JBARF - Julius Bär Gruppe AG (JBARF) Q4 2022 Earnings Call Transcript

Julius Bär Gruppe AG (JBARF)

Q4 2022 Earnings Conference Call

February 2, 2023 03:30 ET

Company Participants

Philipp Rickenbacher - Chief Executive Officer

Evie Kostakis - Chief Financial Officer

Conference Call Participants

Jeremy Sigee - BNP Paribas

Nicholas Herman - Citigroup

Kian Abouhossein - JPMorgan

Anke Reingen - RBC

Nicolas Payen - Kepler Cheuvreux

Hubert Lam - Bank of America

Magdalena Stoklosa - Morgan Stanley

Amit Goel - Barclays

Stefan Stalmann - Autonomous

Andrew Lim - Societe General

Adam Terelak - Mediobanca

Presentation

Operator

Ladies and gentlemen, welcome to the Julius Bär 2022 Full Year Results for Media and Analyst Conference Call. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Philipp Rickenbacher CEO of Julius Bär Group; and Ms. Evie Kostakis, CFO of Julius Bär Group. Please go ahead.

Philipp Rickenbacher

Good morning and welcome. It's great to have you here for our full year 2022 results presentation. I'm very glad that together with our CFO, Evie Kostakis, I can present on behalf of the whole bank and our employees our successful results. 2022 was the second-best year in Julius Bär Group's history. Evie, in a few minutes, will walk you through the details of our strong financial performance which was particularly notable given the wide-ranging sets of market environments in 2022. And once again, not only underscores the resilience of our business model but also our ability to grow. Even more important, we can report today that we have fulfilled all targets for the just closed 2020 to '22 strategic cycle of Shift, Sharpen and Accelerate. We also reaffirm our strategy for our new strategic cycle, '23 to '25, Focus, Scale and Innovate, as presented last May. And I will run through how we have begun to implement it, supported by the momentum derived from the last cycle.

Before handing over to Evie to discuss our results, let me quickly run through how we scored against our 3-year financial targets for the full strategic cycle of 2020 to 2022. Our cost income ratio today is at 65.9% against the target of 67%. Our pretax margin is at 27 basis points at the upper end of the target range of 25% to 28%. Our profit before tax over the 3-year cycle has grown at 10.3% annually, exceeding the 10% objective. And we are producing an industry-leading return on CET1 of 34%, exceeding our 30% target, as we said we would. Let me reiterate that these targets were achieved under a mix of operating conditions that would have been hard to imagine in February 2020 when we set them; a global pandemic, pivots in fiscal and monetary policies, extreme market gyrations and geopolitical escalations. The track record of the past 3 years reflects the passion our staff brings to our business, their dedication to our clients and I would like to thank them for that. And I would also like to recognize and appreciate those who supported us on this journey. I will discuss the many qualitative achievements behind these results in a moment.

Now let me hand you over to our CFO for a deep dive into the numbers for '22.

Evie Kostakis

Thank you, Philipp and good morning, everyone. Let's start with an overview of the market developments on Page 7 of the presentation. 2022 was a year of significant macroeconomic surprises and overall unidirectional falling markets, leading to a combined double-digit percentage decline in global stocks and bonds, something we haven't seen in over a century. The dollar rose for most of the year before falling back quite a bit towards the end of the year, while the euro continued its long-term decline, breaking parity versus the Swiss franc, albeit recovering slightly towards year-end. Much of this was, of course, closely linked to the root cause, i.e., the rapid succession of meaningful Central Bank rate hikes as you see in the graph on the right, thus ending the era of very low or even negative rates. Yesterday, the Fed delivered another 25 basis point rate hike and let's see what the ECB does later today.

Moving on to the AUM development slide -- development on Slide 8. Unsurprisingly, the market and currency movements drove a quite meaningful decline in assets under management on top of which we had a number of divestments. These impacts were partly offset by a significant recovery in net inflows in H2 to which I will return in a minute. All in all, AUM declined by 12% to CHF424 billion and monthly average AUM which is important for our margin calculations came down by 6%. The total client assets tally amounted to CHF491 billion, 9 billion short of the CHF0.5 trillion mark.

Moving on to net new money on Slide 9. As I mentioned, net inflows recovered meaningfully from around CHF1 billion net outflows in H1 to almost CHF10 billion net inflows in H2, of which close to CHF6 billion in the last 2 months for a full year net new money result of close to CHF9 billion. We saw strong inflows from our clients in Europe, particularly in our key markets, Germany, the U.K. and Ireland and the Iberian Peninsula, as well as from clients in the Middle East, particularly from Qatar, where we opened our third Middle East advisory office in Doha just a few months ago. As you may recall from our presentation of the half year results, the main driver of the net outflows in H1 was the deleveraging, especially in Asia. It was therefore very pleasing to see net inflows turning positive in Asia in H2, thereby partly offsetting those regional net outflows from the first half of the year. In addition, close to 60% of net new money came from relationship managers who have been with us for over 3 years. As you can see in the appendix, we have definitively gone back into disciplined net hiring mode which should bode well for net inflows over the next years.

So now let's go to revenues on the next slide. The overall revenue development underscores the resilience of our business model. While the fall in global markets led to a decline in recurring fee income and lower client activity-driven income, the higher rates that caused those market declines led to a significant rise in net interest income as well as in treasury swap income which is essentially quasi net interest income. So going through the revenues line by line. Net interest income grew by 31% to CHF823 million as higher rates benefited both the income from loans, despite lower credit volumes and the interest income from our treasury portfolio which additionally benefited from higher reinvestment volumes. These interest income benefits were partly offset by an increase in deposit costs as clients moved cash from current accounts into call and time deposits to take advantage of the higher rates.

Net commission and fee income fell by 15% to CHF1.962 billion, recurring fee income declined in line with the decrease in monthly average AUM and the slowdown in client activity led to lower transaction-driven commission income. Net income from financial instruments at fair value through profit and loss or trading income grew by 19% to CHF1.051 billion. As the higher rates led to a significant increase in treasury swap income, i.e., the quasi net interest income to which I referred to before, the benefit of which comfortably outweighed the decline in structured products related income. Other income fell to CHF17 million as dividend income on financial investments declined and as net credit provisions ticked up slightly following some IFRS 9 driven model factor changes. These continued low levels of credit provisions reflect our careful management of credit risks and the high quality of our credit exposure across the cycle.

