EFG International AG (EFGN) Earnings Call Transcript & Summary

A very warm welcome to the presentation of EFG International's First Half 2022 results. It's great to see in the room some familiar faces again, so it's for the first time again the opportunity to have at least a couple of people present. Today, we have obviously from the management team Giorgio Pradelli, CEO of EFG International; and Dimitris Politis, CFO and Deputy CEO of EFG International. As usual, we will have presentations from both gentlemen and afterwards we have enough time for Q&A as well. So with all that and pointing out that the disclaimer of the presentation has been read, I hand over to Giorgio. Thank you.

Thank you, Jens, and good morning. Good morning, everyone. Actually, as Jens said, we are very pleased to, after 3 years, to have again a meeting in person. So we welcome everybody who took the time to attend in person. And clearly, we also welcome everybody who's attending via the webcast and remotely. So obviously, today, we are very pleased because we are presenting to you a very strong set of results. And this is clearly the sign of the progress that the firm -- that the bank has done over the last 3.5 years after the announcement of our 2022 strategy 3.5 years ago. Before we go into the presentation, on the other hand, I would like to mention that, clearly, we continue to live in unprecedented times. Now we are 2.5 years in the pandemic, which has caused unprecedented shocks on the supply chains. We had the first invasion in Europe after World War II. And after years of deflation, actually we live in a high inflation environment that has led central banks to raise interest rates faster and higher than the markets expected with a consequent market, I would say, turbulence or at least volatility in the first 6 months. As you know, returns on equities and fixed income have been negative in this month. Clearly, policymakers are trying to orchestrate a soft lending, but there are risks for that. We will talk about the outlook later. And I just mentioned this because, obviously, we need to judge the performance of the last 6 months in the context of the external environment. Having said that, and I start now in the presentation on Page 4, despite the market uncertainty and volatility, I am very pleased that our performance has been very strong. We continued with our business momentum, and we were able to accelerate our profitability. Actually, we report record underlying net profit. Let me take the 2 key points, the 2 key messages of this slide. First of all, continued growth momentum, the NNA development has continued unabated for the last 7 semesters since we announced our 2022 strategy, it is at 2%. It is fair to say that it is slower than in previous periods. And this is due to the fact that clients have derisked and deleveraged their portfolios, their positions following the market volatility. If we exclude this deleveraging, actually, the NNA is 4%, which is within our target range of 4% to 6%. In terms of profitability, we are very pleased to report an underlying net profit of CHF 115 million. This is, I would say, a very strong result, plus 40% year-on-year. And also IFRS net profit is in excess of CHF 100 million. It is the first time that we report both net profit, IFRS and underlying, in triple digit. This acceleration of profitability has led to significant improvements in terms of cost/income ratio and return on tangible equity. And if we take into account the footprint actions that we have already taken and closed at the end of June and beginning of July, our cost/income ratio has reached 75.8%, within reach of our target for year-end of 75%. And our underlying return on tangible equity has reached 14.6%, again within reach of our target for the year-end, which is 15%. Now if we go to the next slide. Again, what I'd like to emphasize here is that these results are the outcome or the result of a consistent delivery of our strategic plan. Despite the volatility over the last 2, 3 years, I would say that we have never lost sight of our priorities, never lost sight of our targets, of our objective. And we have had a consistent delivery of this strategy. I'm very pleased that all the teams across geographies and the growth functions have worked together to achieve these targets. For us, in terms of the priorities, obviously increased client focus has been always, I would say, the top priority. And I would also say that in time like this, in time of adversities and extremes, is when our expertise our services and our solutions actually matter the most. And we always had a policy over the last 3.5 years to be very close to our clients and to deliver the solutions that can meet the -- our clients' needs. Obviously, we have embarked over the last 3.5 years in a trajectory of simplifying our operating model and we have optimized our global footprint, as you have seen. Clearly, all these actions have led -- and you see it on the right-hand side on the chart, have led to an accelerating and an improved operating leverage. And this for us was something that we aspire to and this is what is behind the acceleration in profitability. Now I think that to sum up these introductory remarks, the 2 key messages that I would like to leave with you is that our trajectory is intact. And after 3.5 years of growth, I think we can say that, at EFG, we can deliver consistently sustainable and profitable growth throughout the economic cycle. Now I'll hand over the floor to our Deputy CEO and CFO, Dimitris Politis, who will give us a comprehensive overview of our financial results. Dimitris, the floor is yours.

