abrdn plc (OTCPK:SLFPF) Q2 2022 Earnings Conference Call August 9, 2022 4:00 AM ET
Company Participants
Stephen Bird – CEO
Stephanie Bruce – CFO
Richard Wilson – CEO, Personal Wealth Vector
Chris Demetriou – CEO, Investments Vector
Conference Call Participants
Nicholas Herman – Citigroup
Arnaud Giblat – Exane
Haley Tam – Credit Suisse
Steven Haywood – HSBC
Stephen Bird
Good morning and welcome to the abrdn First Half Results for 2022. I’m joined by Stephanie Bruce, our CFO; Richard Wilson, CEO of the Personal Wealth Vector; Noel Butwell, CEO of the Adviser Vector; and Chris Demetriou and Rene Buehlmann CEOs of the Investments Vector.
Firstly, I will cover our performance as a group and show you how the strategy of diversification and investing our capital in growth areas is beginning to benefit the group results.
Secondly, Stephanie will go through the detailed financial performance, and then I will look at the impact of the market environment and the timing of the delivery of our strategy, our capital stance on dividend returns and how we see the near-term outlook before opening to questions.
In the first half, revenue was 8% lower, adjusted operating profits 28% lower, and cost/income ratio increased by 4%, all compared to the first half of last year.Net flows, overall, recorded a creditable performance in this market with net outflows at 1% of opening AUM. At the half year, assets under management, including liquidity and Lloyds were 6% lower than the start of the year.
The group results have been reduced principally by the market impact on revenues within the Investments vector where profits were 40% lower, while the Adviser and Personal vectors were up 3% and 75% respectively. The latter bolstered by one month’s contribution from interactive investor.
I’m pleased to report that ii is performing ahead of our expectations. When we signed the deal last year, we deliberately structured the group into three vectors, two of which have grown even in the most challenging of markets.
When I joined what is now abrdn in late 2020, I said that we would pursue a strategy of refocusing our Investments vector to areas of strength and growth potential and that we would expand our reach in the higher growth and higher margin, U.K. savings and wealth market. Despite the challenging market context, we are doing exactly that.
While the worsening market environment inevitably means that it will take longer to deliver our stated financial targets, we have the right strategy and we have the team, the right capabilities and the capital resources to execute it well. We have now successfully addressed the significant gap that we had in our business model by acquiring ii, which has transformed our position in the U.K. savings and wealth market.
Our balance sheet remains strong, even after significant returns to shareholders and a significantly stronger than we believe should be necessary to support investment in our business and meet our stated dividend commitments.
As we now have greater clarity on the capital needs of the business, we will continue to allocate capital to deliver shareholder returns. Returning capital in excess of business needs as further stake sales are realized.
I will first focus my remarks on our global investments business where our ambitious program of change is underway and where the benefits that we’ll accrue from management actions are greatest. The procyclical nature of asset management means that it has been most impacted by the fall in markets, and this illustrates precisely why a strategy of diversification for abrdn has been so important.
I will cover the progress we are making at Adviser and share further details of a strong performance in interactive investor and the plans that we have for the future growth of the Personal vector.
Turning to the Investments vector. This is the business with the greatest foundations and people and process. However, it has been hampered by having to deal with legacy issues and a lack of modernization. The rebuilding program is already underway and we will show you the progress to date, as well as outlining in detail our approach to addressing an unacceptable cost/income ratio.
Financial results in the first half have been impacted by industry-wide negative returns from falls in market levels, which have resulted in 11% lower revenue and 40% lower operating profit and an increase in cost/income ratio to 86%.As the business continues to build out from its legacy position in traditional core equity and multi-asset strategies, it is no surprise that we have seen the majority of year-end declines in those areas.
Pleasingly, it is of more recent strategic focus that generate longer term revenue streams and attractive revenue margins such as real assets and other alternatives have delivered AUM growth in the first half despite the challenging environment.
We are progressing well with reshaping our equity franchise to focus on Asia, sustainability and thematic capabilities. Our multi-asset capabilities provide the crucial foundations for the delivery of client led solutions. I am confident that these areas of our business will return to growth over the medium term. Even in current market conditions, our flow position continues to stabilize with outflows of GBP 3.3 billion, excluding liquidity, driven largely by public markets.
Turning to flows geographically. As I said overall, this performance represents encouraging stability and our position despite the environment. You can see there have been differences depending on region, driven primarily by asset types and local market dynamics.
