Good morning, ladies and gentlemen. A very warm welcome to EFG's full year 2022 results presentation, today in Zurich. As usual, we will have presentations by both the CEO Giorgio Pradelli and the CFO and Deputy CEO Dimitris Politis, both here in the room. As usual, we will start with the individual presentations, and then afterwards we have enough time for Q&A. As usual, I point out the disclaimer in the presentation is being read. Without any further delay, I hand over to Giorgio. Thank you.
Thank you, Jens. Good morning, everyone. Also from my side, a warm welcome to everybody who is here in the room here in Zurich in person, in this beautiful day here in Zurich. A warm welcome also to everyone who is following the presentation from home or from the office remotely via webcast. I must say that today we are very pleased to be here to present this set of results. I would say in confidence that actually we are quite excited, but they told me not to be too euphoric, so we say that we are very pleased. Before we go into the presentation, I would like to make three key points that we will articulate throughout the presentation further on.
First of all, I think everybody will agree that 2022 was an extraordinary year, and for sure it developed in different ways that we thought about a year ago. 2022 was also an extraordinary year for EFG, but in positive terms, and we delivered a very strong performance. Second key point, key message that I would like to bring across is that we concluded successfully our 2019 and 2022 strategic plan, and we have achieved all our targets that we have set four years ago, despite the volatile times that we have seen over the last few years. The final, the third point is that we are now closing this chapter. We are now looking forward to 2025.
We have announced in this room, the 2025 strategic plan. We enter this new planning cycle in a position of strength. We are confident that we will achieve our targets with the discipline and consistency that we have done over the last four years. Let me give the context of the 2022 performance and the key highlights. On page 4, we here show that actually 2022 was a very strong year for EFG. We continued our positive business development trajectory. We have delivered for the 15th consecutive quarter positive NNA. This growth over the last four years, we could translate this growth over the last four years in increasing and accelerating profitability. We have a record underlying net profit of almost CHF 250 million, which increased by almost 50% year-on-year.
This in turn allowed us to increase the return on tangible equity to 16.4%. Obviously with this increasing and accelerating profitability, we were able to distribute a higher dividend by 25% of CHF 0.45, CHF 0.45 per shares. As anticipated, I am now on page 5, 2022 marked a successful completion of our 2019, 2022 strategic plan and underscores the resilience and agility of EFG business model. You can see on the left-hand side that we have achieved all the targets that we have set ourselves and presented in this room actually four years ago, at a time when nobody could foresee the unprecedented events that we all lived through the last few years.
I think it's also interesting to take a step back and look in cumulative, in aggregate, what we have achieved over this period. In terms of net new assets, we have generated CHF 26.6 billion, which I would say is a strong performance. This growth was translated into underlying net profitability of almost CHF 640 million. This allowed us to create value for all our stakeholders, and in particular for our shareholders, who received CHF 469 million in dividends and share buybacks. Obviously, we are very pleased about these figures. We are very pleased about the numbers. They clearly show that we have delivered, but probably, I think, as a management team, we are even more proud of what is behind these numbers.
What is behind these numbers is a consistent execution of a radical transformation of our bank and of the de-risking of our bank. I think that we have done this focusing mainly on two elements. First of all, the last four years, as we have said many times, have been unprecedented and volatile, and it was extremely important for us to be close to our clients. We want to be the trusted and independent advisor to our clients, and our clients need us in difficult times. I think we are very proud and we are very grateful to our clients for their trust. The second element was to execute, as I was saying, the transformation under the strategy of simplicity.
We have been trying to reduce complexity and simplify our business, increasing efficiency, increasing operating leverage, and this has delivered the increase on profitability and return to shareholders that see that. With this, again, I would like to thank all our colleagues across geographies and across function for the contribution that they have done in the successful delivery of this strategic plan over the last four years. With this, I'll pause here and hand over to Dimitris, our CFO and Deputy CEO, for a in-depth presentation of our 2022 financial performance. Dimitris.
Thank you very much, Giorgio, welcome from my side as well to this presentation of the 2022 results. Clearly, it is the end of a period. It is the end of our strategic cycle. Before I go into the numbers, I'd just like to say that, you know, as the CFO, it's a great feeling to have to present this set of numbers. You know, it's, We were joking before, it definitely makes my life a bit easier in terms of communication, the reality is also what Giorgio said. I'm really proud to be part of a team that managed to deliver this performance. I'm very honored and privileged to be able to share with you the financial aspects what we've done.
As Giorgio said, this comes through a lot of work and a lot of combined work in a great team of people working at EFG. Page 7. Page 7 gives you the highlights of 2022. NNA CHF 4.2 billion with an annual growth rate of 2.4%. Clearly we had deleveraging from clients that went against us in this CHF 4.2 billion and this growth, but the name of the game has been consistency, and I'll come back to that, just showing also the progress that we've had over the last four years. AUM at CHF 143 billion. Clearly, this also incorporates the disposal of our Spanish subsidiary, which is about CHF 12 billion, which happened in mid-2022.
We clearly had the negative impact from markets and from currencies within the year. Revenue margin. Revenue margin increased to 81 basis points for the year, coming from 71 basis points in 2021. That's +10 basis points year-on-year. I think more importantly, the revenue margin in the second half of the year was 91 basis points, so another 10 basis points up, which is a very good tailwind going into 2023. We have hired 58 CROs over the course of the last 12 months. In terms of profitability, Giorgio gave you the number, the headline number is CHF 249 million of underlying net profit in 2022. It's almost 50% up year-on-year. This came through our continuous efforts to create operating leverage.
This year, revenues were up 6.4%. Costs were practically flat year-over-year, this is what has been driving the increase in profitability. IFRS net profit came at CHF 202 million, has been impacted by the final settlement we have reached in one of our long-standing litigations that we have talked about in this room and in other rooms over the last five, seven years already. We are very happy to put it behind us, we're looking forward without significant legacy issues at this point. Costs, underlying cost income 75%, 75.4%. It's almost 5 percentage points better than what it was in 2021. In terms of capital, clearly a very strong capital position. We have announced in December that we would be reclassifying portfolios into Hold to Collect.
