -- it's really hard to comment on a month that we're still running, honestly. So let's not get ahead of ourselves because that would only be kind of 2.5 weeks or 3 weeks in a month, which you can't extrapolate anyway. So I don't think there's a lot of value in commenting on what we have seen in the last 2, 3 weeks. I think the most important thing here is what we see and what we can indicate to you is that our most recent checks in terms of investor sentiment globally has not really changed from a quarter ago. It's a mix of positivism of coming out of the COVID situation. And combined with the cautiousness around inflation news to see around the war, and that is basically muting the investor demand specifically, but that is not different from the numbers that we saw at the end of the fourth quarter. And that is basically -- those are the recent numbers that we have, where we see actually in all regions, including Asia, by the way, similar sentiments around our clients and investors.
So similar from a quarter ago in terms of the balance between being optimistic or neutral or pessimistic. We haven't seen that. Only Switzerland is a little bit more pessimistic around the sentiment. But globally, it's the same numbers like a quarter ago.
Yes. In terms of the RWA question, there's a combination of factors that I already highlighted. It is partly due to increased lending that we were doing during the quarter. Obviously, all of that is positive for us and consistent with our strategy and also consistent with our plan when we referenced where we expect to be by 2024. In addition to that, there was also an increase due to derivatives activities. And so when you reflect on our markets revenue and the fact that we were up and a lot of that increase was from our equities derivatives, our FX derivatives and our rates derivatives businesses. All of that resulted in higher overall asset levels that correspond, of course, with the very good performance we saw from the deployment of those assets. Then there's a bit there related to model updates, which we highlighted is $1.6 billion, and we referenced that we expect some more of that going forward.
As to the increases or the reductions going forward, a lot of that will depend on the business environment and also the continued execution of our strategy.
The next question is from Nicolas Payen from Kepler Cheuvreux.
Kirt, thank you very much and good luck for the future. I have 2 questions first. The first one, just a follow-up on Russia. And I just wanted to make sure I understood that well, that the $100 million impact for the P&L was for Q1? And if it was the case, do you expect further impact for the rest of the year?
And the second question would be on the payout and capital distribution. As you said, you reached 100% payout ratio for the quarter. And I wanted to ask if it is something that we should keep in mind for the rest of the year and in parallel to that, could we expect you to increase the share buyback above $5 billion at some point if the capital development is positive or earnings development is positive? Or is it a hard [ failing ]?
Nicolas, on the first one, nobody knows how the world will develop, but what we can say is that when we manage the situation, in the beginning, and we were pretty early in derisking even before the war actually started. Clearly, the risk costs are generally coming from as Kirt has already indicated, some counterparty risk as well as some failed settlements basically or block settlements or frozen settlements, whatever you want to call it, because counterparties can perform money-wise, but sanctions forbid us to collect the money or against to pay the money.
And that's where we have taken a view as to how to provision for that. And this is basically in a period in which we did a lot of derisking, a lot of derisking. And as you've also seen that the direct risk exposure to Russia has decreased to $400 million, which basically now constitutes of a bit of nostro, some counterparty, but a lot of trade exposure which is basically exposure that will self-liquidate with trades being performing.
You -- again, nobody knows where the world is going. But I think -- and you should expect from us that we are -- that we have prudently taken a look at what is the provision or the risk/cost that we should take for the quarter on the total.
Yes. And Nicolas, in terms of payout, so we'll just go back and as you know, we don't guide on payout. So what we've indicated is progressive cash dividend you saw and we highlighted the $400 million in the first quarter. We also indicated we're going to repurchase, we said before up to now we said around $5 billion. And so that is stronger, more confident language. And so when you look at the remainder of the year, you can assume that we're going to stick with the progressive dividend and that we're going to follow through on repurchasing up to $5 billion. And then the payout ratio will be what it will be.
The next question is from Andrew Lim from Societe Generale.
So I've got 2 questions. Firstly, on GWM. If we look regionally, the U.S. split sounds the best in terms of having strong revenues like some of the other regions, except for Asia. But also for the U.S. more than offset by cost inflation. So I guess we're seeing pretax profit fall. And I'm wondering whether that's symptomatic or structural inflation that we're seeing in the U.S. or whether there's more of a one-off element to that?
And then secondly, on litigation, I know you can't talk about this in too much detail, but I was wondering if you could confirm or not whether U.S. regulators have made inquiries to yourself about your block trading activities?
And then finally, best wishes for myself, Kirt, good luck for the future.
Yes. So in terms of the Americas and GWM, so what happened in the quarter, as you said, we had 6% top line growth. But then also, we highlighted the fact that we also had a litigation, of course, increase year-on-year, plus we had FA comp increase year-on-year. And also, I would note -- last year in the first quarter, we had a onetime overall compensation effect that caused for lower levels of variable compensation. So all of that went into the increase in cost. So it's not something that we would certainly expect going forward, except for obviously FA comp. FA comp will depend on [ compatible ] revenue.
But having said that, also I would note that -- so if you think about increases in NII, in general, a payout ratio on NII is far lower than other revenue sources. And so that should be positive and accretive to pretax margin.
And then the last question, as you can well understand, we never actually comment on our interactions with authorities or regulators. So also in this case, we won't do that, Andrew.
Good. Thanks. That gets us to the end of the session. As you know, our Investor Relations team is always ready to pick up the phone and answer further questions that you may have, while diving into the numbers. At this moment, I just want to conclude saying that focusing on delivering our strategy, staying close to your clients, managing risk adequately led to a very strong quarter for us. Strong quarter in terms of continuous commercial momentum with clients, strong quarter in terms of P&L, also a quarter in which we feel that the share buyback is showing confidence in terms of our capital position as well.
With that, I would maybe reiterate my thanks to Kirt. Thanks a lot, Kirt, for all you've done, and let's close the call. Thank you.
Thank you.
Ladies and gentlemen, the webcast and Q&A session for analysts and investors is over. You may disconnect your lines. We will now take a short break and continue at 10:45 with media Q&A session.