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Earnings Call Transcript 2022-Q4

[Stephen Bird, CEO]

Hello and welcome to our 2022 Full year results. It’s great to see everyone here in the room and also welcome to those of you who are listening remotely. I’m delighted to have our management team here and we’ll be taking you through our strategy and our progress and then Stephanie will walk you through the financials. Then, we’ll open up to have a conversation.

2022 was one of the hardest investing years in living memory. Against this backdrop, we made good progress in delivering our strategy and creating a stronger business model for abrdn, as we exit year two of our three-year strategy. I’ve now got a team around me that I didn’t have two years ago, a talented and motivated team of leaders who are focused on transforming this business. He’s not here today but I’m also pleased to announce that Peter Branner is joining us as CIO in May at the right point in the strategic journey for our Investments business.

Today you’ll hear from me, Stephanie and each of the business CEOs in turn about what we’re doing individually and collectively to transform abrdn into a sector leader with a sustainable growth trajectory. We have defined our business model; the shape of the group is settled in its three vectors. Each of these businesses are at different stages of transformation and all three have clear opportunities to develop and grow.

We’re building direct distribution to over 850,000 clients in the high growth savings and wealth market. Within which, the adviser platform market is projected to grow at double-digit rates for the next five years. It’s an attractive market and one that we are a leader in. The acquisition of ii into the Personal vector has delivered GBP114 million of high-quality, sticky revenues operating within an efficient and scalable business with higher margins.

The three businesses, Investments, Personal and Adviser are complementary to one another and we will show you more on the synergies and joining the dots between the businesses in the second half of this year. To give you a sense of what we’re doing, we’re developing abrdn fixed income propositions for the ii customer base and we’re designing the right referral processes for those clients into financial planning.

In the Investments vector, there is further to go. This was always the longest cycle of transformation given the structural challenges and the nature of active asset management. We have taken the hard decisions and we have built the foundations for growth. We’re simplifying our product range, getting out of undifferentiated and lower-margin areas. We’re reducing cost and complexity so that we are focused on delivering higher-margin products with the right supporting performance.

We are disciplined allocators of capital. We’ve invested in high-quality businesses that will generate long-term growth, and at the same time we’ve made sure that we have delivered sustainable dividends and buybacks in order to drive shareholder returns. In 2022 we invested GBP1.4 billion in ii and the business continues to perform very well under our ownership. It has already exceeded the investment case that we set out when we did the deal and it has much more to deliver.

We realized GBP800 million through dividends and returned GBP600 million in the form of buybacks and dividends to our shareholders last year. You can expect us to continue this approach as we go through 2023 and beyond. When we feel that we can deliver the right level of value for our shareholders, from bolt-on, M&A opportunities, investing in the business in the right way, you can expect us to continue to do that in a disciplined and an effective manner.

To illustrate the change we’re making to our model, you can see here in the slide that in one of the worst investing years in memory, the contributions from Personal, largely thanks to the acquisition of ii and Adviser offset the challenging results within Investments. Diversification is helping our margin mix, as the platforms have a significantly lower cost to serve than traditional asset managers. Overall, this meant Personal and Adviser represented 60% of abrdn’s adjusted operating profits at GBP158 million.

As I said at the start, we're building the foundations for growth, but we still have some way to go. The changes we have made within our Investments business started by getting the right leaders at the top, and they are now well into reshaping that business for growth. Before we get into our Investments business more deeply, let me cover our relationship with Phoenix, our largest single client. Our priority is helping Phoenix achieve their main strategic priorities of growing their open book business and continuing to win bulk purchase annuities.

They are operating in a competitive marketplace for pensions and insurance, and this has necessitated a reallocation of assets from active equities into lower cost passive strategies and to move from public to private credit. Our joint goal is ensuring that we have the right products at competitive price. These changes, combined with the natural runoff of the closed-end pensions book results in revenue pressure and the necessity to remove complexity and cost. This program of work is well underway and will continue throughout the current year.

The themes of simplification, reducing cost and focusing on products that are right for our clients are the core features of our investment strategy. We have concluded a root and branch review of our Investments business, and I'm confident that we have areas of strength and scale in higher-margin products that will be in demand and are in demand from our clients. Chris is going to cover this shortly.

It's important to understand how this program of work and the execution in this current year builds on the work we did in our first two years of our strategy. We've made hard choices to become focused. We had to identify what we're not going to do as well as what we would invest in. We've exited noncore geographies, and we've divested of noncore businesses and you can expect us to do more of that. I'm pleased to inform you that today, we have agreed to sell our traditional discretionary fund management business, which is a further simplification, allowing us to focus on the more scalable and efficient model portfolio services.

We've also closed or merged about half of the 120 funds that I told you were subscale and not aligned with our client demands. The remaining funds targeted for rationalization will complete this year. Overall, we're reducing costs. Headcount and costs are down, and we are accelerating the GBP75 million that we committed to in the summer within the Investments business to be delivered as a save in 2023. Now you can see here that our organization has fundamentally changed. We are often asked what the new abrdn looks like for Investments. The answer is two distinct pillars, public markets and alternatives, and the specialist areas within these reflect how our clients want to work with us and how we can be most successful.

This chosen business mix is supported by the long-term market trends: the growth and development of Asia, the anticipation of peak rates in fixed income and the faster growth of alternative asset classes. All of these trends are supportive of this business mix through time. We've created a business model to deliver growth by focusing in areas where we have scale, a distinctive client offering and supportive performance. We're at the point now where preparation meets opportunity. Today, we'll be hearing from Chris. Chris is going to talk about our Investments business, then Noel is going to walk through the progress that we've made in adviser, and Richard will talk about our Personal business, which he now runs including interactive investor. Then Stephanie is going to walk you through the financials, and then we'll do Q&A. But first, let me hand over to Chris.

[Christopher Demetriou, CEO, Investments Vector]

Thanks, Stephen. I'd like to start by sharing our view of the growth opportunity for Investments. For clarity, any flow figures I reference will be excluding Lloyds and liquidity assets. Gross flows were GBP49.1 billion in 2022 and at 12% of opening AUM. This is consistent with 2021 and compares favorably with industry figures. Net outflows did remain negative, but at 3% of opening AUM were in line with industry average, which is an improvement over recent years.

We made progress in the U.K., which has been our most challenged distribution market for some time. Broadridge data on mutual funds showed abrdn improving to 10th in the market, having not made the top 100 in 2021. So when we have the right proposition and the right performance, we have the client relationships to open up the door to return to growth. As we look ahead, there are three areas in particular where we believe we can create positive value for our clients and for the firm.

Firstly, at GBP120 billion of assets, fixed income is our largest business. It's a core competency from our standard life heritage. And for an asset class that's been out of favor for many years due to the low yield environment, it is now trending strongly to one where industry data and our own opportunity pipeline shows great potential. This potential is underpinned by performance with 72% of our fixed income assets outperforming over three years. In credit, where we have particular strength, 92% of our assets are outperforming over three years.

Second, with GBP87 billion of assets under management, our large alternatives franchise is reaping the benefits of a recent repositioning. It is a growth business with net positive flows over the past three years, which have driven double-digit revenue growth over that period, including 2% revenue growth in 2022. In order to further capitalize on the opportunity, we're reorganizing our alternatives capabilities to allow greater specialism in distribution and operations to accelerate profitable growth. We will report on alternatives separately from 2023 onwards to allow greater analysis of this business area.