This reclassification became effective 1st of January, 2023. Following that reclassification, core tier 1 is at 16.6%, total capital ratio is at 20.5%, and even more importantly, our gross capital generation now exceed 300 basis points. We create 3% of capital every year simply by our own profitability. On a net basis, after risk-weighted assets and after dividend, the net production of capital is at 180 basis points, and that very strong capital position, that significant growth that we've had in underlying profitability, and the capital generation that it comes with allows us to have a proposal of CHF 0.45 for the dividend, which is an increase of 25% compared to last year.
On page 8, I'm highlighting the two key objectives that we had over the last four years. One was clearly to improve profitability, and the second one was to de-risk the legacy issues. The way it's worded on the page is that we have a strong improvement in underlying profitability, which is what you see on the left, the 48% growth in underlying profit. Maybe a better word is step change. It's not just significant, it's a new base. It's 50% up year-on-year, and this is all recurring underlying profitability. The second point is about de-risking. Clearly, we are taking a hit in the second half of the year. It's about the second half impact is about CHF 24 million net of tax of an additional provision to settle.
We believe that is very appropriate given where we are. You have more information in the press release. There's some more disclosure in the annual report if you would like to see more disclosure. In reality, what this does is it allows us to have a loss in our books of $120 million on a risk which could potentially, worst case, be $270 million and increasing over time. For us, it was the right time to put it behind us. We are looking forward now without having significant impacts from legacy topics.
Also, because over the last four years, we have managed to de-risk our life insurance portfolio, and you'll see that in 2022, the contribution of the, in the P&L of that life insurance portfolio has been pretty much flat at CHF 1.8 million. Following those two developments, both in life insurance and in the Taiwanese loan case, we will discontinue reporting underlying P&L versus non-underlying P&L, and we will simplify our financial reporting effective 1st of January, 2023. I will skip the next two pages, which include all the financials on an annual basis and on a semester basis, and we'll move to page 11. For the next couple of pages, I would just like to take the time to show you the journey that we've had over the last four years.
Consistency in increasing our AUM through NNA. You'll see that we had a growth rate of 4% going up to 5.5% in 2020 and 2021, and 2.4% in this challenging year of 2022. On average, the CAGR for the four years has been 4.7%, which is pretty much in the middle of a range of the 4%-6% that we had as a target from our previous strategy cycle plan. In terms of operating leverage, you will see the bottom, the cost to income ratio has decreased by about 10 percentage points. Has gone down from 85% to 75%, and clearly, the trend is very much in the right direction. On the right-hand side, you'll see what has been the impact in terms of bottom line.
Everything has doubled since 2019. If you look back to 2018 and the net profit, it has tripled from, in terms of what we posted in 2018 as IFRS net profit. We have reached a return on tangible equity of 16.5% and a return on equity of 11.5% for the consolidated performance. The next page 12, gives you a bit of a visual also on all the targets. We clearly achieved all the targets that we set. We are very proud to have delivered on these targets, clearly in times which have been quite volatile. As we said before, like when we were presenting in 2019, nobody expected COVID, nobody expected a war in Europe.
We had to manage our performance through the angle of what was happening in the macro environment. For me, what is more important in that page is not, again, not looking back. We've had a very good run in the last four years. We have built a very solid foundation. The idea of the next plan for the next three years is evolution rather than revolution. We're building on this very strong track record of recovery, and we would like to have our performance in 2022 as really the base for what we're gonna be delivering the next three years. This step change is very important for us to be able to grow our business and further increase our profitability going forward. Page 13, you've seen it before. It was in the Investor Day presentation in October.
It's just an idea of how the bank has managed itself during the course of the last three years. Clearly, the macro trends and the external shocks that we've seen have been quite different. It is all about agility. If you look at the first block, which is between 2019 and 2020, we actually had a decrease in revenues. How did we react? We actually managed to reduce costs even more, and through that, we managed to increase profitability. In the following year, conditions were very different. Like, we were increasing revenues substantially by CHF 71 million, and we were modest in increasing costs. Again, we managed to increase profitability. This year, or 2022, it's again about being modest and being cost-efficient and making sure that we create operating leverage.
This is a CHF 76 million increase in revenue with cost pretty much being flat. Since cost is pretty much the name of the game in our industry, on page 14, you'll see our performance. It's the 10 basis points down in cost to income ratio. I think more importantly is if you look at the bottom left of the page. You will see the actual numbers that we posted. Our underlying operating expenses have actually gone down over the last four years. Our number of FTEs have also gone down throughout the last three years. We have becoming more efficient in our operations, despite increasing the size of operations and expanding in new offices, like we've done very successfully, like in Dubai, in Portugal, and in other locations.
I think that the performance management aspect in the culture is clearly part of the way that we do our everyday job, because cost management is an everyday job. We have monitoring mechanisms, both for performance, frontline, back office, support functions. We have strict monitoring of general admin expenses, and we have allocated the responsibility, and we also have incentives for people to make sure that we operate in a cost-efficient way. On page 15, I'll just go back to 2022. This is the picture of the AUM for 2022. Started with CHF 172 billion, CHF 4.2 billion of NNA, disposal of CHF 11.9 billion, almost the entirety is in Spain, and then negative impacts from market currencies, brings the total to CHF 143 billion at year-end.
If you look at the right-hand side, it is positive to see that new CROs and new business initiatives have been continuing to deliver NNA. Clearly, the existing CROs have been the part of the business has been hit by the deleveraging that we had during the course of the year. Excluding the deleveraging, they will also be delivering a significant amount of NNA for the bank. Page 16 is the usual page on delivery by region. Continental Europe has been leading the NNA growth in 2022. Switzerland has also been delivering a substantial amount of net new assets in absolute terms with CHF 1.4 billion. Asia Pacific and Latin America has been positive, and U.K. and our FCAM fund business has also been negative.