Institutional and Wholesale outflows were limited to 1% of assets. In the U.K., our home market, we have seen important progress with net flows improving by 33%. There has been continuing benefit delivered from diversification, including commodity ETFs in the U.S. And in Asia, we’ve seen broadly flat net flows in a market experiencing net outflows. I’d like to focus in one of our bolt-on acquisitions for the investments business Tritax. We purchased 60% of Tritax in late 2020 as part of our repositioning of real assets. This gave us exposure to the warehouse and logistics distribution sector.
Since its acquisition, AUM has grown by 33%.Tritax works closely with our established abrdn real assets team, and as an illustration of how we’re working together, has contributed to the win to lead on capital raising for the Britishvolt power and electrification project.
The addition of Tritax to the vector has added capability, specifically in the logistics ecosystem and green energy area and the collaborative approach to delivering growth, scale and client access. I draw specific attention to this acquisition because it demonstrates commitment to our strategy. The role of bolt-on acquisitions demonstrates how we can grow even in tough markets.
Of course, the prime driver of flows in the long term is investment performance, which is best viewed relatively. Over one year, our performance shows 53% of AUM ahead of benchmark; three years, 63%; and 5-year, 61%.We have seen the impact of market conditions result in mixed performance across asset classes. Performance in real assets, alternatives and fixed income is highly competitive over the short and longer term.
Our performance in equities and multi-asset remains a critical focus and both were impacted in the period by the market derating of growth and rotation into value. We are reshaping these franchisees to be considerably more focused. Our overarching goal is to achieve more consistent investment performance and we are investing in our people, processes and technology to make that happen. We outlined how the Investments vector strategy fitted into the group strategy in March last year.
And while the environment has changed dramatically across all the economic indicators, we remain fully committed to delivery. Indeed, we will step up the pace of change in this market dislocation. We are changing the shape of our investments business and repositioning ourselves in higher-growth asset classes that play to existing abrdn strengths and global trends.
Through this repositioning, we are focusing and investing in growth areas, exiting subscale businesses and driving down costs. This will position us optimally when broader global economic recovery resumes. We see highly attractive investment opportunities aligned to the global trends, and we have the investment expertise that is necessary to capitalize on them.
And to be clear, you will progress – you will see us progressively move away from a broad waterfront offering as we focus the business on areas where we have competitive strength and scale. There are three things that we are doing in the Investments vector. I’ve already talked about the focus on improving investment performance.
Secondly, we’re working to drive improved flows. And thirdly, we’re reducing costs. We are continuing to accelerate fund development and launches in the areas of growth. Increasingly, through time, we will shape new retail offerings guided by the data that flows from our market-leading Adviser and Personal vectors. But right now, we are executing our programs to drive transformation and reduce the cost base of the Investments vector itself. Our new products and solutions are designed to capitalize on the global growth trends. Let me highlight recent launches.
Asia, sustainable. China, next-generation follow-on funds and commercial real estate debt and core infrastructure and easy-to-access packaged solutions, such as MyFolio Sustainable and global risk mitigation. We are confident that these new product initiatives, combined with actions to improve investment performance in our existing capabilities, will contribute to growth as market conditions improve.
We are well into an ambitious fund rationalization program that will result in the closure or merger of about 110 funds. We are simplifying our organization, resulting in lower headcount and fewer management layers.
Over the coming months, we will complete the transition to a single global middle office for public markets, unlocking cost benefits from strategic use of partners. As a result of these actions, we are committed to delivering gross cost savings of a GBP 150 million by 2024. And over the same period, we will reinvest GBP 75 million in the business.
Turning to Adviser, we have the U.K.’s largest adviser platform by assets under administration with an impressive reach of more than 50% of U.K. advice businesses partnering with us. The strength of our existing offering and the quality of service is already highly regarded with a 96% customer satisfaction score.
We are building on that strength, investing to further enhance our technology capability and the adviser experience. We’ve already added new portals and new ways of engaging with us. And in the second half, we will launch our next significant upgrade, overhauling the look and feel of the platform, making it much more intuitive, streamlined and focusing on helping the advisory businesses that we serve.
By ensuring that when firms partner with abrdn, they can deliver more for their business success, we in turn increase advocacy, growth and retention for Aberdeen. Our continued investment in adviser experience will further enhance our leadership position in a market that is estimated to grow AUM by 19% CAGR through 2025.In this half year, the Adviser vector has performed strongly with growth in both fee-based revenue up by 6% to GBP 92 million and adjusted operating profit up by 3% to GBP 38 million, despite a tightening consumer environment.
The acquisition of ii completed at the end of May has transformed our position in the vibrant U.K. wealth market and delivers a significant acceleration of growth revenue and diversification for the group. The transition of ii into abrdn has been smooth, and Richard’s senior leadership team ensures continuity in management and delivery of the next phase of growth.