Third is our considerable experience of investing in Asia and emerging markets, a business that celebrated its 30th year on the ground in Asia just last year. The structural growth opportunity in Asia is well understood, and we as a firm and our product lineup are well positioned. Our performance in equities is strong with 78% of our AUM outperforming over three years. This includes top decile performance in our sustainable China A strategy, which is growing again, benefiting from the renewed client interest following China's reopening.

These examples illustrate the strength of foundations in place in product and performance, and we are working hard to capitalize on the opportunities that are in front of us. Equally, we are very clear that there remains meaningful work to do to address the parts of our business that face headwinds on performance or a subscale, and we are acting accordingly. Let me expand on two examples. We're consolidating our developed market equity strategies to focus on three distinct client outcomes, sustainability, income and small cap. This aligns our team to the equity outcomes where our clients continue to see value in taking an active approach.

We're refocusing multi-asset, which is an area of significant historical strength for abrdn. We see outcome-oriented model portfolios as a key offering in a world where more responsibilities for saving and wealth is delegated to private individuals or their advisers. So we're organizing ourselves to align to our clients' priorities, and I look forward to providing you with further clarity on the implementation of these initiatives at the interim results.

In building a sustainable Investments business, we're focused on three key areas: first, our work to drive efficiency proceeds at pace. We reduced cost and headcount in 2022 as our program of simplification began to move into its implementation phase, which will continue into 2023. We continue to adjust our geographic footprint, entering into distribution arrangements where on-the-ground presence is too costly. In alternatives, we're pursuing divestment of certain noncore assets and hope to provide updates on the progress during this year.

The work to rationalize products is well underway. We designated 120 funds for closure or merger, and we're now halfway through that program. The remainder will be completed in 2023. The overall program drives efficiency, whilst impacting only 2% of our AUM. We will deliver our targeted GBP75 million of cost savings in 2023 by accelerating the implementation of all these changes, and Stephanie will have more on this shortly.

Second, while performance is good in areas, we want it to be better, and we want more consistency. Having settled on the shape of our business, the Peter Branner, currently CIO of one of Europe's largest pension providers is joining to lead our talented group of investment professionals. He brings considerable experience in our key areas of focus and will have responsibility for the oversight of investment process and performance.

Thirdly, driving increased revenue yield is of particular importance. Our overall margin of 25 basis points, which is lower than most peers, is heavily influenced by low margin insurance assets. This is a material contributor to our cost income ratio challenge. We're working closely with Phoenix to simplify existing business and expand into new areas of mutual benefit, and we are confident that our key areas of focus discussed earlier, particularly Asia and alternatives, will drive more favorable mix over time, building on the 36 basis points revenue margin currently generated by our institutional and wholesale activities.

Furthermore, our significant position in listed closed-end funds with GBP23 billion in AUM, generates perpetual higher-margin fees. We're the third largest player in it globally, up from fourth largest this time last year. Overall, significant work remains to improve efficiency, address remaining areas of performance weakness and improve our revenue yield, but clear plans are in place to achieve those goals. We truly believe that through this work, a highly capable and relevant abrdn Investments business is beginning to emerge. With that, I'll hand over to Noel to discuss Adviser.

[Noel Butwell, CEO, Standard Life Savings]

Thanks very much, Chris, and morning, everybody. So against the market backdrop that Stephen outlined earlier, we delivered another year of growth for the business through disciplined cost management and increase in cash margin. And at the same time, we've retained our #1 position as the largest adviser platform by AUA, and we also remain to be the only AKG-A-rated platform for financial strength in the market. But the key focus in 2022 was in the delivery of the next phase of our Adviser Experience Programme, and this lays the foundation for our strategy and the growth ambitions we've got for the business.

I'm delighted to be able to announce that we have successfully gone live with our most significant technology development as part of our Adviser Experience Programme. The new functionality delivered under Phase 2 of this programme amplifies our market-leading position, marking a step change in our overall proposition. Crucially, this enables us and our advisory partners to be more productive, delivering increased capacity for those businesses. The capacity creation benefits us, it benefits the client but also the end customer, ultimately contributing towards reducing the advice gap that continues to persist in the UK.

So using Phase 2 of our Adviser Experience Programme as a catalyst, we now move from a transformation phase into a growth phase with growth delivered through three key pillars. Firstly, our existing customers. Now we have 430,000 customers with an average wrappers per customers of 1.66. However, over 50% of these customers do not have a pension with us, so we see that as a huge consolidation opportunity going forward with potentially up to GBP50 billion worth of assets based current SIPP case sizes. And that's just from the advised customers that sit on our platform today.

With our existing clients, we partner with, as you know, 2,600 firms in the U.K. with 46% of our assets under administration coming from firms that use abrdn as their primary platform meaning that we can expect to receive over 70% of their new business every year. So our focus is on leveraging the Adviser Experience Programme to increase the number of existing firms that use us, as their primary platform converts from secondary or tertiary into their primary platform of choice.

Finally, engaging with new clients. Well, as we said, we currently partner with over 50% of the U.K. advice firms. However, we do have ambitions to work with some of the other 50% that we currently don't. So unlocking this relationship, one of the key drivers is advocacy. 40% of advisers actively recommend their primary platform to peers. Therefore, through delivering an excellent service to our existing clients and encourage them to be advocates for abrdn, we will grow our business. And with that, I'll now pass over to Richard.

[Richard Wilson, CEO, Personal Wealth Vector]

Thank you, Noel. Good morning. For those of you who don't know me, my name is Richard Wilson, and I'm delighted to have joined abrdn as part of the ii acquisition. And since this summer, I also assumed responsibility for the Personal Wealth vector. As we know, 2022 saw some of the most challenging market conditions in living memory with a market correction and accelerating inflation and interest rates impacting short-term investor confidence that had a knock-on impact on customer acquisition, plus 3% net of tail churn and trading levels, which were 30% down year on year. Thanks to our subscription model, plus 17% in subscription income which is insensitive to market levels, a supportive rates environment and the continued focus on digitization and simplification, it helped to contain operating costs at minus 1% compared to the previous year.

We have expanded operating margin. That's further underpinned by a 17% growth in our SIPP accounts. We see a material opportunity in the pension market, where, by virtue of our history, we’re underpenetrated compared to our peer group and we expect double digit growth in the medium term thanks to our award-winning SIPP and fixed price model.

We are focused on broadening ii services to a wider audience with the advantage of abrdn financial planning and product expertise from across the group, and we see a material opportunity to contribute actively to simplification and integration of pre-existing D2C activities from within abrdn.

ii will continue to develop and deploy new features and services currently at a rate of once every two weeks to make the user experience more simple and more engaging to a larger audience. We expect the market environment in 2023 to remain challenging and competition to increase.