All in, it's a CHF 4.2 billion NNA for the year. Excluding the deleveraging, which is what you see on the right-hand side, excluding loans, we would have a CHF 5.2 billion increase in net new assets. Next page 17, is about the evolution of CROs. We've hired, signed or approved 58 CROs in 2022. As you will see, we continue doing performance management. Our CROs have remained flat, going from 440 to 436. This excludes, of course, Spain, which got deconsolidated in half year 2022. That also excludes Shaw and Partners, which has also been stable. We are continuing to attract strong CROs with sizable portfolios.
We have clearly a unique business model that is attractive to certain, ambitious and growing CROs, we are clearly working on improving on the productivity of our CROs. You'll see that our AUM per CRO, which is the bottom right chart, is now at 313 million per CRO. Page 18 is about revenues. I don't think it's gonna be a surprise to tell you that clearly NII has been a very strong driver in terms of improving the revenues. You'll see that increase 58% year-over-year, it was at 26 basis points of margin for 2022 on average. Commission income is subdued.
It's a combination of lower nominal AUMs from the market correction, lower client activity when it comes to the brokerage side of the business, and also the fact that we deconsolidated our Spanish operation half way through the year. On a like-for-like basis, the drop is not 17%. On a like-for-like basis, the drop is more like 12.5%, because of the technical input from the deconsolidation of Spain half year through 2022. What is very interesting is that with the lack of client activity in bonds and equities, which creates the broker side of the commission income, our CROs have been very active in figuring other areas where they see more appetite for client activity. We've seen a lot more activity in currencies.
We've seen more activity in precious metals in 2022, and this has been the main driver of the increase in net other income. If you do the math, there is a substitution, if you wish, of margin between one category and the other category. I think that this is also a testament of the entrepreneurial side of our CROs trying to figure out what is the best way to provide good advice to the client to make sure that the client can take advantage of volatile markets. Mandate penetration has been resilient at 56% of AUM excluding loans. At the bottom of the page on the right-hand side, you also see how the revenue margin has evolved over the last four semesters.
You know, 81 basis points, which is the average of the year, is an average that shows a very different picture in the first half. First half was 73 basis points. In the second half of the year, it is at 91 basis points, which is a very good dynamic entering into 2023. Page 19 on costs, flat year-over-year. Zero increase in personnel expenses and +2% year-over-year on G&A expenses. Clearly, discipline cost management approach. Successful conclusion of all the footprint projects as well, which makes our operations simpler. The personnel expenses are flat year-over-year. I think what you'll see is that the contribution or the element of variable compensation is higher on a like-for-like basis compared to last year.
Clearly, that is driven from higher revenues and higher profits. The admin expenses are marginally up, mostly impacted from new investments that we have been making throughout 2022. Page 20, a very strong balance sheet. Balance sheet is up by 3%, mostly on deposits grown. The liquidity coverage ratio is at 205%, and the loan-to-deposit ratios are 44%. As you'll see, like, we have over CHF 20 billion of excess liquidity on the balance sheet, which is a very good way to make sure that we can grow our business going forward. On page 21, about capital. We currently have the strongest core regulatory capital position that we've had in recent years.
You'll see that in 2021, core tier 1 ratio was 15.8%. By the way, all these figures are reported under IFRS. We switched to IFRS reporting or IFRS-based reporting for capital ratios on the 1st of January, 2022. From going from 15.8, we closed the year at 14.7. Following the declassification of the hold to collect portfolio, 1st of January, 2023, we are looking at a core tier 1 of 16.6% and a total capital ratio of 20.5%. Risk-weighted assets have gone down. The reason they have gone down is that the nominal amount of loans has gone down, partly through deleveraging and partly because of currency translation differences.
Clearly, the credit risk part of risk-weighted assets has reduced. We have been active in managing our overall capital. We bought 7.7 million shares through our buyback program in 2022. We redeemed the remaining tier 2 notes, which was about $200 million, in April 2022. This is on the back of issuing $400 million of tier 1 in 2021. Clearly, with these figures, we're looking to quite a substantial amount of excess capital, which is available to us, either for M&A or for distribution to our shareholders. The board also decided to continue the share buyback program for up to 3 million shares up until the end of April.
The scope of the, or the purpose of the buyback is to buy shares for equity incentive plans. Page 22 is the bridge for on capital. You will see that on the left-hand side, we have this 3.2% or 320 basis points of organic capital generation. This is from organic profitability. If you take into account risk-weighted assets and dividend, the net capital generation is 180 basis points. Clearly, we had some non-underlying P&L. We had a benefit from the disposal of our Spanish operations. We did some buyback. All in all, you will see that at the end of the day, again, we are at a very strong 16.6%, core tier 1 ratio and a 20.5 total capital ratio.
As a reminder, the minimum that we have set ourselves for the next planning cycle when it comes to core tier 1 is 12%. We are about 4.5 percentage points above our minimum set by management in terms of the core capital. Now, I guess this is the last page that we will ever talk about the 2019, 2022 financial performance. Turning the page to the next cycle and literally turning the page to page 23, there you have our financial targets for the next strategic cycle. As we said before, it's evolution is not a revolution. Again, 4%-6% growth in net new assets. Our revenue margin f 85 basis points in 2025.
Cost to income ratio of 69% in 2025, and a return on tangible equity of 15%-18% in 2025. With a minimum floor in quarter one of 12% and, target, dividend payout of 50% of profit. I think that, we are very confident that this is the right set of targets for EFG. What we've seen in the last couple of months is that the team is very excited to for this new strategic cycle in terms of, delivering again on the promises. We are clearly already almost two months into 2023, I think 2022 is a bit in the back burner just for us who are presenting the results. Everybody is looking forward to 2023 and beyond.
You know, the two main lines are sustaining the business growth as we did in the last cycle and increasing our operating leverage to make sure that we improve on the profitability. Our boards will also be proposing to the AGM a new long-term incentive plan, this is coming in April, to further align the interest of employees with shareholders, and there's some more information about the plan on page 40. Thank you all very much, and I'll pass the word to Giorgio for his closing remarks.