On Slide 11, in gross margin terms, one can see the different moving parts in a different and perhaps clearer way. The left-hand graph shows the development of the gross margin over the last 6 half year periods and you can see the full year numbers in the table below the graph. The 2022 full year gross margin increased by 5 basis points to 87 and the H2 gross margin went up to 93 basis points, an increase of 12 basis points from the level in H1. The light blue stack at the top of each of the columns represents the NII gross margin which recovered strongly to 22 basis points in H2 and to 19 basis points for the full year, following the rise in interest rates. The larger blocks in the middle of the columns represent the commission and fee gross margin which came down quite a bit following the decline in client activity. We will see this a bit more clearly when I move on to the next slide. The gross margin contribution from financial instruments at fair value to profit and loss or trading income rose to 27 basis points in H2 and to 24 basis points for the full year. We show on the right-hand side how the increase in treasury swap income, the quasi NII component contributed to this. From 6 basis points in H1, it more than doubled to 13 basis points in H2. Year-on-year, it also more than doubled to 9 basis points. The H2 NII and treasury swap income gross margins are particularly relevant as a basis for the interest rate sensitivity to which I will come back later.

On to Slide 12. Here we show in a bit more detail the developments in the commission and fee gross margin. In H2, it declined to 43 basis points and on a full year basis to 44 basis points. When we look at the recurring fee component within this, you see clearly that this component has been quite stable. It is up from the levels in 2020. And while it came down slightly from 2021, it is probably worth reminding you that the corporate disposals we did in H1 had a slightly negative impact on the recurring fee gross margin as did a lower contribution from Kairos. So the underlying trend is moving in the right direction. And as we told you in our strategy update last May, we are aiming to get this recurring fee margin up to at least 39 or even 40 basis points by 2025. The nonrecurring component came down quite a bit in '22 as clients took a much more passive approach in the uncertain environment and stood at the sidelines in line with our guidance. If we see more constructive markets in '23 on a sustained basis, then I'm fairly sure there will be room for upside in terms of client activity. Other commission and fee income at 6 basis points for H2 '22 was the lowest print in the last 6 half year periods. So with China reopening and more benign market conditions, the upside is possibly there.

Turning to Slide 13. The rate environment in 2022 was unique as we came from a 0 or negative rate situation and then saw, in rapid succession, a number of very meaningful rate hikes. Last year, in May and again in July, we tried to guide the market as best as possible for our sensitivity to these rate hikes. For me, as the incoming CFO, it was very reassuring to see how well our internal finance specialists have done their job because the realized margin uplift in H2 indeed ended up quite closely in line with our guidance, not only in terms of the estimated benefit to NII and swap income but also in terms of the partial offset from client shift in cash from current accounts into call and time deposits. Indeed, on the balance sheet slide later in the presentation, you can see that the volume of call and time deposits rose by CHF27 billion to CHF33 billion or 45% of our total deposit base. That net rate hype benefit is now largely in the H2 numbers.

And from here on, we expect a little further benefit compared to the H2 gross margins in terms of swap and NII contribution. Important to understand, this is a sensitivity given our balance sheet at year-end with a potential loan volume increase and given the fact that our balance sheet reprices faster and higher on the asset side, there could be further upside. Yes, there are still some income benefits to come through from the rate hikes last year but there are also still some deposit incomes to -- deposit impacts to come through. So on a steady-state basis, the combined gross margin contribution from NII and treasury swap income is likely to be close to what we saw in H2, again, assuming balance sheet as at end of '22. Of course, steady state is purely academic now because yesterday, the Fed rates by 25 basis points and the ECB will deliberate later today. But as you can see on the left-hand side of the slide, we're now at a point where further rate hikes are expected to have an essentially neutral effect basically, because we would expect, based on our experience, that further rate hikes will lead to further shifts in time and call deposits.

Let's turn to operating expenses. Adjusted operating expenses grew by 5% but this included a 70% increase in legal provisions and losses, mainly driven by the settlement in the summer of an old legacy litigation case. Excluding provision and losses in both periods, operating expenses went up by 3% to just over CHF2.5 billion. That increase reflected further investments in strategic long-term recruiting after 3 years of quite meaningful restructuring as well as the lifting of COVID restrictions in many of our key regions, the combined impact of which was balanced by disciplined cost management, especially considering the uncertain environment in 2022. Personnel costs which represent almost 2/3 of the total expense base, rose by 2% to CHF1.684 billion. Payroll costs were up 2%, exactly in line with the year-on-year rise in the average number of staff. Performance-based remuneration declined but other personnel expenses went up driven by higher costs related to recruitment and the Swiss pension fund.

Excluding provisions in both years, general expenses rose by 8% to CHF652 million, mainly due to IT-related projects and software expenses as well as an increase in costs related to travel and client events following the relaxation of COVID-related restrictions in certain key jurisdictions. Depreciation and amortization went up by 3% to CHF205 million following the rise in IT-related investment in recent years. So while the increase in pre-provision cost was rather limited, the unchanged total revenues meant that the cost-to-income ratio went up to 65.9%, thereby clearly meeting the target of less than 67% that we had set for 2022 at the start of the strategic cycle and in line with the updated guidance we gave you at the half year results.

Moving on to profit development on Slide 15. Even though adjusted profit before tax declined by 10% to CHF1.2 billion, with an average PBT growth of 10.3% over the cycle, the more than 10% profit growth target was just about met. The pretax margin fell 27 basis points at the upper end of the 25 to 28 basis point range that we had set as a target for 2022. Adjusted net profit decreased by 8% to CHF1.050 billion, not quite reaching the record high level of 2021 but still the second highest net profit in the group's history and a result that we can all be proud of. And thanks to the buyback, the decline in adjusted earnings per share was limited to 6%. Our guidance for the adjusted tax rate is unchanged from what we indicated in February, i.e., for 2023, we're currently expecting something around 14% and for next year, at least 15%.

On to the balance sheet. Our largely deposit-driven balance sheet remains solid and liquid. Deposits decreased by 8%, slightly less than the percentage decline in AUM, combined with a 20% year-on-year decline in the volume of structured products issued from our balance sheet, our overall size of the balance sheet shrank by 9%. On the asset side, you see that the loan book came down by 12%, exactly in line with the percentage decline in AUM, meaning that the loan-to-deposit ratio fell to 58%. And next to that, we saw a clear shift from cash into the treasury portfolio.

On to capital development on Slide 17. Starting with the CET1 ratio on the left-hand side. Above the graph on the left, you see that risk-weighted assets increased by CHF1.4 billion or 7%, mainly following an increase in market risk positions. You can find the details in the appendix. CET1 capital came down as the profit for the period was more than offset by the combination of the dividend accrual, the share buyback execution and of course, the negative OCI move following the sharp rise in rates and the resulting fall in the market value of bonds held in our treasury portfolio. As I mentioned last summer, we've started to make a change in how we book those bonds in our balance sheet which should dampen short-term volatility.