Notwithstanding, we expect to continue to take market share. In an otherwise flat market, our value proposition continues to attract net flows with our overall AUA market share up 1 point to 19% and our share of share trading increased two point to 25%, thanks to our global multicurrency execution capability. We also expect to benefit from a continued supportive regulatory environment with subjects like simplified advice helping to appeal to a broader audience. However, we remain cost disciplined and we expect, nonetheless, to increase our investment in product and marketing this year to the extent that we see Adviser of doing so.

ii customers are at the more affluent end of a self-directed market with roughly 2 times the AUA in the sector, and our overriding priority remains to deliver a quality service using the best technology. Today, we have more five star Trustpilot scores and the rest of the industry put together. However, there remains a lot more to achieve and we look forward to sharing more of that with you at our planned Investor Day in Manchester in April. On that, I'll hand over to Stephanie.

[Stephanie Bruce, CFO]

Thank you all, and good morning to all of you. So the events of this year, I think, as we've heard have definitely created a very difficult environment in which to operate, and this has been seen in our overall performance. So markets were the biggest headwind for revenue, and in abrdn, this was principally evident in the Investments vector.

Our diversification of the group through the Adviser and Personal businesses has built more resilience into our revenue sources and introduced more leverage into our trading results. With a substantial contribution from seven months of ownership from ii, the decline in group net operating revenue in 2022 to GBP1.456 billion was limited to 4%. Now our discipline on cost management continues. Here, we're generating cost savings in less efficient areas and investing in new costs, which benefit revenue.

In 2022, we did this again, creating savings to offset GBP65 million of new costs from ii, Tritax and Finimize. Now as Chris has highlighted, the work to further improve the operating margin of the Investments vector is ongoing. However, the cost taken -- as the cost actions taken in Investments only delivered 1% of savings in the second half as the vector responded to inflationary pressures on staff costs. This contributed to group cost being flat year-on-year at GBP1.193 billion rather than the 2% reduction we had indicated for the full year.

Adjusted operating profit of GBP263 million is 19% lower than 2021 and comprises a reduction of GBP139 million in profits for Investments, which was partially offset by the increase of GBP76 million in profits from Adviser and Personal.

Now the IFRS result was a loss before tax of GBP615 million, due principally to three main components: firstly, impairments of GBP369 million largely in investments of goodwill and other intangibles, reflecting lower expectations due to market conditions; secondly, the GBP187 million lower value of the listed stakes; and thirdly, restructuring and corporate transaction costs of GBP214 million.

Our disciplined approach to capital management has continued with the purchase of ii, which has been immediately earnings accretive and the return of GBP0.6 billion to shareholders by way of dividends and share buybacks. At year-end, there is GBP2 billion of available capital, comprising GBP0.7 billion of regulatory capital surplus and GBP1.3 billion in listed stakes. Adjusted EPS at 10.5p is 23% lower than prior year due to lower profit but benefiting by 3% from lower average share count due to the share buybacks completed in 2022. The full year dividend remains at 14.6p, in line with our policy and is 0.9 times covered by adjusted capital generation for the full year in 2022.

In H2 2022, with the higher level of adjusted capital generation, the dividend was 1.1x covered. AUMA is a key driver for revenue and investment adviser due to their fee structures while not a driver of ii's revenue, which, as we've heard from Richard, is underpinned by its subscription model. At year-end, AUMA was GBP500 billion, 8% lower than the prior year.

Now overall, the evolution of AUMA has been impacted by three key factors: the final withdrawals of GBP24 billion of the Lloyds assets, GBP59 billion reduction due to lower market levels, and on the plus side, the acquisition of ii, which added GBP55 billion of AUA, which broadly offset that impact from markets.

In addition, net outflows, excluding Lloyds, reduced AUMA by GBP13 billion or 3% in 2022. Average AUMA excluding ii was GBP478 billion, 10% lower than 2021 and does create a headwind for revenue. The decrease was concentrated in the investment vector, primarily driven by equities and fixed income.

Now looking at flows in more detail. We can see very clearly that the customer and client activity does vary by vector. Within Investments, the industry trends out of equities, fixed income and multi-assets are clearly demonstrated here on the graph on the left-hand side, and this was mirrored by similar impacts in abrdn. Specifically in Investments, and this is the second chart from the left, net outflows of GBP13.4 billion, excluding Lloyds exits and liquidity represents 3% of opening AUM compared with 2% in 2021.

Gross flows and investments, excluding liquidity, were GBP49 billion, 14% lower as client activity was impacted by the wider market, particularly in equities and fixed income. Redemptions, excluding Lloyds exits and liquidity, is worth GBP62.5 billion, which was 3% lower. In insurance activity, which is now largely represented by Phoenix, there were benefits from almost GBP3 billion of flows from bulk purchase annuities and GBP5 billion flows into low-margin quants, offset in quarter four by the withdrawal of GBP6 billion of actively managed equity funds following Phoenix's change in investment approach.

Now moving to Adviser and Personal on the right-hand side of the slide. Here, we can see the continued delivery of positive net inflows, although at a level than the peak seen in 2021. Overall muted levels to customer activity that Noel and Richard have both covered. Against this backdrop, advisers net flows were GBP1.6 billion, 59% lower and in Personal, ii's net flows were GBP3.6 billion, 38% lower.

Now the evolution of revenue over 2022 is shown here. And you can see the two key impacts of market pressure offset by the benefit of acquisition of ii, resulting in an overall reduction in revenue of GBP59 million, 4% to GBP1.456 billion. Moving from the left-hand side of the chart, the largest reduction 7% was from markets. Overall, net outflows continue to create a drag of 1.5% on revenue, while the group yield has reduced by 0.2 basis points with investments the key contributor due to changes in asset class mix, which reduced their yield by 0.5 basis points.

Specifically in insurance, Phoenix's withdrawal of GBP6 billion of equities triggered a contractual payment of GBP9 million, equivalent to 1 year of associated revenue. This one-off payment and the positive impact of foreign exchange of GBP24 million were partially offset by the revenue reduction associated with the last LBG exit and lower performance fees. Revenue increased by 7% with the net impact of our acquisitions and disposals. For revenue overall, we have seen a benefit from higher interest rates of GBP68 million, largely from ii. And then looking forward to 2023, benefits will arise from a full year's contribution from ii.

In terms of cash margin, the indicative average in basis points is 160 to 180 for Adviser and 160 to 170 for ii. There are headwinds as well for revenue from the lower average AUMA particularly in Investments as a result of market movements this year. In addition, for Phoenix, we expect to see continued shifts from active to passive strategies which, together with related pricing changes will result in yield contraction in this activity. Fund rationalization continues, as Chris has outlined, and does progress well and is expected to have a revenue impact of below GBP10 million.

The impact on revenue of lower markets is most marked in investments. In public markets, revenue declined 18% to GBP746 million. While in the alternative asset classes, revenue grew 2% to GBP324 million, benefiting from a full contribution from Tritax. In Adviser, the benefit from cash margin on client cash balances of circa 2% of total AUA was circa 85 basis points in 2022 and increased revenue by 4% to GBP185 million, driving the increase in yield to 26.1 basis points. With the platform yield stable, the reduction in platform charge revenue reflects the lower average AUA due to markets.

Personal has benefited significantly from ii scale. And to understand the drivers year-on-year, we have presented ii on this slide on a pro forma 12-month basis. Now this shows that the revenue has increased by 20%. Subscription fee revenue was 17% higher, reflecting 9% higher average customer numbers in 2022 as customers from previous acquisitions were migrated on to the platform. Treasury income was GBP71 million with an average cash margin of 120 basis points on circa GBP6 billion of client cash balances. This has more than offset the 30% reduction in trading revenue, which reflected less customer activity in these markets, particularly in the second half of the year.