Thank you, Dimitris. Let us look a bit forward. Let us look at the strategic priorities going forward. I always like to start with this page 25, because it gives a perspective over 10 years, and it shows where we're coming from and shows where we want to go. If in the planning cycle, 2019, 2022, it was all about reigniting the growth, the sustainable and profitable growth after the integration and the acquisition of the previous period. I think for the next cycle, 2023, 2025 is gonna be all about sustaining this profitable growth and achieving scale. Obviously, as Dimitris has said, is going to be an evolution rather than a revolution, at EFG, evolutions can be quite fast, so it's gonna be a fast evolution.
Now, page 26, you have seen this page already in October. It encapsulates somehow what are our, you know, strategic priorities and the levers that we want to activate, starting basically now for the next three years. Again, I'd like to emphasize this, we are entering into this strategic cycle in a position of strength, and we are very well placed to create value for all our stakeholders. Now, since it is an evolution, I think that we need to again, continue to do what we have been doing well over the last four years. I always like to point out that we have a very strong foundation of our business.
I think this is extremely important in volatile times to be resilient and to have a very solid and, as I say, sometimes solid and liquid balance sheet and strong compliance and risk management framework to avoid incidents along the way. What we have been doing very well, I mentioned it earlier, and we will continue to do so, is to focus on our clients. We are client-centric. We don't have any other purpose but to, as we say in our purpose statement, to empower entrepreneurial minds, our clients and our colleagues to create value for today and for the future. For us, this is a must to be close to our clients, to deliver the best possible service.
I think that our client relationship officers deliver a service to clients which is second to none and to deliver the best possible solutions. We will continue, Dimitris said, financial services is about efficiency, is about productivity. We will continue to simplify our business model and our business in general. Now, what we can do to accelerate, we will continue in this evolution, in this fast evolution to transform the bank. We think that content innovation is key, is key for our clients, but is also key to improve our competitive market position. I think that this year in particular, but also in the next three years, we are gonna see an acceleration in the digital, in the deployment of our digital capabilities. I think that, probably next year we will announce a lot of what we are planning to do.
We are very excited about that. At the end of the day, this is about improving the experience of our clients, of our client relationship officers and in general of all our colleagues. Now, we are in a people's business. People for us is the most important asset. Out there there is a very strong competition to attract and develop talent. We will continue to invest in our people, to empower our people, and I think that, you know, if there is one element that I would say was the root cause of the success of the last four years was the people of EFG and the culture of EFG and the performance culture.
Obviously, at the end of the day, we want to create value, we want to deliver a consistent financial performance, which, as you see here, is translated in NNA growth and EPS growth. Dimitris already emphasized again what are the targets for the next three years. They are here on the right-hand side. I would like to point out again that our business model is capital light and very diversified, and has managed to deliver value and strong results throughout the cycle. In terms of our strategic priority, I think that, in this concept of evolution, we will continue to do what we have done well, as I said, to focus on the growth momentum.
This will improve the operating leverage and profitability, and in turn, this will continue to improve our dividend distributions and capital returns to shareholders. As I said, we will continue in this transformation of our business. In particular, I emphasize again the digital acceleration, we will drive our performance based on a robust and compliance risk framework. We are convinced, I am convinced that with these ingredients and with this strategic positioning, we will set the course for a continued long-term success. I thank you for your attention, I now hand over to Jens for the Q&A. Thank you.
Thank you, Giorgio. Thank you, Dimitris, for your very insightful presentations as ever. We will start the session with Q&A. Can we maybe start in the room first, and then we move to the telephone lines? Any questions in the room? I think we start with Daniele here, if possible. Thank you.
Good morning. Thank you. It's Daniele Brupbacher from UBS. Firstly, on the gross margin, the 91, can you tell us what the trend was in Q3 versus Q4? Then probably whether this level has sustained going into 2023 now. Within the gross margin, obviously, there is a lot of moving parts, and you mentioned NII. Can you remind us how that works from a compensation point of view? Because NII clearly has a treasury element, and how much of that is compensable revenues, and then basically hitting data comp line? That's question number one. Secondly, on slide 17, the hiring dynamic and the numbers there, I think you mentioned 58 for the full year. In H1, if I remember correctly, it was 39, so there was a bit of a sequential slowdown.
Is that just seasonality, or should we be aware of anything else? Can you talk about the hiring ambitions probably for 2023? Thank you.
I'll take the first one on the margin. You're right to say that in terms of the way that the rates have been coming in, clearly they have been coming in more towards the end of the year. Your Q4 margin is higher by your Q3 margin. The difference there is not as substantial as between half one or half two. You would be looking at, you know, Q3 + 2, 3 basis points, Q4 + 2, 3 basis points. Clearly the big impact starting off was the dollar, and the dollar's already started moving upwards in May, April, May of 2022. The run rate that we have for January is at or at the levels that we have for the second half of the year.
You know, again, you should not expect another 10 basis points if that's the case. I think things are normalizing. Don't forget that we always also have some substitution from clients who are in non-interest-bearing accounts that now we are paying interest. This is also damping a bit how the margin works. Overall, I think the other point to say is that given the structure of the balance sheet the way it is now, if we have 100 basis points on all currencies, on an annual basis, we're looking at another CHF 90-100 million of incremental revenue. Again, that is everything else being equal. Like reality is a bit more complicated.
Maybe in terms of the second part of the question about how much, if I understand correctly, how much will translate into variable compensation or not. Obviously, we follow, and we've been following this now for almost 10 years, fund transfer pricing between the various areas of the bank. Clearly there is a part that is, let's say, the remit of the private bank and the client relationship officers. Obviously there you have the usual model. Another part which is obviously related to treasury and how to invest excess liquidity that obviously attracts a different, let's say, compensation model. In terms of the hiring of CRO, if I understand the last question, I would say that last year was an okay year with 58.