So looking at the development in CET1 ratio terms, you see that from a starting point of 16.4%, the main drivers were profit which contributed 470 basis points. The dividend and the buyback which reduced it by around 400 basis points and the OCI impact by around 300 basis points which is expected to reverse, taking the CET1 capital ratio to 14% at the end of December. That is, of course, still very significantly above our group floor of 11% but at the buyback threshold of 14% which means we will not launch a new buyback after the current one and at the maximum approved level of CHF400 million at the end of this month. It is important to note that this OCI impact is temporary, transitory and will reverse over the next few years. On the right-hand side, you see the pull-to-par estimate based on which we would normally expect to see around 1/3 of OCI loss reversing in '23, around 1/4 in '24 and 1/5 in '25 and the remaining small balance in the following years.

One final point on our risk density guidance. Last May, in the strategy update, we provided you with some guidance for the risk density which at that point was based on the balance sheet structure at the end of '21. In the meantime, as we have seen the balance sheet size has decreased and its structure has changed with a shift out of 0 risk-weighted cash into higher risk-weighted treasury portfolio. At the same time, revenues which under the standard approach to determine operating risk went up relative to the size of the balance sheet. Market risk, as expected, increased as well. Based on where we are today, from 20.5% at the end of '22, our new guidance range is 21% to 23% for the next 3 years. This is not expected to be a gradual increase. We currently estimate a density rather towards the lower bound of this range in '23 and '24 and towards the upper end in '25, as we assume the impact of the Basel III fundamental review of the trading book will apply as of 1st of January '25. There still is a small chance that this could come into effect 6 months earlier. And in that case, obviously, the upper end would in our current estimates apply from mid-2024.

Moving briefly to the Tier 1 leverage ratio on Slide 18. The development of Tier 1 capital is very similar to the one for CET1 capital in the previous slide, except that the Tier 1 capital benefited from the net CHF0.1 billion increase in additional Tier 1 capital. The leverage exposure fell by 10%, broadly in sympathy with the balance sheet shrinkage. And as a consequence, the Tier 1 leverage ratio increased to 4.3%, well above the regulatory floor of 3%.

As we have now completed the 2020-2022 strategic cycle, it might be useful to take a step back and summarize a number of key achievements over the past years. First of all, compared to the preceding 3-year cycle, we have seen a very clear step-up in profits and a step-up in profit growth. Whereas adjusted net profit grew at a CAGR of 3% in the 2016 to '19 period, this increased to an 11% CAGR over the last 3 years when we shifted our focus from an asset gathering driven emphasis to sustainable profit growth. Our wealth management focused business model is naturally capital accretive and we have been able to raise the returns on CET1 capital deployed. Our return on CET1 which is among the very highest in the sector went up to 34% in the past 2 years, significantly and sustainably above the 30% target that we had set for ourselves.

Finally, at least for me, on Slide 20. Apart from a step-up in profit and profit growth, the last 3 years have also delivered a step-up in distribution to our shareholders. We increased the dividend payout ratio from 40% to 50% last year and we enhanced the deployment of share buybacks. As a result of our capital distribution policy changes and the strong profit growth, we were able to deliver a total capital distribution CAGR of 36% in the 2020, 2022 cycle, up from 11% in the preceding 3-year cycle.

With that, I now hand back to Philipp for an update on our strategic progress.

Philipp Rickenbacher

Thank you very much indeed, Evie, for the in-depth view into our 2022 from a numbers perspective. Now let me take a step back to review the 2020 to '22 strategic cycle of Shift, Sharpen and Accelerate and recap its important qualitative achievements. The last 3 years have been truly transformative for Julius Bär. The sizable expansion of the past decade has now been fully digested. Today, we are more resilient and profitable than ever before and sustainably so. We are the leader in our field and in excellent shape and poised to gain from further profitable growth.

Let's first look at how in 2020, we began to shift our focus to sustainable profitability. We started with lowering our costs by CHF200 million with a structural efficiency program that we completed successfully already by the end of 2021. But the improvement in the cost-to-income ratio from 71% at the end of 2019 to below 67% was not simply driven by cost cutting. Close to half of the improvement or CHF150 million run rate was driven by stronger revenues. The greatest impact was delivered by the introduction of value-based pricing for our services. We have repriced more than 20,000 accounts over the course of the last 3 years, working closely with our clients who ensure mutually beneficial outcomes. The resulting attrition was minimal. This has been a crucial exercise. And together with a broad range of other revenue-generating measures, has built further muscle for revenue generation that should sustain us well into the future.

At the same time, we overhauled a cornerstone of our business model which is the compensation model for our relationship managers. The model, aligned with our financial targets and entrepreneurial aspirations as well as our risk standards, ensures that today, some 90% of our eligible relationship managers are rewarded for performance in a transparent and consistent fashion. The results have been remarkable. The model has created strong buy-in and positive impact on the work culture. It adds attractiveness to our employer value proposition and supports the overall profitability of the bank. At the same time, we have upgraded our team head and group head compensation as well as implemented a new model for intermediaries, thus coming full circle on the upgrade of our compensation system.

A next key point. We successfully closed most of our legacy legal cases. This shows our commitment to deal with and address issues head-on and create certainty for our stakeholders. With these steps, we significantly derisked Julius Bär and further strengthened our reputation. But in fact, we have done even more than that. We have fundamentally over the past years transformed risk management at Julius Bär, top to bottom and front to back. Starting with our overall framework and governance, risk appetite and tolerance, we have worked our way through people, processes and our organization across all the risk disciplines and ending with our risk culture as embodied by our new code of conduct. We had started this work already prior to the FINMA enforcement in 2020. And in fact, the halt the regulator imposed on large-scale transactions was lifted within only 1 year. During this period, total investments in risk management processes and systems amounted to more than CHF200 million and we have boosted risk resources across all lines of defense. We now have a strong and scalable foundation for sustainable profitable growth in the years to come.

The last point I want to raise under the Shift strategic goal covers the streamlining of our legal entity portfolio, closing or selling small offices and noncore businesses, consolidating and restructuring our footprint where it made sense. This was not only important in connection to costs but also key in terms of reducing complexity.

Second, let me recap how we sharpened our value proposition. More than ever, we are laser-focused on high and ultra-high net worth clients and intermediaries catering to such clients. We have further focused our market strategies, ensuring that the largest investments go to geographies with the higher strategic and profit potential, building on local critical mass. This creates the base for the coming cycle where we will pursue growth to scale at a global and local level while maintaining a well-diversified international footprint.

Turning to our clients. Over the past 3 years, we have made important steps to sharpen our value proposition for core client segments of Julius Bär. These include ultra-high net worth individuals but also intermediaries or more granular segments in key markets, such as executives or entrepreneurs. In all these segments, we upgraded our service models and delivery introduced new touch points and added solutions, with the objective to add even more value to our clients. Examples of this are family office services, structured lending or philanthropy advisory for ultra-high net worth, the extension of the Swiss-based real estate and mortgage offering with the integration of KMP, our direct private market offering or cybersecurity consulting for some of our institutional clients.