So turning to costs. We continue to focus on removing areas of cost in inefficient or shrinking areas of the business in order to enable funding of those areas we believe have the best opportunities for growth. This slide summarizes that pattern over the last few years. In 2022, savings of 7% reflect 14% reduction in FTE, lower bonus pools reflecting performance and reductions in technology servicing costs. These savings were offset by staff pay inflation, particularly in investments in the second half. We have also invested in areas of growth with Tritax, Finimize and ii increasing costs overall by 5%. Due to volatility in the second half of 2022, the cost base has also increased by 2% for FX.

Now including ii, again, on a 12-month pro forma basis for ease, all the vectors reduced costs in the period. Overall, the group income ratio increased to 82%. Now operating margins in Adviser and Personal at 54% and 62% are efficient and aligned with our target overall. In Investments, however, the cost base at 23.6 basis points on AUM continues to be inefficient for the revenue yield being earned from the AUM of GBP376 billion, and the resulting cost income ratio of 89% remains high, reinforcing why the simplification of the operating model is underway that Chris has already highlighted.

Investment costs overall were 2% lower as a result of an 8% reduction in FTE by the year-end and reduced technology and third-party costs, offset by increased cost of regulatory change, additional pay inflation in the second half and foreign exchange impacts. In Adviser, costs reduced by 5%, benefiting from reduced head count in the first half as colleagues transferred to FNZ and lower overall servicing costs. Within Personal, ii's costs of GBP47 million reflected the 7-month period since acquisition.

Now looking out to 2023, the costs in both Adviser and Personal are expected to grow next year due to growth in the businesses with the group benefiting from the efficient cost models in both vectors. And in Investments, we're targeting a net GBP75 million reduction in 2023, which I'll now explain. So the program of work to refocus and simplify the operating model is prioritizing the cost base within public markets, which is very inefficient. The detailed work on simplification that Chris has highlighted, and it's now well underway. The Investments leadership have now been able to improve their objective on cost savings, with delivery of circa GBP75 million of net cost savings in 2023 itself. This is before any cost reductions that may arise from noncore disposals and has been computed from the 2022 outturn.

As these savings will all now be delivered in 2023, this is an increase of GBP20 million in net savings over the original objective. Our disciplined management of the capital position has supported the investment to scale our U.K. savings and wealth business is supporting the transition of investments to a more profitable position and has enabled returns in 2022 to shareholders through dividends and buybacks. Adjusted capital generation full year largely meets the dividend cost, which has reduced to GBP295 million and will further reduce in 2023 once the full impact of the buybacks is seen.

Dividend cover at 0.9 times impacts capital by circa GBP35 million for 2022. We realized value from the sales of blocks of HDFC Life and HDFC AMC as well as 4% of Phoenix, which together generated GBP0.8 billion of capital. The largest deployment of capital was into ii, which has been immediately revenue and earnings accretive. Based on the last seven months of 2022, the GBP1.49 billion purchase price represents a multiple of 16 times annualized post-tax adjusted profits.

We completed a further buyback of GBP300 million at an average cost of GBP1.68 per share and reducing the number of shares by 179 million. Restructuring expenses of GBP169 million comprised severance, platform transformation and specific cost to effect savings and investments. Corporate transaction costs of GBP45 million are higher than 2021 largely in relation to ii.

Now turning to the chart on the right-hand side, in terms of the capital stack, we have optimized the regulatory levels and debt holdings. We redeemed GBP92 million of Tier 2 debt in December 2022, which had a rate of 5.5%. This had no impact on capital. Our issue of GBP210 million of AT1 debt paying fixed interest of 5.25%, which we set up in December 2021, is proving very efficient in these markets and our remaining Tier 2 debt of GBP569 million is swapped into sterling and fixed at 3.2%.

Our subordinated debt stack is structured to fully utilize the 25% Tier 2 allowance and to meet 19% of the Tier 1 requirement through additional Tier 1 capital. This delivers efficiency in meeting the group’s capital requirement and means that our capital surplus comprises the highest quality deployable CET1 resources. Our debt stack is now optimized for our funding needs, with interest rates locked in prior to the 2022 rate increases. Clear approach to capital generation and allocation. Our strong capital position provides us with resilience during periods of economic uncertainty and volatility. We continue to have a disciplined approach to generation and allocation of our capital. We will continue to look at inorganic bolt-on investments and expect to allocate capital to support these opportunities.

We will redeploy the proceeds from non-core disposals into the business to support simplification and organic growth opportunities, including covering future restructuring costs, to be in the order of cGBP0.2 billion in 2023, primarily related to the reshaping in the Investments vector.

As part of our approach to allocating capital, we apply a buffer of GBP0.5 billion to provide a level of management flexibility, capital strength and resilience during periods of volatility. The dividend policy remains unchanged at 14.6p per share per annum until at least 1.5 times covered by adjusted capital generation. Our capital strength also benefits from the value of our listed stakes, which at year-end had a total value of GBP1.3 billion and represents additional capital to the regulatory capital surplus. Our intention is to continue to make returns to shareholders at similar levels to 2022, comprising both dividends and further share buybacks, recognizing that share buybacks in turn reduce the absolute cost of the dividend. Therefore, we are committed to return a significant proportion of capital generated from further stake sales. Back to yourself, Stephen.

[Stephen Bird, CEO]

Thank you very much, Stephanie. So now we're going to enter the Q&A session. I want to welcome Rene Buehlmann, our CEO in Asia Pacific. He is joining us live from Singapore to participate in this session. If you would like to ask a question in the room or online, we have a mic in the room, so if you please wait for the mic. Let's start with a question in the room here, please.

[Nicholas Herman, Citigroup]

Thank you for presentation and for taking the questions. Two for me, please. One on -- well, basically on disposals. Could you talk -- please talk about the profit contribution from the now sold DFM business, please? I think you also had a GBP40 million of revenues in last year. I think you've also been linked with the sale of the private equity business. I'm not expecting you to comment on that unless you wish to do so. But could you please again also talk about the profit contribution of that business, too, please?

The second question is on your Phoenix stake. I note that you've included all listed stakes in available capital. You have noted your commitment to the partnership with Phoenix. But are you trying to tell us that you don't need to keep the stake in order to have that long-term strategic agreement? Thank you.

[Stephen Bird, CEO]

Thank you for your question. So taking those in order. Just so everyone understands, we divested our -- we've announced today the divestment of the traditional discretionary fund management business. Consistent with all our other divestments, that divestment is designed so that we can focus on what's important to our remaining businesses which is the development and model portfolio of services, which is the more scalable, efficient, machine-driven capability.

The business we sold GBP140 million of proceeds or thereabouts had about GBP11 million of earnings associated with it. But what's also notable in detail is that we have released GBP120 million of capital through that divestment. So I would say it was -- we feel very good about it. It was the right business to sell at the right time and is going to have the right impact.

