Presentation of the 2018 full-year results for the Julius Baer Group
Stable profit in challenging market environment
- IFRS net profit attributable to shareholders of Julius Baer Group Ltd. grew by 4% to CHF 735 million and IFRS earnings per share (EPS) by 4% to CHF 3.37.
- Adjusted1 net profit for the Group increased slightly to CHF 810 million (2017: CHF 806 million). Adjusted EPS attributable to shareholders of Julius Baer Group Ltd. up 2% to CHF 3.72.
- Net new money over CHF 17 billion, or 4.5%, inside 4–6% target range.
- Assets under management (AuM) CHF 382 billion, a decrease of 2%, reflecting market performance.
- Gross margin 86 basis points (bp), down 4 bp on lower contributions from client activity and Kairos.
- Adjusted cost/income ratio2 at 70.6% and pre-tax margin at 25 bp – both impacted by weaker gross margin and additional legal and restructuring expense items.
- BIS CET1 capital ratio 12.8% and BIS total capital ratio 18.7%, well above minimum regulatory requirements and Group’s own floors.
- Proposed ordinary dividend of CHF 1.50 per share for financial year 2018, up 7% from CHF 1.40 and fifth consecutive increase.
- Structural cost reduction programme initiated: Expenses to be lowered by CHF 100 million. Strategic growth investments not impacted and to be continued.
- Updated medium-term targets: Cost/income ratio2 <68%, pre-tax margin 25–28 bp, return on CET1 capital >32%. Net new money target unchanged: 4–6%.
Bernhard Hodler, Chief Executive Officer of Julius Baer Group Ltd., said: “Julius Baer ended 2018 with stable profit and robust net new money growth − and we did so in an environment that was challenging for the entire industry. We continue to make strategic growth investments, and have initiated a structural cost reduction programme to absorb revenue fluctuations from potential market headwinds over the short to medium term.
Our updated financial targets underscore our long-term ambition to pursue sustainable and profitable growth, and to deliver attractive capital returns to our shareholders. We will follow a clear strategy centered on smarter market coverage, holistic and personalised advice, and technology transformation, aiming above all to enhance client experience, improve efficiency and increase revenues.”
Robust net inflows partly compensated for negative market performance
Assets under management decreased by 2%, or CHF 6 billion, to CHF 382 billion. AuM were supported by net new money of CHF 17 billion and a net acquisition impact of CHF 3 billion. However, these positive contributions were more than offset by negative market performance of CHF 22 billion, following the sharp decline in global stock markets in the second half of 2018, and a negative currency impact of CHF 5 billion, driven mainly by the decline in the euro.
The annualised net new money growth rate of 4.5% was inside the Group’s medium-term target range (4–6%). Net new money was well balanced throughout the year and across European and growth markets, with particularly strong contributions from clients domiciled in Europe (especially the UK, Monaco, Germany, Luxembourg and Spain), Asia (mainly Hong Kong, Singapore, India, China and Japan), the Middle East (in particular the UAE) and Brazil.
Including assets under custody of CHF 62 billion, total client assets decreased by 3% to CHF 444 billion.
Gross margin affected by lower client activity and Kairos contribution
Operating income rose to CHF 3,368 million. With an increase of 4%, it grew less than monthly average AuM (up 9% to CHF 394 billion), resulting in a decline of 4 bp in the gross margin to 86 bp.
Net commission and fee income declined by 1% to CHF 1,903 million. Brokerage commissions decreased by 6%, reflecting a sharp drop in client transaction volumes as the market environment deteriorated in the second half of the year. Asset-based fee income was flat due to the impact of considerably lower performance fees at Kairos compared to 2017. Excluding Kairos, asset-based fee income grew by 8%, in line with the increase in average AuM.
Net interest and dividend income decreased by 7% to CHF 919 million. It included CHF 178 million of dividend income on trading portfolios, down CHF 17 million. Excluding this item, underlying net interest and dividend income was down 6% to CHF 741 million, as the increase in interest income on loans was more than offset by a decline in interest income on the Group’s treasury portfolio and higher interest expense. Interest income on loans improved on the back of higher US interest rates and an increase in average credit volumes. Interest income on the Group’s treasury portfolio decreased following a year-on-year decline in the average size of the portfolio. Interest expense went up as the result of an increase in US dollar non-current accounts where payable rates rose throughout the year, as well as a rise in negative interest payable. The latter was the result of an increase in excess USD deposits being swapped into Swiss francs and then deposited with the Swiss National Bank (SNB).
Net trading income grew by 75% to CHF 530 million. Including the dividend income related to trading portfolios, underlying net trading income increased by 42% to CHF 708 million. This was partly driven by a rise in structured products-related trading income, benefitting from the further internalisation of structured products issuance, and to a large extent (CHF 91 million) related to growing treasury swap income following the increased placement of excess US dollar deposits into Swiss franc treasury swap positions, thereby capitalising on the rising spread between US and Swiss rates. The rise in treasury swap trading income significantly exceeded the combined impact of the aforementioned decline in treasury interest income and rise in negative interest payable to the SNB.
