Earnings Call: H2 2012

Mar 7, 2013

Okay, let's start. Apologies for my voice, and don't get too close would be my advice. We announced our results for 2012 this morning. We had a small decline in revenues of about 2%, which was lower performance fees and a 2 basis point reduction in net revenue margins. Costs were 4% higher as we continue to invest in our business. As a result, our profits were GBP 360 million, down 12% on 2011. Earnings per share GBP 104.7. We increased the final dividend by 15%, making a 10% dividend increase for the year as a whole. As we said in the statement, it reflects the strong financial position of Schroders and the board's confidence in the long-term growth of the business. So this, to some extent, is a rebasing of the dividend. We're not moving away from our declared dividend policy of increasing dividends in line with profitability over the long term. Investment performance has been very competitive. Over three years, 71% of funds are outperforming, and we've had very strong results over the 12 months, which I'll show you in a minute. Net new business, I think a very competitive GBP 9.4 billion for the year as a whole, including a very strong fourth quarter, taking assets under management to their highest ever level of GBP 212 billion as we go into 2013. We completed or announced two acquisitions during the year, the acquisition of 25% of Axis Asset Management Company, the asset management subsidiary of the third largest private sector bank in India, Axis. This is the first time we've moved into India. We have in Axis, a partner who shares, I think, our long-term approach to building businesses, and they have a very strong distribution capability. So this is what attracted us to Axis as a partner. Together with Axis, we intend to build the top 10 and even a top five asset management company in India over the medium term. It's early stages, early days, but so far our cooperation has been very pleasing and very satisfactory. Towards the end of the year, as you know, we announced the acquisition of a U.S. fixed income manager, STW, with $11.6 billion approximately of assets under management. We expect that to complete in the first half of this year, and the early feedback from clients, consultants, and so on, again, is encouraging. Both those transactions, I think, complement our organic growth strategy. The first one takes us into a major long-term mutual fund market in our view, and the second one increases our presence in fixed income and in the United States, which are two strategic goals for the firm. If you look back just a few years to 2008, you see that our assets under management have almost doubled from GBP 110 billion at the end of 2008 to GBP 212 billion at the end of 2012. We saw a very big jump in revenues on the back of that rapid growth through 2010, since when revenues have more or less leveled off. Also, a pickup in costs associated with that as we increase the level of investment in the business. Costs have remained pretty much flat since then. Our costs in 2012 were 2% higher than they were in 2010. Again, looking at this history since 2008, you can see that the increase in assets under management has come pretty much across the board. We've had good growth in our flagship business equities. We've also had significant growth in some of the newer activities in multi-asset and fixed income. At the same time, we've seen a progressive decline in net revenue margins in asset management from 66 basis points to 55 basis points in 2012, reflecting that change in business mix. We're not really seeing margin erosion for competitive reasons. We're seeing net revenue margins come down, particularly as we've been very successful in growing our institutional business, which as you know, is a key strategic objective of the firm, but also as we grow some of these newer businesses in multi-asset and fixed income. Coming back to investment performance, I think these are very competitive numbers. Over one year in institutional, 80% of our assets under management are outperforming and 79% in intermediary. The three-year numbers are also strong. I would draw your attention particularly to the pickup in performance in equities, and even more so in fixed income over the shorter term, which is obviously very important. Multi-asset performance is also strong, particularly on a risk-adjusted basis. So adjusting for volatility, these returns in multi-asset in both institutional and intermediary, I think are very competitive. Looking at the new business trend by quarter in 2012 in three ways, by channel, by region, and by asset class. In terms of channels, we had four quarters of positive flows in intermediary and institutional in 2012, which I think is a very creditable performance. If you look back and see where Europe was, investor concerns, investor sentiment in the first half of the year, it was pretty tough. But we generated four quarters of positive net sales in our intermediary business. We had a particularly strong fourth quarter in intermediary with GBP 1.5 billion of net inflows in Q4. By region, we had small net outflows in the U.K., and you can see that that was concentrated entirely in the fourth quarter. This was the loss of a large, very low-margin LDI mandate, which we saw in the fourth quarter. Not for performance reasons, I should add. This is why we flagged to you at the time of our Q3 results, we had some hesitancy around our net inflows in institutional in the fourth quarter for that reason. However, as it happened, very strong new business momentum elsewhere in institutional in the fourth quarter led to, I think, GBP 2.6 billion of net inflows in institutional in Q4, despite the loss of this large LDI mandate in the U.K. We saw a big turnaround in continental Europe, as you can see from this in Q4. A really remarkable set of inflows in the fourth quarter from continental Europe, particularly in intermediary. We had three good quarters after the first one, three good quarters in Asia Pacific. By asset class, GBP 5.4 billion of net inflows in multi-asset, GBP 3.6 billion in equities with, again, a standout performance in the fourth quarter. Strong flows in property more than offset by outflows in emerging market debt absolute return, where our absolute return strategy lagged the EMD index, and we saw some redemptions in intermediary from that strategy as a result. Although returns picked up in the fourth quarter, I think we go into 2013 with a strong story. In any event, this is an absolute return strategy, and we are not really offering this strategy from this group