In terms of financial results in the first half, ii has performed ahead of our business case expectations in terms of revenue and profitability, of which one month is recorded in the first half.
Despite the less active savings market, ii has grown its customer base to 408,000, adding 19,000 customers in the half and has maintained its industry-leading assets per customer of a GBP 128,000. This has driven a 17% increase in revenue and 47% increase in adjusted operating profit on a full year 2021 run rate basis, while the cost-income ratio improved by nine percentage points to 56%, highlighting ii’s operating scale.
As we said at acquisition, we believe abrdn is the best home for ii as it brings stability uncertainty for the business, and we have a clear roadmap to add significant scale going forward.
Growth in ii is underpinned by three drivers: strength of the platform, compelling pricing and scale of the customer base. ii has a fully scalable operating platform supported by cutting-edge data that drives personalized customer content and experience. This is what will enable significant future margin expansion.
ii’s transparent flat fee subscription model is favored by customers and our recent – and over recent months, it has launched a series of offerings to further grow the existing customer base, including bundling, fixed fee pension provision and advice.
As part of our growth strategy plan, we are folding the abrdn established personal business, wealth services, digital advice and the financial planning team, under Richard, who will lead this as CEO of the entire Personal Wealth vector.
This will enable us to offer an end-to-end customer proposition from simple online transactions to more complex financial advice. We are developing further synergies to fully serve this integrated customer group. Taken together, growth in the Adviser and Personal vectors will significantly increase our exposure to the fast-growing U.K. wealth market and will transform the shape and the source of group revenue in line with our stated strategic ambitions. Richard is with us today for any questions.
I’ll hand over now to Stephanie.
Stephanie Bruce
Good morning, and thank you, Stephen.
As Stephen has highlighted, our results in this half have principally been impacted by market levels in 2022, which have reduced our fee-based revenue. At a group level, revenue was 8% lower due to an 11% reduction from the Investments vector, with Adviser and Personal partly mitigating this impact through revenue growth in both sector.
Adjusted operating profit is 45 GBP million lower than prior year due to a GBP 50 million lower contribution from the Investments vector which has been significantly impacted by the market performance in equities in this half year, together with the impact of net outflows in equities in the last 12 months.
This has resulted in an increase in the cost/income ratio in the Investments vector to 86%. While this has been disappointing, the benefits of the actions taken to diversify the business are already evident as our vectors operating in the U.K. wealth sector are both delivering resilient revenue growth and profit contributions even in these volatile markets with decreasing consumer confidence. As a proportion of the group results, profits from our U.K. platform and wealth management businesses have increased from 26% to almost 40%.
And of course, we only have one month of ii results included at the half year. Now if we had owned ii for the whole of the first half, Adviser and Personal would have accounted for over 50% of pro forma group adjusted operating profits in the period. Given the acquisition of ii, this higher contribution of adjusted operating profits from the Adviser and Personal vectors is a trend we now expect to continue.
The Adviser team have driven increased revenue of 6% due to higher average AUA and stable yields over the period. Adjusted operating profit of GBP 38 million was 3% higher. The cost/income ratio of 59% is a small increase on prior year and reflects the current overlap of specific outsourced service as we continue to transform this business.
The consolidated results for the Personal vector include just one month’s contribution from interactive investor. But given its scale, its impact has been to increase the vector’s revenue by 41% and adjusted operating profit by 75%.ii CR – cost/income ratio of 56% will have an immediate uplift to the efficiency of the Personal vector overall.
To demonstrate the ii impact for the group, just the one month’s profit contribution is 6% accretive to the group’s EPS for the half year. Now in the management report provided today, we have provided the key financial and operating metrics for ii for the full year 2021 and half year 2022.
And these evidenced the strong growth trajectory of the business and the resilience of its subscription-based model. Our dividend policy is unchanged, and the interim dividend is 7.3p. Benefits from our actions to diversify the business are also evident in a change of mix in our assets under management.
AUMA at the half year are 6% lower than at the year-end, with market movements contributing GBP 52 billion or 10% of opening AUM. The primary negative headwind in Institutional Wholesale was within equities. This movement was largely offset by the value of ii’s AUA of GBP 55 billion at acquisition. Now, within overall group net outflows of GBP 36 billion, circa 90% reflects Lloyds exits and liquidity net outflows.
The Lloyds exits are now complete, with the final transfer of EUR 24 billion executed in this half year period. Liquidity net outflows in the half year of almost GBP 8 billion arose as corporates drew down cash built up during COVID. Now, you will recognize that these are relatively low margin products, so the revenue impact is less significant.
