Ladies and gentlemen, thank you for standing by. I am Gabby, your chorus call operator. Welcome, and thank you for joining the Bank of Cyprus conference call to present and discuss the group preliminary full year 2022 financial results. All participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Panicos Nicolaou, Chief Executive Officer, Ms. Eliza Livadiotou, Executive Director of Finance, and Mr. Demetris Demetriou, Chief Risk Officer. Mr. Nicolaou, you may now proceed.
Good morning, everyone. Thank you for joining our financial results conference call for the year ended 31st of December 2022. I am joined by Eliza Livadiotou, Executive Director of Finance and Legacy, Demetris Demetriou, Chief Risk Officer, Annita Pavlou, Manager, IR and ESG, as well as our look back at Q4 and 2022 as a whole. I'm pleased to outline our upgraded financial targets for 2023 and 2024. Let's start with some of the key messages for the year on slide number five. I am pleased with the group's strong performance in 2022, which exceeded expectations and delivered an 11.3 recurring ROE, confirming the strength and diversification of our business model. Our fourth quarter was especially strong, delivering a recurring ROE of just over 19%.
The year was marked by the recovery of revenues, driven mainly by the expansion of net interest income, up 25% in the year, with the non-interest income remain a significant contributor to total income. The proactive efficiency outcomes implemented earlier in the year are delivering tangible results. Our total operating expenses reduced around percent despite the inflationary environment, supporting a cost-to-income ratio excluding special levies and other contributions of below 50%. Our NPE ratio at 4% as at the end of the year is a proof that our balance sheet de-risking is largely complete. The bank is in a strong position, we look forward to the future with confidence. Moving now to slide number six.
The bank has successfully surpassed its 2022 financial targets across all of the financial metrics we set ourselves in November 2022, including net interest income, recurring profitability, efficiency, and asset quality. These resulted in a recurring ROE of 11.3% for the year, above our target 10% target, with the capital position remaining robust throughout the year. Turning now to slide number seven. We expect to continue our profitability path, and here we are today upgrading our ROE target to over 13% from over 10% for 2023. It's important to note that our new ROE target is based on reported profits. The main building blocks for this upgrade are the following. Firstly, on the net interest income. The group benefited from the steep and fast increase of interest rates in 2022.
This positive performance is expected to continue in 2023, factoring in the current expectations for the evolution of interest rates. Our net interest income is now expected to grow by 40%-50% year-on-year, equivalent to net interest income in the range of EUR 520 million-EUR 550 million for 2023. On efficiency. The cost-to-income ratio, excluding special levy on deposits and other contributions for 2023, is revised downwards to mid-forties to reflect the embedded revenue outlook and also continuing cost focus, as the efficiency actions undertaken during 2022 will partially absorb inflationary pressures. On asset quality. Our total risk target and NPE ratio targets remain unchanged at 50-80 basis points and sub 5% respectively.
Both these targets reflect our conservative assumptions, but also our belief in being able to successfully navigate the ongoing macroeconomic uncertainty, given our prudent lending criteria and the current performance of our performing book that demonstrates no signs of asset quality deterioration to date. With our current view of the macroeconomic backdrop and the underlying fundamentals, we see this level of profitability being sustained in 2024, with ROE targets being sustained at over 13% as well. With the upgrade of our targets, we are laying the foundations for a meaningful return to dividend distributions from 2023 onwards, subject to regulatory approval and market conditions. Based on the final SREP decision received in December 2022, effective from first of January, 2023, the equity dividend distribution prohibition has now been lifted. Any dividend distribution remains subject to the usual regulatory approval.
Slide eight provides our assumptions on the evolution of net interest income. As this is an important driver of our ROE target upgrade, I will go through this slide in detail. We expect that net interest income will expand by 40%-50% year-on-year, equating to a range of EUR 520 million-EUR 550 million for 2023. Our margin is expected to further improve to 2.5% in 2023, a level we do expect to be sustainable in 2024. The group's balance sheet is highly geared towards higher interest rates. Our sizable liquid balances see an immediate benefit in net interest income, while the full benefit on our mostly variable loans will continue to feed fully during the year.