in alternatives in a relative return context. We had GBP 1.2 billion of net inflows in fixed income in 2012. Turning to the institutional business. Net inflows of GBP 6.4 billion for the year as a whole. A very strong performance in Asia with GBP 3.7 billion of inflows, GBP 2.2 billion in Europe, GBP 1.1 billion in Latin America. Outflows net of about half a billion in the U.K. relating to that large LDI mandate I referred to. Interestingly, by contrast with intermediary, where we had net outflows in equities for the year as a whole, we had a very strong performance in equities in our institutional business. The largest asset class in terms of new business with GBP 4.2 billion of net inflows, GBP 1.2 billion in multi-asset, GBP 900 million of net inflows in fixed income, and small net outflows in alternatives. Our sovereign wealth fund business continues to do well. We now have GBP 18 billion of assets under management from official institutions, and we had net inflows from that segment of GBP 2.8 billion during the year. Net revenue margins are stable, in fact, marginally up 1 basis point in 2012. The average longevity, which is a very important factor for us, has continued to increase, and if you look back over the last three or four years, it has increased materially and probably now is pushing up at 6.2 years to a level which is about as high as I think we are going to get it. In intermediary, four quarters of positive net flows and GBP 3.3 billion for the year as a whole. Very good performance, again in our U.S. sub-advisory business with net inflows of a little over GBP 2 billion over the year. A remarkable turnaround in Europe with GBP 1.3 billion of net inflows from continental European branded mutual funds in the second half. Big redemptions in 2011 and the early part of 2012 and a big change recently. Also, Asia, a strong performance in the fourth quarter, again after net outflows earlier. Significant inflows in multi-asset. We have been very successful, for example, with our multi-asset income fund in Asia. We had GBP 500 million of net inflows in equities in intermediary in the fourth quarter, which was a significant turnaround again. Net revenue margins in our intermediary business, now 78 basis points down from 82. That is basically the change in business mix with multi-asset in particular being very strong in this channel in recent years. I think we will begin to see an erosion, to some extent, of net revenue margins in intermediary for reasons other than business mix. For a number of reasons, transparency, the impact of RDR, distributors concentrating their relationships. That is a two-edged sword. I think it is going to lead to pressure on net revenue margins on the one hand, but concentrations with fewer providers on the other, and we can potentially benefit from that. In our view, scale in this business is very important, and we have significant scale and diversity. Turning to the private bank. Assets under management end of the year up slightly despite about GBP 300 million of net outflows for the year as a whole. Looking at underlying revenues, they were down 10% to GBP 102 million. Lower management fee income and lower transaction income, both really linked to low levels of client activity. Costs were well controlled and were down 12% on an underlying basis. Profit, therefore, underlying profit down about 4% at GBP 22.9 million. However, we had GBP 7.9 million of loan loss provisions, principally against the commercial property loans, where we have taken impairments in the past. This is a deduction from revenue as we present it now. Then we took a GBP 3.2 million provision relating to a change in the regulatory environment in Switzerland. FINMA, the regulator in Switzerland, is telling private banks to potentially return retrocessions that have been charged going back 5-10 years, in relation to clients. Some private banks in Switzerland are taking no provision against that at all. We have decided to be conservative and take a GBP 3.2 million provision against that, which is in addition to costs. It may be that we do not, in fact, have to pay that. That is something we will work through in the next year or two. This is not Schroders specific. This applies to Swiss banks across the board. Taking account of those provisions, profit was down at GBP 11.8 million. Clearly, this is a disappointing performance in the Private Bank. Although the underlying health of the business is there, this is not a satisfactory result. We are streamlining the management structure. We are bringing the management of our business between Switzerland and London much more closely together than we have done in the past. We are looking at a number of global functional roles in investment, in finance, in risk management, and business development. We need to leverage what is a competitive track record for clients and a strong client proposition into a better performance in terms of new business, and we are intent on doing that. I think in the short term, we may see further outflows, say, in the first half of this year. We do believe we will turn this business around, and there are some important opportunities for us in private banking in the medium to long term. We have been repositioning our Swiss business. For example, we terminated our relationship with one or two distributors in Switzerland, which led to an outflow of about GBP 200 million. We are taking steps to reshape our business, which has costs in the short term and is manifested in some of the outflows we have seen. That is now coming towards a conclusion. Our target remains to achieve a 70% cost-income ratio in this business in the medium term. I will now hand over to Kevin. Well, good morning, ladies and gentlemen. As usual, I will take you through the results, starting with some key numbers, and then go on to some greater detail to explain the drivers of both revenue and costs. I will end, as normal, with a few slides on the capital position. Key figures first. Profit before tax, GBP 360 million. It is down 12% on 2011's GBP 407.3 million. The economic uncertainty continued throughout 2012, and whilst we generated good net sales, and the asset classes in demand for much of the year had the effect of decreasing the revenue margin earned on assets under management. However, the strong second half rally, combined with a strong net new business, resulted in record assets under management in 2012, but we will have to wait until the first quarter of this year to see that revenue increase coming through. Moving to the costs. The cost to net revenue ratio, this