We continue to systematically extend our offering in line with client needs. At the end, investment performance is central to the value we deliver to clients and we have done so across a turbulent period. Our investment strategies ranked among the top quintile of our competitors in this tough 2022 vintage and consistently outperformed over the medium to long run. Of our 25 rated in-house funds, a total of 14 funds, scored a 4 and 5 star Morningstar rating. Sustainability is a key part of our client value proposition. First, we walked the talk as a company and we have been taking strides forward to achieve net 0 for our own operations as part of our climate strategy.

Equally important is our focus on enabling our clients and we have been innovative in this field. As an example, in '22, we introduced ESG client reports to eligible clients in Switzerland and Luxembourg. This has been an industry-leading step. We have also constantly upgraded our offering leading, for example, to an almost doubling of sustainability mandates between 2019 and 2022. I'm very proud that this has been recognized externally with MSCI upgrading our rating to a AA. This is just an interim step and our action-oriented work will continue.

One final point worth touching on under Sharpen is the resilience of our operational model. During the pandemic, we seamlessly shifted to a work-from-home mode practically overnight with zero losses. Since then, we have further developed the technology and processes for a flexible and value-added way of working at Julius Bär. In '22, we had to handle the notable operational fallouts of the war in Ukraine, its resulting sanctions and wider geopolitical shifts. We have done so, again, successfully, diligently and efficiently and are ready to master an even more complex world in the future.

Let me move to the third point. We have accelerated our investments in technology and in people, as we said we would in February 2020. We considerably upgraded our digital channels to clients, including new e-banking, content distribution and even the possibility for digital client onboarding. We have continuously invested in technology for our relationship managers, such as our digital advisory suite or the mandate solution designer, both industry-leading tools crucial in scaling our business in a flexible yet regulatorily compliant way. We continue our strategy to be the most digital bank for our relationship managers. Over the past 3 years, we've also made our business even more effective to a relevant part, thanks to the introduction and application of new flexible ways of working and of agile business practices at scale.

Business transformation and technology change in investment solutions, in markets, in channels, in client lifecycle management are delivered today by applying the Julius Bär agile approach, representing close to 50% of all change initiatives across the bank and many more are implementing agile principles in their daily routines. Our pragmatic nondogmatic approach to agile increases our effectiveness at creating innovation and our attractiveness as an employer.

Turning to people. I'm very happy to announce that we have successfully returned to relationship manager hiring in 2022. After the conscious restructuring of our front configuration in 2020 and '21, we have returned to growth mode. The RM headcount is up by 18% in 2022 once the divestments of smaller entities are excluded. This trend will continue and accelerate into 2023 and is an important ramp-up for our profitable growth strategy moving forward. As a last point, we have progressed our diversity and inclusion efforts. We are getting close to 30% female representation in our senior management ranks, thanks also to our in-house programs. Key and also worth flagging, as of this year, we are included in the Bloomberg Gender Equality Index, a public index that tracks the performance of companies that disclose their efforts to support gender equality through policy development, representation and transparency. This was a long recap but I felt strongly that at the end of this important strategic cycle in our company history, it was key to stop a moment and take stock before moving on to the next chapter.

When developing our strategy for the next cycle, we have a firm view on what we want to achieve in the longer term. You remember our strategy update in May last year, where I started my presentation by outlining our aspiration for the next decade. There is nothing in our way to stop us from thinking we could reach more than CHF1 trillion of profitable assets under management by the end of this decade or the beginning of the next. This continues our path to extend our position as the world's leading international wealth manager for wealthy private clients. Many things will change along the route. We may face -- we will face unexpected curves but the map we are following is clear. Our focus on pure wealth management with the absence of conflicting lines of business like corporate or investment banking will not change. Our absolute focus on ultra-high and on high net worth clients and our total dedication to those clients will not divert.

We will remain to the core bank base and build on trustworthy personal connections in an ever more industrialized wealth management sector. This does not clash with our investments in technology on the contrary. It will drive them in order to address the needs of a new generation of clients that are digitally savvy but still look for authentic relationships. We want to drive local critical mass in our focus markets because more and more of our business happens locally where our clients are domiciled. We will continue to drive a guided open architecture which allows us to bring the best of the market to the client but also to develop value-added solutions where we can truly differentiate ourselves from our peers. And finally, our safety and stability as a bank is our bedrock; the foundation on which not only our past success was built but also is the base for the rest of this decade.

Let's zoom in on our new strategy for the coming cycle, '23 to '25, Focus, Scale and Innovate. It will guide us in the years to come and as I will show you in a minute, it is already in action as we speak. Focus is all about focusing on driving sustainable profit growth with a continued evolution of our pure wealth management model. We place particular emphasis on generating recurring revenues by achieving the right balance between transactional and recurring income. And we drive efficiency and cost management with a keen eye on creating room for selective reinvestments, especially in technology, something I will discuss further shortly. Scale is about driving our next phase of profitable growth. We are positioned to benefit from attractive high-quality growth opportunities in our most important markets. Scale is also about moving from linear to exponential economic profit growth in our focus markets, creating operating leverage through growth beyond critical mass. And Innovate is about digitalizing wealth management through investments in technological advancements designed to change our business in the coming decade. All of this will be underpinned by a result-oriented sustainability strategy and very strong focus on risk management.

Turning now to the concrete actions that we are already working on and our list of priorities for 2023. Focus starts with a systematic program to grow the adoption of discretionary mandates, driven by our conviction that discretionary mandates, besides being a driver of recurring revenue are a better way of serving many of our clients today and in the future. In May, we spoke of our ambition to increase the recurring revenue margin from today, 36 basis points to around 40 by 2025. Discretionary mandate penetration should move to roughly 25% of assets under management in the same period. This is why we call this part of the program 25 by 25.

How are we going to do this? By simplifying and modularizing our mandate offering, by thinking in core satellite approaches where discretionary and advisory modules complement each other, by upgrading the experience and interaction for delegated solutions and through a systematic review and upgrade of each client situation one by one. It's a big task but we want to make investing in discretionary mandates as exciting as participating actively in financial markets. Beyond mandates, we continue to work on solutions such as private equity, funds or trusts that complement our efforts on recurring revenues. Work on all of this is already underway.

Focus also contains efficiency measures to generate gross run rate savings of around CHF120 million by 2025. We have built efficiency measures already into our '23 budget and are planning for opportunities to structurally further streamline our portfolio and simplify our operational model in '24 and '25. Scale. Scale is about profitable growth and looks at our most important markets, 9 to be precise, Germany, the U.K., Switzerland, Iberia, Singapore, Hong Kong, Brazil, the Middle East and India. These are the markets where the growth potential from the market position we have today is greatest. We will provide you with updates and deeper insights on our position in these key markets throughout the cycle. But let me specify here that this does not mean we will not be investing elsewhere but rather, we will continue to use an 80-20 model to calibrate growth investments across our different markets.