Thank you very much, and welcome from me. I think today is one of the critical dates in terms of the presentation of the results because we are getting closer to the end of the plan that we announced in 2019, so our 2019-2022 plan. So it is the time where we will compare ourselves to our targets, Giorgio will do that in his closing. But I think that the performance we have in the first half of 2022 gives us a lot of confidence in terms of the trajectory going forward. I'll take you to Page 8, which has the key messages. But before I go into the specific numbers, I'd just like to make 3 points, which I think are the 3 key messages from the results today. The first point is that throughout the period, we have continued growing, we have continued to create operating leverage. What you see as the result, which is CHF 115 million of underlying net profit, which is 40% up year-on-year, is the result of that effort and of a very successful delivery of the strategic plans over the last 3.5 years. As Giorgio said, it is the first time we publish a triple-digit underlying profit and a triple-digit IFRS net profit. This gives us a lot of confidence that we have reached a new level of running profitability. And also, and I'll come back to that, we are optimistic about the evolution of our revenue margin going forward, which will support even further profitability growth. The second point is that, throughout the period, we have continued simplifying our operations. And we've done it through 2 streams, one is a series of small actions that -- or larger actions that relate to our 8 core booking centers, but also by relieving the pressure or de-complexifying, if that word exists in English, our presence in other regions. What we've done in the first half of 2022 is that we have concluded the sale of our Spanish operation, concluded on the 7th of July, but also we have terminated our operations in Milan. I will come back to that with some figures because, clearly, what you see in the first half is not the full benefit of what we've done. So there is more benefits coming in from these actions in the second half of the year. The third point is that in times which are uncertain, having excess liquidity and having excess capital is key, allows you with optionality of how you will address the situation. And it could be through organic growth, as we've done in the past, but it also means that there is an opportunity to take advantage of some M&A opportunities if these come to light. So now on Page 8 with some of the key figures. NNA, CHF 1.7 billion for the first 6 months, growth rate of 2%. As Giorgio mentioned, there was a lot of deleveraging because of market uncertainty, also relating to the war in the Ukraine in the first half. Excluding that deleveraging, the annualized growth rate is 3.9%. AUM of CHF 158.8 billion (sic) [ CHF 155.8 billion ]. This is 9% down versus the year-end of 2022, clearly driven by the correction in the markets, both in the equity side and on the bond side. The revenue margin has gone up by 2 basis points. So we have 73 basis points in the first half of 2022. This compares to 71 in the first half of 2021. What is important here is that the run rate is even higher and our exit rate at the end of the first half of this year is already at 80 basis points, excluding the disposal of Spain. And we are also optimistic that 80 basis points will move north, getting closer to the 85% -- 85 basis points that we have as a target for the full year plan. Profitability. Continued operating leverage, 3% up on revenues, flat on costs. This supports the growth in the underlying net profit. CHF 115 million of underlying net profit, 40% up, which is a record year. And an IFRS net profit of CHF 100.3 million, which is down 6%. And the reason it's down 6% is that, in the first half of last year, we have an exceptional gain from settlement in the life insurance space, which gave us about CHF 35 million at the time. That was the net result of life insurance at the time, which clearly is not repeated this year. On the cost side, cost-to-income 77.3%. It is actually 75.8% taking into account all the actions and footprint we have completed in the first half of this year. Clearly, this comes with discipline in costs. Otherwise, the cost performance would not have been the one you see. And finally, on capital, we have a capital -- core Tier 1 capital position of 15.5% after the conclusion of the transaction in Spain, which gives us a lot of buffer compared to the regulatory minimum, of course. We are generating gross capital at a rate of 120 basis points this semester. And also in terms of total capital, we have redeemed some remaining Tier 2 notes and some Bons de Participation, which was a small amount during the first half of the year. I'll skip Page 9, which is all the detailed figures. I'll go straight to Page 10, which is the highlights of the performance. 2% NNA growth or 3.9% excluding deleveraging. You will see the huge improvement in the cost-to-income ratio over the last 2 years. We are 2.3 percentage points down versus last year. I think, more importantly, we are 10 percentage points down versus the first half of 2020. And on the right-hand side, underlying operating profit, which is just revenues less costs, is up 15%. And the underlying net profit after tax is up 40% with a return on tangible equity of 14.6%. Let me just remind you that the target for -- in the financial plan is to reach 15% in 2022. I'll go to Page 11. I think Page 11 is critical because we have a lot of moving parts in the figures. So we're trying to provide some transparency of what happens once Spain is deconsolidated and once the Milan operations, which have concluded now, do not have an impact on the profitability. So comparing the first half of 2022, the way it was printed, to the figures, excluding AYG and all the other footprint actions, you will see that our [ actual ] revenue margin is 75 basis points, and our cost-to-income ratio is 75.8% for the first half of the year. And on the right-hand side, you'll see that our actual underlying profit is CHF 119 million and that leads to a return of tangible equity of 14.9%, which again is just 0.1% shy of the target that we had for -- that we have for 2022. Page 12 is our usual page reconciling underlying to IFRS profit. Underlying yields 40% up. We have the usual adjustments that we have to do for non-underlying items, so life insurance, the legacy legal cost and provisions for the Taiwan case and the intangible amortization, gets us to a bottom line of CHF 100.3 million. And again, when comparing the CHF 100.3 million to the CHF 106.5 million of last year, you should take note of the exceptional CHF 33 million of profit we had in life insurance. If we had not had that, then also IFRS net profit would be growing by something like 30% year-on-year. Page 13 is about NNA growth. It is CHF 1.7 billion, 3.9% annualized, excluding deleveraging. I think what is very telling is the chart on the right, which supports and confirm the strategy we've had about how we approach CRO hiring. You'll see that despite the uncertain times, both new CROs and new business initiatives, which have to do with new location that we have started operating, have been adding NNA even in the first half of 2022. Clearly, the impact of deleveraging has been on the existing CROs. But again, what we are seeing is that the gross inflows that we're having have either stayed the same as last year or have increased versus last year. So it is more about outflows relating to deleveraging, which we consider to be temporary, that are the reason for the lower but still positive and 2% growth that we have in our NNA for the first half of 2022. Continuing on the strategy of CRO hiring, I'm moving to Page 14. What you see here is the trajectory of a number of CROs and hirings, this is on the left. We are practically flat on the number of CROs. We are continuing to hire a bit higher levels of hiring than we had in the past, so in general, the hiring is strong. We have dedicated a lot of resources to make sure we hire the right people. We are focusing very much