In analysing the result (excluding dividend on trading portfolios), the sum of total net interest income and treasury-swap trading income increased by 4%, representing an almost stable year-on-year contribution to the gross margin of 24 bp (2017: 25 bp).
Other ordinary results declined from CHF 30 million to CHF 19 million, driven mainly by a negative result on the disposal of investments from the treasury portfolio.
Gross margin decline and extraordinary expense items drive increase in cost/income ratio2
Operating expenses according to IFRS went up by 5% to CHF 2,474 million, driven by a 4% rise in personnel expenses to CHF 1,621 million, a 6% increase in general expenses to CHF 688 million, a 6% increase in amortisation to CHF 126 million and a 9% decrease in depreciation to CHF 38 million.
As in previous years, in the analysis and discussion of the results in the media release and the Business Review, adjusted operating expenses exclude acquisition-related integration and restructuring expenses (CHF 10 million, 2017: CHF 30 million) as well as the acquisition-related amortisation of intangible assets (CHF 74 million, 2017: CHF 72 million).
Adjusted operating expenses rose by 6% to CHF 2,391 million, less than the increase in average AuM, leading to a decline in the expense margin to 60 bp (2017: 62 bp). Expenses included CHF 34 million of costs (2017: CHF 13 million) related to the ongoing project to advance the client documentation to the highest industry standards, and CHF 20 million of additional legal and (non acquisition-related) restructuring costs. Excluding these latter items, adjusted operating expenses increased by 4% to CHF 2,337 million.
At 6,693 full-time equivalents (FTEs), personnel increased by 6%, or 401 FTEs. The monthly average number of employees went up by 6% to 6,576. The number of relationship managers (RMs) rose to 1,501, an increase of 105, or 8%, reflecting successful hiring and internal talent development as well as the inclusion of 13 RMs from Reliance Group. Adjusted personnel expenses grew by 5% to CHF 1,619 million.
Adjusted general expenses went up by 9% to CHF 681 million, driven mainly by higher regulatory and legal costs, a rise in general expenses resulting from increased staff levels, and, to a lesser extent, an increase in marketing spend (mainly in the first half of 2018). Provisions and losses fell by CHF 6 million to CHF 14 million.
Adjusted depreciation decreased by 8% to CHF 38 million and adjusted amortisation rose by 13% to CHF 52 million. The growth in amortisation mainly reflects the rise in IT-related investments in recent years.
Despite the realised positive operating leverage from a larger average client asset base, the adjusted cost/income ratio2 went up from 69.0% to 70.6%, above the 64–68% medium-term target range, driven by the second-half decline in the gross margin and extraordinary expenses.
Stable profitability despite challenging market environment in second half
IFRS profit before taxes rose by 1% to CHF 894 million. As income taxes fell by 7% to CHF 159 million, net profit for the Group grew by 3% to CHF 735 million. After considering non-controlling interests in 2017 of CHF 11 million (negligible in 2018), the increase in net profit attributable to shareholders of Julius Baer Group Ltd. was 4%, and EPS rose, also by 4%, to CHF 3.37.
Adjusted profit before taxes decreased by 1% to CHF 977 million and the adjusted pre-tax margin declined by 2bp to 25 bp, below the 30 bp medium-term target. The related income taxes fell by 8% to CHF 167 million, representing a tax rate of 17.1%, compared to 18.5% in 2017.
Adjusted net profit for the Group increased slightly to CHF 810 million (2017: CHF 806 million). After considering adjusted non-controlling interests in 2017 of CHF 13 million (negligible in 2018), the rise in adjusted net profit attributable to shareholders of Julius Baer Group Ltd. was 2%, and adjusted EPS grew, also by 2%, to CHF 3.72.
The return on CET1 capital (RoCET1), defined as adjusted net profit attributable to shareholders of Julius Baer Group Ltd. divided by average CET1 capital, was 30% (2017: 32%).
2019 cost reduction programme launched
While continuing its strategic growth investments, Julius Baer has put in place a structural cost reduction programme. The Group will lower expenses by CHF 100 million by further enhancing market focus and related prioritisation of resource allocation; leveraging automation and digitalisation; and applying stricter performance management. This will by the end of 2019 lead to a net reduction in the Group’s headcount of 2% compared to the end of 2018. The results from these structural cost reductions are expected to fully materialise in the 2020 financial results, with the aim to reduce the cost/income ratio2 below 68% in line with Julius Baer’s new medium-term target in that year, assuming no meaningful deterioration relative to the 2018 average market conditions.