As the starting position we have is different in each market, capturing the growth potential to scale covers 3 key routes: First, successful strategic recruiting focused on senior talent but also harnessing the next generation of up-and-coming relationship managers. This includes systematic hiring and pipeline management of front staff. As flagged earlier, I'm happy to repeat that we've moved to a net positive increase of 18 relationship managers in 2022. Our hiring pipeline for this year is full and we are running at full steam. We will continue to apply the highest quality standards to hires and make sure that the business cases work in our context. I can say with confidence that Julius Bär is a highly attractive employer and that this will be an important route for us to develop in years to come.

At the same time, we have also significantly ramped up the second route, our capabilities in terms of organic talent development. Organic development means on the one side, talent intake, for example, through graduate programs which we have once again doubled in '22 and plan to develop further but even more importantly, a new internal development path for relationship managers. Last year, we launched a new associate relationship manager program which will be scaled up over the next years. This program will not only provide front talent at capacity but also introduce generational change to our frontline workforce.

As a final yet important point, we will continue to support growth through disciplined and targeted M&A. As I said in May, M&A is clearly part of our growth path and we continue to follow a consistent playbook to realize repeatable value-added transactions that create shareholder value. We actively look for deals that fit Julius Bär strategically and culturally. While we execute on our fundamental plan of organic growth, Julius Bär is ready to create value for all stakeholders through industry consolidation.

Turning now to Innovate. On the innovation side, we have already announced a substantial increase of business transformation spending over the next 3 years. An additional CHF400 million aggregate on top of today's technology budget of CHF600 million for the full coming cycle will drive and accelerate the required digital evolution. This will not be spent all in one go but will be ramped up intelligently and cautiously over the 3-year period. This investment will enable the growth we envisage over the next decade. It will also enable further product innovation and time to market. We will upgrade our business in a modular fashion. This will include specific projects looking at both technology and our operating model with the aim to upgrade our effectiveness and efficiency.

Looking specifically at the back end. This is about our core banking, trading and ERP system. In the middle about automating lifecycle management, KYC and AML and in the front, we will continue to improve the digital interfaces to our clients. We'll be reporting on these as we progress but I reconfirm that this investment will be supported by our cost management efforts and by the scale and volume benefits we will be able to realize through the program. We will also continue to innovate products and services in line with evolving client needs. We will continue to work in private markets, real estate, mortgages, loan bar and structured lending in funds and derivative capabilities. We will extend our service range in sustainability and philanthropy and continue to smartly push the boundaries and learn to harness the benefits of Web3 in the experience for our clients and in the solutions we offer. This will entail in a measured manner, continuing our exploratory path in the field of digital assets as decentralized finance continues to find its way to regulatory convergence with traditional finance.

Our strategy '23 to '25 also comes with ambitious financial targets. Today, we reconfirmed the targets laid out in May '22. We believe we can bring our cost income ratio below 64% by '25, thus further pushing ahead our industry leadership. We aim to increase our pretax margin into a 28 to 31 basis point bracket, maintain the 10% profit growth over the cycle per annum on average and continue to exceed our RpCET1 target again with an absolutely industry-leading threshold of 30%, underpinning the capital efficiency of Julio Bär's model.

Let me end my part with a recap of what I see as the essence of Julius Bär's success story. At Julius Bär, we have a truly unique position in the wealth management market with our pure wealth management business model and sole focus on high net worth and ultra-high net worth clients. We have demonstrated the resilience of our business model over the past cycle and we've seen ourselves thrive in times of negative and positive interest rates with growing and shrinking markets, low and high volatility. This gives us the confidence that we'll be able to thrive under different and yet uncharted market conditions in the years to come. We have proven time and again the solidity of our balance sheet and the quality of our capitalization. We are a high capital generating business. This is obviously important for our shareholders but also for our clients as we place our balance sheet for their use.

Our strategy for years to come is crystal clear. It is all about profitable, high-quality growth. And last but not least, we are a purpose-driven company. Creating value beyond wealth is our purpose. And with our 132 years of history, we benefit from a strong and unique corporate culture. This culture is both the foundation and the secret ingredient that will help us be successful.

Thank you very much. This concludes my remarks and we are now ready to hand over to the floor and the phone lines for our Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Jeremy Sigee from BNP Paribas.

Jeremy Sigee

A lot to talk about. Can you maybe focus on 2 related topics which is the sort of organic growth drivers of adviser hiring and also flows. So firstly, could you talk a bit about the sort of people you're hiring, the sort of regions and the profile of people that you're bringing into the firm? And then secondly, the impact on flows. You're back in the sort of 5% a year net new money zone. What expectations can we have for 2023 in terms of continuing around that level? Can we model flows linked to the adviser hiring? Is that a sensible thing to do and to expect that you remain at a strong pace of net new money?

Philipp Rickenbacher

I think in terms of quality of people of the kind of people, obviously, I think the focus of our model will be on hiring experienced relationship manager target -- talent in our key markets. We have a strong pipeline all across the globe, I'd say here in Switzerland and Europe, in Asia, that will materialize now once these markets open again, especially the hiring velocity in Asia has been very, very slow still in '22 with the pandemic still having effect and we expect this to change moving forward. The second thing we do, as I said, we are also hiring alternative creative talent. We are hiring new talent into our organic development program, for example, through the graduate program and by other means that will allow us over the course of the next years to develop a new generation of relationship managers internally. But I'd say in the near term, the balance is clearly on hiring experienced talent.

As to the velocity, I think we still -- we continue not to give external net new money targets. But if I look at the dynamic of 2022, there is nothing in the way of continuing and extending on that dynamic as we go into the new year, given our very strong market position, given the opening of China, I think this gives a good environment for continued growth -- for accelerated growth for Julius Bär.

Operator

The next question comes from Nicholas Herman from Citigroup.

Nicholas Herman

Yes. Just 1 quick follow-up on the net new money and then 1 on the fee margins and 1 on M&A. So just quickly on the net new money, very strong in the second half. Is it possible to disaggregate the underlying trends. So let's say, market -- I guess, strong underlying performance versus idiosyncratic market share gains given the recent events? And then on fees. So the recurring margin has stayed flat but I note that the discretionary mandate penetration increased to 17%. Just curious if that mandate penetration is reflective of genuine increasing sales or is it an effect of lower market and some currency? And I guess what we see that tailwind or fee margins into 2023 as you meet towards your 39 to 40 basis points margin target? And then finally, just on M&A. You are very, very positive on M&A potential. Clearly, the large market drawdown last year will have increased pressures on all managers, especially smaller ones, you have [indiscernible]. So just curious what you're seeing in the market and if there are signs of buyers and seller price expectations converging?

