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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, and welcome to our earnings call. 2022 was a very good year for Commerzbank. We delivered what we promised and the financials turned out even better than we expected. And despite all uncertainties around, we look positively into 2023. In other words, Commerzbank is back, and there is still a lot of value potential we will tackle. Let me provide you with my view on 2022 and the priorities ahead before Bettina walks you through the financials.
With a net result of €1.4 billion, we have more than tripled our result of 2021. Fueled by rising rates, this is the best result for more than 10 years. At the same time, our loan book has proven to be resilient. So far, we have not seen any meaningful fallout from the economic downturn. And for 2023, we have a good cushion with our top-level adjustment of roughly €500 million. This is also reflected in our very comfortable capital ratio of 14.1%, well above our target range. This superior financial performance is complemented by good progress in our transformation. The restructuring part of our transformation is fully on schedule. Roughly 90% of the gross reduction of 10,000 FTEs is already locked in and the remaining execution risk is limited.
The original target number of 450 branches in Germany has been reached and will close another 50 this year. I would like to point out that this painful exercise has been accomplished seamlessly based on a broad alignment of all stakeholders. Very important going forward, we have successfully set up our new and lean business model in PSBC as well as in our Corporate Clients division. Altogether, and as released to the market yesterday, the strong performance in 2022 allows us to propose a capital distribution to our shareholders with a payout ratio of 30%. In concrete terms, and after AT1 coupons, the proposed payout translate into $0.20 dividend per share and the first €122 million share buyback program. Let me spend a few words on the intended share buyback program.
As a Board of Managing Directors, we are convinced that our strategy will continue to create material value in the years to come. We are all shareholders of Commerzbank and believe in the ultimate potential of our business model to earn cost of capital. The size of the intended program is obviously not large, but it's the first step into the buyback space and the respective capital distribution to shareholders.
With this in mind, let me share you with my priorities for 2023. We First of all, it's about speed. We have been fast in the restructuring, and we need to maintain this path going forward. So how can we do it faster question will definitely remain on my first list for management meetings. The second point on my agenda is focus on customer business and revenues. To leverage our client base in the new business setup is absolutely key. I will come to that in a minute. As said, the right to play for Commerzbank requires unchanged strict cost discipline. Only if additional revenues kick in, will I be willing to sign off investments based on our targeted cost/income ratio? This is the third bullet point on my list. Number four is further tangible progress in our ESG journey. I will get back to this in a minute with an extra slide. So let me now elaborate a bit on the fifth point, increased attractiveness for Star.
It has been tough for our teams during the restructuring. Up to 1/3 of the jobs in Germany have been cut. Obviously, this has had an impact on Moral. Going forward, the tailwinds from our strong performance provides us with a great opportunity for improvement. Increased variable compensation is one part and having the business set up in place is clearly important to our staff. Also the reentering of the DUCs is a strong positive for everybody in the bank. Based on these ingredients, it is a number one priority for our new Head of HR Sabine Minarsky to increase attractiveness of Commerzbank for our staff. Becoming an employer of choice is increasingly important to attract talent in the labor market.
Let me now shed some more light on the key priority customer business. As I've said, the new business model is in place and now it is all about client business in the new model. Unlocking the revenue potential, especially from affluent and wealthy clients is key to our success. Hence, it is good to see our relationship managers being busy with their start of the year advisory meetings. -- excellent advice and good service are main drivers to limit churn and to help our clients to adapt to the new business model. This will be complimented with an ongoing digital enhancement of our client offerings and processes.
Regarding our international setup in corporate clients, we need to adjust to client needs in view of changing trade flows. This includes the closure of another 3 locations in 2023, but also, as I already said in November, new rep offices, for example, in Jordan and Morocco. Last not least, RWA efficiency remains a high priority in order to optimize capital deployment. In the last 2 years, we've already reduced the share of RWAs in the low-yielding client bucket from 34% to 26%. In 2023, we want to keep it at 26%. This is a challenge because it requires strong efforts to counter negative effects from the RWA models and potential rating migrations against the backdrop of a mild recession. On ESG, we have made significant progress and will continue to do so in 2023. SBTI steering of our portfolio towards our carbon emission reduction targets is obviously the most prominent driver to become net 0 by 2050. We -- another important and tangible topic is sustainable finance volume. In 2022, we have mobilized €246 billion of sustainable products in order to support our clients on their transformation path. With that, we are well above our target of €207 billion. This year, we want to reach €257 billion as the next milestone towards our target of €300 billion in 2025.