In terms of the PE business, I'll take your permission not to comment on that. But I would add one thing because we talk about alternatives, we talk about the growth of real assets. We talked about the growth of logistics. We talked about the growth of specialist commodities. And we've got a big private markets business, private credit. The businesses that you are referring to are fund of funds, secondaries, different type of business. We have got to be a distinctive investor. We invest in areas where we've distinction on margin and so that's the way to think about the unspoken thing.

Now Phoenix, the way to think about Phoenix, and we've tried to guide this way clearly, the investment mandate is separate from the stake. So we manage assets, and we're an investor in the company. So that's why we've been really, really clear about it. The focus and investment -- the investment mandate is helping Phoenix achieve the strategy, which is growing the open book, and you've heard Andy talk about that at length. We sold the Standard Life brand. That's one of the most important ways in which we've helped them develop that open book. They're now winning business in the open book.

We've also developed efficient DC default passive options so that you've got the right option for your pension workplace, and that's helping them. And likewise, we're helping them access private credit swapped into Sterling, et cetera, et cetera. So we're doing the right things for Phoenix in the investment mandate because they've got to have the right products at the right price, but that's a separate matter from the stakes. And that's why when we talk about the stakes, we show you that we've got GBP1.3 billion in stakes. And we've built a business that has got both capital generation and a divestment plan overall. Please, Haley?

[Haley Tam, Credit Suisse]

Thank you. It's Haley Tam from Credit Suisse. Could I ask you two questions, please. First of all, just on the acceleration of the cost savings, Stephanie, the GBP75 million. Does that help us give any more confidence to the achievement of the less than 70% cost income ratio target at the group level? I know at the half year, you extended the time line for that. And I just wonder if you can comment on that now.

And then secondly, just a question, if I may, on ii to Richard. It's not a business I know as well. So could you talk to me perhaps about the 9% average growth in customer numbers and the 17% growth in subscription revenues, whether that is something you'd expect to track more closely together in the future? Or just help us understand the dynamics there. Thank you.

[Stephanie Bruce, CFO]

So if I can come on in terms of the acceleration of the cost savings. Just to be absolutely clear, Haley, our ambition remains to achieve our 70% overall for the group. And clearly, we made good progress by actually having both adviser and personal be much, much more efficient and a part of our overall group. I think the point about the cost savings that we're being able to say that we can accelerate them with very firmly clearly now can be in 2023, whereas when we talked at the half year, we were -- the team were obviously still working through the real precise timing of that. And what's helpful is that they can now commit to that by the end of 2023 for that delivery, and that will clearly help and aid the cost/income ratio in investments.

I'm not going to try and second guess what's going to happen entirely with markets in 2023, but that is entirely the ambition is to continue to move through. But all of these cost saving changes will help us achieve that ambition.

[Haley Tam, Credit Suisse]

Is that still a 2024 ambition?

[Stephanie Bruce, CFO]

I think in -- we're not changing our view in terms of -- it will be a longer ambition to get to overall 70% for sure, Haley. So we're not changing that, but we do -- we are very firmly giving us confidence that we can deliver those changes in investments in 2023.

[Stephen Bird, CEO]

Richard?

[Richard Wilson, CEO, Personal Wealth Vector]

So on the question of the relationship between subscription and customers, over time, you'd expect those to correlate. The subscription business is a multi-bundle business and we have different service offers for different types of consumers. But you would expect those two to align over time subject to premiumisation or upselling to higher bundles.

[Haley Tam, Credit Suisse]

Was there a lot of upside this year?

[Richard Wilson, CEO, Personal Wealth Vector]

Pretty muted to be straightforward, but that remains a difficult opportunity going forward. We released a new service in February, which was Investor Essentials, which appeals to a lower asset level. And we're now increasing the different features in different bundles so we can optimize the pricing against different subscription services.

[Stephen Bird, CEO]

This line from Haley and the -- thank you.

[Enrico Bolzoni, JP Morgan]

Thank you. Hi, it's Enrico Bolzoni, JPMorgan. Just a couple of questions for me. Going back to actually Investor Essential you launched in February, I just wanted to know if you can get any color in terms of whether you saw an uptick in customer acquisition or any dynamic there would be interesting.

Second question is the new disposal that you announced today. Can you just give a bit of extra color in terms of what do you expect is going to be the impact on cost and the phasing? So should we expect that to be in the first half of the year point of view.

And then I noticed that in the annual report, you commented on an auto investing proposition that will be rolled out in 2023. Can you please clarify on whether it's going to be a robo advice type of proposition or something else? Thank you.

[Stephen Bird, CEO]

So we'll start with Richard, Investor Essentials and...

[Richard Wilson, CEO, Personal Wealth Vector]

And the last, so I'll go first and last. So Investor Essentials, what that does is -- for those who are familiar with the space, we were very competitive and compelling in the marketplace previously, above GBP30,000 of assets. Investor Essentials brings that competitive point down to the GBP10,000 to GBP15,000 level. It only launched a few weeks ago, and we're seeing consistent traction. But in terms of overall customer acquisition levels, the market still remains quite muted. So it's a structural play rather than a short term era. It's landed well. The service is delivering. And now it's a question of ongoing marketing and promotion.

On the other point, which is -- and I can't stand the word robo, we'll look forward to showing you what the product looks like during the Investor Day for all of those of you who can make it to Manchester. But it will stay on the left-hand side of the advice model. So it will stay in the guidance space and for the time being. We're working actively with financial planning on drawing those streams together. But it's carefully worded or to investing because it's not an advice proposition.

[Stephanie Bruce, CFO]

And in terms of -- sorry, in terms of coming back to you on your timing of the sale from today, I mean, clearly, it's subject to the normal processes of completion and regulatory. So we obviously have to work through that process. But as Stephen has highlighted in terms of the overall earnings profile of roundabout GBP11 million a year, it will be reasonable to hope that half of that would move through from this year depending on when we do completion.

[Stephen Bird, CEO]

Bruce?

[Stephanie Bruce, CFO]

Thanks, Hubert.

[Stephen Bird, CEO]

Yes, Hubert.

[Hubert Lam, Bank of America]

It's Hubert Lam from Bank of America. I've got three questions. Firstly, on the dividend cover, 0.9 times. I know if you look at the first -- second half of the year, you said it goes up to 1.1 times. It's still relatively low. Just wondering -- I know you're trying to reduce the cost of the dividend by doing buybacks from sale of proceeds. But if markets remain challenging, how do you think about the dividend cover? Is that sustainable? Or do you have to reconsider the dividend? That's the first question.

A second question is on the real estate assets. I know you have GBP42 billion of real estate assets. Can you talk about the performance of the real estate funds and performance of Tritax? How do we think about -- just given the pressures in the real estate sector, how should we think about the AUM going forward?

And lastly on ii, I know the average retail trading fell significantly in the second half versus the first half. How should we think about -- what's your outlook for 2023 in terms of trading just given inflationary pressures, cost of living prices, et cetera, et cetera? Thank you.

[Stephen Bird, CEO]

Thank you, Hubert. So I'll start off on capital and then have Chris talk about our real assets franchise and Tritax and then we'll switch to Richard to talk about views on the outlook. So I think importantly, the direction of travel dividend was 0.7 times covered in the first half. Of course, we didn't have ii. And then we did have ii, and we were 1.1 times covered in the second half. But you've got to think about capital in its totality. In 2022, we gave GBP600 million back, which was roughly half dividends and half buybacks. And now our current capital position and an improving trend on dividend cover, and we have GBP700 million surplus capital in the stock and GBP1.3 billion in stakes in addition to that.