Philipp Rickenbacher

Let me take the first and the third and I'll give the fee question to Evie. On net new money, I think we've mentioned that growth in '22 has been based on a very broadly diversified basis. That is true geographically. We talked about Europe, Switzerland, Middle East, Asia, that is also true from the source. I think single idiosyncratic events among market participants may have contributed but have not been the dominant part of contribution to our new money in 2022. And that will continue like that into '23. On M&A, I've said this multiple times, I think there are 2 elements to it. On the 1 side, there is the market propensity to act and to move. We are coming out of many years of very, very little to no activity in pure wealth management M&A, driven, of course, by the markets in the late 2010s and then now by the turmoils, the pandemic and everything in the last few years.

I still believe that the fundamentals have not changed. And the pressures, as you said, on small and midsized industry players continues to increase. And again, there's the second part, to Julius Bär readiness to do M&A. I think this is a muscle that we have. We know how to integrate wealth management businesses and we are in an excellent position to create value for all stakeholders from industry consolidation. That's how our board view the next few years.

Evie Kostakis

And Nicholas, thank you for the question. I'll try and tackle question number 2. So let me remind you again that our overarching goal is to increase the proportion of our gross margin that's associated with recurring fees from roughly 36 basis points to maybe 39 or even 40 by 2025. Increasing discretionary mandate penetration is 1 lever to do so but of course, there are many, many others. And that recurring fee income line, you see things like advisory fees, fund management fees, private equity management fees, et cetera, et cetera. The discretionary mandate penetration ticked up slightly, 17% is rounding. So I wouldn't read too much into it. And what I would also like to say is as we're pushing ahead for 25 by 25, this probably won't happen linearly. We probably expect to see more back-ended increase in discretionary mandate penetration as we traverse the strategy cycle.

Operator

The next question comes from Kian Abouhossein from JPMorgan.

Kian Abouhossein

Yes, I have 2 questions. The first 1, if you could maybe just talk a little bit about Asia. You mentioned the flow around -- turnaround in net flows in the second half but could you also talk about deleveraging, has that stopped? And what is the outlook for loan growth opportunities? And in that context of clearly, transaction margins, how they're developing in Asia, considering the improvement in the exchange data. And then the second question is slightly different. If I look at your pretax margin target and I compare that with some U.S. peers, on a same basis, they're already at over 30% targeting higher than that. And I just wanted to see why would you not be significantly higher than 31 basis points plus over -- in terms of target, considering that ultimately, we all know the cost structure in the U.S. is much more difficult and additionally, clearly much less of an ultra in some of these brokerage numbers that we are seeing. So just trying to understand why it would not be, as a stretch, significantly higher than 30%? Or should we think that's kind of what you think you can actually make significantly more than 30%?

Evie Kostakis

Thank you, Kian, for the questions. Let me start first with Asia and Philipp, please feel free to supplement. So if we look at the H1 last year, as you know, we had significant deleveraging in Asia. In H2, deleveraging continued, albeit at half the pace of H1. So that was encouraging. And important to note that in the second half of the year, Asia had positive net flows. I will draw your attention to the slide where we talk about commission and fee margin. And you will note, I think I mentioned it also in my opening remarks that transaction-driven income, the gross margin associated with that was around 6 basis points. I think if the benign market conditions that we've seen in the last couple of months, particularly in Asian stock markets continue, we will see Asian clients coming back and transacting more as well as potentially leveraging. As far as I can tell, our credit pipeline is relatively healthy looking into this year. On the second question with regards to the pretax margin, I'm not quite sure which competitors, U.S. competitors or market players you are referring to. We have put out a rather ambitious target range out there but there's nothing that precludes us from exceeding that.

Operator

The next question comes from Noele [ph] from Reuters.

Unidentified Analyst

My name is Noele and I'm with Reuters. I wanted to ask to what extent are you exposed to Adani? And the second question is whether you are still accepting bonds of Adani's Group of companies as collateral?

Evie Kostakis

We have no exposure, de minimis exposures at Adani.

Operator

The next question comes from Anke Reingen from RBC.

Anke Reingen

I have more near-term questions. If we look at the exit margin for November, December, if I calculate it correctly, it seems to be like 96 basis points. If you can maybe just tell us a bit about the mix of the exit margin if it's more towards NII or on the trading line? And then how should we think about costs into 2023? I guess there's an element of annualizing inflation, there's hiring on the tech investments. And clearly, that there is room given where your return is. So could we see the cost-to-income ratio deteriorating into 2023 versus '22? Obviously, understanding that it's all a function of the top line as well. But if you can give us a bit more of an indication of what we should expect in terms of costs in '23?

Philipp Rickenbacher

Let me start with the second 1 strategically. I think as we start a new cycle, we will invest. We will continue to invest. We are talking about the technology and the ramp-up which will happen cautiously but we obviously talk about investments in frontline staff. On the other side, I think we have a track record of being very cautious on the overall cost development. And as we have tactically managed the cost line also now during '23, we will be watching very closely the market environment -- in '22, we will be watching very closely the market environment in '23. You said it right. It's a balance between revenue and costs at the end.

Evie Kostakis

And Anke, your first question, your calculation is absolutely correct. The exit margin for November and December was 96 basis points. I can provide you with a breakdown, you can probably back it out yourself with calculations. It was about 41 basis points for commission fee income, 24% for NII and 30 for trading which, of course, includes the FX swap income.

Operator

The next question comes from Nicolas Payen from Kepler Cheuvreux.

Nicolas Payen

I have 2, please. The first 1 is on the follow-up on Asia. If we were to assume APAC client returning to a more normal run rate of client activity and leveraging, what kind of revenue benefit we could expect from current levels? That's the first 1. And then the second 1 is on your share buyback. Would it be a possibility if you were to see some improvements on the CET1 ratio, notably driven by the OCI recovery but maybe a bit of help on the bond markets that you would be open to a new share buyback program in 2023?

Evie Kostakis

Nicolas, let me try and take on these 2 questions. So again, on Asia, we don't quantify the regional contribution of transactional-driven income. But I think you can surmise from my remarks that we do think there's potential upside there. And then on the share buyback, our capital distribution policy that we laid out in May is pretty clear. At the end of the year, if our CET1 ratio is meaningfully above 14%, then the Board of Directors will allow for a share buyback.

Operator

The next question comes from Hubert Lam from Bank of America.