Our 2023 guidance is based on the following assumptions: An average ECB deposit rate of 2.8% for 2023, further expansion of fixed income portfolio, a gradual shift in the deposit mix with an increase in the share of time deposits from 30% to 40%-45% by December 2023, and a gradual increase in the time deposit rate pass through from 7% currently to around 50% by December 2023, and increased wholesale funding costs. Finally, reflecting high interest rate rises and slower economic growth, we expect the net performing loan book to remain stable to slightly up for 2023. Additionally, there are some headwinds materializing in net interest income.
Following the completion of Project Helix 3 3 and the end of TLTRO favorable terms in Q4, EUR 28 million that benefited 2022 will not be repeated in 2023. We expect that 2023 net interest income level will be sustainable into 2024 on the back of market stabilization to 2.5% and modest loan book growth. Moving now to slide nine, which focuses on efficiency. The cost-to-income ratio, excluding special levy on deposits and other levies and contributions for 2023, is expected to decrease to mid-forties as we continue to manage our cost base carefully and in disciplined manner despite elevated inflation.
This target includes a commitment of maintaining our total operating expenses in a range between EUR 350 million and EUR 360 million, reflecting some upward pressure due to ongoing digital transformation, investment in business, and the renewal of the collective wage agreement in 2023. On the same basis, we expect the cost-to-income ratio to remain around similar levels in 2024. Let's now turn to slide number 10. As mentioned earlier, we have maintained a conservative approach in terms of our asset quality assumptions. Therefore, despite the improved credit metrics in 2022, we have kept unchanged our target for an NPE ratio of sub 5% in 2023. It is important to note that there are no signs of asset quality deterioration from our ongoing monitoring of customer behavior.
Additionally, we have maintained the wide range of cost of risk between 50-80 basis points for 2023, reflecting the ongoing macroeconomic uncertainty. We expect cost of risk to start normalizing from 2024 onwards to around 40-50 basis points. Slide 11 provides another view of macroeconomic conditions. The effects from the war in Ukraine, the energy crisis, high inflation, and global monetary tightening are weighing on the global economy. Against this backdrop, the Cypriot economy has shown its usual resilience. The economy is at a different stage of the economic cycle, with GDP continuing to grow by 4.4% in the fourth quarter. Recent projections by the Minister of Finance point to a growth rate of around 3% in 2023, outperforming Eurozone average.
Growth in 2022 was underpinned by strong recoveries of tourist activity despite sizable loss of tourists from Russia. Revenue generated by tourist activities reached 90% of the corresponding revenue in 2019, which was a record year. The unemployment rate remained at low levels in Q3 2022, and is expected to reach to 6.7% for 2022. As in many other countries, consumer inflation accelerated significantly, impacted by supply chain disruptions, high energy and other commodity prices. In Cyprus, inflation peaked in July 2022, and has since started to decelerate. The annual average inflation was 8.1% in Cyprus and is expected to drop to 4% for 2023. Let's now move to slide number 12. This slide highlights our unique equity story. Firstly, we hold a leading market position in a liquid and consolidated market.
Secondly, we benefit from a well-capitalized, diversified business model with a focus on improving efficiency. This model is delivering sustainable double-digit returns on tangible equity. Thirdly, we are focused on delivering sustainable shareholder returns. All that with Cyprus being a small open economy with positive prospects of outperforming Eurozone. Taking each in turn. The banking sector is liquid, consolidated, with the top two players having 65% market share across most business lines. We, as Bank of Cyprus, have a sustainable and diversified business model with meaningful capitalized non-interest income contribution. The bank is one of the most liquid banks in Eurozone with strong net interest income benefiting from rising interest rates and limited funding pressure.
We have been and continue to be focused on disciplined cost management, achieving a sub-50% cost-to-income ratio, which we will further improve to mid-40s in 2023, placing us attractively within the European banking sector. We have a healthy loan portfolio and an NPE ratio below 5%. Today, we are on track to achieve a ROTE of over 30% for 2023, which we believe is sustainable in 2024 as well. We continue to focus on delivering sustainable shareholder returns through strong capital generation, and intend to commence meaningful dividend distributions from 2023 onwards, subject to the governor approval and market conditions. I will now hand over to Eliza to take you through our financial results for the period.