Even last year in the worst year for investing memory, the augmentation of the dividend was only GBP35 million from the capital position. So the dividend is, I certainly wouldn't be concerned about dividend. The first direction would be on buybacks. I mean you would first go in the sequence of buybacks then dividends. So dividends are very important.

They're very important to our shareholders. We have 1 million retail shareholders, many of whom rely upon the dividends that come from our legacy of mutualization. So we're committed to making sure that we are -- we show up on the dividend. And so Chris, do you like to talk about real estate?

[Christopher Demetriou, CEO, Investments Vector]

Yes, very happy to. So overall, our real estate performance has held up fairly well given the significant decline in valuations that we experienced at the end of last year. So to put a headline figure on over 60% of our real estate assets continue to be outperforming over three years.

But it really was quite an extraordinary movement in valuations that we saw at the end of last year, particularly in the U.K. marketplace where we probably had the most significant write-down in U.K. real estate asset as possibly ever.

What we see there is significant opportunity to be able to get into the market. There are two areas of the marketplace that we have a -- we favor in particular. One is the logistics area, the other is residential and living space. We think the fundamentals of those two sectors remain incredibly strong, and therefore, the valuation movements are fairly temporary in nature, and we will see recovery come through later in 2023 in those two spaces in particular.

Tritax, as you asked being sort of predominantly current assets in the logistics space has clearly seen the valuation implications take hold that you've seen across the sector, particularly coming off the back of COVID and the sort of the premium valuation on e-commerce-related value chains that we saw coming on the back of that. But the Tritax business has, I think, the largest undeveloped land bank for logistics assets inside of its funds. And so again, we are really, really constructive on the opportunity to take advantage of the market situation that we experienced at the moment.

And the final point I'll make about the real estate business is clearly, as we went through last year and we saw the U.K. pensions market be quite challenged as a result of the gilts marketplace. Clearly, almost the next biggest overweight in that space is U.K. real estate, and you saw a number of open-ended real estate funds come under pressure. We were able to once again stay open through that period, continuing to offer our clients liquidity. So overall, I'm really proud of the way the real estate team have managed the business over the course of this year, and Rene and I are very excited about the opportunity to take advantage of the valuation decline for our clients over the course of the next 12, 24 months.

[Stephen Bird, CEO]

And just turning to Richard, there are a few things that I think are important when you think about ii. So there's the ii business, which is the model that particularly we were attracted to was fact that it was the favorite -- customers favored way of paying for investment access.

And then the business model having a composition of revenues, whether it was inherent balances. So when you -- you have subscription revenues, trading revenues, FX revenues and you also have net interest margin. So you want to have a business that through cycle can display high-quality revenue characteristics. But Richard, when you think about next year, there's external market, and perhaps Richard can comment on that, which is tough. And there's also the internal market opportunity because Richard runs more than ii. He runs the entire personal vector.

[Richard Wilson, CEO, Personal Wealth Vector]

Why you said. So a few points on the question. Number one, obviously, it's not in our gift to speculate on market volatility. Clearly, it's been subdued in 2023. And the reality is that in a higher rates environment, that suppresses trading appetite. That, of course, plays to our financial model. We have a very substantial and growing share of subscription. And so we don't live off trading commissions. A data point which is quite telling is that in September, we reduced our standard commission rate by 25% and that had a 1% impact on revenue.

Secondly, we have, as I mentioned earlier, a much higher level of AUA per customer than the sector. And whilst no one is immune to cost of living and clear that raises all sorts of challenges for the acquisition model, in terms of trading behavior, we're perhaps less impacted than some others. And that's certainly been seen in our relative market share over the last period where, as I mentioned, we've taken 2% more market share.

Lastly, and not least, we are very lucky to have a wonderful technology organization that enables one of the best global execution models, which is reliable and fast. And we -- so we tend to attract the more active investors to our platform because of that capability. So all in all, we remain guardedly positive in the space, but we can't dictate to the market.

And clearly, our expectations in 2023 are not adventurous, but we expect to be solid. The first two months of the year as of this morning, trading activity and revenues are on plan, but I wouldn't want to predict tomorrow.

[Luke Mason, BNP Paribas Exane]

Good morning. It's Luke Mason from BNP Paribas. Just three questions. Firstly on bolt-ons, you talked about bolt-ons. Just wondering what focus areas. Is that mainly in the investment sector or in adviser and personal as well? Just secondly, on the alternatives business, which you talked about as well. Just wondering what opportunities there can be to accelerate growth in that business like in infrastructure or private credit, new fund launches, et cetera.

And then just thirdly, on interactive investor, you just mentioned market share. Just wondering if you can talk about the competitive dynamics. You've seen a step-up in interest income, but then seems like others are increasing marketing spend, et cetera. So just wondering how you think this will play out in terms of competitive dynamics.

[Stephen Bird, CEO]

Thank you. Let's deal with ii first, and then we'll talk about acquisitions and alts.

[Richard Wilson, CEO, Personal Wealth Vector]

So in terms of the competitive environment, what we see, obviously, the DTC space has attracted focusing capital as a number of institutions trying to focus on the wealth space. So generically, we see generally increasing competition. Specifically, the only people I watch are Vanguard, frankly. So we'll be head-to-head with them this year, next year and the year after. What was the other part of the question?

[Luke Mason, BNP Paribas Exane]

I guess, just you've seen interest income step up. Do you think it’ll put any pressure on other parts of revenue as you’ve taken down trading fees, et cetera. I’m just wondering how you think that will play out?

[Richard Wilson, CEO, Personal Wealth Vector]

Well, back to the point about our financial model is very resilient, and we have a revenue mix, which is quite powerful. Clearly, over the last 10 years, interest rates have been around zero, and now they're reverting to a more normal level, which means that's an integral part of the revenue mix. Our net interest income is a function of both yield curve base rates and competition, and that remains an open market space. We are competitive in that space. But again, we're not competing for cash for small savings with banks, but it will remain a strong part of our revenue stream going forward over time.

[Stephen Bird, CEO]

Thanks, Richard. On bolt-on acquisitions, very good question. We use the term advisedly because the shape of the group is settled. And I say, we won't be doing any acquisitions in the scale of ii. The shape of the group is settled, and I think now people really understand we've taken capital invested in areas of higher growth, higher margin, more efficient businesses. And what it does is it creates more ways to win. You have three investing businesses that are very focused on each of their own segments, but they're all investing businesses. They're all related.

And in the second half of this year, we're going to show the relationship between the businesses. There's some significant actions that we're taking to build the linkages between them. In terms of M&A activity, bolt-on, and we use the term bolt-on acquisitions, you can think about some of the things we've already done. We said that 21st century trends, e-commerce logistics, Tritax was an example of that. We've talked about a closed-end fund business. We're at GBP23 billion closed-end funds business, third largest in the world.