Updated medium-term targets
In response to the changing operating environment, the Group has updated its medium-term targets. While the net new money target remains unchanged at 4–6%, the cost/income ratio2 target is modified to <68% and the pre-tax margin target adjusted to 25–28bp. In order to provide a clearer linkage between the Group’s profitability, capital efficiency and capital return ambitions, the Group will target RoCET1 of >32%.
Decrease in loan-to-deposit ratio
Total assets went up by 5%, to CHF 103 billion. The total loan book declined by CHF 1 billion to CHF 45 billion, a reduction of 3%, slightly more than the 2% decrease in AuM. The loan book comprised CHF 36 billion of Lombard loans (a decrease of 2%) and CHF 9 billion of mortgages (a decline of 5%). As deposits rose by CHF 4 billion, or 6%, to CHF 72 billion, the loan-to-deposit ratio came down to 63% (end of 2017: 69%). Total equity attributable to shareholders of Julius Baer Group Ltd. increased by 4% to CHF 6 billion.
Solid capital position3
Despite the partial reinvestment in 2018 of the Group’s excess capital into accretive acquisitions − i.e. the residual 20% stake in Kairos (Italy) acquired in January 2018 and the acquisition of Reliance Group (Brazil) in June 2018 − and an increase in the dividend accrual, CET1 capital rose by 3% to CHF 2.7 billion (compared to fully-applied CET1 capital of CHF 2.6 billion at the end of 2017). Following the redemption (in March 2018) of CHF 250 million of perpetual Tier 1 bonds issued on 18 September 2012, BIS Tier 1 capital decreased by 4% to CHF 3.9 billion (compared to fully-applied Tier 1 capital of CHF 4.1 billion at the end of 2017) and BIS total capital by 4% to CHF 4.0 billion (compared to fully-applied total capital of CHF 4.2 billion at the end of 2017).
As risk-weighted assets increased by 9% to CHF 21.3 billion, the BIS CET1 capital ratio declined to 12.8% (compared to 13.5% fully-applied at the end of 2017) while the BIS total capital ratio decreased to 18.7% (compared to 21.2% fully-applied at the end of 2017). The redemption of the Tier 1 bonds and a 5% rise in the leverage exposure, to CHF 102 billion, were the main drivers of the reduction in the Tier 1 leverage ratio to 3.9% (compared to 4.2% fully-applied at the end of 2017).
At these levels, the Group’s capitalisation continued to be solid: the CET1 and total capital ratios remained well above the Group’s own floors of 11% and 15% and significantly in excess of the regulatory minimums of 8.1% and 12.3%, respectively, while the Tier 1 leverage ratio continued to be comfortably above the 3.0% regulatory minimum.
Proposed ordinary dividend of CHF 1.50 per share for 2018, up 7% from 2017
The Board of Directors of Julius Baer Group Ltd. will propose an ordinary dividend of CHF 1.50 per share for the financial year 2018, representing the fifth consecutive increase and a rise of 7% from 2017. Subject to shareholder approval at the AGM on 10 April 2019, the dividend will be paid out of the statutory capital reserve. The total proposed distribution amount is CHF 336 million, equivalent to 41% of adjusted net profit attributable to shareholders of Julius Baer Group Ltd. and to 46% of IFRS net profit attributable to shareholders of Julius Baer Group Ltd.
Update Deferred Prosecution Agreement in U.S.
On 4 February 2016, Julius Baer concluded a three-year Deferred Prosecution Agreement (DPA) with the U.S. Department of Justice to settle its liability in connection with its legacy U.S. cross-border private banking business. Since Julius Baer fulfilled its obligations under the DPA, the U.S. Attorney’s Office for the Southern District of New York will file a motion to dismiss the charges against the Bank with the U.S. Federal Court for approval shortly.
1 The adjusted results as presented and commented in this media release and in the Business Review are derived by excluding from the audited IFRS financial statements the integration and restructuring expenses as well as the amortisation of intangible assets related to previous acquisitions or divestments and the taxes on those respective items.
2 Calculated using adjusted operating expenses, excluding provisions and losses.
3 The multi-year Basel III phase-in period ended at the beginning of 2018. As a consequence, the differentiation between the formerly used ‘phase-in’ and ‘fully-applied’ capital ratios is no longer relevant.
Please note the disclaimer regarding forward-looking statements in the attached media release PDF.
The results conference will be webcast at 9:30 a.m. (CET). All documents (presentation, Business Review 2018, Consolidated Financial Statements 2018, spreadsheets and this media release) are available at www.juliusbaer.com.
18 March 2019: Publication of Annual Report 2018 including Remuneration Report 2018
18 March 2019: Publication of Corporate Sustainability Report 2018
10 April 2019: Annual General Meeting 2019, Zurich
12 April 2019: Ex-dividend date
15 April 2019: Record date
16 April 2019: Dividend payment date
24 May 2019: Publication of four-month Interim Management Statement
22 July 2019: Publication and presentation of 2019 half-year results, Zurich