We have been successful in retaining around GBP 7.5 billion of Lloyds’ assets in a new quant mandate, which will be running our Institutional Wholesale team. Excluding these Lloyds and liquidity flows, net outflows were circa GBP 4 billion, which at 1% of AUM is similar to prior year levels and reasonably encouraging given the challenging markets.
Adviser and Personal continue to attract positive new business at GBP 1.7 billion, albeit at a lower level than the prior year, reflecting less consumer activity. Personal flows have also benefited from one month’s contribution of flows from ii.
Within Institutional and Wholesale, our AUMA highlight increasingly different patterns of investment between the traditional asset classes of equities and fixed income compared to the real asset and alternative franchises.
Our increased focus on these latter asset classes has benefited performance in this half year. Since the start of the year, about 2/3 of the book, which is in traditional areas of equities, fixed income and multi-asset saw decline in overall AUM, principally due to market impacts.
In real assets and other alternatives, which represented around 1/3 of our book at the start of the year, we have increased levels of AUM even in these challenging times.
As a result, the AUM in these asset classes have now grown during this half year to represent 43% of the total book as at June and generated 2% growth in revenue. Our focused growth strategy in the Investments vector is underpinned by concentration on our areas of competitive strength. Within Institutional and Wholesale, real assets has grown to the second largest asset class, driven by the investment in Tritax, which complements our established abrdn capability.
Decline in market-based fee revenue and performance fees accounted for the majority of the reduction in revenue in this half year. There was a small net GBP 4 million negative impact on revenue from disposals and acquisitions versus the comparative period, the biggest of which was Parmenion. It is important to note that net outflows and yields each had less than a 1% impact on revenue.
Within investments, the main reduction in revenue was concentrated within equities, which remains the largest source of fee-based revenue in the Investments vector at 42%. There were reductions in revenue across most other asset classes other than alternatives and real assets, which saw a GBP 7 million increase largely due to Tritax. Now, looking forward into the second half, we have revenue tailwinds from a full six months contribution from ii and certain specific fee uplifts of circa GBP 9 million.
In addition, our performance fees are skewed to the second half, and we expect continued positive flows in Adviser and Personal Wealth. Market levels have shown some signs of improvement in July. And if this trend continues, provides a further tailwind. With a greater contribution from ii, our sensitivity to market-based fee revenue will be lower.
With net outflows at 1% of opening AUMA, flows activity has been relatively stable in these challenging markets. Insurance flows continue to be lumpy and we had minimal benefit in this first half of 2022 from levels of bulk purchase annuity activity by our insurance clients. In addition, the continued derisking is impacting asset allocations for insurers to lower margin exposure.
We expect these market conditions to drive continued volatility in the pattern of both flows and mix of business in these mandates. Adviser flows have been resilient. As Stephen highlighted, there are a number of new products and service improvements coming in 2022 and ’23, which are aimed at growing assets on our platforms. Personal flows, GBP 0.3 billion, include the flows from ii of one month that we are consolidating.
ii’s net flows for the full six months to 30th of June were GBP 2.2 billion, gaining 2% market share in the period. Now, as I explained at the full year, we are reshaping the cost base by reducing the core structural costs required to operate our investment activities, improving efficiency and creating the capacity to invest in our chosen growth areas. We have continued with cost actions in the first half of 2022, which of course have been undertaken in a changed environment for both inflation and interest rates. Overall, the adjusted operating costs at half year are 2% lower than the prior comparative.
The first half cost benefited about GBP 20 million from the disposals made in 2021, namely Parmenion, the Nordics real estate business and the Hark and Bonaccord businesses in the U.S. This broadly offsets the increased costs from Tritax, Finimize and ii.
Across the three vectors, excluding ii, we have reduced the headcount by circa 10% from around 5,500 at June ’21 to 5,000 at June ’22.Even with the additional cost from acquisitions, notably Tritax and ii, for full year 2022, we have a clear pathway in current markets to lower overall operating costs.
We aim to deliver a similar percentage level of cost reduction for full year 2022 to that we have achieved in H1.This will be driven by cost management within the Investments vector, a further reduction of headcount by about circa 10% and continued cost control across the group. If we are to achieve our cost/income ratio target, we need to deliver growth of revenue in the Investments vector as well as reducing the cost base.
Looking forward, three factors in the Investments vector are now impacting the timing of the achievement of our objective of high single-digit revenue CAGR by the end of 2023. The current significant uncertainty in global markets, the associated impact on flows and the shift in client asset allocations to lower risk and lower margin products.