When I first sat with the team, and we were fourth in the world, I said give me a plan to move up through the rankings because this is a great business. It's a permanent capital business. And you -- I think we've got a fantastic team running it. They're a really sophisticated team. They understand how to invest, govern and manage these entities. So we do have a pipeline there, so the anticipated bolt on, the areas that I'm working on, where we're actually talking with potential counterparties are in areas of specialist investing because we -- that's where the margin is going to be, that's where there's less. It's less correlated with beta and market levels, and you'll see us, we're in 87 billion, call it, 90 billion alts job, and that's not really been well recognized. I'd like to ask Chris to talk a little bit about alt.

[Christopher Demetriou, CEO, Investments Vector]

When I may, I have a comment on the distribution opportunity for alts in Asia in just a minute. But the -- we're looking at a number of areas. I've already mentioned the opportunity in real estate given where valuations are for us to work with our clients on a fairly opportunistic basis over the course of the year to find good entry points. As I said, the fundamentals in terms of occupancy rates in living and logistics remain very, very strong. We signed the partnership with John Lewis to develop some of their properties in the living space as well as an example.

We're in the market raising a core infrastructure fund, targeting around EUR1 billion at the moment in our core infrastructure. That fundraising is going very well and is on track. In the private credit space, this is a business that's accumulated some good assets over the course of the last five or six years, partly due to our partnership with Phoenix. And as they write new business in the bulk purchase annuity space, we expect to be deploying capital on their behalf into the private credit space.

But within that, just assuming that one interesting capability, we have a very strong fund financing capability, floating rate debt. There's an awful lot of demand now for both commitment back and -- now backed fund financing opportunities, and our team have done a brilliant job of deploying capital.

And given the often floating rate nature of the underlying asset classes, we see a lot of demand in those areas. So really across the board in our alternatives capabilities, we're really excited by the opportunity to grow. What's important to us is getting the organization right, getting the right distribution focus, the right operational focus, like I mentioned. So that as we grow into that business in a profitable way, and we drive both the operating margin and the revenue margin of the business forward as a result. Rene, I don't know if you want to touch on it, on Asia at all.

[Rene Buehlmann, CEO Asia Pacific]

I think with our Asian franchise, essentially, we have two goals. One is obviously going to provide top-class Asian capabilities to global investors. But the second element is certainly also bringing global content to Asian investors across the region. And I think to the point that Chris mentioned earlier, I mean if you look at some of the real estate topics such as the living teams and the like is definitely something given the price development that you have seen that is very attractive. So you can see us definitely in that space being way more active in the distribution of these capabilities also across Asia.

[Stephen Bird, CEO]

Thank you, Rene. With your permission, I had forgotten about the phones, and we have Bruce and Stephen, I believe, on the phone. Andrew, if you don't mind, I'll come back to you after. I'll just check whether we're still live online. Do we have any -- BT, do we have any questions on the lines?

[Operator]

We've got the question from Bruce Hamilton of Morgan Stanley. Please go ahead.

[Bruce Hamilton, Morgan Stanley]

Thank you very much for taking my questions. Maybe a couple of questions on costs. So impressive your management of the cost and bringing forward the GBP75 million savings. So are you in effect committing to cost down in absolute terms 2023 versus 2022? Because I guess we've got to build in a full year of interactive investors, some inflationary pressures, but just trying to assess that.

Secondly, on the cost saves of GBP75 million, just to confirm, those do include some expected savings from the noncore disposals that are expected to happen at some point in 2023. So there will be some revenue attrition that we need to think about.

And then finally, on the Investments business. I mean, clearly what you're trying to do in terms of repositioning and you've made a number of changes. But I guess the reality is still that the performance across equities, multi-asset and quant looks very, very weak. So how should we think about managing a real squeeze on the cost base further from here versus improving that performance. What sort of steps you're taking to avoid that just continuing to see significant asset attrition? Thank you.

[Stephen Bird, CEO]

Thank you, Bruce. So let's first give you some clear answers on costs. Stephanie?

[Stephanie Bruce, CFO]

Yes. So Bruce, in terms of the cost, just to be absolutely clear, the GBP75 million net is clearly and firmly being led by the investments team. So what I was trying to make sure is understanding of that's where the investments leadership are taking their cost profile to for 2023 in working out from an outturn of 2022 and net overall GBP75 million of savings on that 2022 cost base that we currently have.

Now clearly, if markets change, and there's a huge bounce in markets then clearly, we may well do other things in terms of additional cost base. But as we sit here today, on the 2022 outturn, that is what the team are very clearly focused in on.

I'll comment a little bit. I'm not sure Chris will come in as well in terms of where does that put a squeeze on performance. I think, again, if you look to the slide where we articulated the four real key parts of the work that is underway in investments, it's very clearly focused in on the fund simplification, the absolute simplification of the operating model, reducing further head count in the areas where the team have worked through very religiously as to where that can be.

And therefore, it's been done very much with an understanding of how to manage both the growth of the business and the performance of the business. And Chris, you can maybe comment on that in just a second.

So it's not a question of it's getting squeezed to not allow the business to grow at all. Quite the reverse. That's -- the team have been working very hard to be clear on the actions that have to be taken both in public because as I said, that is the most inefficient part of the business. And within alternatives, there are still some elements that can still be made more efficient.

And to your other part of the question, you said, does it include the disposals. Now just to be absolutely clear, again, we were less -- we've now been able -- since the half year, we've now be able to very clear that the GBP75 million that does not include disposals. So if there's any additional disposals off the top, which you're quite right, Bruce, would also bring revenue change as well. We haven't factored that in at all because that will come at a later time if and when those disposals went ahead.

Chris, why don't you just comment on actually the impact it puts into the investments team in terms of performance?

[Christopher Demetriou, CEO, Investments Vector]

Yes. Again, Rene may want to come on over the top. But for us, the way we're going to drive improved performance in the areas where we need to, there's a few things. Firstly, it's focus. Rene and I have done a very detailed review of our investment processes and performance across the business. And so we're really clear about why in the areas where we need to improve. When it's a capability that we just genuinely don't believe that we will be able to offer meaningful leading performance over the long term, we have -- we are rationalizing and exiting those capabilities.

Where there are areas where we understand that we can make some adjustments to the discipline inside of the investment process, we are making those changes and the introduction of a CIO will help to reinforce those changes over the course of the year.

And so I think whilst there are areas that remain challenged, there are considerable elements in the book that are performing really well, as I highlighted earlier on. And those areas are aligned to where client demand is. And we really do believe that we can put our best foot forward in terms of capitalizing on those opportunities.

So performance in an organization that runs as many of the broader set of assets as we do, it's going to be mixed. But where we do need to improve, we are really clear on the specific changes that need to be made that range from exiting the capability to tightening up on the investment process and that work is well underway. Rene, I don't know if you want to comment on that further.

[Rene Buehlmann, CEO Asia Pacific]

No, no. I think you've worded this perfectly. We have very clear core strengths. And I think maybe just highlighting, fixed income as an asset class, we could and there was no demand for many years. That's an asset class which is back now, and we see quite strong pipelines in that space with very competitive performance also on our side.

[Stephen Bird, CEO]

Thank you, Rene. I think also coming back to -- I'm going to take Andrew in the room, and I'm conscious that Steve is on the line as well. But please, Andrew.

[Andrew Crean, Autonomous Research]

It's Andrew Crean, Autonomous. Three questions, if I can. I'm not sure whether it's in the pack, but do you have the revenue margins by the different parts of the investment business? And could you give us some guidance around that on your revenue margins for the institutional business and the insurance business? I think you've given us some directional.