has moved to 70% in 2012, compared with 66% in 2011. Whilst that is in line with our long-term target, it has increased by four percentage points compared with 2011, and that results from the continued investment in people and infrastructure in line with the strategy for growth. General costs unassociated with investments continue to be tightly controlled. Earnings per share is down 10%. That is two percentage points better than pre-tax profits, which were 12% down and amount to 104.7 pence per share. The board has recommended an increase in the final dividend of 4 pence to 30 pence. That is a 15% rise, which brings the full year to 43 pence. You should look at this as a one-off rise reflecting the strong capital position and there having been only limited share buybacks in the year. Our policy remains to grow the dividend in line with increases in operating profits. The dividend will be paid on the 9th of May. If I look at the components of profit before tax, bridging from last year to this year, 2011 PBT, GBP 407 million, as shown on the graph. We have got a decrease in revenue of just GBP 18 million. Let me show the underlying movements of that GBP 18 million decrease. Here is net revenues last year, 2011, GBP 1.153 billion. Although we had net new business in 2011 and throughout 2012, we had net redemptions in the second half of 2011, and that decreases 2012's revenue. In 2012, we won lower margin business whilst having higher margin redemptions, which also serves to reduce revenue. Inflows, as Mike said, were notably in multi-assets, global bonds, property, and QEP. Outflows were notably in emerging market debt, absolute return, and until lately, equities. Overall, the impact is a GBP 17 million reduction in revenue. Market conditions were volatile, but the impact was only a small GBP 6 million reduction, but it does conceal a lot of noise, and I will come back to that when I go through the sales channels. Transactional net revenue reduced by GBP 50 million, and this includes a GBP 7.9 million of loan loss provisions in private banking. I will give further detail on that when I go through the private banking results. Performance fees were GBP 9 million lower than in 2011 at GBP 28.5 million. Notable fees were in from equity mandates, including emerging markets and QEP. Total performance fees were just a little bit ahead of the GBP 25 million that I predicted in the third quarter results. It wasn't a vintage year for performance fees, despite the strong performance, and that's to do with funds not having exceeded their previous high water marks. Finally, we've got the group segment. Net revenue was up GBP 29 million. There was a large swing in returns on seed capital, and we crystallized gains on legacy investment portfolio in private equity, mainly on the disposal of SVG. The increase was partly offset by lower interest income, which is not recorded in revenue, and I'll address the group segment as a whole later. That explains the decrease in revenue. If I now color in the gray bars, you'll see what's happened on a segmental basis. We see that net revenue from both asset management and private banking has reduced, and it's been offset this year by group segment revenue. If I flick back to the previous chart and reconcile the profit before tax. There's the GBP 18 million that we've just run through. Compensation costs have increased by GBP 46 million year-on-year. It equates to a comp to revenue ratio of 49%, which is higher than 2011's underlying ratio of 46%. I indicated on the Q3 call that the ratio, which was then at 48%, might need to increase, and that was indeed necessary. In 2011, you'll recall that we had a one-off reduction in staff costs for the closure of the U.K. defined benefit pension scheme. Excluding non-recurring pension credits, the underlying increase in compensation costs is GBP 36 million. I'll, as always, revert to compensation costs towards the end of this presentation. Other costs were down a net GBP 17 million compared with 2011. I'll revert to costs in detail later on, too. Net finance income was down GBP 3 million due to less cash on deposit and more capital being held in short-term securities, where the return is recognized in revenue. Joint ventures and associates, GBP 3 million improvement, particularly associated with the private equity associated SPIL, which improved its performance. The profit for a whole, GBP 360 million. If the bars are colored in into colors, you will see that on a segment basis. In asset management, a GBP 41 million reduction, which has been impacted by lower revenue and higher costs broadly in the proportion 2 to 1. So the revenue proportion twice as important as the costs. In private banking, there's a GBP 12 million reduction, largely attributable to loan loss provisions and the industry-wide ruling that Mike referred to. That's been partly offset in the case of private banking by lower costs, particularly in respect of compensation. In the group segment, the losses have been all but eliminated. But as usual, there is a number of one-off items in there that I'll need to take you through. I'll start with now going through the segments, starting with the asset management segment and the institutional sales channel. Net revenue from the institutional business was GBP 489 million. That's up GBP 35 million on the year. The increase is mainly due to strong net new business with positive net flows in 2011 and 2012, and notably every quarter throughout 2012. We've also had positive market movements each quarter, except for the second quarter of 2012. Excluding performance fees, the net revenue is up GBP 38 million. That's 9% up on a year ago. Nine million GBP of the increase is attributable to net new business through the channel of 2011's full-year effect of the 6.8 billion GBP that we had in that year and 2012, the 6.4 billion GBP of net new business, and that contributed a further GBP 10 million to net revenue. The 6.4 billion GBP in 2012 was won in all regions except the U.K., with a particularly strong performance in Asia Pacific. Net sales were mainly in equities, particularly in emerging market equities and QEP, and they were also in multi-asset. 