As you recall, we have signaled in October that our target for the next three years is between 50 and 70 CROs in a gross manner. The objective is to ensure that obviously we take bigger teams, more seasoned teams, and as you have seen, we have increased, or we have maintained stable, which in a year like last year, I think is a major achievement, the CHF 313 million AUM per CRO, which I think is an important objective. All in all, the pipelines are good, are across geographies, is a top priority for the top management team, all the regional business heads and the head of private banking.
I think we are very excited that, I think also with this set of results, it's gonna be much easier to attract new talent to EFG.
We'll take the gentleman here.
Good morning. Thomas Hallett, KBW. I just wanted to ask about the mood of your clients that in the press release read that last year it was quite deleveraging and risk aversion. Could you say a little bit how this evolved now in the first months or so? Is there more risk appetite? Is there some re-leveraging? Thank you.
Well, we can say that obviously last year, last year we had several events that all concurred to make sure that in many quarters, we had risk-off by clients. Obviously, when there is risk-off and clients become more cautious, they close their positions to reduce exposure. We have seen that obviously in the second quarter, or the end of the first quarter, second quarter following the war in Europe. We have seen that obviously after the markets had a major dislocation in the equity and bond markets. We have seen also a bit of that when we in the fourth quarter, we had a recovery of the market. Some clients decided to close the exposure when the markets were coming up.
I think from what we can see, the visibility at the beginning of the year is still not great. What we can see is that the markets and the clients have stabilized somewhat. I think it is premature to talk about releveraging to be very honest. Obviously, we will see how the year will develop and if the stability will set in. I'm sure that some risk on will come, but as you know, you've seen yesterday, I mean, it is still very, very volatile and unstable.
Thank you. So we then move on to the first question from the phone. Can we please have the first question on the mobile phone? Thanks.
The first question comes from Nicholas Herman from Citigroup. Please go ahead.
Yes. Good morning, gents. Can you hear me okay?
Yes, Nicholas. Hi, good morning.
Yeah. First of all, I just want to say congrats on largely delivering the less than 75% cost income target last year, despite what was without doubt a tough operating environment. Three questions from me, please. One on capital, one on other income, and one on fees. Bear with me. Sorry. The first one is a little bit of a multi... There are a couple of sub-questions within that. I guess, look, your CET1 ratio is now, well, pro forma for the reclassification 16.6%. That looks at about CHF 140-150 million of surplus versus your 15% or 12% minimum, versus your 50% minimum target, which is, I guess, for M&A.
The question is, why not do a buyback? Can we read into that you do expect to do a transaction in the coming months? Can you also remind us, please, what kind of transactions are you looking for, types of business, regional mix, return criteria? That's the first bucket. Moving to other income, I'd like to dig into that a little bit, please. You saw 18 basis points of other revenue margin in the second half. You reported 13 basis points in Q3. That suggests like a low-mid 20s in Q4. It looks like that step-up was driven by fair value gains, but there was also a genuine uptick in trading too, which seemed a little bit unexpected because your peers have all seen lower trading. Just curious, what.
If you can give us a bit more color why that might, why that actually is? Were there any particularly lumpy trades? I guess you seem to suggest that this is a substitution effect. Do you think we can indeed extrapolate this going forward? The final question, quickly on recurring fees. It looks like your recurring fee margin declined in 2022 versus 2021. Is that driven by a shift of products into lower margin products? And, and as part of that, how to think about the path to the 65%-70% mandate penetration, is that more back-ended or is it a grind up from here? A few questions there, but that's okay. Thank you.
Let's start with the capital, I guess.
Yeah. Good morning, Nick. To start with your first question on capital, as you say, following the reclassification, as of 1st of January, our capital ratio core is 16.6, gives us 4.6% of available capital for acquisitions. You asked about the buyback. We have a buyback in place. As you know, you know, our free float is not that extensive given the structure of our shareholding. We cannot really utilize a buyback in the best way or in the way that some other companies might be using it in terms of reducing their capital, through that increasing the performance of the stock to the benefit of the shareholders. We have a limited buyback. We did almost 8 million shares in 2022.
We will continue for the next couple of months as the board has decided. I think that for us, this available capital is really the firepower that we need to be able to very quickly move and do acquisitions. I don't know, Giorgio, if you want to say anything about the criteria of the acquisitions.
Yeah.
We discussed them in October again, but...
Yeah, I think, Nick, I mean, we discussed acquisitions several times. Obviously, we are open for that. In terms of the criteria, our criteria have been mentioned last October in the presentation. They've been always the same. I think, for us, the critical point is to have add-on acquisitions where we can acquire market share in strategic markets, so we can realize synergies. This is for us extremely important. The second key criterion is that we have a very strong cultural fit, otherwise it would not be a successful acquisition. In terms of, you mentioned the metrics, in terms of, let's say the return metrics, we need to have clearly an acquisition that is value accretive.
For example, we have indicated a return on investment over 10% by year three. This has been our framework over the last years, and clearly, now, you know, depending on how the consolidation in the market will evolve, we are ready for that.
Now to your second question about net other income. Really the trend that we see in net other income or what is driving net other income year-on-year is clearly increase in client activity in currencies and client activity in precious metals. This has been the key driver for the increase in NII. You know, we can discuss, if you wish, offline, like quarter, last quarter versus third quarter or first half versus second half. Clearly, you know, the trading portfolio did not deliver exactly the same way in the first half versus the second half. This is for me is more noise rather than the underlying trend, which is clients substituting their activity. I think this is what you referred, if I caught it correct, because I couldn't hear you very well on the substitution point.
What is happening is we are seeing clients moving their activity from bond trading and from equity trading, which was part of the commission business, into trading of other instruments like currencies, because they believe that these are a better way of positioning themselves under the current environment where there is a lot more volatility on the rates, for instance, and on the valuation of the stocks. We've seen that substitution between different products. Again, this is also, as I said earlier, part of the entrepreneurial approach of our CROs to be able to make the best possible decision and give the best possible advice to their clients, depending on market conditions.
