personal finance

Julius Baer: private bank can keep investors dancing to its tune

Notes of caution rang out of an update from Swiss bank Julius Baer on Monday. Disappointing client asset growth caused typically optimistic chief executive Philipp Rickenbacher to miss a beat, sending its share price 5 per cent lower in response.

The likely culprit was weakness in emerging markets, home to about half the bank’s assets under management. Those worries add to any top-of-the-cycle fears. Then again, lower valuations might help to usher in the bank’s next act. A business built on transformational deals is ready for the next one.

Private banking profits remain subject to the same pressures as the rest of the banking sector, namely persistently low interest rates and fee erosion caused by competition from passive funds. Signs of a reversal in the former bode well, but the latter will continue to weigh on profit margins. Together with lower trading volumes, gross margins fell to 82 basis points in the 10 months to October, down from 87 in the first half of this year.

Chart showing Swiss bank valuations for Julius Baer, Vontobel, EPG International, UBS, Credit Suisse and the Switzerland average. Return on equity 2021 (%) and the Price to book multiple.

Cutting costs helps counteract this slippage. Rickenbacher has succeeded in driving the bank’s cost-to-income ratio of 63 per cent, below the target of 67 per cent for 2022.

Another way to shore up profitability is to sell more high-margin, alternative products. Swiss banks including Julius Baer have been forced to squeeze more from their own balance sheets using structured products and Lombard (pledged collateral backed) lending. The bank’s transition to a new payment model for private bankers that will incentivise profitability is going smoothly.

Two charts. The first shows Lombard lending (as % of total Assets Under Management) for Credit Suisse Asia Pacific, Credit Suisse international private banking and Credit Suisse private clients Switzerland, along with EFG International, Vontobel and Julius Baer. The second chart shows Lombard lending as a % of total revenues and as a % of total pretax profit for the same companies.

Net new money was up 4.4 per cent. Even if lower than expected, assets under management in the year to October were still 12 per cent higher than last year at SFr484bn ($520bn). Faster asset growth than peers has propelled shares to close to record highs. That puts the bank on a rich valuation of 3.5 times tangible book value.

Capital remains strong with a 16.7 per cent common equity tier one ratio. Post distributions that leaves about SFr1bn in reserve, enough firepower for Rickenbacher to finance his next sizeable deal. Should no suitable candidates emerge, then more buybacks will offer music to shareholders’ ears.

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