Let me conclude with my key takeaways before I hand over to Bettina for the financials. First, we have delivered a strong financial performance and plan for a 30% payout to shareholders. Second, we have successfully delivered on the restructuring so far and have set clear priorities for 2023 with focus on profitable customer business. And third, we are targeting a 2023 net result well above 2022 and are committed to capital return with a new payout ratio of 50%. And now over to you, Bettina...
Thank you, Manfred, and good morning also from my side. I will now walk you through the financials of the quarter. As Manfred said, we have made very good progress in 2022, reaching our key financial targets. And as promised, we plan to pay out 30% of our net result after 81 coupons. We have earned an operating result of €2.1 billion and a net result of €1.4 billion despite burdens of more than €1 billion in Poland. The ROTE has reached 4.9%, a big step towards our target of more than 7.3% in 2024. This success is based on strongly increased revenues, mainly thanks to higher NII and ongoing cost management. This has led to a cost income ratio of 69%, also a significant improvement on the way to our target of 60% in 2024. The risk result came in at €876 million. It confirms the quality of our loan book as it includes the effect from Russia and only benefits from €41 million of net top level adjustment consumption. We retain a €482 million top level adjustment into 2023. We -- and finally, in 2023, we start with a CET1 ratio of 14.1%, comfortably above the MDA. This gives us a significant buffer for any potential effects of the expected mild recession.
Our comfortable capital base will also allow us to continue our planned capital return. We aim to increase the payout ratio to 50% for 2023. On Slide 10, you see the full year view. It again confirms that we have improved in almost all key financial indicators even compensating the burdens in Poland. The exceptional revenue items on Slide 11 are largely canceling each other out. Benefits from the TLTRO are offset by valuation effects and burdens from credit holidays in Poland. On a net basis, we have burdens of €38 million in Q4 and €52 million for the year. This leads to the underlying revenues, starting with the commission income on Page 12.
In 2022, corporate clients has increased its underlying net commission income by 6% with each quarter being above the respective quarter of the previous year. In contrast, PSBC Germany NCI has come down every quarter in 2022. This is due to the securities business that has seen lower transaction numbers from clients and is also affected by the lower value of securities in customer accounts. For 2023, we are currently planning with the group MCR at the level of 2022, assuming a stabilization of the securities business of PSBC and a less adverse market environment. Now to NII on Slide 30. We -- the trajectory of NII in 2022 has been impressive, driven by higher central bank rates, which helped the deposit businesses. For the whole year, it has been 36% above 2021. In Q4, the increase in underlying NII was particularly pronounced as there were several euro rate hikes, while the deposit better was still very low and the contribution from the loan business largely stable.
On the next slide, I will cover the expected developments in 2023, but will continue to be dynamic. Let's first start with our assumptions and sensitivities to give you a clear picture of our base case and the upside potential. The key drivers are interest rate levels and the development of the deposit better. The base case for our planning was built on the rate assumptions of consensus economics from December last year. With the 20, 25 basis points average euro deposit rate in 2023, this is outdated with the current ECB rate over the above and the ECB expected to raise rights further at the next meeting. The 3% 5-year swap rate is closer to current market expectations.
In Poland, the expectation is for a more or less flat development of interest rates. For the deposit better, we plan with a substantial increase. For Germany, our base case assumption is an average better of 30% in 2023. December is better was 10%, and we had around 15% in January. Our assumption could be conservative, but some increase of the deposit beta in 2023 is clearly inevitable and strongly dependent on competitive behavior in the German market. So far, mainly neo banks and new brokers have started to offer higher rates on deposits. Established banks have tended to offer higher rates only for new deposits and moderate rates for existing deposits. However, throughout the year, some change in behavior is to be expected. For mBank Poland, we also applied a higher better. It reflects the lagging increase of customer rates after the sharp rate hikes last year. This had already started last year and should continue in 2023. We -- with these assumptions and an expected slight reduction in loan volumes, our base case scenario is an NII of more than €6.5 billion in 2023. This is roughly equivalent to 4x the Q4 NII adjusted for an increase in the better by around 20 percentage points and around €100 million higher funding costs.
With the latest actions and announcements of the ECB, it is, however, safe to assume that NII will be well above the base case of €6.5 billion. In the upside scenario, we have applied the forward rate from the end of January and assumed an average deposit better in Germany that is 5 percentage points lower. These changes and assumptions at €600 million to NII and the total NII could easily reach €7.1 billion. Acknowledging the potential upside, we stick to our prudent base assumption of well above €6.5 billion NII in our internal planning. Thereby, we keep pressure on cost discipline and on our cost-income ratio steering. With that in mind, let's move to cost on Slide 15.