on hiring teams because we found that the benefit from teams is a lot more positive. The pipeline for CRO hiring is strong. And what you see at the bottom right is that we have continuously increased what we call the load of the CRO, so the AUM per CRO, and that is important for not just for the capacity of the CROs, but it's also a measure of how efficient we can be in delivering our services. Clearly, with higher AUM per CRO, you need less in the back to support those AUM going forward. Page 15 is the breakdown by region. Breakdown by region, as you see, we have Continental Europe and Middle East leading the pack this time. Asia Pacific and Latin America have also had positive contributions. Switzerland and Italy have been the region mostly hit by the deleveraging. And U.K. has been flat -- or pretty much flat for the year. What is -- provide us some -- more confidence is, if you look at the chart on the right, all the business regions are in a positive trajectory if you were to exclude the loans. And I think that is important in terms of our view of how the future should evolve as the deleveraging effect subsides. Now Page 16. So Pages 16 and 17, I think, are critical because we try to give you as much as we can on the -- both the revenue and the cost performance. Revenues came at CHF 602 million, this is all underlying. This is the best performance we've had in the revenues since the beginning of the plan. I think it's even further going back -- further than that, it's probably a record year in terms of revenues. We've seen a very significant uptick from net interest income. It is 21% versus last year, and the trajectory for this figure is to continue growing throughout the second half of the year. Clearly, commissions have been impacted by the market correction and also from lower client activity. What has compensated, to some extent, is that we've seen a lot more client activity in the currency space, which have -- has helped support the net other income line. Overall, the mandate penetration has been resilient. It is 55% of AUM, excluding loans, and this is despite the market correction we had in the first half of the year. And to give you an idea of how we are approaching the future, I would focus on the chart at the bottom right, which is the revenue margin anticipation. First half, 73 basis points. Our exit run rate after the conclusion of the Spain deal is at 80 basis points already. And we are expecting that figure to grow even further, closer to the 85 basis points that we have as a target. To give you an indication, in 2018/'19, when rates were again at much higher levels, we were looking at margins, which were in the region of 83, 84 basis points. So I think looking back in history and comparing the figures on a higher interest rate environment gives us the confidence that we will be moving towards the 85% -- 85 basis points that we have as a target for 2022. Next page, Page 17, is on the costs. Clearly, a very substantial improvement in cost-to-income. The main driver for the cost is the decrease in personnel expenses, which is driven by lower payroll expenses. This is the outcome of continuous efforts in managing the cost base. On the other hand, we've had an increase on the general and admin expenses. We were expecting that because as the world turns to more normal business operating mode, there are certain costs which are increasing. To give you an example, travel costs is something that we didn't have in the first half of 2021. And clearly, there is some expense included in the first half of 2022. At the same time, we are investing in growth opportunities and digital solutions. In that respect, you'll have some increase in your G&A. What we're getting as a positive is clearly the impact from all the footprint actions, and this is how we get to a cost-to-income ratio in the first half of this year of 75.8%. This is the pro forma or adjusted figure if both Spain and the other footprint actions had already been concluded in the first half of the year. Page 18, the balance sheet. Balance sheet has grown slightly compared to the year-end. Now it's at CHF 43.9 billion. At year-end, it was at CHF 42.1 billion. Pretty much the entire increase is on the deposit side. So we have increased deposits by about CHF 1.2 billion, CHF 1.3 billion in this period. This leads to a loan-to-deposit ratio, which is lower than before, so it's now at 48%, and a liquidity coverage ratio of 172%. As I mentioned earlier on, in times of uncertainty, having liquidity and having capital, which is the next page, is very important. And this is a very solid and a very liquid balance sheet at the same time. Page 19,is all the information you need on the regulatory capital position, which is very strong. To note that since the 1st of January 2022, we have transitioned to reporting all our capital metrics based on IFRS versus Swiss GAAP, which was the case before. That has led to some adjustment from the Swiss-based GAAP that we were listing before. If you look at the footnote, we are still mentioning our core Tier 1 and our total capital ratio under Swiss GAAP, but this is the last time we will be doing that. I think what is very important is we have been very active in managing capital. The disposal of AYG in Spain will add 70 -- or has already added because it has happened, 70 basis points in core Tier 1 capital. We have redeemed Tier 2 notes, but that is on the back of issuing $400 million of Tier 1 notes in January last year. And as you see also, we have been managing our risk-weighted assets throughout the period. And now our risk-weighted assets are at CHF 9.5 billion of risk-weighted assets. Total capital ratio -- core Tier 1 capital ratio is now at 15.5% and total capital ratio is at 9.3% with a very substantial buffer clearly to any regulatory minimum. In terms of evolution of capital throughout the period, and this is on Page 20, we started with a core Tier 1 of 15.8%. We have had a very substantial gross capital generation of 120 basis points, very little impact from risk-weighted assets, and then our dividend accrual. We had a markdown on our bond portfolio of 1.1 percentage points on the capital. That revaluation will come back almost in its entirety in the next 24 months. So you should be expecting to have an additional 110 basis points coming into the figures mostly by the end of 2023 and in 2024. And again, at the right-hand side, you also see the impact from Spain, which gets us to the 15.5% core and 19.3% total capital ratio for June 2022. I will close with Page 21. We've been repeating this page pretty much every 6 months that we have reported, and for us, has also been a bit of a compass on how we are delivering. Clearly, in all these plans, there are 2 elements. One is are you delivering what you promised on an action plan basis, and then what is the financial outcome following that. I'll cover the first in terms of what we've done, and Giorgio will come back to what this means for financial performance versus the financial targets that we've set. I'll be very brief because you'll see that with the exception of digital solutions, where clearly the world is moving forward and we need to move forward with the world in that respect. Pretty much everything else has a tick. The most volatile time, or like sometimes we call it a roller coaster, has been the part in the middle with AUMs dropping substantially in the first half of this year. Interest rates going negative post-COVID. Interest rates now really picking up where we have a very positive expectation going forward. But in the end of the day, I think that the key message from this page is that the delivery on the plan that was committed to by management in 2019 has been very strong, has been very timely, and not trying to steal Giorgio's thunder, it has printed in the financial performance at this point in time. So on this basis, we feel confident about how we're going to close the year. And I think it also puts us in a very good footing when we start discussing our next plan, which will happen in October. On this note, thank you very much. And I'll pass it on to Giorgio.