This adds priority to our continued focus on delivering the program of cost savings through the rationalization, simplification and streamlining of activities in the vector, which we have previously reported in March. Now on this slide, each of the five areas of activity are designed to realize substantial savings and are already well underway. A few areas that I’ll highlight.
We have now reviewed circa 550 funds and concluded that 20% with an AUM of about $7 billion are subscale, inefficient or no longer aligned with our core strengths. These will be merged or closed, resulting in simplified fund ranges across the U.K. and Luxembourg domiciled funds, removing duplication and simplifying our product offering and freeing up resources.
This program of work will continue through the second half of 2022 and into the first half of ’23, resulting in a product shelf aligned to our key strengths and to client demands. Although there will be a revenue impact from actions which target both fund rationalization and disposal of noncore activities that are inefficient or subscale, once completed, the overall cost/income ratio of the group will improve as a result of these initiatives.
As our clients’ asset allocation profiles are changing, we continue to review the cost of servicing these complex mandates across the equity and multi-asset businesses. We are confident that we can unlock savings in technology and information servicing costs as we change how we service such mandates. We will continue to exit noncore businesses, which are no longer aligned to the overall strategy and where we do not have scale or a strong growth franchise.
Recent examples are Hark and Bonaccord and the Nordics real estate businesses. We do not expect any further such disposals to impact the revenue or cost base before 2023.We are simplifying our investments operating model to realize efficiencies by creating a single middle office operating model, we increased capacity and delivery of client service. While our reshaping of the vector has recently unified the U.K. and European equities teams in order to streamline processes.
The full suite of actions interim is targeted to deliver net savings of GBP 75 million, with gross savings of circa GBP 150 million before reinvestment of GBP 75 million to support growth. The majority of the initiatives will impact 2023 with benefits fully realized in 2024.Additional restructuring costs associated with these actions are expected to be broadly funded by proceeds from the disposal of our noncore assets. We continue to have a strong balance sheet even after the acquisition of ii and an uncovered dividend due to the capital actions we have taken.
Movements in capital in the first half were dominated by the consideration for ii, which was settled in cash from our group liquid resources. We benefited from the sale in January of part of our Phoenix stake, which raised GBP 0.3 billion. At June, available capital is GBP 2.3 billion comprising a regulatory capital surplus of GBP 0.6 billion and GBP 1.7 billion of additional but unrecognized capital from our value of listed stakes.
We will continue to restructure and invest in the business to support organic growth across our diversified business model in order to achieve our ambitions for sustained revenue growth and a 70% cost income ratio. We use an internal management buffer for the regulatory surplus simply as the management tool to support a disciplined approach to capital management with the objective of supporting both our growth ambitions and continued shareholder returns.
We are conscious of disappointment in our share price and remain focused on growth of return for shareholders. We announced our intention to return GBP 300 million to shareholders and commenced in early July a GBP 150 million share buyback program, which we estimate will take H2 to complete.
As previously stated, we will continue to monetize the Indian stakes as a key element of our disciplined approach to capital management. As a result, and as we deliver our priorities and investments and generate performance from all three vectors, adjusted capital generation will more closely track profits. Given the scale of our resources, we can support investment in our businesses as well as our stated dividend policy. Where we generate capital beyond the needs of our business, we will continue to make capital returns to shareholders.
Such returns will reduce the overall cost of servicing future dividends as the share count is reduced. I will hand back to Steve.
Stephen Bird
The dramatic shift in the global economy has impacted the industry and our financial results. Despite these headwinds, by concentrating on what we can control, we have continued to deliver our strategy of building a much more durable business through the three vector model, based around diversification of revenue sources.
The current market turbulence strongly reinforces that this is the right strategy. The two vectors operating in the U.K. wealth market have both delivered resilient performance and are on track to increase our diversification into higher growth, higher-margin businesses.
Performance in the Investments vector was, like all of the sector, hit by market turbulence, combined with us being in a period of restructuring. We are doubling down and focusing the business on the strengths that lean into the micro global growth trends, cutting costs and driving efficiency.
The current economic and market conditions mean that our ambition for group revenue growth and cost income improvement will take longer to deliver, depending, of course, on the speed of the market recovery. We are continuing to execute on our client-led growth strategy, first, by improving the performance of each vector and then by extracting value across all 3.
We are confident our approach will diversify earnings, improve efficiency, deliver our revenue and cost ambitions and ensure optimal use of capital. Now that the shape of the group is largely settled, you can expect inorganic actions on a more modest level. These will likely include both further divestments and selective reinvestment where we see capabilities that we need and compelling value.