14 million GBP of the increase is attributable to markets, which fell off in the second half of 2011 but recovered well in the early part of 2012, and then again since the third quarter of last year. Transactional income was 5 million GBP better, mainly from gains on investments held for regulatory capital requirements and from funds associated with deferred comp. The performance fees fell just GBP 3 million due to the high water marks levels that I've referred to. The institutional channel experienced good core business growth throughout the period of market uncertainty. Growing assets under management has, of course, been a key objective of Schroders' strategy through this channel. Moving to the other sales channel, intermediary. The net revenue from the intermediary business is down GBP 62 million on last year and includes GBP 6 million less performance fees. The revenue decline arose mainly in the first half of the year, where the management fees were down GBP 51 million on the same period of 2011. The decrease excluding performance fees is GBP 56 million, and that's mainly due to redemptions of higher margin equities and alternatives, and they're being replaced by lower margin multi-assets and fixed income throughout most of 2012 as retail investors de-risked their portfolios. Redemptions in the second half of 2011 resulted in a full year net revenue fall of GBP 28 million, and this includes the move to lower margin business. We've seen growth in net new business flows throughout most of 2012 and a steep increase in quarter four, which accounted for 1.5 billion GBP of the 3.3 billion GBP of sales through this channel. Investor risk appetite returned in the final quarter, but the effect of the difference in margins for sales and redemptions and the growth in the sub-advisory business throughout 2012 resulted in a reduction in net revenue of GBP 7 million. Net inflows in the year were dominated by multi-asset. In contrast to institutional, market movements have reduced revenue. This is attributable to the market volatility, with most retail funds being priced on a daily basis, whereas most institutional fees are based on month-ends or quarter-ends. Let me illustrate this by a chart. This is the MSCI World Index, which is just there to show the volatility that we saw throughout 2012. You'll obviously be familiar with that. The index has grown overall, with the average index above 2011, but the daily movements have been really quite volatile. Institutional fees based off month-ends and quarter-ends, intermediary based on daily fees. If you look at the table underneath, you see a very contrasting pattern. Eight month-ends were up and only four were down. That was the benefit of institutional because of the way they're priced. On the other hand, if you do it on a daily basis, the way intermediary is priced, you had a different pattern with 1.7 times as many falls as rises. That explains why institutional benefited from markets, whereas intermediary did not benefit. Not immediately obvious, in my view, unless you look at that graph. Reverting to that intermediary slide. Transactional fee reductions were mainly lower profits on holdings in unit trusts, which facilitates client purchases and redemptions, as well as lower transactional fees, bringing the revenue to GBP 522 million, a reduction of GBP 56 million on the previous year. I just pull that together for asset management as a whole and look at margins. The slides on the left just summarize the previous two slides for convenience. Dealing first with performance fees, they account for one basis point reduction in margins. The underlying margin, excluding performance fees, is reduced by two basis points to 54 basis points. That's no change from the half year. The year-on-year reduction of two basis points is attributable to two factors equally, the sales channel mix and the asset class mix, which each account for one basis point of the reduction. I said throughout 2012 that I expected margins to be down by one or two basis points due to the expected progress in institutional sales and the performance of the lower margin channel of intermediary. This emerged at the half year. I think it's my view now that the proportions of businesses have rebalanced, and with higher equity markets, my anticipation is that we will not see further margin decline in the current year. Moving to private banking, both revenue and costs, the other operating segment. Private banking revenue is down 17% at GBP 94.4 million. However, this includes loan losses of GBP 7.9 million, which are charged against revenue. The underlying net revenue is GBP 102.3 million. Excluding loan losses, there are three components of the revenue in private banking. Management fees, transactional income, and net interest income. The management fees, they're in dark blue, have decreased by 8% to GBP 68.7 million. 6% of that is due to the absence of any significant performance fees this year compared with the GBP 1.2 million last year. Likely the intermediary channel, private banking has suffered from the market conditions and also changes to the asset mix, with more clients seeking high security in leading government bonds and in cash. Transactional income in orange has decreased by 20% to GBP 19.8 million as client activities continue to be slow, particularly reducing dealing and FX commissions. Net interest income in lighter blue has reduced slightly by just GBP 0.6 million due to reduced interest-bearing securities. The total loan losses for 2012 were GBP 7.9 million. On the third quarter call, I reported that when we received the year-end valuations of the related property securities, I could foresee a further GBP 5 million-GBP 6 million provision on top of the GBP 2 million that we reported the half year, and that has indeed happened. These are non-recourse loans secured on provincial commercial property, and they have continued to reduce in values. They remain sensitive to property values and further provisions cannot be ruled out. As I have noted before, no non-recourse lending has been undertaken since 2009. Moving to costs, starting with staff costs, which are in gray. They're lower at GBP 49.7 million, and there's been a reduction in compensation costs to take account of the performance of private banking. Other costs have decreased by GBP 2.5 million. We carefully managed the costs during the period and benefited from a weakening of the Swiss franc against the pound. You recall that the private banking back office is in Switzerland. Offsetting the reduction is a market-wide regulatory issue concerning rebates paid, retained by fund managers, and we provided GBP 3.2 million in connection with that exposure. Finally, the group segment. A number of variable items in both years, as usual, and they are on the first three lines of the slide here. The routine costs of the offices of the chairman, the chief executive, and the board, and the central costs around insurances and governance. To get the