Thank you. Thank you, Dimitris, and now we will start the last part or the pages, the last section of the presentation about the outlook and strategic priorities. Maybe before going into slides, I'd like to mention about the outlook. And clearly, we are in a difficult situation to be able to have a clear visibility. Actually, the visibility is quite poor. As I was saying at the beginning, what we see is that policymakers and central banks are trying to orchestrate a soft lending to -- following the shocks, the multiple shocks in this post-pandemic world. And clearly, the risks are there. The risks are that maybe we give too much medicine and we will plunge the world into a recession. Or maybe we'll do too little, too late and then inflation and stagflation will dominate our world. To be very blunt, obviously, we don't have the crystal ball and it is difficult to make prediction. What we can say is what we control. And the key message that we want to pass is that at least for the foreseeable future, we are coming out of these 3.5 years in a position of strength. And for the next few quarters, we control the levers and we are able to navigate whatever environment we will have to be faced with. Following on -- and now on Page 23, following on what Dimitris has just said, we are very confident that for the next few quarters we can deliver what we promised basically 3.5 years ago. We have consistently delivered on our targets, and now all the pieces of the puzzle are coming together. Now we highlight here the underlying return on tangible equity. We believe that at the end of the day, all the actions that we do and all the implementation of our strategy lead to improvements on this very important measure, especially for our investors and shareholders. And as Dimitris mentioned, we are very close basically in achieving the 15% that we have set. To be very fair, I would say that the way we arrived there maybe is not the way we envisaged 3.5 years ago. Actually, 3.5 years ago we were much more confident and bullish about the revenue margin. I must say, there, as Dimitris mentioned, has been a roller coaster. We were maybe less, at the time, confident about NNA growth. And indeed, actually the growth has been 5.1% on average, and we are confident that we will continue to deliver profitable and sustainable growth. Our pipelines are good. And again, for us, it was extremely important to deliver on the cost-to-income ratio. This is an indicator of obviously, of scalability, of efficiency, of productivity and ultimately of quality. Clearly, our capital management has been good throughout the period and this is a very strong solid foundation that allows us to continue growing and also allows us to deliver returns to our shareholders, and the dividend payout is in excess of 50% and will remain. So in a nutshell, we are very pleased of having achieved our targets, our hard targets, and we believe that we have the levers, as I said, to navigate the next few quarters. But as already mentioned, we have always this dual focus: one is to hit the numbers that we have set ourselves; and on the other hand, to continue to further enhance the quality of everything we do and continue the transformation of our bank in order to drive sustained value for all our stakeholders, starting from our clients. I believe this has been always our North Star, and as I already mentioned earlier, it is in times like these that actually clients need us. This is our focus. And we believe that our bankers, our client relationship officers are able to deliver superior service and advice, which is second to none in the market. Obviously, clients want solutions, clients want content. And this is also an area where we invested, over the last 3, 4 years, a lot and we will continue to invest. This is one of our top priority. And clearly, we have been trying to simplify everything we do from the footprint, introducing digital solutions and automation and centralize and streamlining our infrastructure. Besides the transformation and hitting the targets, again, I'd like to emphasize that our confidence is also due to the fact that we believe that the foundation of the bank are very solid, are very strong. We have, as we just heard, a very strong balance sheet with strong capital and a very liquid balance sheet with a lot of excess liquidity that can benefit from a rising interest rate environment, and obviously, strong compliance and risk management framework. To close, I would like to say that in times of uncertainty and volatility like this, what makes the difference is having strong teams, a solid balance sheet and a distinctive business model. And we believe that our business model is competitive and is able to deliver sustainable and profitable growth throughout the economic cycle. We believe that we are coming out of this cycle in a position of strength. And actually, we are very excited and looking forward to present to you in October, on the 12th of October, the 2025 strategy. And with this, I close the presentation and over the floor to Jens for the Q&A. Thank you.