Hubert Lam

I've got 3 questions. Firstly, your cash on your balance sheet fell to CHF12 billion at the end of the year and I think it was CHF20 billion in June. Is there still potential for further deployment from the cash into its treasury book to come or you expect cash at this level to be a little more stable? That's the first question. The second question is on net new money growth in LatAm. I see that continues to have negative flows in the quarter in Latin America despite you're seeing inflows in Mexico. Just give us a little bit more insight as to what's happening in that business in Latin America. And last question is just a follow-up on the cost income -- on costs. You -- currently the cost income was 66%, you're targeting below 64% by '25. How should we think about the progression to that level, considering investments hiring, et cetera? Should we expect to be leaner or a little bit or should be a little more stable before or more back-end loaded question?

Philipp Rickenbacher

Hubert, I'll quickly take number 2. I think we've seen promising developments in LatAm over the entire year. And obviously, the net number is masking a series of inflows. On the other side, I think there still have been sort of the last legs of restructuring and also integration work around our different operations in Latin America. But I think the business is fundamentally healthy and we'll continue to develop it further from that base.

Evie Kostakis

And Hubert I will now try and do number 1, number 3, you're right, cash did fall from fell to CHF12 billion from a much higher number at the end of last year. Of course, we grab the opportunities that the market gave us and deployed more firepower in our treasury book. I always say this, we try and always triangulate capital liquidity and profitability considerations. The balance sheet is a moving thing. So perhaps, yes, depending on how the balance sheet moves and what interest rate opportunities or credit opportunities are out there, you might see a smaller cash balance. You also see our LCR, it's pretty healthy. The balance sheet is liquid. So that's all I can say on that. On the cost-to-income glide path, what I would say is that for this year, given the investments we're intending to make, the strategic recruitment side, on RM hiring, et cetera. We envisage cost-to-income ratio around the levels where we ended up this year, going down in the outer years as our cost measures come into full force.

Operator

The next question comes from Magdalena Stoklosa from Morgan Stanley.

Magdalena Stoklosa

I've got -- I've got a couple of questions. They're all quite straightforward. So on the NII, well, thank you very much for the new sensitivity. But can we talk about the underlying kind of dynamics here from a perspective, particularly of kind of growth and the EBITDA numbers that you may have put into the model. Because I'm particularly interested in your kind of broad assumptions, maybe ranges of the loan growth, particularly on the Lombard side. Also the mix of deposits and how far do you think that, that kind of shift towards term savings is likely to go for you because, of course, the private banks tend to see it in a much more accelerated way? And I suppose all-in, should I assume that the kind of -- that the annualized run rate in 2023 should be broadly similar to what we've seen in the second half? So that's the first question.

And the second question is -- so a little bit on the RM side, you've talked about those very strong pipelines but can I ask geographically where do you see your recruitment as the strongest? What's the mix of that recruitment pipeline? And my last thing very, very quickly is on MENA. You singled it out as a source of flows and of course, also as a source of your expansion. Could you kind of give us a sense what you see in the region and how important it may become going forward?

Evie Kostakis

Maybe, Philipp, you want to take 2 and 3 and I'll take the complex number 1 question that Magdalena just posed.

Philipp Rickenbacher

Let me take a stab at that. MENA, I think a strategically important region for us and where we've actually opened the first office, as Evie said, in a very long time with Qatar that is meaningfully complementing our footprint. We see strong core growth in Dubai itself, where we hold license number 1 and have an excellent market position. We do see inflows from all across the region. And I think our Qatari presence will help us and we continue to see order inflows on the non-resident business that we also manage out of Dubai. I think this region will continue to have strategic relevance for us moving forward. In terms of geography of RM hiring, we've mentioned the 9 focus markets moving forward. You should expect us to have a full hiring pipeline actually in all of those markets. We have a very strong understanding of the local market and we intend to grow actually across our entire network. That's our ingoing position for '23.

Evie Kostakis

And Magdalena, let me try and do question number 1. So let me clarify the following. On Page 13 of the presentation, you see the interest rate sensitivity assuming an instantaneous a 100 basis point parallel shift in the yield curve with an assumption of a switch from current accounts to call and time deposits, 20% for the dollar, 25% for the euro and 25% for the Swiss franc. It's important to understand that this is based on the balance sheet as of December 31, 2022. Our balance sheet, of course, will evolve. I don't know what numbers you're penciling in your models for net new money flows and AUM growth for us for next year and what numbers you're penciling in for credit penetration. But you should assume that there is some potential upside to the numbers we gave you, given the fact that our balance sheet is going to be growing, hopefully, with benign market conditions.

In terms of the shift from current accounts to time and call deposits, what I can tell you is that at the end of last year, our time and call deposits globally was around 7% of total and now it's around 43% of total deposits. I hope that helps.

Magdalena Stoklosa

Absolutely. And in terms of the lending growth that you may see?

Evie Kostakis

We don't give out specific lending growth targets. However, I think you can triangulate that based on your AUM projections for next year and the historical credit penetration that you've seen in our business.

Operator

The next question comes from Amit Goel from Barclays.

Amit Goel

I've just got one kind of follow-up question actually relating to Slide 13 on the rate sensitivity. And just kind of curious as we go into, say, next year 2024, if rates start to go the other way, U.S. dollar sensitivity, I'm just curious, do I kind of just reverse the impacts or are there other reasons why the contribution would be a bit more stable, essentially based on swaps benefits and so forth?

Evie Kostakis

Amit, look, it's hard to say. The 1 thing I can tell you for sure is that we will keep on updating you on interest rate sensitivities in our half year results and full year results.

Philipp Rickenbacher

The elasticity of moves in both directions is not necessarily fully linear. And I think that the question obviously is very speculative.

Operator

The next question comes from Stefan Stalmann from Autonomous.

Stefan Stalmann

I have 2, please. The first goes back to Slide 17, the CET1 waterfall for 2022. You mentioned there a 1 percentage point benefit from other factors. Can you maybe remind us what that is, please? And the second question on deposits. You have seen quite a bit of a reduction of deposits since June and some of it is probably just the FX translation from the dollar but there were certainly also real outflows of deposits. Could you maybe add a little bit of color on what drove this? Is it just clients basically disintermediating into direct investments or was there anything else that would work? And do you expect this to continue? Do you think that the deposit balance in your balance sheet will continue to decline?

Evie Kostakis

With respect to the details on the 1% other, may I refer you to the capital development slide in the appendix of number 36, where you can see the detail and the reconciliation between equity at the beginning of the period, equity at the end of the period and CET1 capital. With respect to deposits, I think on the deposit side, the FX -- so we lost about CHF6.8 billion and on a FX-neutral basis, we lost about -- or the deposit balance was down by 5.4%. So the FX effect is around CHF1.3 billion. With respect to whether we expect to see an inflow of deposits or outflows of deposits, it's hard to tell. Generally, in risk-off environments, generally speaking, we get flooded with deposits because we're deemed a Safe Harbor.

Operator

[Operator Instructions] The next question comes from Andrew Lim from Societe Generale.