Thank you, Panikos, and good morning from me, too. I'll start by highlighting some of the key highlights for the full year 2022 on slide 14. As the largest financial group in Cyprus, we have extended a record EUR 2.1 billion of new loans in the year, an increase of 17% on the prior year, whilst maintaining robust underwriting. Our net performing loan book of EUR 9.6 billion grew by 3% year-on-year, and it demonstrates strong fundamentals to withstand uncertainty in the macro outlook. During 2022, we delivered a profit after tax before non-recurring items of EUR 188 million, more than double of the prior year, corresponding to a carrying this intangible equity of 11.3%.
An important driver of this performance was our net interest income that amounted to EUR 370 million for the year, up 25% year on year, of which EUR 136 million was generated in the fourth quarter. Operating expenses decreased by 1% as the efficiency actions undertaken during the year more than offset inflationary pressures. As a result, our cost-to-income ratio for 2022 stood at 49%, 11 percentage points down on a yearly basis. The reported result was a profit of EUR 71 million for the year, of which EUR 80 million was recorded in the fourth quarter, reflecting the strong NII performance, offset by the one-off restructuring charge of EUR 101 million we took earlier in the year for our voluntary departure plan as part of our proactive step to optimize our staff and branch cost base.
The bank's capital position remains robust and comfortably in excess of our regulatory requirements. As at 31st December 2022, our total capital ratio was at 20.6%, and our CET1 ratio at 16.4%, both on a transitional basis. Our liquidity position also remains strong, with our cash balances with ECB amounting to EUR 7.6 billion, excluding EUR 2 billion of TLTRO funding, leaving the bank well positioned to benefit from further interest rate increases. Deposits on our balance sheet remained roughly flat in the quarter, but increased by 8% year-on-year to EUR 19 billion. In November 2022, we also completed Project Helix 3 and have derecognized around EUR 550 million of NPEs from our balance sheet.
Together with the additional organic NPE reduction of EUR 360 million in the year, our NPE ratio stood at 4% as at 31st December, achieving our 2022 NPE ratio target of sub 5%. Our cost of risk of 44 basis points for the year was well within our target range, reflecting healthy asset quality performance. Moving to slide 16. Net interest income accelerated in the fourth quarter, totaling EUR 136 million, driven by immediately good asset repricing, including the fixed income portfolio and the Euribor repricing benefits reflected into our loan book. As a reminder, the vast majority of our loan book is variable rate, with around half of it linked to Euribor.
As a result, net interest margin increased by 83 basis points to 236 basis points in Q4, we expect that it will continue to rise to around 250 basis points in 2023, reflecting the full benefits of the fourth quarter and subsequent rate hikes. Our cost of funding modestly increased to 25 basis points in Q4, reflecting small increases in the cost of time deposits and increased cost of interbank funding. Our TLTRO borrowings stood at EUR 2 billion as at December, after EUR 1 billion was repaid during December 2022. Panikos mentioned earlier, in 2023, we foresee NII of EUR 28 million as a result of the end of the TLTRO favorable term, as well as the NPE sale completed in the year. Moving to new lending now on slide 18.
New lending granted in Cyprus reached a record of EUR 2.1 billion in the year, up 17% on the prior year, driven by increased activity across all sectors, with corporate being the main driver. As a result, the net performing loan book as of December amounted to EUR 9.6 billion, up 3% since 2021. However, there were some signs of increased repayments observed in Q4 following the rate hikes. We have high-quality loan originations supported by prudent underwriting standards. Meticulous assessment of the repayment capability of our customers, evidenced by the fact that 99% of new loans extended in Cyprus since 2016 continue to be performing. Due to the continuing rate hikes, demand for new loans is expected to be relatively slow in 2023.