We are announcing a half year dividend today of 7.3p.As I said earlier, our disciplined approach to allocating capital is focusing on delivering shareholder returns, and we will continue to return capital in excess of business needs as further stake sales are realized. While the global economic outlook remains very uncertain, we are focusing on what we can control, namely the continued execution of our strategy and that will provide diversification of revenue streams and put the group on a sustainable growth trajectory.
That concludes our presentation. We’ll now take a short break and resume for your questions. Thank you.
Welcome back. I’d like to ask the operator to open up for questions, please.
Question-and-Answer Session
Operator
Of course. So the first question is coming from Nicholas Herman from Citigroup. Please go ahead.
Nicholas Herman
Yes, good morning. Thanks for taking my question. A lot to dig into, but I’ll try to limit myself to one question, one clarification, if that’s okay. So the clarification is, could you please clarify the expected revenue attrition from on the fund consolidation and rationalization? And then my question on costs. So is [technical difficulty] of GBP 540 million cost for the core business and about GBP 40 million cost for ii. So in terms of the cost decline coming from the core business, just to confirm, that is coming from your initiatives and not from flexing or delaying investment spend where there may be a catch-up later on? And I guess as part of that then, when do you think you can now achieve your cost/income ratio target of about 70%. We’re talking 2024 or 2025? Thank you.
Stephen Bird
So let me open that up and then I’ll ask Stephanie to talk a little bit more about the detail on the cost reduction. So the fund rationalization that we’re doing is very, very obvious, 110 funds that comprise GBP 7 billion of assets. So this is a $508 billion business. You’ve got 1.5% of funds that have 110 fund management activities around them. So it’s the right thing to do. Now of course, it takes time to do it, but it’s really compelling logic to rationalize that tail such that our energy, our focus, our research and our disciplines applied to the go-forward growth business.
So that’s the – so when you think about the AUMs and the scale of the total business, you can see that it has a very small impact on revenues. And Stephanie will talk a little bit of detail the cost reduction, but let me address your question on the 70% cost to income ratio target.
So we focused in this market environment, there’s market dislocation underway. It’s impacted the entire asset management sector. We are using that environment to accelerate the actions that we need to take, that we can control. We’re not sitting here waiting for the market to recover.
We are addressing the things we can control and that’s what you would expect us to do. Now the cost/income ratio is a function of revenue growth and costs. So because revenue is uncertain in this market environment, I’m specifically sharing detail on the things we control, which is cost. Where will the revenue environment be? Where will the market environment be? What will market levels be over the piece?
We don’t know. This is a point of maximum market uncertainty. So it would be foolish to give you the cost/income ratio, a time line for that. The ambition to achieve it is unchanged. The resolve to take the actions against the cost base is strong and we are well into the process, but I’m not going to speculate on where the market revenue is going to be at this point. Stephanie?
Stephanie Bruce
Nicholas, thank you. And I think – sorry, I think I caught most of that question. But in terms of the 2022 cost and being able to give you the guidance that overall, we see a total reduction in 2022 full year. It’s not about delaying investment at all.
We’re being a very considered series of actions that we already have well underway that will play out into 2022 and we can make that statement around the total overall cost reduction in 2022, even taking account of the additional costs coming through from ii. And where are those coming from?
Principally from the impacts of the actions that we’ve had through in terms of headcount, but also in terms of very close management of our supplier contracts, and those are having benefits as we come through into 2022.The program, of course, that we’ve talked about very specifically within the investments vector is also well underway. The majority of those actions will be completed by the end of 2023 and we will see many of the benefits in 2023. But equally, we will see the full realized benefits in 2024. And that program, as I say, is well underway already.
Stephen Bird
Thank you, Nicholas.
Nicholas Herman
Thank you.
Operator
And we have the next question from Arnaud Giblat from Exane. Please go ahead.
Stephen Bird
You may be on mute, not hearing anything from Exane.
Arnaud Giblat
Hello, can you hear me?
Stephen Bird
No, we can’t. Thank you. Please go ahead.
Arnaud Giblat
Yes, sorry. If I could just ask a clarification in terms of the quantum of net savings achieved – that will be achieved in 2022 out of that GBP 75 million announced today. And my question is on net interest margins FI. Can I ask you what the net interest margin are you currently earn on client monies? And can you give us a bit of a sensitivity to the short-term base rates in the U.K.? And do you see a risk of the FCA stepping in at some point and maybe imposing some further pass-throughs of high interest rates for your clients, because generally in the retail brokerages we’ve seen that a lot of the upside from interest rates is being kept by the platform. I’m just wondering if there’s a risk of the FCA stepping in at some point and asking you to pass it on, specifically for sub-clients. Thank you.