Maybe on the last question, which was about recurring fees, I would say, Nick, that we do not disclose the breakdown between recurring fees and transactional fees, et cetera. I think that actually last year, and this has been a trend over the last four years, actually, the recurring fees have improved in relative terms, in basis points terms, because we've been doing a repricing exercise, and we have been focusing on more high value and high margin products over the last four years. Clearly, what you see is a drop on the net commission income, but the drop of net commission income is driven mainly, if not solely, by the drop of the transactional element of the net commission income.
What we saw, and we have seen it throughout the year, is that the level of activity and the transactional, let's say, bias of the clients reduced dramatically when the markets obviously were in turmoil. As Dimitris was saying, on the other hand, if, and again, I'd like to point out because I think the point is important on page 18, if you add up...The net commission income and the net other income, you know, in 2021, the aggregate margin was 55 basis points. In 2022 it was 54 basis points, because as Dimitris mentioned, while on the equities and bonds, the transactional activity, you know, reduced very significantly on the FX, it increased dramatically. There has been a compensation there.
Coming back to the original point, the recurring fees are on a trend, on an upward trend and will continue. This is part of our strategy of content innovation. You're right to say that our, you know, penetration was 57% last year in 2021, is now down 1 percentage point. This is obviously because, you know, cash, which by the way, if you look in the appendix, cash increased dramatically, was 21% of our total AUM, now is 25%. Obviously cash doesn't decrease in value while, you know, the mandates decrease in value. That 1 percentage point is due to the fact that there has been this, you know, drop in value by the mandates.
Now, our target, as you know, we have announced it in October, is 65%-70%, which I would say is quite ambitious. Obviously we have a plan for the next three years to ensure that we increase significantly both advisory mandates and discretionary mandates.
Thank you for that. If I could just have a quick follow-up on the capital. It's a fair point in the buyback, I should have said capital return. I guess the question remains that now that you are generating organically more than 300 basis points of capital per year, and I don't know if there's gonna be also pull to par effect as well after the, after the reclassification. Regardless, with that CHF 400 million of surplus versus your 12%, you obviously said that anything also above 15% is eligible for distribution subject to M&A. I guess. Again, just to reiterate the question, is it fair to say then that you are seeing opportunities in the market right now, otherwise you would have returned it?
Is it a case of you wanna keep that for the majority of the plan? In which case, at what point in the plan would you then considering returning capital above the 15%? Are we now talking 2024, as in 2025, the back end of the plan? Is it, yeah, just how to think about that, please. Thank you.
Thank you, Nick. Look, let me put it this way. This is a very nice problem to have, okay? We have a lot of excess capital. We have been very public in the market that we would like to do transactions. Unfortunately, the last three, four years, the actual number of transactions in the market has been the lowest that I've seen it ever. We are looking forward to more transactions coming to market, and we would like to be very well placed to do those transactions.
I think the timing of what will happen in terms of transaction or return, I wouldn't like to speculate at this point, but again, I love to be in this position where we have, I could say about CHF 400 million of excess capital above the, above the 12% minimum for us to be able to take advantage of a possible acquisition in the future.
Maybe Nick, a comment about timing, right? I mean, we are entering now the new strategic planning. Obviously, the management team is very focused on deliver short-term targets, but we have also a vision of the next three years. I would say that we are gonna look and assess, as Dimitris said, the situation in the next quarter.
So don't expect that, you know, something is gonna happen in the next quarter or the next two quarters. We have now another three-year period and another three-year strategic plan to deliver, and we will, you know, look at that as we have done with a medium term. I never say long term, medium term vision.
That's very clear. Thank you very much.
Thank you. Can we have the next question on the phone, please?
The next question comes from Adam Terelak from Mediobanca. Please go ahead.
Morning. Thank you for the questions. I had couple on NII and then one on capital. On NII, I just wanna get a sense of what you're seeing on deposits so far, and what your thoughts are on deposit migration into next year. Unlike other banks, I think your deposit volumes have held up pretty well, and whether you're seeing big competition at the margin there and what that really means for your NII from here. Clearly the exit rate's very strong. How should we think about that through further euro hikes and dollar hikes this year, and how we should think about the liability side in terms of the sustainability of your NII and your gross margin exit rate, which is clearly very strong.
To follow up on that point as well, excess liquidity in dollars, is that still being placed at the SNB via swap? If so, what sort of volume is that and how much revenues is there in other income that is actually related to interest rate levels rather than kind of some of the FX trading that you're talking about? Some color on the swap income would be great. Finally, just a quick point on the dividend payout. Is that pre or post the AT1 coupon, so the minimum payout? Do we think about that pre AT1? That'd be very helpful. Thank you.
I'll take the first question on NII. As you said, we have seen significant migration of our client base from non-remunerated accounts to remunerated accounts. If you look at our accounts, there is disclosure. There's a breakdown of deposits between the interest-bearing and the non-interest-bearing. There's about 8 billion Swissy of movement between the end of 2020, 2021 and the end of 2022. The majority of that 8 billion happened starting in, call it May of 2022. It was a second-half event. We have been seeing a slowdown in that conversion. The majority of the conversion was on our dollar deposits.
Clearly now dollar deposits in nominal terms are above 4% even in the short term. It is clear that clients want to be remunerated. We've seen a smaller conversion on the other currencies also, clearly because the nominal compensation is smaller for the other currencies. I do expect it to continue to some extent. What we're seeing is that the rate of that transformation has been decreasing the last two, three months. Like for instance, on the dollar side, we don't see big changes. On the euro there is a bit more coming in. I think that what gives us more comfort than what we had before is if I look at the combination of that conversion and the expectation on the rates, I don't see...
I see one compensating the other, quite a bit, at least in the short term. I think on that side, the visibility is a bit better than what we had back in October or in July when we were discussing the same topics again. Now.
But just to-
Yes?