consolidation effect here, you need to add on other comprehensive income. The investment gains go through both the P&L and through the statement of comprehensive income. What I am going to do is analyze this here between the two types of function in the group segment. So governance costs and investment capital returns. This is the economic basis at the bottom, taking into account all of the items associated with the group segment. Let me start with governance and management costs. The first three lines here. A number of variable items in both years. Each year, we mark to market deferred compensation awards. The group hedges the cost for asset management and private banking of compensation awards, and they negate corresponding gains that are in transactional revenue in those segments. There is no material consolidated effect, but the group segment suffered a GBP 0.9 million loss in 2012, compared with a GBP 3 million loss in the previous year. Just from hedging and cancels out on a group basis. The pension fund, we had a credit last year. It is a curtailment gain on the closure of the DB scheme. That does not recur this year, and there is just a small credit in 2012. I think this number will remain small in future years and probably won't warrant separate identification. Last year, we had no significant movement in net provisions. In 2012, we have got a charge of GBP 11.9 million. The charge is primarily associated with an insurance claim made by private banking in connection with securities that we now consider was not fit for certain client mandates. We have not yet been able to recognize the related insurance recovery to the extent of GBP 8.1 million, and we are self-insured to the extent of GBP 5 million. Consequently, we have a charge of GBP 13.1 million, and the strictness of accounting rules mean that we will have to wait till 2013 for the recovery. Additionally, there is some other swings and roundabouts, which was a small credit of GBP 1.2 million. The net charge on provisions is GBP 11.9. As far as 2013 goes, I think for these variable items, I would suggest that you anticipate a profit of around GBP 5 million to take account of the insurance recovery that should come back in later this year. That leaves the underlying costs in the group segment that are up GBP 1.4 million at GBP 29.7 million, which is just under 5%. The main rising costs were associated with consulting and the strategic review that we carried out during the course of the year. If I now move to the other element of the group segment, which is the investment capital returns. The investment capital result is a profit of GBP 32 million, significantly better than last year's loss of GBP 7.4 million. Investment capital comprises three components. First, there is an actively managed portfolio of securities, which seeks to deliver an absolute return described as LIBOR plus. Second, seed capital, which supports products in the course of development, which are establishing a track record. Thirdly, there is the legacy illiquid investments that are not able to be actively managed by us. I am pleased to report that the actively managed portfolio did achieve a positive return of GBP 14 million, and that includes a very strong second half where we saw gains on multi-asset, EMD, and credit holdings. In the light of the economic uncertainties, we are, however, maintaining a cautious investment portfolio. The seed capital result was a profit of GBP 5.9 million compared with a loss of GBP 6.3 million last year. We hedge out market and currency risk on relative return products, but we do not hedge absolute return products and cannot hedge alpha. The purpose of seed capital is not primarily to generate a return over all accounting periods, but to produce marketable products over the medium term. The gain in the context of the current markets has been satisfactory. Finally, there is the private equity and property. We generated a profit of GBP 12.1 million, which coincidentally negates last year's loss. So in 2012, we certainly achieved the LIBOR plus outcome, and that remains our objective for 2013. So that concludes the group segment. In summary, we have got higher costs due to no pension fund curtailment gain and adverse timing difference on insurance. We have had strong investment gains with the managed portfolio being as expected and a good profit on the legacy private equity business. So let me go back to the group as a whole, moving from the segments to the total picture. Go to the cost base. I will start with the staff costs, the top of the box that is highlighted, as this highlights all three together. This represents 69% of our cost base, up from 66% in 2011. In 2012, we have continued to invest in our people and reward success. In particular, we have increased our headcount by some 109 people. That is an increase of 289 over the last two years, bringing our headcount to just over 3,000 people. As I mentioned earlier, we had a comp to revenue ratio of 49% in 2012, up from 46% last year. To avoid confusion, that has been calculated excluding the pension curtailment gain, which was a reduction in our compensation costs. So excluding that gain, compensation costs increased by GBP 35.7 million to GBP 545.7 million. On a per head basis, it was down about 16%, and that reflects the lower profitability of the group. Other costs were GBP 233.5 million. They are lower than last year due to reduced marketing, reduced fees, and property costs, partly offset by development costs on our IT systems. We also benefited from a one-off profit of GBP 11.6 million relating to a lease disposal recognized in the operating businesses. The depreciation and amortization charge has reduced as some of our assets have come to the end of their lives, notably in respect of IT systems and property fit-out costs. We stayed within a cost to revenue ratio of 70%, which, as I said earlier, is in line with our long-term target over a cycle, but is 4% higher than last year due to lower revenue and higher compensation costs, as we grew the employee base to deliver growth for the future. Looking forward, I expect other costs, including depreciation, to be of the order of GBP 265 million for 2013. That is up from GBP 245.5 million. It takes account of the one-off nature of the property lease profit. It takes account of the anticipated insurance recovery in the group segment, together with the cost increases, particularly in IT, in accommodation, in marketing, and in fees, which will add to our cost base. Overall, the 2013 costs, excluding staff, are likely to be around GBP 20 million