Stephen Bird
So thank you for your question. Actually, I’ll hand over to Richard in a moment to address that. The first thing that I would say, and I think this is very important. In terms of net interest margin, first of all, if you look at the U.K. bank sector, the entire bank sector has so far passed on only 15% of the increase in net interest margin.
So that is obviously a much, much bigger factor for the market overall than any of the direct investing platforms. Now our platform, ii, offers the best value for the direct investor in the U.K., and we analyze that value across the entire total cost to a client. So the subscription model. We recently reduced the cost associated with subsequent trades, and we analyzed that relative to our peers, and we are committed to ensuring the ii remains the best value platform and the best way to access investing in the U.K. We actually also just did announce a pass-through to the ii clients as a consequence of rates moving up.
Let me hand it over to Richard to illuminate that a little bit further.
Richard Wilson
Thank you, Stephen. Clearly, what we’ve also seeing here is, this is the end of a very long period of quasi-interest rates and ii has started paying interest for the first time ever in July, as Stephen mentioned. Currently, and in terms of our – through the business lifecycle, our assumption, subject to the vagaries of market forces as that net interest margin will hover around 100 basis points.
That’s subject to all sorts of uncontrollable, not least of which is the Bank of England, the shape of the yield curve, competitive pressures, et cetera. But what we should be seeing compared to what’s been the case for the last 15 years, where we’ve had artificially super compressed rates is some reversion to a more normal level of interest margin accruing to the business as opposed to quasi 0.
With respect to the question around regulatory action and just to build on Stephen’s point, but today, the clearing banks, I believe actually pay lower interest than we do. It would be an extraordinary step for the regulator to price regulate in this space, and it’s something which would move their footprint a long way from where they are today. And given the fact that platforms, including ourselves, are listening to market forces, and we are paying interest on accounts.
It would be a very surprising move. It’s something that’s been concern raised occasionally over the last 15 years, and it usually dies after the first breadth. I don’t think it really has any great substance. So to the original point, our spread expectations are around 100 points. And that I think is – represents a reversion to some more normal level of interest rate behavior as we go through the business cycle.
Stephen Bird
Thank you, Nicholas.
Operator
And we have the next question from Haley Tam from Credit Suisse. Please go ahead.
Haley Tam
Good morning, Steve. Good morning, Stephanie. Thank you very much for taking my question. I could ask a lot of quick question, and it will be shorter hopefully. On costs, first of all, the GBP 150 million of gross cost savings in investments, that’s a big number, right? It’s 15% of your cost base in that vector in 2021. Does that mean that they’re unlikely to be any further sources of savings after that, so we should look at revenue growth as the driver beyond those? And could you clarify for me just exactly what the scale is that you expect to spend in terms of additional restructuring costs associated with that so that we can better understand how much of the proceeds from noncore asset disposals that might consume in the future?
And then – and just one point of clarification, if I may, on Interactive. I noticed that your net new customer growth seems to have been 4,000 in H1, because it’s 404,000 in December and 408,000 now at the end of June. Yet you said you added 19,000 new customers. So I’d just like to understand if there’s something one-off about some redemptions there perhaps. Thank you.
Stephen Bird
Yes. Thank you, Haley. What I’m going to do is we’ll take the ii question first because you do need to understand the net new number I gave you was correct. You need to understand the post-acquisition activity that is going on in ii, Richard will talk to that, and then I’ll hand over to Chris and Chris will talk about that.
You’re right, the gross level of saves of GBP 150 million is material because we are materially reshaping the business, but we did state that it’s a net save of GBP 75 million because we have specific investments associated with the change program as well.
Richard, would you like to comment on the numbers?
Richard Wilson
Sure. So on that, the question of the net new customers, we have two things going on. And on the one hand, we have our organic engine, which is currently producing a net annualized 5% growth. So that’s around 20,000 net new customers on a current run rate basis, typically that’s seasonally skewed, so that the Q1 tends to be higher. But to your comment on the absolute numbers, we also have the tail effect of a number of previous acquisitions. You’ll recall that we acquired the Share Centre and in June ’21, the EQi business liquidity and those tail books have some runoff which would skew those two numbers.
Stephen Bird
Thank you. Thanks, Richard. So Chris, would you like to talk about the – what we’re actually doing – what you’re actually doing in the business to drive these? So simplification and the rationalization of the base.