Thank you, Giorgio, thank you, Dimitris, for your presentations. As Giorgio has indicated, we will have now the opportunity, obviously, to answer the questions you might have. As we have this time some people present in the room, I don't know, starting with the room, if there's any question. I think, Andreas, you get a microphone, 1 second.

Andreas Venditti, Bank Vontobel. I have a number of questions, I'll start with a few and then maybe I'll add some more later. Maybe you could talk a bit on the repricing actions you mentioned, where you stand there, how you see the potential to go further, I think that's important. Then in terms of net interest income. Obviously, we've seen now the pickup. Maybe you could guide a bit more in terms of second half. We've seen 19 basis points in the first. Where do you think we will end in the second? Then on M&A, obviously, capital, as you said, is strong and is building excess capital. Maybe you could quantify how we should think about excess and what would be realistic of you using for M&A. And in terms of M&A, what you might be looking at, not in terms of names, obviously, but in terms of regions, qualitative, size and things like that. Yes, that's it for now.

Thank you, Andreas. Now maybe I start with the repricing actions. Obviously, this has been, I would say, light motive of our strategy over the last few years. Clearly, as I said, in 2019, we did not expect interest rates going down also on the dollars so drastically. And clearly, this has been, for sure, a major trigger. Repricing, the way we think about it, is always a balance between, let's say, being competitive in the marketplace. On the other hand, we believe that we deliver a good service and good solutions and it is important that clients recognize that. Now we have been starting in a more systematic repricing approach about 18 to 24 months ago. We have started at the beginning more in Switzerland. Now we are following across geographies. And we are trying to -- and again, the repricing is commensurate to the kind of solutions we offer. So one major and important element is the conversion of certain assets that maybe are more for brokerage or forecasted into advisory, in discretionary. Clearly, structured products is something that, especially with these volatile markets, are an important asset class. Leverage, we think that leverage is important for clients. Obviously, when there is a volatility, it is something that has to be seen in a dynamic way. So I believe that regarding forward-looking, I think there is more scope, there is more scope for repricing. I cannot quantify it. And to be fair, I believe that clients understand. I believe that clearly there is a secular trend in a compression of margins in the banking industry, and we will not get away with it. But clients understand that if they want to receive a personalized, customized service, obviously this is a price. And usually, what is always very interesting is that, obviously, if you don't ask, you don't get. And very often, it is surprising that when you ask, actually there is no problem. And so -- but this is also a cultural mindset. I believe my view in general for the industry is that there are certain specific areas where the industry will regain pricing power. But again, we need to deliver something value-added to the clients. For sure, margin will continue to compress in the commodity like services that obviously, in the future, will be delivered by machines. So there is this polarization, this dichotomy. We need to deliver personalized and customized services and there we can achieve better pricing.

Should I take the question on net interest income? I'll take you to Page 16 of the presentation, which shows the evolution of the revenues. If you look at the margin for net interest income, it was 15 basis points last year and it's 19 basis points for the first half of this year. Now the way that the extra NII from the rate increase has come into the picture this year is not throughout the period, it is towards the end. Actually, we've had -- clearly, May and June, we've had the benefit, perhaps a bit in April, but it's mostly May and June. So keeping it very simple, I would say that the 19 basis points of average is starting from 15 in January and then you're looking at something, which is of the order of 22, 23 basis points at the exit, which is about 4 basis points above what is the average of the year. So what we also expect is that the rate increases, which have already happened, still have something to give to the P&L because some of them happened already in just middle of June. So we don't have the full effect. And we do expect more rate increases coming. Look, the Fed is definite now. We can talk about whether it's 75 basis points or 100 basis points, we'll see what happens. ECB is deciding shortly, let's see what happens there. But we definitely expect that to be also beneficial. So let's call an exit rate of 23 basis points. And to compare to 2018/2019, at the time the net interest margin was about 26, 27 basis points. So it was another, call it, 3 basis points or 2, 3 basis points higher than what we see from the exit rate. So this gives us the confidence. Now there are many moving parts clearly. So it's -- we feel optimistic it's going to move towards the 85. Let's see exactly how close to the 85 we're going to get.