I was just gonna say, does that give you a bit of upside risk for the 85 basis points in your gross margin in your planning assumption?
Look, I will say that I feel more confident about the 85 basis points in 2025 today than what I was three months ago or six months ago. I think we have better visibility than what we had. I think the level of confidence. Again, as we said back in October, like, for us, the priority is to make sure that we improve on what we control, which is the commission income line. The rates, you know, people are talking about hard landing, soft landing, now no landing, which is a different scenario. Again, we clearly want to have higher rates. It's like, as a bank, it's very positive. Our focus in terms of delivery is really going to be on the commission line.
I think that the prospects of the net interest income line, now that we have more visibility, are a bit more positive than what we had, three months ago. You asked a question about excess liquidity and swapping. There's no big difference in what we had been doing, versus what we're doing last year or middle of the year. We don't disclose exactly what is the swap amounts, and we don't disclose exactly what is the benefit from that. Closing with your dividend payout. The payout. Like, clearly we have a payout for common shares, core shareholders, which is the dividend. The 50% guidance on profitability, which is our guidance for the payout, is only for normal dividends to shares. The dividend for the tier 1 is over and above.
With the proposal that we have now, we have about $130 million of dividend to be paid to core shareholders and another $20 million on top of that of dividend to be paid to tier 1 holders in 2023.
Great. Thank you for all of that. The swap income, I know you don't want to give numbers, but is it, I presume, 'cause rates are up, the contribution's up year-on-year?
Sorry, Adam, I couldn't hear you very well.
Rates are up, so the contribution from the swap is up year on year. That's potentially some sustainable income in your swap, in your other income rather, over and above the trading benefits you're talking about.
Yeah. With the rates being higher, your income would be higher, correct.
Great. Thank you for clarifying.
Great. I think we have another question on the phone, please.
The next question comes from Daniel Regli from Credit Suisse. Please go ahead.
Good morning. Thank you for taking my question. First question is on capital and capital strategy. Sorry, maybe this is a little bit of follow-up on questions which have already been asked before. Maybe this is also kind of a topic which was already discussed in the investor day in more detail, but can you maybe re-explain to me why, you know, have kind of a floor of 12% versus 14% previously, while obviously the IFRS CET1 numbers seem to be even higher than the previous numbers. The second question is a bit on the share buybacks. You did obviously the share count was historically always growing slightly.
Should we expect kind of going forward that we at least have a flat share count, or even decreasing share count? Should we expect this to continue to grow as we have seen it historically? Also a little bit of follow-up on the NNA. You were talking about CHF 90 -CHF 100 million incremental revenues from 100 basis points rate increases on all currencies. Can you maybe break this down a bit into the various currencies? It's the maturity, I expect this to come from the US dollar, but maybe can you be a bit more specific about the different currencies and yield curves?
One last question, if I may, on net new assets: Can you maybe again specify a bit what was the moving parts in the NNA number? What was coming from deleveraging, particularly H1 versus H2? Maybe also particularly in H2, have you seen kind of a, an additional benefit or tailwind from coming from the misery of another institute in the market? Thanks.
You cover the last one or I?
Yeah. If I could, I'll take the last one, yeah.
Okay.
Starting with the capital strategy. When we did the October presentation, that was page 62, if I'm not mistaken, of that presentation where we talk about the capital light model that we clearly have and our drive to generate organically a lot more capital while we're also de-risking. The reason that we moved from the 14% capital ratio to the 12% capital ratio has been because over the course of the last four years, we have substantially de-risked our legacy problems. You saw now that we've actually managed also to settle in one of the two, so it is behind us. We said at this point, we are willing to drop that minimum tier 1 from 14% to 12%.
This is also on the back of the fact that, you know, we are generating so much or capital organically that you don't need to have extra buffers in your capital because your operating performance is much stronger than before. The overall thinking of the capital strategy is strong organic capital generation, make sure that you have dry powder if you want to do acquisitions. As Giorgio described earlier, there are specific rules around or specific thinking around what sort of acquisition targets we're talking about, which geographies, complementarity in culture and overlap geographically and some very fixed return targets. We need to make 10% return on investment by year three in order for that acquisition to qualify for us as an acquisition that we would make.
The other thing that we said, which I think that was also discussed a bit earlier, was we said that if we are at the quarter one above 15%, which we currently are, we will consider returning capital. This is subject to market conditions. This is subject to M&A targets being available. It is a conscious decision, as Giorgio said, we are trying to build the value of the franchise in the medium term. The fact that we are above at this point is good because it'll give us firepower to do something. It doesn't mean that we will act immediately on it in terms of returning excess to shareholders in the next one or two quarters, for instance. Second point on the share buyback, we are doing a limited buyback.
We did 8 million shares in 2022. The purpose is to avoid dilution from the equity incentive plans that we have for employees. The idea is, as you said, we're trying to keep the number of shares in circulation pretty much flat. We will have new shares from incentive programs coming in. At the same time, we are doing the buyback, and we try to keep the total number of figure flat so that we avoid diluting the existing shareholders from the incentive plans. To your third question about sensitivity to interest rates. Out of the CHF 90-100 million, with all rates going up 100 basis points, about half of that is on the euro, and then about a third of it is on the Swiss franc. At this point, our currency.
Our NII exposure to the dollar and to the pound are really, really small. We had a much bigger exposure to the dollar at the end of 2021, because we've seen conversion of deposits into now remunerated deposits, that exposure has reduced dramatically. I think that our exposure to the dollar is about 10% of that CHF q100 million with 100 basis points. It's really marginal going forward.
I think the last question was about NNA and what we have seen about deleveraging. I think Dimitris mentioned it earlier. It was about CHF 1 million, so excluding the deleveraging, CHF 1 billion, so it would have been CHF 5.2 billion. Regarding obviously what's happening in the market, I think obviously we are in the market and there are certain situations, but, you know, there has been nothing, I would say, that has moved the needle dramatically.