With active cost management, we have lowered our operating costs in 2022 despite headwinds from inflation and ongoing investments. In contrast, compositive contributions are significantly higher than last year. In total, costs are slightly above our target of lE6.4 billion. This is due to variable compensation, which we have raised in line with a very positive development of our operating results. When excluding mBank and the increased variable compensation, we have reduced operating expenses by nearly 10%. In 2023, we will maintain our focus on active cost management with a clear target to further reduce our cost base. Given that part of the increase in compulsory contributions were extraordinary burdens in Poland, we assume that there will be some relief in 2023.
The next 2 slides detail the risk result. The cost of risk on loans has increased slightly to 33 basis points for the year 2022. In Q4, the risk result of PSBC has been driven by additions to the TLA. In Corporate Clients, the driver has been a few single cases, in particular, Russia related. We have fully used and released the remaining Russia TLA in line with the derisking of this portfolio. Without the direct impact from Russia, the 2022 cost of risk on loans is only 19 basis points. This is proof of the high credit quality of our portfolio. We continue to see a very strong resilience of our customers and a low level of default.
Based on this resilience on a net basis, we had to use only €18 million of our top level adjustment in Q4. For the financial year, the net usage of the TLA was €41 million. For 2023, we plan for a mid-recession on potential disruptions to economic activity. For this environment, we maintained its top level adjustment of €482 million for expected secondary effects like supply chain disruptions or effects from higher energy prices. The majority of the GLA remains allocated to CC with €284 million, €189 million are available to cover risk in PSBC. Having covered the key drivers, I will now quickly touch on group results and the tax rate. We have increased our return on tangible equity to 4.9%, a significant improvement on our way to more than 7.3% in 2024. -- sorry. Also, the cost/income ratio has improved by more than 10 percentage points to 69%, both lower costs and higher revenues have driven these improvements were the biggest driver being interest income.
Other income largely reflects the legal provisions for stress-ranked mortgages in Poland and charges taken for us in a space that is no longer needed. It is strongly negative with minus €249 million in Q4 and minus €750 million for the financial year. Concerning the tax rate, in Q4, we could benefit from deferred tax asset valuation adjustments on the back of a better outlook, leading to a positive tax result -- for the financial year, the tax rate is 31%, basically at our normalized level. The 2 big extraordinary effects we have this year are largely offsetting each other. On the one hand, we have the burdens in Poland and compulsory contributions that are not fully tax deductible. On the other hand, we had positive effect from DTA. In 2023, we expect a similar tax rate as in 2022, assuming no significant burdens at mBank.
The next slides cover the operating segments, starting with private and small business customers. The securities volume has recovered towards the end of the quarter due to higher equity markets. The positive development of the markets would be clearly beneficial for the business. The total mortgage volumes have slightly increased, but new business has further declined in Q4. Unless there is a recovery in new business, the back book should start to reduce in 2023. The deposit business has seen continued inflows. So far, there has been no material passing on of rates to customers. We have started to offer interest of 25 to 30 basis points for coal money, and some competitors are offering teaser products to attract new customers and deposits. We will carefully adjust our pricing to market conditions and expect an increase of deposit better over time, mainly from a switch from site deposits to term or core deposits.
This brings me to the performance of PSBC on Page 20 and 21. We PSBC Germany's private and small business customers units have increased revenues, mainly from deposits due to higher rates. At the same time, commission income has decreased. And the operating result has decreased in the quarter. This is mainly due to 2 factors which are not directly related to the underlying performance of the customer business in Q4. These are higher risk result, which is driven by the increase of the GLA in anticipation of a recession in 2023 and variable compensation. Accrual for variable compensation has so far been centrally kept in other consolidation and has been allocated to the segments in Q4.
Looking at the financial year, PSBC Germany has increased the operating result by 43% and improved the cost income ratio to just under 70%. I -- and mBank managed to earn a record result of €301 million in Q4 and excluding the additional provisions booked for Swiss franc mortgages and credit holidays. This is proof of the strength of the underlying business and revenue growth of MBank. With the increased provisions for Swiss franc mortgages, mBank has a solid coverage ratio of 54%. However, the final cost from the Swiss franc mortgages are not yet clear, and further burdens imposed by the -- before government cannot be ruled out in 2023.