Despite that, net interest income is expected to be supported primarily by asset repricing and higher levels of investment in securities. On slide 19, we highlight the strong liquidity surplus of the bank, which makes us one of the most significant beneficiaries to rising ECB rates. Just as a reminder, the repricing of our liquidity takes place immediately, whilst there is a modest delay in the repricing of our mostly Euribor-linked variable loans. The Cyprus banking system has one of the lowest loan-to-deposit ratio amongst the EU countries, below 55%, which should support moderate pricing pressures on deposits. Cost of deposits remained low in the Q4 at 7 basis points, although we observe a modest increase in time deposits to 20 basis points. Despite this, the contribution of time deposits to total deposits remained broadly flat year-over-year at around 30%.
Turning now to slide 20, fixed income portfolio. As of 31st December, the bond portfolio of the group amounted to two and a half billion euro, up 30% year-on-year, representing a total of 10% of assets. The completion of the balance sheet de-risking and the good comfortable liquidity position allow it to further grow the bond portfolio in 2023 subject to market conditions. The portfolio comprises highly rated fixed income assets with low average duration, giving the group the flexibility to take advantage of rising rates. Moving to non-interest income on slide 21. Net fee and commission income for the 4th quarter was up 4% Q-on-Q due to higher non-transactional fees. Net insurance income was up 53% Q-on-Q, driven by exceptionally strong new business and positive changes in valuation assumptions and lower insurance claims.
Non-interest income for 2022 increased by 16% on the prior year to EUR 329 million, driven by higher net fee and commission income, net foreign exchange gains, and net gains on financial instruments and insurance income net of claims and commissions. Net foreign exchange gains and net gains on financial instruments increased by 35% on the prior year due to higher Forex gains through FX swap. We would remind you that the FX gains are volatile contributors to total income. We have a well-diversified business model, with steady non-interest income contributing significantly to total income. Please bear in mind that in 2023, non-interest income will face some headwinds.
Net fee and commission income for 2022 included EUR 16 million from the liquidity fees, which were fully abolished in December, and around EUR 6 million of servicing fee relating to the NPE sale that will be phased out in Q1 2023. Additionally, the adoption of IFRS 17 is expected to result in a modest annual negative impact on the group's net insurance income. Let's review now operating expenses on slide 25. Total OpEx amounted to EUR 89 million in Q-on-Q, up 8.8% Q-on-Q, as inflationary pressures kick in and seasonally higher other OpEx, and total EUR 343 million for the full year, down 1% on a year-on-year basis. Overall, our cost-to-income ratio, excluding the special levy on deposits and other levies, for 2022 stood at 49%, 11 percentage points down on a yearly basis.
On the same basis, the cost-to-income ratio for Q was at 38%, down 9 percentage points, mainly driven by the higher total income. Looking ahead, we will not lose sight of our cost discipline as revenue expands. You have already heard that we expect a modest increase in costs this year to EUR 350 million-EUR 360 million, leading to a mid-40s cost-income ratio, excluding levies, a ratio which we expect to deliver in 2024 as well. Turning to capital on slide 29. Our CET1 and total capital ratios in December stood at 15.4 and 20.6% respectively, including our current capital generation of 120 basis points in the fourth quarter.
With the phasing in of the IFRS 9 impact of 65 basis points on the 1st of January 2023, the CET1 ratio will converge to the fully loaded CET1, which was at 14.7% at year-end. The benefit from IFRS 17 on 1st of January 2023 from our insurance business equity is estimated to be around EUR 50 million-EUR 60 million, of which EUR 50 million was distributed to the bank as dividends in February 2023. When offset by the impact of IFRS 9, our pro forma 1st January CET1 is estimated at 15.2%. In December 2022, we also received the final SREP decision, and our minimum requirement for CET1 and total capital ratio, effective 1st January 2023, is set at 10.25% and 15.10% respectively.
The minimum requirements reflect a decrease by 25 basis points of the P2R requirements and the final phasing in of the O-SII buffer. The SREP decision effective from the 1st of January also included the lifting of the equity dividend distribution prohibition. Any dividend prohibition remains, of course, subject to regulatory approval. Moving to slide 31 on asset quality. The NPE ratio was reduced to 4% or 1.3% on a net basis, delivering our 2022 NPE ratio target of sub 5%. The bank NPE coverage ratio has been improved to 69%, and when including tangible collateral, NPEs are fully covered. With the legacy asset quality issues firmly behind us, our focus remains on monitoring and limiting NPE inflows. Despite macro uncertainties, there are no signs of asset quality deterioration to date, as evidenced by the modest growth inflows during 2022.