Excuse me, can I then quickly follow up on, obviously, on slide 15, you're showing like deleveraging having been like CHF 2.4 billion on the existing CRO. Why isn't the total number only about CHF 1 billion?
The deleveraging that you see on that page is the impact, the impact is double. The deleveraging, the reduction in loans is about CHF 1 billion. Here, what we're trying to show is if we did not have that reduction in loans, we would be CHF 1 billion up because we count loans as part of our AUM and our NNA. We would also because the deleveraging goes with losing the assets that that leveraging are invested into. When every time you lose CHF 1 million in a loan, you lose CHF 2 million in net new assets, because where that amount is invested also goes at the same time. That is how we count, and this is how we show this figure on that specific page of the presentation.
The net new asset number would have been more like 6 point-.
Correct. Yes.
That's correct.
CHF 5 billion.
Yes. If we did not have any deleveraging, our NNA, the way we present it, would be CHF 6.2 billion.
Okay. Very helpful. Thanks a lot.
For any further questions, please press star followed by one. We have a follow-up question from Mr. Nicholas Herman from Citigroup. Please go ahead.
Yeah. Just a small one on going back to the ROI of the deals. Shaw and Partners, am I right that the ROI in year three is about 10%? Well, just over on that one. Thank you.
I don't have the calculation handy. Return on investment. I would, I would bet that it is significantly higher than 10%. Again, Nick, maybe take it offline. We can run the calculation in year three. When we made the investment, again, we were clearly above the 10% ROI, in the business plan that was presented at the time, and they are beating that business plan in Australia. I think that we are massively over the 10%, but.
I can confirm, Nick, I mean, I've been in Sydney at the end of January, and we have actually took out of the drawer the old business plan, and we are beating it, or the team in Sydney and in the rest of Australia are beating the business plan in all dimensions. I'm sure that offline we.
Do the calculation.
We can do the calculation. We are very, very pleased with the partnership and I think it has been a very good investment and a very good partnership. As you have seen, some of our peers have followed.
Another question in the room, and then I think we have another question on the phone, but we'll take room first.
Okay. Thank you.
Yeah, just on capital again. So the reclassification of the fixed income portfolio led to the almost 200 basis point increase in CET1. Is it fair to say that this is basically a front-loading of the pull to par because of the spread widening? We, basically, the way we should think about the capital ratios profits, RWA and capital returns, and that's it. Is this relevant when you like, for the board or even the regulator, two days, because it's, in a way, it's market to market versus accrual accounting. Is the 14.7 even relevant? Because that would be below 15, right? Do you take that into consideration? I mean, we all assume these bonds pull to par and you get the money back, it's all fine unless there's a default.
Are these two ratios both still relevant, or is it really just the one for all the decision makers?
Look, we report both here. You know, we provide quarterly reporting to the regulator on capital. You know, whether it's first of January or 31st of March, you know, in the 31st of March submission, the capital is gonna be 16.6% plus minus whatever we have in the first quarter. For me, the relevant number, both to investors and to regulators, is the figure that is gonna be reported, which is gonna be at this high level. As you say, it is the pull to par. You know, for us, the majority of the bonds that are in the portfolio are US Treasuries.
You know, if the drop of the valuation is because of interest rates, which is what happened in 2022, I think that, you know, the hold to collect is the correct way to think about it because you don't carry credit risk. If it was for a different reasons, like for credit, then it's a different discussion. I think that for all purposes and for all audiences, the 16.6 that we have as of 1st of January is the appropriate number to discuss.
Okay. Thank you.
We have another question on the phone, I think. Can we please?
We have a follow-up question from Daniel Regli from Credit Suisse. Please go ahead.
Yeah, thanks for having another question from my side. My question is also on Shaw and Partners, and I just wondered, you know, what is kind of the mid to longer term strategy, whether if there has anything changed? Yeah, just noted that you always kind of report these employees separately. Is there nothing, no ambition to kind of more fully integrate Shaw and Partners into the EFG operations?
Yeah, thank you for the question. No, as I said, we were in Sydney at the end of January after 3. 5 Years. We had the opportunity to do a strategic review of the business. As I said, we are very pleased with the partnership. It's already four years. I mean, time flies. You know, I think it is a strategic partnership. Nothing has changed there. Actually, also in Australia, we were discussing how to grow further the business organically or inorganically. We will look at all the avenues to go to the next level.
In terms of the reporting, the simple reason is that clearly the Shaw and Partners business is an FA business, is a domestic business, has some drivers that are different from the international private banking business. To give the best possible transparency to investors and analysts, we make this difference. In terms of synergies, you can go back to the presentation of four years ago. We have highlighted at the time three types of synergies. One was to give access to the clients and investors in Australia to international markets and also to Lombard lending, for example, out of our different international booking centers. We are developing that. Clearly the last during COVID times, it was very complicated to travel to and from Australia.
Now this is again taking a renewed, let's say, energy. The second area was to look at the, let's say the Chinese diaspora. As you know, Sydney after Vancouver is the second-largest city where you have Chinese national that take residence, and many obviously are very affluent. On that, we have strong capabilities, and we are looking at that. The third is how to basically leverage our international funds, New Capital funds, for example, for institutional clients in Australia, and we have a team dedicated to that. The three strategic, synergetic priorities remain the same, and we are following the plan, and as I said, we are looking at all avenues to grow both organically and not organically.
Okay. Thank you so much.
Great. I think we have no further questions on the phone. Any last-minute questions in the room? I don't think so. I would hand over for Giorgio for some final remarks.
First of all, I'd like to thank everyone attending the presentation for your interest, your support and your questions. To sum up, again, I'll do a full circle. The key takeaways are, again, you know, 2022 was a very strong year for EFG. We have successfully completed our 2019, 2022 strategic plan in a challenging environment. Now we are turning the page. We are entering a new planning cycle, 2023 and 2025, in a position of strength, and we are very confident that we will be able to achieve our objectives, and we will be able to make EFG one of the best brands in international private banking and wealth management. Thank you very much.