Andrew Lim

Can I draw down a bit more into Slide 13 and the assumed switch from current accounts to call time deposits. Is that based on natural behavior? And I know you've given some data down on how much quartile deposits actually account for the total. But is that the same kind of behavior that we should have seen going forward? And I'm a bit surprised actually that you've seen 20% versus 25% for euro and Swiss rates. My expectation would be that for the higher rates available in -- on the dollar that may be the migrated behavior might be stronger versus euro and Swiss rates. So some color there would be appreciated. And then on to M&A. How much of the CET1 ratio would you be willing to seed in any kind of M&A transaction. Would you be able -- would you be willing to see the CET1 ratio go down more towards 11% in any kind of transaction there?

And then, just in terms of like overall view of the landscape. I remember when you joined Philipp as CEO that you seemed may be a bit skeptical maybe on M&A because maybe although you had pressures on the wealth management landscape, it was still a high return business that a lot of banking groups would like to retain. But it seems like you're being a bit more constructive on consolidation in the current environment. And I would just like to ask more about your thinking here.

Evie Kostakis

Okay. Let me try and tackle the first question with respect to Slide 13. So the reason why we're assuming a 20% shift from current accounts to call and time deposits for the dollar is because the Fed moved faster and higher and we've seen a higher percentage of shifts from current accounts to call and time deposits so far. At the end of the day, you have to consider that clients will never fully go a 100% into call and time deposits because they need dry powder and firepower to invest. So that's why for the interest rate sensitivity, we've -- we're talking about a 20% assumed switch from current accounts call and time deposits for dollar and 25% for euro to Swiss franc, where we have a higher proportion of current accounts today. On the second question with respect to CET1. Again, I'll refer you to our capital distribution policy that we announced in the strategy update in May, 14% is the buyback threshold. 11% is the threshold, the CET1 internal floor that we never want to go below.

You can surmise, we ended up the year at 14% CET1 -- so from a CET1 perspective, we have about 3 percentage points excess capital that we could deploy for the right accretive M&A opportunities. Obviously, for anything bigger than that, we would have to go back to our shareholders. And I'll pass it on to Philip for the broader comments on the M&A environment.

Philipp Rickenbacher

Thank you for that. And yes, indeed, I might sound a little bit more constructive today than 3 years ago but I don't think our perspective on it has fundamentally changed. I think what's still the same is the ability of Julius Bär to generate value through M&A that has been the case 3 years ago and is today, maybe even a tick more so, given the additional scalability we've brought into our business through the transformation of the last 3 years. I think when it comes to environment, I believe we are now seeing a changing environment. I was a bit cautious 3 years ago looking at the absence of any pure wealth management transactions looking at still the -- if I may use the word, the hype around tech-related M&A activities in the market.

I think in the meanwhile, this curve has ebbed off quite substantially. And again, looking at the development out there in the market, the fundamental cost to do business in our field has not gone down, the complexity keeps going up. And I do believe that keeps creating additional pressure for either midsized and smaller players but also for wealth management units of large integrated banks, to ultimately create more value. And that, in principle, should increase the opportunity set. Now still it's hard to time this. And we are updating you as we go forward but I tend to take a constructive approach to it.

And the last point, in terms of financing, I think, obviously, there is firepower in our CET1 ratio but there's obviously also the market that I do believe would finance a value creating and accretive transaction for Julius Bär.

Operator

The next question comes from Adam Terelak from Mediobanca.

Adam Terelak

A couple back on NII and swap income and then 1 on cost. The easy 1 on costs first. You mentioned cost income ratio for this year. Can you just give us kind of an idea of the controllable versus noncontrollable, i.e., inflationary impacts year-on-year for 2023. So what's kind of the underlying inflation impact? Secondly, you've given color on deposit assumptions. Can you give us that by currency? Obviously, in previous cycles, you've had maybe 40% deposits turning out. But clearly, that's probably because there's been no moves in euro and Swiss franc. Can you just give us some color about where we are by currency in terms of volumes that have termed out? And then finally, on the swap income implied is very, very high. I can't get to that number on the basis of your swap volumes on just the pure cross-currency swaps.

So, I'm just trying to work out what else is given your swap income. Are you adding any duration? Are you kind of running a basket of long-dated hedges that is driving up effective NII there? What is driving the additional NII coming through that line over and above a pure kind of dollar to Swiss franc cross currency swap? And just on that point, I noticed your cash balances are down into year-end, does that put a little bit of put on swap income into the first half of this year?

Evie Kostakis

Okay. That was quite a litany of questions. Let's see what I can do. Let me start with the cost-to-income question. So I think in the past, we have said -- first of all, as you're well aware, a big chunk of our cost base is in Switzerland, right, where inflation has been compared to other jurisdictions, relatively benign. So that's point number 1. In the past, we would assume a roughly 1.5 percentage increase in personnel expenses, ceteris paribus. This year, given the bout of inflation, several jurisdictions, we're talking about 2.5% which I think is still relatively benign in the general environment. So I hope I answered that question, NII. Then the question on swap volumes, so -- and cash balances. We do believe that there is further trading income to be made from FX swaps that the treasury does. And in terms of the volume associated with the FX swap income that we show in the interest rate sensitivity at year-end. And obviously, this number fluctuates quite a bit. It was about CHF14 billion or so.

Adam Terelak

And deposits by currency.

Evie Kostakis

Deposits by currency. Okay.

Adam Terelak

Well termed deposits by currency.

Evie Kostakis

Okay. I'll give you current accounts and then you can subtract the fine call and deposits, if that's okay. So on current accounts for dollar deposits, we were at roughly 44% at year-end; Hong Kong dollars, 50%; for Swiss francs, 86%; and for euro 62%. I think that should do it for you.

Operator

The last question is a follow-up from Ms. Anke Reingen from RBC.

Anke Reingen

A follow-up question. About the exit margin, sorry, I should have asked the 30 trading the step up from the 27 to the 30 in the fair value of how does it split with treasury and other income? And your comments about stable balance sheet, there could be upside. I assume that also refers to the exit margin and not just to the H2 margin?

Evie Kostakis

Anke, what I can tell you is that it was a little bit more than -- the swap income was a little bit more than half the trading income, gross margin contribution in the exit margin.

Operator

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to the management for any closing remarks.

Philipp Rickenbacher

Thank you very much and thank you all for listening in and thank you for your questions. Let me close by saying that all of us at Julius Bär are proud that over the past 3 years, we've been able to produce 2 of the best results in our history. We've delivered on our commitments and our targets and made immense progress by transforming our organization. We've started '23 with great motivation to build the next chapter of our success which is great because now it's not a time to rest but one to create value for our clients.

I wish you a great day and look forward to seeing you or speaking to you all of you soon.

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Julius Bär Gruppe AG (JBARF) Q4 2022 Earnings Call Transcript