The next 2 slides cover corporate clients. In Corporate Clients active portfolio and RWA efficiency management continues. Average RWA efficiency has increased further to 6.1%. Corporate Clients will continue to focus on efficiency. However, there could be a slowdown of the improvement in 2023 as we have higher RWA from the partial switch of the standard approach for RWA and potential effects from a recession on waiting. Volumes in the loan business are lower compared to the third quarter, that is mainly driven by the U.S. dollar. Deposit volumes are seasonally lower over the year-end, and we have seen an increase in deposit better as some site deposits were shifted to term or core deposits. Corporate Clients operating result is based on good revenues from the customer business, mainly better NII, but also strong commercial income and a good contribution from the Capital Markets business, especially the commodities and interest rate businesses were strong in Q4. I -- the pre-provision results almost doubled year-on-year. However, SnP SBC, there has been an increase in the risk result, mainly single cases and total costs have down compared to 2021. The increase in Q4 is due to variable compensation. Compared to 2021, the operating result increased by more than 60% and the cost income ratio reached 60%.
Finally, a quick look at others and consolidation. Others and Consolidation reports a flat operating result of minus €8 million in the quarter and a small profit of €33 million for the year. In 2023, we also expect others in consolidation to have a relatively low contribution to the results with the caveat that valuation effects cannot be forecasted. Group risk-weighted assets have been reduced by €6 billion. The main driver has been credit risk RWA. These reflect movements in the U.S. dollar, but also reductions in securities business and a securitization in mBank. Market with RWA benefit from a reduced regulatory multiplier while operational risk RWA are increasing in line with the regulatory rules, which faced the RWA on the development of the revenues, which improved compared to previous periods.
Capital has decreased slightly as the positive net result was offset by currency effects and increased regulatory deductions. In total, this has led to the improvement of the CET1 ratio to 14.1% and the buffer to MDA to 466 basis points. As a countercyclical and sector-specific buffers become effective this month, the buffer to MDA will reduce to around 400 basis points on a pro forma basis, still a strong starting point for 2023. And now to our outlook for 2023 on Slide 26. Our outlook is based on the assumption of a mild recession and no significant additional burdens in mBank.
For the financial year, we expect commission income on previous year's level and interest income well above €6.5 billion with a clear trend towards the upside scenario of €7.1 billion. We aim to lower our expenses to €6.3 billion in 2023. However, our key steering metric is the cost/income ratio. We reached a cost-income ratio of 69% in 2022. In 2023, we will progress further towards our 2024 target of 60%. We -- the risk result is expected to come in below €900 million, assuming usage of the TLA. Further, we expect the CET1 ratio around 14%. And we expect a net result well above 2022 and target a payout ratio of 50%, in line with our capital return policy. Thank you very much for your attention. And Manfred and I are now very happy to take your questions.
The first questions are coming in. And the first question is asked by Mr. Benjamin Goy of Deutsche Bank.
Thank you for the updated net interest income guidance, but I was still wondering because when you any annualize the impact in Q4 on a clear number, you get to almost €7.5 billion. So, wondering at the high end, 7.1 billion, what is the negative impact from here? And then secondly, you mentioned you are more profitable than basically in the last 10, 15 years, yet your capital ratio is higher also and the buffer is higher than you had any time before. So, I was wondering why do you need a capital ratio of 14% in this environment? And whether you would reconsider maybe a second buyback throughout the year in case macro concerns subside.
Yes. Thank you, Benjamin. So, the NII, and this is why we also tried to explain that. Indeed, if you would take the Q4 NII would reach a much higher number. But keep in mind that the deposit better was only 10% in December. It was nearly 0 in September and -- or in October and November, meaning that the fourth quarter is just not comparable with the deposit better, which we expect for the full year of 2023 because apparently, we also need to think about our customers, and they want to have a certain share of the positive interest rate environment. And that's why we adjusted it. So, we adjusted it and increased the deposit better to 30%. If you then also deduct higher funding costs, as I said, then you come to a lower number. However, again, what I said, or €6.5 billion number is based on the 2.25% assumption for '23, which is no longer valid. And therefore, it's fair to add automatically the €300 million, which we have laid out on this page and on this interest rate scenario page. And the second thing is a little bit of what you believe. I mean, we started January at 15%. Do you believe that we reach on average 30% deposit better for the year? If you do that, then you probably stick to something around 6.8%, 6.9%. If you believe that on average, it will be lower then, you probably are much nearer to the €7.1 billion, which we have shown.
On the capital ratio, and yes, I mean, we had one similar result in the last 10 years, and that was in 2010. It was exactly, I would say, the same net income. It was 140, so €5 million less than we have shown this year. But there has been nothing before and after. So, the last higher result was before the financial crisis, I think, in 2007. And we have come a long way. We have -- I mean, we have been now through a very, very severe transformation program, and we're still in it. And I also joined the bank in 2014, where we still had some concerns about our capital ratio. So, we feel really comfortable in the moment with the buffers. And we, however, also made it clear that we now will start to, yes, participate our shareholders by a higher capital return than they have seen clearly over the past years. So, we feel comfortable with the 30% as we have announced. And we take the 50% and everything else will very much depend on our progress and the numbers. And we will see over the year how everything is developing...