On the M&A, maybe just to give the overarching perspective, how we see it. Obviously, as you said, Andreas, we have excess capital. We like M&A. I think we have demonstrated in the past that we can do M&A and we can integrate and execute also complex transactions. . Now in terms of the criteria and then maybe we discuss about the excess capital later. In terms of the criteria, I think, for us, what is important is that we identify targets where we are already present. So for us, add-on acquisitions is what we are looking for where we can extract synergies and increase, let's say, the load of our infrastructure. But I would like to say that probably the most important criterion is actually the cultural fit. At the end of the day, we need to find some other companies that share our philosophy in serving the clients and that client relationship managers have somehow the same approach, which is a very dynamic and positive approach in terms of client focus. And obviously, the right price, which I would say is probably the reason why in the last 3.5 years there were not many opportunities. Now in terms of excess capital...

Well, I think when we came out in 2019, we set ourselves a minimum core Tier 1 ratio of 14% at the time, that was under Swiss GAAP. And now we have transitioned to IFRS, so the numbers are not exactly comparable. And I think the 2 other elements to consider is that over the last 3.5 years, we have derisked on our legacy positions, both on the life insurance and on the legacy legal case. So I think that if we're having the same thinking, going through the same thinking process today, the 14% would be lower to some extent. And at the same time, we see that we are continuously generating capital organically. Plus, we expect to recover the revaluation, the mark-to-market of the bond portfolio in the next year, 2 years. So that gives us confidence that the number should be growing. Now CHF 100 million goodwill, which I don't know if the going rate is 1% of AUM, you're talking about CHF 10 billion of acquisition, would reduce our capital ratio by 100 basis points to give you an indication. So -- and the space that we are really looking for the acquisition is bolt-on acquisitions of -- in private banking. And it's CHF 5 billion, it's CHF 10 billion, that's for us the sweet spot in terms of the transaction we'd like to do, clearly in a booking center where we operate so we get maximum efficiencies. So just to give an indication of the potential impact of such M&A at this point.

Say, another question in the room. Otherwise, we move to the telephone, please. Can I have the first question on the telephone, please?

The first question from the phone comes from the line of Adam Terelak with Mediobanca.

I've got 3, one on flows, one on NII and then one on costs. On flows, clearly, I think it implies small outflows in the second quarter. Could you just confirm that? Can you also confirm kind of timing of some of the deleveraging actions and how maybe June and July to date may have looked just to get a kind of underlying feel of the progress and when we can see a return to a bit more of the normalized environment? On NII, clearly, the upside on the central bank moves is exciting, but I just want to understand the liability side a little bit more. Clearly, rates are moving quickly. What are your depositors doing? Have you seen depositors turning out? And kind of what's the cost of that? And how should we think about that in kind of just a pure [ beat ] standpoint, so pass-through of higher rates is a positive. And then finally, on the cost profile, I just want to have to think about what first half against second half looks like this year. Is there any spending you've held back because you've got rate sensitivity in the second half of this year to absorb? Or is the first half kind of clean run rate, a good position to be thinking about adjusting clearly for potentially some compensation in the second half?

Thank you. Maybe on the flows, what I would say is that actually the 2 quarters have been quite comparable. I think we came out at the end of April and the net-net NNA growth was also 2%, and excluding deleveraging, was also 4%. So it's exactly the same. We saw, obviously, the markets in June were particularly negative. So we saw there, I think April, there was a bit of a respite in April and May, and then there was again a bit of volatility and turbulence in June. But by and large, the 2 quarters have been similar even if the underlying causes were probably different because in the first quarter they were affected by the war and the second by the market volatility. Again, regarding to forward-looking, it's difficult to make predictions about deleveraging. What I can say is that in terms of pipelines, in terms of being close to the clients and generate gross new assets, I think there we are very strong and the figures, as Dimitris has mentioned, are very much comparable to previous years. So our ability to generate new inflows is the same. How tactically clients manage their portfolios and deleverage of their portfolios, this is something that is very much dependent on the market conditions and volatility.

On your question, Adam, on the NII, clearly, as you said, we see the upside in the NII. We've seen some client movement from noninterest-bearing accounts to interest-bearing accounts. I think the quantum we're talking about is probably somewhere between CHF 1 billion to CHF 2 billion of transfer during the period. At the same time, we've seen the balance sheet -- the liability, the deposit on the balance sheet to increase. So I think from a net-net position, this is not creating any issues at this point. Do we expect that we will see some further movement? Yes, we do expect that we'll see some further movement to interest-bearing accounts. But what we've also seen, and this goes back more than 10 years, even before the financial crisis, even as the times -- at times where we had high interest rates, we still had a very substantial amount of our deposits in noninterest-bearing accounts, especially on the dollar. So the -- behaviorally, there is clearly some movement, some price sensitivity between lower interest rates and higher interest rates, but there's a solid block of deposits which remains in noninterest-bearing accounts irrespective of the level of interest rates. Third question on the cost profile, I think that I'll try to give you a few of the levers of what we expect to see in cost in the second half. Clearly, the starting point is excluding Spain. So your starting point is lower in nominal terms versus the first half. We are seeing more business activity picking up. So some of the expenses that we had already in half 1 will definitely continue or maybe increase a bit in the second half of the year. But this is the result of business activity, so we expect also to see a benefit on the income line with more business being generated through these costs. We do see inflation picking up. It really depends on the jurisdiction. We've seen locations like U.K. or Miami where the nominal inflation posted is of the order of 9%, which is peaking at this point. We are, to some extent, insulated because 50% of our costs are in Switzerland, where clearly the inflation rate is somewhere close to 3% at this point. So the impact on the cost side is going to be lower compared perhaps to some other players in the market where they have different exposures on the cost side. At the same time, we are also continuing or picking up on other simplification actions. So if you remember, we had one project, which we call footprint, which is pretty much done at this point. The second project that we are running is what we call internally the Simplicity project, and that includes many actions over 2022 and 2023, which have already started even earlier on. Some of them started in 2021, which should help us mitigate the cost actions. Now it is a balancing act. And in general, given some seasonality, second half costs have been higher than first half costs if you look in previous years. But overall, the target that we're managing is the cost-to-income rather than just the revenue or just the cost. So I think that if we believe that there is merit in investing at this point given the tailwinds we're getting from interest rates, we will do so to be in a better position for the next business cycle, so the '23, '25. And again, the target we have for cost-to-income is 75% for 2022.