Now linking to that, let's move to slide 34 on cost of risk. The cost of risk for the full year was at 44 basis points as compared to 67 basis points in the previous year, down 13 basis points reflecting strong asset quality performance in 2022. The cost of risk for the fourth quarter was at 42 basis points, broadly flat Q- on- Q. For 2023, we confirm our guidance of sub 5% NPE ratio and a cost of risk of 53 basis points, which reflects further assumptions on NPE inflows and macroeconomic uncertainties. Our cost of risk is expected to steadily normalize from 2024 onwards to around the 40 to 50 basis point level. With that, I will hand back to Panicos for closing remarks.
Thank you, Eliza. Let's turn to slide 38. We've had a strong performance in 2022, completing our efficiency and restructuring actions and delivering a transformed bank with a sustainable business model and well-diversified revenues that are showing strong growth. We are pleased to have exceeded our 2022 financial targets across all key metrics, including net interest income, recurring profitability, efficiency, and asset quality. Capitalizing on this strong performance, we are today upgrading our ROE target for 2023 to over 13% from over 10%, laying the foundations to commence meaningful dividend distributions from 2023 onwards, subject to regulatory approval and market conditions. We see this level of profitability as sustainable for 2024, and we are maintaining our ROE target of over 13% for 2024 as well. This concludes our presentation, we'll now open the floor for your questions.
Ladies and gentlemen, at this time, we will begin the question-and-answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please mute your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question is from the line of Borje Kim with Numis Securities. Please go ahead.
Hi, it's Kim Borje from Numis. just one question from me. you're saying that you expect loan growth to be modest in the year ahead. I just wanted to sort of ask and to sort of give a bit more guidance on that and a bit more of your thinking around that. How should we be thinking about that loan growth there? Where might it come from? Where might it not come from? Where do you see the opportunities given the market conditions and the competition out there? Thanks.
Okay. Thank you, Kim. As we said, given the macro uncertainty, we want to be more cautious on approved and new lending. That's why we have in our assumptions for 2023, we say modest loan growth. This will come mostly through Cyprus, but also through our non-Cypriot portfolio, which you see gradually expanding and has been contributed 8% in the new loan generation in 2022. It's. These are our, let's say, assumptions for our ROE guidance of more than 13% in 2023. The focus in the short term remains on net securities and NII growth, which is in the near term will be coming from margins to oppose to growth. In the middle term, we are expecting loan growth or process to remain good given strong growth expected in the economy cycles.
Okay. Thank you. Thanks so much.
The next question is from the line of Alevizos Alevizakos with Axia Ventures. Please go ahead.
Hi. Thank you very much for the presentation. Congratulations for these results. Very good. For a couple questions, especially regarding your targets primarily. I will start with the NII. You gave a range of EUR 520 million-EUR 550 million. I realize that the upper end of the range, if you multiply the fourth quarter of this year NII, you get to about the same number. The question is the fourth quarter as good as it gonna get in terms of the NII, or do you forecast something in the interest expense?
I'm assuming the deposit beta is actually would be pushing the number lower. If so, you say that the deposit beta will be about 50% for term deposits. Sorry, 50% for the overall deposit base. I was wondering whether you can split that between time and current deposits. My second question is regarding the NPE ratio. You're already below the 5% target, and you're still guiding for less than 5% for next year. Is there something there in terms of the NPE flows that you expect or you wanna be kind of cautious about? Thank you very much.
Okay, thank you, Ale. I will start with the deposit beta. As we said in our comments in the beginning, currently, our deposit beta is 7%, and we see no visible change yet. We acknowledge that beta arising everywhere. As a management, we take this into our planning assumption. For the current book, the assumption is that there will be no change in the 0% that most of the current deposits are enjoying. On the term deposits, the assumption is that the percentage of the term deposits will increase from 30% to 45% by the end of the year. Gradually, the deposit with beta past ratings will increase from 7% to 50%.