Okay. Thank you.
Next question is Kian Abouhossein of JPMorgan.
Yes. First of all, congratulations to the strong results. I have 2 questions. The first one is related to 2024 NII. Your target used to be or is still, I guess, I assume, is changed, €6.3 billion. And I just wanted to -- wondering if you could discuss that a little bit in terms of the -- in light of the upgraded NII guidance that you have given how we should think about NII in '24 and the sensitivity that you assume.
The second question is on cost income, which clearly, as you highlight, is more the focus for 3 -- you have a target of 60 by 24%, you're increasing your NII guidance for '23. And I wonder if you get to over €7 billion of NII, should we think about 60% cost income even potentially in this year.
Thank you, Kian. So on 2024 NII, I mean, the environment is so volatile. Just take 23. The numbers which we now have laid out have nothing to do with the multiyear planning, which we have done last year. So, we already increased the numbers for our budget 2023. We base them on the consensus of December, and we all know this is already outdated again. So, we again created the subside potential. And I mean, for 2024, it all depends on competitor behavior, interest rate development. what happens with the deposit better at the very end. And I mean, if you assume that there is no change in deposit better and the forward rate materialize, then we will definitely continue to benefit from the reinvestments of the model deposits. And then you can assume that what we have laid out in the third quarter on NII for 2024 is far too conservative. But I really would like to see a little bit how the next months are developing, and then we will definitely also give an update on 2024. But I assume you can take the 2023 guidance already. And if you also believe that interest rate levels at least stay stable, if not even increasing further, you know what to do on 2024.
On the cost-income ratio, I mean, we target the 60% for 2024. Clearly, it all depends on where we end up in our upside scenario, -- but yes, I would also assume that we are more closer to the 60% than to the 69% in 2023.
Next, we have Mr. Stuart Graham of Autonomous Research LLP.
Congratulations on the buyback Champagne moment, I think I had 2 questions, please. Firstly, on costs. On Slide 29, you missed on your FTE headcount reduction. You're targeting 4,300 3,665. Why was that? And then the second question was on capital return. A 50% payout ratio for 23 earnings will likely be $1 billion of payout. So, I add that to the $370 million you just announced. That gives me $1.4 billion. and you've got 1 year to go in 2024, if you can achieve your €3 billion to €5 billion goal. So, I can see how you can do the €3 billion, but I can't see how you're going to do the €5 billion. How are you going to do the GBP 5 billion because of a 50% payout ratio, just isn't going to get you there. Thank you...
So on cost, yes, I mean we said that already during the third quarter that with respect to the FTE headcount reduction is net slower because we basically accelerated our buildup of IT capabilities in the nearshore center. And we also slowed down a little bit the reduction of staff on the private client side because we have seen that we probably have been with some measures faster than our clients and that we really need to make sure that we have enough people in private clients to minimize the churn. So that's the whole reasoning contracts are signed, but we also said that you will probably see a little bit of reduction in the net FTE reduction just simply by the fact that we do a little bit more of internalization on the one side, and we also have some additional requirements with respect to cybersecurity compliance and all the stuff which we need to take into account, but that doesn't change anything on our cost steering.
On the payout ratio point, it's the right calculation, I can only say that we always said that we -- I mean, we stick to our capital return policy. And there, we have laid out that for the first year would show the 30%, which we now do that in the subsequent years, we would basically target the 50%, which we also laid out. And then there is a sentence in the capital return policy subject to further successful execution of 320 24 and a regulatory approval, share buybacks can be considered as part of the payout ratio or as an additional payment. And that's where we are. But I would say we stick to what we have done in the past, we deliver and then we talk about further steps.
But mathematically, if you want to do the €5 billion, there has to be another big buyback in the second half of 2023, is that mathematically, that's correct, yes.
I mean it all depends on how we do it. But I mean, first of all, we really need to show now also that we deliver what we have promised also for 2023. And we now do our first share buyback. Let's do that first, and then we take it from there.
Next up is Borja Ramirez of Citigroup.
I have 2 quick questions related to deposits. The first one is regarding the deposit EBITDA guidance of 30% for 2023, could you please provide details on what you expect for household and for corporate deposits? And then my second question would be, what do you expect for deposit evolution in Germany going forward? And also, would you expect the competition to come from?