Great. Can I have one quick follow-up on the inflation. Is that applying to the full cost base? Or is there a little bit of relief for CROs, which are paid on revenue generation?

Well, as you say, CROs are not impacted by inflation. The -- all the variable compensation is based on profitability. This is both for CROs and for the non-CRO bonus pool that we have. There are other elements, clearly, which are not affected. So all the intangible amortization or the tangible amortization, all these elements, are not affected. Some elements may be affected more. I'll give you an example, some of the lease agreements are slightly heavier than others. So it is a blend of different elements when you look at the cost. Again, you need to look line by line to start figuring out how big the impact is going to be.

The next question from the phone comes from the line of Nicholas Herman with Citigroup.

Yes. Three from me, please. Firstly, on loans and client behavior. Loans were flat in the half year, which is, I guess, is impressive given the strong deleveraging, which have been about CHF 1.6 billion. So it looks like there is strong underlying demand for leverage. So I'm just curious what you're seeing in terms of general client demand and risk appetite. That would be the first question. . The second question is just moving -- we've obviously focused a lot on NII, just moving to the fees and commissions. The fee and commission margin dropped by, I think, about 1.5 basis points versus the second half of last year on lower activity, but also it looks like also on lower recurring fee margin, too. Now I think you previously said that there were no real lumpy items or performance fees in the second half last year. So just curious in terms of what would have driven that decline in recurring fee margin. Not revenues, but obviously the markets fell down, but the margin. And is that like driven by a shift in client allocations as well as lower mandates? So just -- again, just curious what you're seeing there. And then, finally, just in terms of the leadership and the Board, got to announce a new chair today, Alexander Classen; and a new Board member, Boris Collardi, who's announced at the first quarter update. Do you see these gentlemen placing greater emphasis on citing strategic factors versus the past? And I guess what do you expect Mr. Collardi to bring in particular, please?

Could I just take the technical couple part of the first question, which is, as you rightly say, Nick, the nominal balance sheet figure we have alone is practically the same versus December. What has happened is we've seen deleveraging, but then the currency translation impact has been positive, which brings back the nominal credit loan balance to where it was in December. So it is a combination of deleveraging and some of the currencies helping out in terms of increasing the nominal balance of the loans. I don't know, Giorgio, what you want to say about the...

No. In terms of flows, I think, as I mentioned, net-net, we have seen at the end, the deleveraging and derisking. This has been clearly mostly in March and June, first because of the war and then because of the market. Some people say, not yet capitulation, but for sure volatility in June. Again, it is clearly tactical. Obviously, for people coming in now and also if you look at the bond yields certain people are more interested to leverage again. But net-net, what we have seen in the first half is a net deleveraging. Clearly, in our view, lending and leveraging is an asset class. It is something that clients can use to optimize their portfolios and their performance. So clearly, we see that demand is -- remains good.

Now on your second question on net commission income, and I'm not sure I fully caught it, but I think I did. Clearly, we've seen a drop now. We have 43 basis points commission margin in the first half of the year. As you point out, last year, it was somewhere between 44 and 45 basis points on average on the year. The difference between the two is because we've had lower client activity on the brokerage side. So we see a bit of an uplift from mandates. But at the same time what we've seen in terms of client activity has been -- it has been the lowest -- probably the lowest semester in terms of brokerage activity from clients that we've seen since the beginning of the plan. So it is really subdued. It is not unexpected given what is happening to the market. Usually, when things move, it's a bit of a -- several of the clients take our wait-and-see stance and do not switch very, very quickly. We do expect that figure -- that margin to move higher or to normalize at some point. But again, I think that is something that we will have to wait and see when exactly that happens. The last one is about the Chair.

So regarding the last question about governance. Clearly, the first point I'd like to make is that we have been working very well in a true partnership with Peter over the last 3 years. And clearly, as you can see, this has delivered results. Now regarding Boris Collardi and Alex Classen, the new Chair, we are very pleased and looking forward to working together with the Board to shape the next cycle. As you have seen, they will be appointed on the 6th of October. And clearly, will be integral part of the Board for bringing the bank to the next level in 2025 in the strategy. And again, we are pleased that we have experts in the field that have joined the Board. And for sure, the company can benefit and the new Chair and Boris will contribute in shaping the new strategy.