higher than in 2012. For 2013 compensation, I see markets continuing to grow. If markets continue to grow as we've seen in the first couple of months, I can see that the comp to revenue ratio should fall by around 1% to 48% as we look at it in early March. The final component of our income statement is the tax charge. The effective tax rate has reduced to 21.3% for 2012, below the U.K. rate of 24.5% and lower than 22.5% effective rate that we had in 2011. It's lower than the 23% that I've been anticipating at the half year due to Q4 private equity capital gains, which were covered by brought forward capital losses. That benefited the tax rate by 1.25%. In 2013, the effective tax rate is likely to stay below 22% because of the 1% reduction in U.K. corporation tax rates from April this year. After deducting the tax charge, our post-tax profit for the year was GBP 283.2 million, which equates to earnings per share of 104.7 pence, 10% down on last year's 115.9 pence, due to lower profits before tax, partly offset by the lower effective tax rate. The total dividend of 43 pence is 10% up. This is on a traditional basis. We decided to increase the payout, recognizing the strength of the capital base and the prospects for the business. Going forward, it remains our policy to increase the dividend when operating profits are higher than previously reported. Leaving the income statement, a couple of slides on capital. The total group capital at the end of the year was GBP 2.1 billion. It's GBP 168 million up on December 2011. I'll just run through the movement. On the last slide, you saw the profit after tax was GBP 283 million. During 2012, we spent GBP 39 million on share purchases. After the purchase and cancellation of something over GBP 100 million worth of shares in the last three years, the only share purchases in this year were to acquire shares to hedge employee share awards. Our issued share capital continues to be one non-voting share to every four voting shares, as it was last year. Dividends amounted to GBP 104 million. To avoid confusion, this is on an IFRS basis, so that's the amount of 2011's final dividend and 2012's interim dividend and not the final dividend that we've announced this morning. There's an accounting credit of GBP 45 million, which relates to share-based compensation, where there's an equivalent charge that goes through the income statement. FX has reduced the capital base by GBP 28 million due to the strengthening of sterling relative to particularly the euro and the Swiss franc. Our capital is, of course, held in many overseas locations and is a permanent aspect of the business. Other movements include actuarial gains on the pension fund and tax credits and reserves. Together, they increased equity by 11, giving us overall GBP 168 million increase and a balance of GBP 2.1 billion at the end of the year. Finally, let me analyze that GBP 2.1 billion of capital. Operational capital amounts to GBP 957 million compared with GBP 884 million last year. It mainly represents cash and other components of working capital and reflects the profit for the year that has not yet been remitted to investment capital. The regulatory capital requirement is now GBP 539 million on a group basis, 539. We anticipate GBP 350 million of dividends will be remitted by operating subsidiaries in 2013 into investment capital. The investment capital amounts to GBP 926 million, compared with GBP 837 million last year. It increased due to profits on investment capital and amounts remitted from operational capital, partly offset by the share purchases, the dividends, and the acquisition of the Axis business in India for GBP 23 million. The final component of capital is goodwill and intangibles. The increase is attributable to investment gains in the pension fund. The pie chart on the right shows the components of the investment capital as it was invested at the year-end. As I noted, it remains cautiously invested, to take account of potential volatility that we might yet see in markets. With that, I will hand you back to Mr. Dobson and his man flu. Thank you. Our priorities for this year are to, first of all, leverage the strong investment performance we have generated for clients in the last 12 months to three years, the product range, the distribution strengths, and our global footprint. In what is, in our view, a much more positive environment for investor sentiment, I think we are very well positioned to do that. Clearly, it is also a priority for us to improve the performance of the private bank. The buoyant equity markets of the fourth quarter of 2012 have clearly continued into the first quarter of 2013. We have seen a significant increase in investor demand. We have had strong flows in the first quarter of this year into our intermediary business, continuing the trend of the fourth quarter last year, continuing positive in institutional. As I said before, we expect in the first half of this year, some net outflows in our private banking business. Longer term, we still think there are very exciting opportunities for this firm around the world, given our positioning, and we continue to selectively invest behind them. We will now open it up for questions. There is a microphone which will come around if you put your hand up. If you could just identify yourself before you ask your question, I would be very grateful. Thanks. Good morning. It's David McCann from Numis. I just wondered if you could perhaps give a little more color on those positive flows you've seen year to date, perhaps, just around exactly the scale that you've seen there, would be helpful. Then just secondly, on the dividend, am I right in reading from your comments that around the 40%-ish payout ratio should be what we should be looking for going forward given the rebasing this year? On flows, it's been pretty much a continuation of the fourth quarter. We've seen good flows in our intermediary business, particularly out of Europe. They are running ahead of institutional, which is still usefully positive. Equities continues to be strong, as is multi-asset. On the dividend, as I say, this is somewhat of a rebasing of the dividend, in the light of the financial position and our confidence in the long term. We'll continue to move it ahead in future, in line with the underlying trend in profitability. We don't target a specific dividend cover number. I think after this move, you can expect to move it ahead. We'll move it ahead with the trend in profitability. In the long term, we seek to achieve a position where the interim is roughly one-third of