So on the deposit better, I mean, this is clearly a blend of corporate clients and private clients. And you can assume that deposit better on the corporate client side is higher than on the private client side. It has been at least in historic terms, which is the basis we only have. And you can also -- I mean, our assumption is that we will continue with the standard that we do not pay on site deposits for private clients. So, there will be a shift from site deposits to call and term money on the private client side. And we have also partly seen that on the corporate client side. With respect to the deposit development, I think it's -- it's fair to say that it's probably stable, if at all, a small growth in deposits, which you can expect for 2023.
Next we have Johannes Thormann of HSBC.
Two questions from my side, please. First of all, on your operating costs. As you said, you rather focus on the cost/income ratio steering. How likely is that we get above the €6.3 billion, especially looking at the slowdown headcount reduction? And then probably also how likely is that you meet your 2024 target? Secondly, just on the site deposits and the term deposits, you currently have a 70%, 30% mix in PSBC. Do you expect this more to move to a 50-50 ratio? Or what is your underlying thinking? And probably last but not least, on the risk costs and another question. The €90 million guidance, including till your top level adjustment usage. What is the driver for this? Do you expect more corporate defaults? Or does this come from retail? Just help me thinking.
So, on the operating costs, the €6.3 million is what we steer and we ensured that we would do everything to show the 6.3%. However, I mean, we don't know what's happening on the composite contribution side. We had some unpleasant surprises here last year, 2022. And if we have, again, unpleasant surprises, this will be very difficult to balance out, at least on the cost side, then the revenue side would be leveraged -- and the second thing is also on variable compensation if we see a tremendous increase in the operating result and better than we expected as we have also seen in 2022, then also to keep up motivation of staff and also related to the incentive models, which we have, we will see an increased and variable compensation. But besides that, I can ensure you are in the performance dialogues, Manfred and I do, the cost discipline is an important element of the whole thing.
On site deposit thing, I'm not sure that I got the question right. I think you were asking whether we would go from 1/3, 2/3 to something around 50%, 50%. Probably that is too much. I mean we would expect further shift from site deposits to term or core money, but not so much. And the last point on the risk result. I mean, what is included here is really the mild recession of minus 0.5%. And that's specifically the top-level adjustment, for example, in private clients is very much related to [Ukasor] smaller business clients within private clients and then on the corporate client side. But apparently, the sentiment is improving day by day, which is, as a consequence, it might be that this risk result guidance is a little bit too conservative.
Next, we have Mr. Jeremy Sigee of BNP Paribas Exane.
Firstly, a follow-up on that last question, please. The guidance for loan loss provisions in the year, you say assumes usage of the TLA. I wonder what you had in mind whether you meant a tiny bit of usage as you did in 2022 or complete usage of the whole buffer or something in between. So that's sort of what I just wanted to clarify on the first question. And then secondly, I wonder if I could follow up. You made a comment about moderating staff reductions in retail to minimize customer churn, franchise damage. I just wondered where we are on that. We're clearly quite a long way through the restructuring. And I just wonder how you think about any remaining franchise risk from the restructuring? Or are we sort of past the worst of that now.
Yes, I do the question on restructuring. So yes, we are actually faster than what we have expected in the transformation of the private client business. We started with the 12 advisory centers, the year ahead of plan. Therefore, we needed some more staff churn is far less than what we have expected. So, we are fully on plan in the development. So, I think we feel very comfortable with the setup right now with 400 branches in Germany, 12 advisory centers and a good combination of comdirect on Commerzbank. So, we have reached here our final model, and we're very happy with the setup.
Is that finished -- is that risk finished now, the churn risk...
You never know how you can never say it's finished. I mean there are a lot of customers who don't have the branch anymore. So. because they have more distance, and we are now in the middle of the process of offering them also digital and in call and out -- service provider. So usually, after closing a branch, it talks up to 24 months in order to see whether it's stabilized or not. But so far, we are doing a lot better than we have expected, but we remain cautious.
And we still have churn included in our revenue assumptions for '23 and '24. So that's important to note. So on the chart level adjustment, I mean, that's a key question, right, -- you can think about everything. I mean 900 plus 50, I think we would agree that would be kind of a high number. So, it all depends also on our outlook for '24. Because I mean, clearly, you would keep top level adjustment in some form or other, if you believe that still there could be something in '24 might be not necessary. So, it's -- that one is really fluctuating. And we made this smaller than 900 for purpose. So, it's not smaller equal, but it's smaller than 900 million, and there's a reason for that.
Next, we have Mr. Tobias Lukesch of Kepler Cheuvreux.