The next question from the phone comes from the line of Daniele Brupbacher with UBS.

Yes. Can I briefly come back to the gross margin. You did say in the press release that it was on an underlying basis 77 basis points in the second quarter, 73 for first half. So Q1 was probably, I don't know, 70 or so. So if I think about the increase, and bearing in mind what you said on NII, Dimitris, is it fair to say that, I don't know, more than half of that 7 basis point increase is NII and the rest is then, what is it, is it this FX trading revenues, I think you mentioned, that probably picked up? And then second question, just on the SMB move a few weeks ago. What is the impact on the P&L bearing in mind that you -- I guess you have dollar excess liquidity, you probably swapped that and then there was the exemptions and the threshold, just thinking around those economics. Does it have any impact on flows, probably more like on a forward-looking basis? Does that help? Is that relevant at all? Then very lastly, sorry, again, on Lombard lending and deleveraging. You -- probably people expected APAC to be a key driver of that, but you did mention actually Europe and Italy overall. Is that driven by some small -- some big -- small number of big positions? Or is it across the board? And can you give us a bit more color in terms of what's happening in APAC, how significant deleveraging was in that region?

Let me take the first question on the revenue margin. And again, I'll go back to Page 16 of the presentation. So Daniele, as you rightly say, we have 73 basis points on the first half of the year, which is based on the 19 basis points that we have on the interest. Now the second half or the exit, whichever way you want to call it, of the year, enjoys a higher interest component. So that 19 basis points is 23 basis points, which gets you to the 77 overall. And then the 77 goes to 80 following the deconsolidation of Spain. So this is how you get to the 80 basis points of exit. And again, we do expect the 80 to increase further with more interest rates impact coming in for the second half of the year. Does that answer the question on net interest margin -- on gross margin?

Yes. It does. I think I can follow the math, but I still -- I mean I sort of tried to back out Q1 because I think in the press release you are saying -- so you have the 73, yes, but you then also mentioned if -- for Q2, you said it's 77. So Q1, just have to make sense...

Yes. The 77 million from 73, the extra 4 is simply the timing of how interest rates came in. All the interest rate impact has been in May and June. That's really we're saying that the second half -- the second quarter has been substantially higher than the first -- from the first quarter, and this is how we get to the 77 and then to the 80, excluding Spain. Now the second question, which is about the impact of the SMB and we haven't -- clearly, we haven't seen the full impact. I don't have the specific impact just for the SMB. But what I can tell you is that the impact from negative interest rates, and that is a combination of the negative interest rates on the Swissy and the negative rates on the euro was negative CHF 18 million in the first half. Now on the expectations that both central banks will move away from negative interest rates and they will go flat, that means that if you annualize that, you should be looking at CHF 36 million increased revenues in the net interest income line from those 2 central banks moving to neutral from negative. Now on the deleveraging on APAC...

On the deleveraging, Daniele, indeed, if you look also at Page 15, you can see that in APAC, in reality, we didn't have a lot of deleveraging or let's say the deleveraging we have seen has been compensated. To be fair, you have seen that over the previous periods, we have had quite a significant deleveraging in APAC when we had some kind of leveraged products, but that was concluded basically last year. So this year, we have not seen a major impact on that. Now I would say, coming back to your question, that what has made the difference have been few situations, important situations, where the client has decided to derisk and deleverage. This is what has made the net position negative. I wouldn't say that this is something that is spread across the board. It is spread across the board in terms of geographies, but not in terms of that clients now are running to close the leverage position. It's a normal dynamic management when the situation is so volatile. So for the moment, we don't see -- let's say, we didn't see any structural or systemic issues developing, are more specific situations.

We have a follow-up question from Mr. Terelak, Mediobanca.

So I was just following up on the negative rate picture. What volume of dollar Swiss franc swaps do you have? So how much excess dollar liquidity is going to the SMB via swaps? I just want to know how much that CHF 18 million has an equal and offsetting item in trading revenues.

Sorry, I will need to get back to you. I don't have that information on hand in terms of how big is our swap, the Swissy-dollar swap that we have. We usually don't disclose that, yes.

A fraction of that will be offset in the trading revenues.

Correct. Correct.

There are no more questions from the telephone.

Do we have another question in the room at this stage? Okay. I think we end for the question session. So I hand over to Giorgio for his final remarks. Thank you.

I'll be very brief. And the 3 key points I'd like to make is, first of all, that we delivered a strong performance in the first half of the year. This is the result of consistent execution over the period, and we are very pleased about that. And in closing, we are convinced that we have the teams, we have the balance sheet and the capital and a distinctive business model to make the difference with our clients in these volatile markets and over the economic cycle to deliver sustainable and profitable growth. Obviously, we look forward to updating you about our long-term plans on October 12. So I hope that -- it will be also in person, so I hope you will be able to join us. And thank you very much.