Chris Demetriou
Thanks, Stephen. Thanks, Haley. As you say, we’re targeting GBP 150 million of gross savings and our cost/income ratio at the moment, certainly on the cost side of that equation, is largely a function of the inherent complexity that exists in the organization, the feature of the business that has grown inorganically over in the past.
We, through our program of simplification, we are eliminating a lot of that complexity that sort of complexity premium that exists in the cost base. The fund rationalization is a material part of that, so is the disposal of noncore assets. And to your point around the restructuring costs, we think the capital that we’re going to generate from noncore assets should broadly offset any requirement for significant restructuring costs.
So we wouldn’t anticipate needing to model for a material step-up in restructuring costs over and above the capital that we’re going to generate from simplification. So our program is really quite clear now. We know exactly which asset classes we are looking to move forward we’re going to invest in.
We know which strategies inside of our desks we don’t believe are aligned to the trends that Stephen outlined earlier on. And the program of shutting down a 110% funds or merging a 110 funds in two areas to create more scale in the business is well underway and making really good progress.
So it is a large number as a percentage of our overall cost base, but it’s available to us as a result of the inherent complexity that has existed in the business historically. And we’ve got a clear plan to reduce that complexity and therefore, take that out. But it’s really important to think about the extra GBP 75 million of investment in the business because the organization really is demonstrating the ability to raise assets in our focus areas and have good revenue yields.
Some examples are the largest revenue-generating fund in the business at the moment is Tritax Big Box fund, which has a blended fee margin of over 50 basis points. We’re in the market raising a core infrastructure fund that will attract 70 to 80 basis points depending on the size of the commitment.
And so we’re really optimistic about our ability to raise assets in high-margin strategies that over time, as we get our flows into the right place, will create a growth business at attractive margins. And so it’s important that we invest to make sure that we can deliver on that the growth potential that the organization has.
Haley Tam
Thank you, Chris. Can I clarify the capital from noncore assets that will cover the restructuring costs? Are you referring there to investment stake sales or actually sales of noncore assets within the Investments vector?
Chris Demetriou
In reference to disposals within the Investments vector.
Stephanie Bruce
Yes. Not related to the stakes, Haley.
Haley Tam
Thank you.
Operator
[technical difficulty] from Jefferies. Please go ahead.
Unidentified Analyst
Good morning. I saw that the ii from interactive investors was GBP 17 million in the first half. I appreciate your answer to Arnaud’s question, but could you just give us maybe what you’re expecting the run rate contribution from that to be based on the rate rises that we’ve already seen come through? That would be helpful. Thanks very much.
Stephen Bird
Yes. Thank you very much, Tom. Let me switch over to Richard for that.
Richard Wilson
Thanks, Tom. You got a wonderful answer to the previous question, and I’m not sure I can give you additional guidance on go-forward run rate. There was a few variables out there. And rates, as Stephen said earlier, we have a dislocation period and a great deal of volatility, so I’m going to stick to my previous comments, I’m afraid.
Stephen Bird
Thank you, Richard. I think we’re getting close to the end of the call. Operator, do we have another question?
Operator
Yes. We do. Should I move on to the next one?
Stephen Bird
Go ahead.
Operator
All right. It is coming from Steven Haywood from HSBC. Please go ahead.
Stephen Bird
Good morning, Steven.
Steven Haywood
Hi, good morning. Sorry about background noise. Two questions from me. The 56% combined income ratio ii, is this sustainable? Can it get even better going forward? And then secondly, I think Stephanie mentioned that capital resources covered the dividend cost. But can you tell us when will yearly adjusted capital generation cover your dividend costs?
Stephen Bird
Okay. So we’ll take that in two parts. First of all, the 56%, yes, it can get better. This is a scalable business. One of the things that attracted us to it was the fact that the tech was built out. That it’s a terrific data model that uses the data to be able to inform the way it develops its products, it services, its growth and we fully expect to be able to improve that from this point going forward. Stephanie, do you want to talk a little bit about adjusted capital generation?
Stephanie Bruce
Yes, I think increasingly, as I referenced, Steven, in my script, we see just the way that we’re being very disciplined approach to capital that increasingly adjusted capital generation will very much track adjusted operating profit, and therefore, you should think of that in exactly the same way increasingly in terms of its cover for dividend.
Stephen Bird
Thank you, Steven. Well, folks, we’ve reached the end of the call. Thank you very much for your interest in our turnaround story and the progress that we’ve made in deploying capital into successful businesses. We are confident that we are very focused on the things that we can control in a highly uncertain world. And I think that’s what you really want us to do. So thank you very much.
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