Two questions on my side as well, please. Firstly, I would like to touch on net fair value result. Is there a potential guidance you can for the next quarters, potentially also the outlook for the year you have? I mean it's a quite fluctuating number basically that you have there. And secondly, on the capital side, maybe you could elaborate a bit on the effect of the quarter 1 ratio development, mainly concerning RWA changes basically and also regulatory changes that you see to the quarter 1 ratio requirements, both in '23 and '24. Thank you.
Okay. So, to be honest, you rightfully said that net fair value is very volatile. -- prediction is so tough that we stay away from it for a good reason because it's really, really hard to predict. On the capital ratio side, we expect -- and that is a little bit in line with our risk result guidance that if you have a risk result in a mild recession, then you also have to plan for potential waiting migrations and therefore, in RWA inflation. And that is embedded in this around 14% guidance for this year means that if we don't see the recession and we don't see the rating migrations and pretty much also the RWA, the developed, sorry, differently. That's one side. On the regulatory side, there is not too much to expect this year a little bit some things on the internal model review -- and then clearly, I mean, we have the ambition, and Manfred said that in his speech that we want to put a lot of focus on customer business and growth. So, there should be also a decent growth with respect to RWAs, specifically coming from our corporate client side.
Thank you...
The next question is Mr. Riccardo Rovere of Mediobanca.
Can you go 4, if I may, sorry. First of all, on NII, when you provide your guidance, of 6.5%, 7.1%, what happens to TLTRO? Is it supposed to be 0? So, the €90 million that we have seen in Q4 should be eliminated completely. The second question -- the second question I have is on DTAs. -- you have a write back here of taxation. So, your probability test is telling you that you will be more profitable and you can claim back something that I imagine was off balance sheet. The amount of DTA that you have a balance, at least for what I recall from the annual report 2021 is just enormous theoretically.
Can you share any thoughts on this? Because this is capital, not on day 1. But on day 2, when you start using those DTAs. So, should we expect this to continue? The other question I have is on DPS and the buyback I'm a bit surprised to see that one is a buyback because the capital of the bank seems to be strong enough to pay everything in cash. Cash once cash gets out, it never get back. While a buyback can be initiated, must be executed, shares have to be canceled, must be approved or can be somehow terminated before? So, it's a little -- I personally find a little less shareholder friendly than cash EPS. So I just want to better understand why did you decide to go for a not for full cash DPS when you start from more than 14% capital? And the last question I have is, can you give us an idea what is the LTV of the mortgage portfolio in Germany in PSBC.
Okay. Ricardo, lots of questions. I'll try to answer them quickly. So, on NII, no TTO. We never planned it, and it's also not included in our guidance. So, it's 0 for '23 and '24. Second, on DTA. I mean, yes, I mean, that is the tax accounting thing, which we have to follow, the better the planning, then you have to activate things like that, but we are fully activated. So, we feel comfortable on that one. On the 30% buyback or not 30% buyback, but the share of buyback and the 30% payout, why have we not just decided on straight dividends. First of all, I mean we are fully convinced that our stock price is undervalued, and therefore, it makes a lot of sense to use also this instrument. And we got clear also signaling that it would be well perceived by our investors. So, it's rather seen as a pilot because as you rightfully say, we need to get the approvals and stuff like that.
The request is out to ECB and the Finance agent, and we are pretty hopeful that we will get within the next 3 months, hopefully, positive answer. And we think it's just important. And you see it also, I mean, with our peers to have a good mixture. And so we just try it out. And on the LTV, I mean, we have a new business. We have something around 80% is the LTV on average for new business. But we always said that we have been very conservative on the mortgage business than continues like that.
Right. Thank you very much...
Next, we have Chris Hallam of Goldman Sachs International.
Just a few quick ones. First, on Slide 30, you're expecting a mild recession in Germany this year. Are you able to help us understand how the €900 million risk result might change if Germany does end up avoiding a recession? Second, on the 50% payout ratio for '23, is that set-in stone? Or is there a reasonable chance you may want to come back later in the year and adjust that higher? And then lastly, just on NII, again, on Slide 14, is the way I should read that, that we're already at peak NII? Because in your prepared remarks, you mentioned 23 expectations reflect annualized performance, adjusting for deposit meters and higher funding costs. And then in the answer to Ken's question earlier -- Ken's question earlier, you said you'd expect to continue to benefit from model deposits in '24, but I'm unsure whether you mean up year-over-year or just maintaining the high level...