Secondly, I'm going to come back on this question on private markets because, yes, I think its revenues are around GBP50 million and Basel stock, I'm just going to say if you said it, GBP50 million off the bottom line on GBP190 million profit is a substantial drop. Is there anything you can say which would lead people to think that the profit impact, if you saw that business would be less?

And then thirdly, I think you want to keep a GBP0.5 billion regulatory buffer. Could you talk about the regulatory process in India? And if, as and when you get clearance on that, whether there is further scope to do more buyback. Or are you just going to maintain a buffer above your GBP0.5 billion buffer?

[Stephen Bird, CEO]

Let me turn to Chris to talk about revenue margin by product. It is in the pack, Stephanie, isn't it?

[Stephanie Bruce, CFO]

Yes. So it's quite detailed splits at the -- in the main ARE, Andrew, which I can point you to a direction of that. So that's absolutely -- yes. But in terms of bringing it to light.

[Christopher Demetriou, CEO, Investments Vector]

Yes. Yes. As mentioned, we're around 36 basis points in our institutional and wholesale channel and around just over 10 basis points on the insurance channel at the moment. What we'll do from the interims onwards is we'll stop breaking that out between alternatives and public markets and be able to bring that to life to demonstrate why we think we can drive improvements in the aggregate or the blended fee margin in the business over time.

But fundamentally, we think that -- as we just need -- we need -- well, our aim will be to drive the overarching net average basis points closer to where the institution and wholesale average is for the group as a whole, and that will be important in helping to address our cost income ratio challenge at the moment.

[Stephen Bird, CEO]

In terms of the private equity transaction that has been reported that we talked about earlier, I can't add anything specific to it other than I would point to, we are incredibly disciplined in understanding revenue and cost dynamics of anything we sell. The purpose of divestments is to make sure that what remains is a better business. We don't need the capital, as you can see, with GBP2 billion surplus capital. We're not divesting our businesses because we need capital. We're doing it to ensure that every fiber of the business is focused where client demand is.

So we don't -- we're not in any way distressed sellers. And that's why if you look at the transactions we've done, including the one we just announced this morning, it was configured the right way and released a lot of capital, and we sold at a good multiple of the trailing earnings. On regulatory buffer?

[Stephanie Bruce, CFO]

Yes. So on the regulatory buffer, Andrew, as you know, so the GBP0.5 billion buffer that we talk about is very much a management buffer. It's guidance that we use ourselves internally, very much there to be -- provide volatility, flexibility, as I've outlined before. If your question was, is that inextricably linked to the -- anything to do with India. It's not done in that way. And in terms of -- it's simply as we look at it in terms of the business itself, as coming into the shape that it's been getting into. And then also as we improve the profile and investments, it's something which, of course, we as the management team could choose to change and to flex. And I think as I said before, it's not a hard and fast guidance. It's not a regulatory rule. It's a buffer that we use ourselves.

So I think -- and in terms of if you were in very benign markets, you might choose to lower it at some point in time. If it got more extreme, you might choose to higher it. So it just gives us that volatility position. If your question in terms of around the Indian regime, clearly, we've got a very detailed work ongoing because I think we've been very clear in terms of the trajectory of travel on both HDFC Life stakes and the AMC stakes in terms of selling out to them, and we just absolutely just stepped through those different processes.

They have quite complicated steps that go into them in different parts, but we're working through them and progressing well, and there's nothing new to add to our guidance in terms of that still our trajectory, and we would expect to step through that during 2023 and into 2024.

[Stephen Bird, CEO]

The only thing I would add, and I think it's important, Andrew, on divestments. Last year, we were able to realize GBP800 million in divestments. And we did that at an average discount to publicly traded prices of 2%, so March improvement.

So we've got actually in our room here, David Mouille and Rushad Abadan, who work on these processes for us and do an excellent job so the process is around the tightness and understanding of our linkage into India and when and we can't is actually tighter than ever. So that all goes well for being able to execute against our stated intent as it relates to divestments. Of course, they're public companies. So timing, I can't comment on. We're into the last seven minutes. Steve is on the line, and I don't want to ignore. Steve, if you have a burning question.

[Steven Haywood, HSBC]

Good morning. Can you hear me?

[Stephen Bird, CEO]

Yes, we can.

[Steven Haywood, HSBC]

Great. Thank you. I've got one clarification and two questions. I hope we can fit them in. The GBP30 million of expenses associated to updating capital. Can you just clarify that, that is not in any of the cost savings plan?

And then the two questions I have on ii, there was lots of customers of about 6,000 in the second half of 2022. How much of these you consider sort of core customers versus what might be within EQI and the share center to try and get a bit more detail of sort of customer growth trajectory? And then last question from me, the adviser business had quite a tough second half in that sense. What trends are you seeing there currently? And are these sort of continuing into 2023? Or do you see that getting better? Thank you.

[Stephen Bird, CEO]

Terrific. Thank you for your questions, Steve. So first of all, we'll talk about the DFM divestment with Stephanie. And then we'll go to Richard on questions around ii. And then we're going to have a big finish with Noel on adviser.

[Stephanie Bruce, CFO]

Just to set you up, right? Steve, in short order, no, the -- anything to do with DFM is not part of the net GBP75 million savings. I hope I've absolutely cleared that up for everyone.

[Stephen Bird, CEO]

That was easy.

[Stephanie Bruce, CFO]

That was easy. Yes.

[Stephen Bird, CEO]

That was easy. Richard?

[Richard Wilson, CEO, Personal Wealth Vector]

So we go for churn rates. So excluding share center in EQI, we track to around 5% churn, 95% retention. The EQI book and TSC, as you know, they were acquired in EQI, I think it was June 2021. It takes a couple of years to run through, and that was churning at around 12%, which what drives up the gross number. For all those who understand churn rates, that will make sense. If you don't, then see me afterwards.

[Stephanie Bruce, CFO]

Drum roll, Mr. Butwell.

[Noel Butwell, CEO, Standard Life Savings]

God bless you, Steve, for asking your question. Thanks very much. Just to pick up on that. So our performance track market performance, it's well publicized that, I mean, historically, Q3 is always a quieter quarter and actually was the lowest level of flows in a decade in the platform market. So the backdrop was obviously -- and our performance in that backdrop was pretty much as expected.

As I said, in terms of looking forward, we've been undertaking a significant technology upgrade. As I said, I was delighted that we completed that last week. We move and pivot now to that growth focus. Our focus is obviously as a minimum to maintain our share and then grow it over time.

The market is still fairly muted on the basis that consumer sentiment, as Richard made reference to, and advisers largely still advising existing clients and reassuring them. But as I said, our strategy is about creating capacity. So if advisers can advise more clients, which they want to do and where the platform and the business allows them to do that, then we should start to see that growth come through. And that's absolutely what our plan is focused on.

[Stephen Bird, CEO]

Terrific. Thank you. One last question in the room or? Well, terrific, it remains for me to say, I want to thank you very much for coming in today. I know today is a big earnings day. A lot's going on in the Street so thank you for your interest in the company and in our transformation back to a growth company. Thank you in the room. Thank you on the line, and we'll see you at the interims.