the total payout for the year. Thank you. Should I have the microphone? Yeah, sure. Thank you. It's Katherine Heath, Cantor Fitzgerald. Two questions, please. First of all, regarding asset management, can you give us a feel for actually where the margin is as you go into the new year on the entire book? Is it in line with the 2012 average? Yeah, it's in line. Okay. It's in line. We expect I don't know whether Kevin said this, we expect it to be It's very hard to predict Sure but I wouldn't expect a reduction this year. It's possible it could edge up because of the flows in equities and intermediary. Can you, again, to that comment, can you say a little bit more about your longer-term expectation of margin erosion on the intermediary side? Well- Quantum and timing, please. As I said in the presentation, the reduction in margins we've seen so far is entirely mix- Sure in intermediary. We haven't really yet begun to see a reduction for any other reason. However, we do think that will happen, maybe up to 15% over time, for a number of reasons, transparency, RDR, distributors concentrating their business on fewer manufacturers, and particularly with larger firms. That, as I said, is a sort of double-edged sword. We will probably get lower average revenue margins, but we would hope to get bigger volumes as a result. I think that we're well-placed to do quite well in that environment. But that's the way we see the industry going. In terms of the timeframe for that 15%? Massimo, do you want to elaborate a little bit on that? Yeah. In the different jurisdictions where we operate, I don't really see a structural change in margins in the U.S. where we are growing significantly because the realignment there already happened with the change in the regulatory framework at the end of the 1990s, in the early 2000. It's in Europe, within the European Union, where we see the effect of concentration of distribution and greater transparency and low yield environment that will drive some pressure on margins over the next five years. We are building our business and designing it to sustain that change in margin. Asia will come a bit later, but it will happen as well there, probably between two and three years from now. Personally, I would expect that in Europe, the margin decline could be due to markets rather than product mix or channel mix, up to a range of 15%. Okay. Thank you. Yeah. Hi there, it's Chris Turner from Goldman Sachs. Just two questions from me. I think the first for Kevin and then the next for you, if I may. With regards to the GBP 3.2 million provision in Switzerland for the retrocession payments, can you tell us what GBP 3.2 million is as a percent of the actual potential liability, so the total retrocessions over the 10 years? That's firstly. Secondly, in terms of the investment portfolio, you mentioned again that you're targeting a LIBOR plus return, which presumably will be below most investors' cost of equity. Can you just outline how the management and how the board think about that investment portfolio as a value creation entity, please? Can I take the retrocessions first? The issue around the retrocessions is the extent to which it is reasonable to presume that the clients knew that retrocessions were being retained. In our case, we have informed the clients of that previously, so it's a matter of interpretation as to how well they understood that. The provision that we've calculated, it's very hard to say what is its percentage and what is the worst possible outcome. We've just taken a view of particularly some earlier years where perhaps it was less clear, rather than more recent years where, as ever, communications get better and better. So it's our reasonable estimate of the outcome. As Mike said, I wouldn't necessarily suggest we will be paying all of that out over the next few years, but time will tell. I think on investment capital, we wouldn't change what we've said in the past. I think it has been a strength of this company, that capital position. I think it's in terms of building an independent asset management firm with GBP 212 billion under management, I think, and giving confidence to clients, institutional clients, intermediary clients particularly, who are distributing our products and entering long-term partnerships with us. I think the financial strength of the firm is one differentiating characteristic, which is very, very positive. Secondly, we think it's very possible we will find acquisition opportunities to accelerate organic growth. We did two small ones in 2012, and I think, as I said, probably at the half year stage, in this environment today, we're probably seeing more opportunities than we have done in the past. I think that's likely to continue. But thirdly, if we don't find those opportunities over the next year or two, then I think that there will come a time, again, as we've said in the past, that yes, we will return some of that capital to shareholders. So I think those are the three responses I would give to that question. None of which really have changed from where we've been in the last year or two. Right. Good morning. Jonathan Richards from Bank of America, Merrill Lynch. Just one question on the U.K. retail side of the equation. Can you give us an idea of what you've seen into 2013 with the implementation of the RDR? Then, I guess going back in Q4 of last year, you said that the U.K. outflow was concentrated from an LDI product. Could you just give us a flavor of what your U.K. retail business did in Q4? Thank you. Max, do you want to pick that up? Yeah. In 2012, our major issue in the U.K. has been the lack of a competitive product range in the bond sector that has been dominating the flows. There has been little demand in equity, and we have done well in properties. As soon as risks start to be back on the table, then our flows have started to improve, and they've been improving significantly in the first two months of this year. In respect to the RDR, we are very well prepared. We don't see any hiatus in our flows. We were among the first to prepare the no retrocession share classes, and we are winning business with those large entities that are reorganizing themselves with a different pricing model. Let me explain that. For large institutions that have a sales network themselves, what's happening is that they are concentrating the number of fund provider or fund managers. They are building their own fund range with their own brand, and then asking for external sub-advisory in slices. Instead of having 50, 60, 70 product providers, they choose 10. They give a much