This is the assumption in our ROE guidance. Because of that, and rightly so, you made the run rate of Q4 net interest income yields. It comes the net interest income planning for 2023 comes, of course, with higher rates. At the same time, comes with the, let's say some pressure on our deposits, but repricing and higher annual cost. The NII will peak in Q1 and Q2 because we have the full rate benefit without pressure on our deposits and back to repricing. This will gradually see this coming into the equation as we move in Q3 and Q4. You know that we are very careful in setting our targets and very calculated on what we say. On the NPE, yes, you are right.
We are firm that the NPE and cost of risk guidance has been left unchanged simply due to macroeconomic uncertainty and not because we are seeing any deterioration in the actual metrics or in the customer behavior. Actually, there is very limited NPE flows.
Okay. Thank you for that. One last question, if I may. Right now it seems like quarter one capital ratio is increasing nicely, and you will be able to kind of offload the IFRS impact by the insurance dividend as well. Are you gonna be ending up the year probably with something significantly higher than all your requirements? I was wondering how this has affected your recent conversations with the regulator and whether it gives you more confidence going into deciding a hefty dividend for the year?
Of course. I mean, without judging the decision of the regulator, the rates, ROE guidance, the stronger capital position and the under control asset quality, these are all factors that make us cautiously optimistic on our discussion with the regulator.
Excellent. Thank you very much. Well done again.
The next question is from the line of Akkelides, Christos with Argus Capital Holdings. Please go ahead.
Hi, just a quick question from my side as well. The ROE of the ROE target 7%-13% to 7%-13%. Can you give us an idea of the dividend income and how is that calculated? I know you tend to be extremely conservative on that, but is it on the low side given that we have just discussed? The second question on slide 29, you said that you are evaluating the, I mean, possibilities arising from strengthening CRD IV capital, but then you mentioned share us on the capital. Thank you.
Christos, we found it quite hard to understand your first question. I think [Manny could make up] I think the second one was 81. Am I right? It's not a very good line. Second question was on 81?
Sorry, on 29. Are you talking now?
Yes. Thank you.
Okay. On 29 about, strengthening of, economic and opportunity projects in addition of capital position, including additional CRD IV capital, including tier one equity. The first one was, just a bit of, color on the target, ROE, et cetera, et cetera. My question is already discussed, and that was presented in meetings on the ROE side. I mean, could you please answer that?
Okay. Okay, Christos. Thank you. On the ROTE side, I will start by saying this is higher. We said that it's higher than 30%. It's on a reported basis. It's calculated on increased tangible equity, and it's also sustainable in 2024 as well. Of course, you know that we take guidance very seriously, and I want to reiterate that we have multiple buffers and conservative inputs built into the outlook to allow for the high degree of uncertainty in the macros. I will mention a couple of these. First one is cost of risk, which we kept at unchanged to 52, 80 basis points, but have not experienced pressure yet on new NPE flows. Secondly, on the NIM buffers, on the pass-through rate, currently we have 7%, pass-through rate.
There should be assumption that we reach to 50% by the end of 2023, even though there is currently no pressure. Over and above, we assume a change in the deposit mix. Currently, this is stable at 30%, on term deposits versus the assumption that we will shift to 45%. These are the basis of our calculation, plus the 2.8% of average ECB demo rate, that actually give us this expectation of ROTE more than 30%. On the AT1, I will pass this to Eliza.
On AT1, as you know, we have a bonding issue that was issued back in 2017. It has a call date in December this year. We will monitor the market for an opportunity to transact in it, let's say, either by replacing it or through another solution, depending on market conditions.
Mr. Akkeledis, are you finished with your questions?
Yeah, sure. Thank you.
Thank you. The next question is from the line of Corinne Cunningham with Autonomous Research. Please go ahead.