Okay. Good. So, I mean, on the Mitre session, what does it mean for the smaller than €900 million it clearly will go down. And if you assume what is our normalized in normal times, what is our risk result, which we assume. That is around our credit portfolio, it's around €600 million to €700 million. That's a fair assumption. And then that is without taking into account that we still have a top level adjustment out there of nearly 500 , right? But normally, you would say €600 million to €700 million you would need in a normal year. The second one, the 50% set in stone, I mean this is our capital return policy, and we stick to that. And we will see how things are developing over the year. And then we will get back to all of you. And then on 3, have we seen the peak in 2023, if I would get your question correct. I wouldn't say no because we said that it's very similar to the negative interest rate environment where we have seen the negative rights eating into our portfolio over time. And something similar is now also happening. So, I mean the strong increase, sharp increase, which we have seen in the fourth quarter is probably not something we can repeat, but we still believe that as long as interest rate environment stays stable and deposit better is not going in the complete wrong direction. We will see a continuous improvement of NII.
Next, we have Amit Goel of Barclays.
I have 2 questions. One, I guess, more of a clarification because I guess it was asked a couple of times. But in terms of the cost guidance for 2023 and the commentary about cost income ratio versus the 6.3, if NII turns out to be €7.1 billion, should I expect the cost number or part of that incremental benefit to be reinvested? And or should I think about the taste 6.3 billion with a kind of GBP 6.8 million to GBP 6.9 billion NII? Or is it just the NII bit just drop through and the 2 kind of independent kind of variables. And the second question just relates to I mean there's some other income bits and pieces, which were slightly adverse in Q4. Just curious if there's anything to be aware of for 2023 in that line?
So, I start with other income. So, what was driving the other income in 2022 that was clearly the main driver. Number one was Swiss franc loan provisions than we had in the fourth quarter a larger amount for no longer used leased office space. And then we also had in the fourth quarter, which is -- and the latter one is probably not something which we will repeat this year. And then we also had a negative effect by the sale of the Hungarian unit in there -- so that is also something which will not be repeated. But on the Swiss franc loan side, I would need a crystal ball to know whether there will be more to come or not. So that one is difficult to predict and clearly is dependent on the development of the situation in Poland. On your €6.3 billion question, I mean the €6.3 billion is our cost target, and that is which we steer. However, as I said, if the operating result is becoming much better than there is an automatic consequence that, for example, the variable compensation will be also higher. That could be one effect. The other factors always our beloved compositive contributions, which could get -- could be different than we have planned for. And I mean, clearly, the flexibility which we currently have is that if we have a very good investment case and with very good investment case, I mean a very good payback ratio and stuff like that, then we will consider that. But for the time being, we really stick to the cost target.
Got it. So, if, for example, just to follow up, revenues are, let's say, €100 million better. Do you think about it in terms of -- you would potentially spend up to 60% of that or would it be 30%? Or how do you think about that potential for additional investments?
Well, I mean, the clear message to our colleagues is that the cost-to-income ratio for new investments must be much better than the average cost-to-income ratio of the bank. Otherwise, it's not a good payback ratio and not a good case. But as I said, I mean, this one, we will we will follow up on in the next quarters. For me, in the moment, the 6.3 million is the one which we have on our steering list to say it like that.
In the interest of time, we have room for one last question. And the last question comes from Daniele Brupbacher of UBS.
You said you would expect the loan book overall to be down a bit in 2023. Can you give us a bit more specific guidance for mBank, German PSBC and corporate clients? And then apologies, but going back to that peak NII question, I still struggle to model that given certain drivers there. But if I -- if you were to plug in your assumption, the 30% beat forward curves on the interest rate side, loan book, slightly down, flattish or so when would you expect to see the peak on NII? Is it -- you said not in '23, but is it 24? And can you be a bit more specific around the model deposits that was always very key and that changes over time. So, can you just describe a bit your positioning there at the moment?
So, thank you, Daniel. So, on the loan book, the decline was very much related to the private client side. On the corporate client side, we would not expect reduction. But on the private client side, it has a lot to do with what we see currently on the mortgage business and the consumer loan business. And that is true for Germany, but also for Poland, that the activity has decreased quite significantly. And it's -- there's a question when this will turn around. We don't see that basically in the first half of this year. And on peak, NII, I mean, our average -- the average duration of the modeling is 5 years. So, you can assume that if the interest rate level stays constant and also the better stays constant, then you will see over the next 5 years, positive out of today's interest rate environment.
Yes. Thank you very much for all your questions, your interest. And yes, we're looking forward to answer your follow-up questions in our meetings to come. We meet each other in meetings and conferences. So, thanks again for today and looking forward to meeting you all soon. Thank you very much. Bye-bye.