larger amount of assets to those 10, and those 10 becomes the strategic partners. Clearly, being a sub-advisory relationship, it comes with lower margins. However, you also have lower administration and operational cost and lower branding cost, and possibly much better longevity. It is a change in the business model. Being a large provider with all-weather product range, with a large capability in specialized high alpha product, we are one of the better suited to win in that position. Much more difficult will be for the smaller firms. All right. I am Gertrude here from Credit Suisse. Just a couple of quick questions. Firstly, could you just give us a reminder of the fees on the multi-asset? Secondly, given the strong performance, where are you in terms of the high watermarks on the performance fee eligible funds? Do you want to do this one? Well, multi-assets, it is a difficult question to answer because we go from LDI, a pure LDI, which would come at eight to 10 basis points to sophisticated multi-management, multi-asset global balance product that could gain 75, 80 basis points. There are a multiplicity of products within multi-assets. In terms of high watermarks, the number of performance fees in the total was over 100 performance fees. It is again very hard to generalize but clearly with markets having gone well ahead so far this year, I would be more optimistic on performance fees for 2013 than for 2012. Sorry. Hi, it is Abby from Exane. Just two questions really. One is a follow-up from Chris's question on the deals pipeline. Can you give us a flavor of how many deals you are looking at right now? For example, what sort of opportunities are out there in terms of where your next inorganic expansion could come from? The second question is on the institutional push. I think you guys said before that the U.S. is a big target for you and developing there was important, but what about countries like in the ASEAN regions? You have the South-South trade picking up, you have trade balances picking up. What are you doing to kind of target the sovereign wealth funds and the institutional mandates that could come out of that region? Thanks. On potential deals. I said again about six months ago, I think that we expect this in environment, we will see more potential transactions, which would range from banks or insurance companies seeking to divest their asset management or part of their asset management businesses in this kind of environment, which I think is possible, to smaller opportunities. We've said that, in terms of what kind of asset class or region in the U.S., we've just done one in the U.S. We've said private banking in the past is a possibility. We've talked fixed income. I wouldn't again change on a change, really what I've said the last year or two on that. On institutional, yes, the U.S. is a big target for us. Actually, it's been relatively quiet for us last year. We expect that to pick up. Again, I think I've said this before, we think there's a big opportunity to grow our U.S. business. It's about 10% of our total business. It is, of course, the largest market in the world. We have strong performance. We are in a net business-winning position in the United States. We have a profitable business there. We think we can really grow that quite significantly over the next five years, and that is our intention. As a proportion of the whole, we would expect the U.S. to increase, I think, quite significantly over the next five years, and institutional would be the key part of that. As far as ASEAN is concerned, the Asian institutional business has been very strong. Australia in particular, but also ASEAN region, and that includes sovereign wealth funds. So we have a strong sovereign wealth fund business across the board. I said GBP 18 billion in total, GBP 2.8 billion, I think, of net inflows in sovereign wealth funds last year, much of which comes from Asia, the Middle East as well, obviously, Latin America to an extent. But significant relationships in Asia, in Singapore, in Hong Kong, in Korea, in China, and we work on that very hard, and I think it's a continued interesting long-term growth opportunity. Bruce, yeah. Thanks. Yeah, just a couple from me. Sorry. On the private bank, and I may have missed this because I arrived a bit late, but on the sort of legacy risks from commercial real estate loans, is there any way for us to try and bracket what else could come through in that line? Can you remind me how much of the 7.9 was in Q4? Was that all in Q4 or not? Then, second question, just to clarify, Massimo, were you talking about the sort of strategic partners doing more sub-advisory business? Were you specifically talking about the U.K. there, or was that more a European point? Just to check. Thank you. On private banking. We had taken about GBP 2 million in the first half, and the remainder was indeed in Q4. The total was obviously the number I put up. In terms of trying to get to grips with it, I think the way I would look at it is for the loans that are causing us problems, which is a small number of loans, the balance that is outstanding on the impaired loans, I was just checking here, I think it is just about GBP 30 million. Let me just get that number for you, Bruce, and I will save the minute while the other half of your questions is answered. In the U.K., there was more urgency because from January of this year, you had the need, those institutions that have a strong distribution power, had the need to transform rebate into profits. There was this, if you like, business model change and transformation to try to obtain the same margin to then pay their own sales force. We see less transformation of this kind in continental Europe. Of course, there are already a large number of affiliated business within the large commercial banking and insurance companies, which operate in this way through their own affiliated business. The landscape is rather different from the one that you see in the U.K. I would estimate that there are a few large groups that could go down that road, but that would be more in the form of outsourcing a specialized part of their business rather than transforming a business model because it is already there. Just to finish my answer, the value of the loans, Bruce, where we have got impairments at the end of December were GBP 37.7 million, and that is down from GBP 47.3 million a year ago. The reduction is obviously the provisions plus some repayments. Thank you. That is probably the best way to slice it. Thanks. Any other questions? Okay, thank you very much for joining us.