Good morning, everyone, and thank you very much for the call. A couple of questions, please. First one on foreclosed assets and then the second one on your liquidity position. The cost of risk guidance does look quite high still. Are you assuming in there that maybe there's some additional provisioning on some of the foreclosed assets to try and accelerate disposal there? The second question on liquidity, what sort of timing are you expecting there in terms of deploying some of that ECB liquidity? In what form? Would you expect it to be sort of broadly similar to the current split, or do you have a preference for where you might deploy some of those assets? Thank you. Some of that cash.
Thank you, Corinne. Cost of risk guidance refers to simply cost of risk, so loan provisions, loan loss provisions. It doesn't include property impairments. We do have modest amounts every year of potential impairment. Remember, our ROTE target includes both cost of risk and everything else in the P&L. The 13% is an all-in projection. On liquidity, I mean, obviously lending and Panicos, I think, covered it earlier. Is the obvious place to deploy, but also on the fixed income instruments. As you know, as you saw, may see on the slide, we have been growing the fixed income book, and we intend to continue growing into this year at similar pace and timing. We are pacing our increases to take advantage of market opportunities.
Thank you. Mix to be similar to what you already have?
Yes. Yes. Yes.
Thanks very much.
The next question is from the line of Hugo Cruz with KBW. Please go ahead.
Hi. Thank you for the time. I have quite a few questions. first on the deposit book, I was wondering if you could give a split of your time deposits between retail, SME and others. Also if you could give us, the average balance of your current accounts where I think you charge or you used to pass a few interest rate there. I was just wondering if that these are very small accounts where you don't have any pressure to raise rates or not. I had a question on, your operating expenses. Your guidance is very clear. I was just wondering what is the underlying inflation that you assumed for both salaries and non- and other expenses in your guidance for 2023?
The third question on the cost of risk, you assume, quite a big increase between 2022 to 2023, but you don't have any recession in your macro assumptions. You still have overlay. I was wondering if you could end up at the lower end of your guidance or even lower below 50 basis points in 2023. the final question on the capital return. I know you are discussing with the regulators, and they can be conservative, but, you know, what kind of payouts do you have in mind at the moment? will you consider buybacks given your strong capital position? That's it. Thank you.
Okay. Starting from the last question, Hugo, on the dividend side, on the capital return, you know that we said many times that I said it before that we are in ongoing discussions. We are feeling good because, and more optimistic because, of the results that we just disclosed to you and on the guidance and on the capital buffers. Unfortunately, we cannot be more specific at this point of time. If I dare to say something, when we say meaningful, it means that we cannot quantify any payout ratios, but it won't be a token dividend. That is why we are saying meaningful.
On the buyback, on the way of capital return, at this point of time, the focus is on getting approval to resume the capital returns, to resume distribution. The exact next timing is something that the board will examine, consider at the right time. On the cost of risk, again, I will reaffirm that we left the guidance unchanged, not because we see any deterioration, but because we want to remain prudent and conservative and to cover any macroeconomic uncertainties. On the operating expenses, yes, we acknowledge that there are some wage pressures. I'm probably 100% correct on the, we pay COLA for 2022, 2023, which are around 4.3%.
This comes with salary increases because of the collective agreement of around 2%-3%. These are the major, let's say, impact coming from the inflation to the overall staff cost of the bank. I don't want to emphasize this again, managing costs and managing costs carefully and not just cost-to-income ratios, this will remain our number one priority, and this is not changing because it happens to have some higher income this point of time. This is a very important message that we would like to convey to the market. Cost and efficiency remains number one priority. On the level of detail, I think Eliza has the numbers and the statistics.
Okay. On deposits, of our time deposits, three-quarters are retail deposits, actually 77%, which obviously are less rate sensitive. I don't have the average balance on the current account, what I think is maybe useful here is that 60% of our total deposits fall under the Deposit Guarantee Scheme, which is at 100K per depositor level. Yes, the average balance of our deposits is small. We can give you the exact numbers later. This together with the low deposit ratio of both the bank and the banking system, which is in the presentation, is what gives us the confidence on the pass rate and is what has been allowing relatively low pass through betas so far at 7%.
Okay, thank you very much.
Thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone. The next question is from the line of Hamilton, James with Numis Securities. Please go ahead.
Hello, and thank you for your time. Two if I may. Firstly on the insurance businesses, it looks like both of the main businesses there took market share in 2022. Could you pass comment on sort of growth prospects heading into 2023 for those businesses? Secondly, and obviously within the parameters of regulatory permissions, do you have in mind, if you like, a ceiling CET1 ratio you would consider? Because clearly, whatever the terms of equity are and likely loan growth, if you are starting with modest dividends, obviously the capital builds quite quickly.
Finally, apologies for returning to your cost of risk guidance again, but given the reduction in stage two and stage three assets in Q4, and you can see no signs of any deterioration at the moment. Would it be right to assume that you're not expecting a return to the sort of annualized 50 to 80 basis points in Q, for the year in Q1, and it'll be skewed towards the later part, last part of the year?
Thank you, James. Maybe I start with the dividend, with the ceiling on the CET1 question, and then I answer about economy insurance. At this point, it's a luxury to be talking about CET1 ceilings. But given that we still haven't started paying dividend, our priority is to, you know, successfully complete the dialogue with the regulator and start paying dividends at sensible payout ratios eventually. Of course, you know, it's not our job to have crazy high CET1 ratios. We do want, we do need to think of ways to optimize them, either through dividends or potentially down the road through buybacks if we are in that high quality problem of very high ratios. We don't have an absolute cap. This is a discussion we may need to have into the next few quarters.
On, actually, on cost of risk and the timing, we don't expect a big increase in our cost of risk in Q1. That... I mean, the guidance remains in the 50 to 80 basis points as we discussed earlier. We continue not to see any deterioration, or asset quality and any reason for a big increase. Of course, cost of risk is a calculation which always has certain level of uncertainty built into it.
It's a mathematical model rather than actual forecast on the ground. We have our, and because myself and Eliza mentioned this many times, we also have our Chief Risk Officers to reconfirm this. Demetris, would you want to say something on the cost of risk?
Well, James, as it was already mentioned a couple of times, there is a sizable element of conservativeness in the guidance for 2023. Overall, yes, we do expect steady normalization to our medium-term target. I think that's the guidance. Of course, we are carefully monitoring the situation both in our loan book, both in the economy and in the monetary policy stance. As soon as we get more comfortable, we will of course, inform the market.
On the last question in terms of insurance. Insurance business is an area of growth because they are simply below the natural market share of the group. We are roughly 40% on banking. We are 27% on life and 14% on insurance. There is room of growth. All in all, our insurance subsidiaries have been through the year profitable and sustainable, contributes to our profitability. For 2022, you see that they contribute 22% on our non-interest, accounting 19% of our profit before tax. Yes, insurance, this is an area of growth.
Thank you.
The next question is from the line of Dimitris Giannoulis with Research Greece. Please go ahead.
Yes, thank you. Apologies if you have already commented on this. What kind of deposit levels do you assume for 2023 compared to 2022? What is in your guidance, would you say?
We're assuming conservatively, again, a slight reduction on the full year 2022 balance. To the full year 2022 balance, we assume a slight reduction on the level of deposits. We assume a shift on the mix from 30% tenor to 35%-45% tenor and a pass-through rate on the time deposits from 7% currently to 50% by the end of the year. All these assumptions, Dimitris, are on slide eight, which we try to be as transparent as possible how we calculate the NII and what does it mean for our earnings guidance in 2023.
Slightly lower overall. Okay. Yeah.
Yeah. On the volume, yes. On the balance, yes.
If I may just add to take into account the macro inflationary conditions, but this may be a conservative assumption.
Thank you very much.
Not because we are seeing realities start to move. This is what I meant.
Okay. Thank you.
Once again, to register for a question, please press star and one on your telephone. As a final reminder, to register for a question, please press star and one on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Nicolaou for any closing comments. Thank you.
Thank you all for participating in the call. As always, myself and the team, we are ready to take any offline questions and arrange one-to-one meetings to take you through the actual results for 2022, and of course, explain the guidance and the assumptions for 2023 and 2024. Thank you very much.
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.