Fri. Dec 3rd, 2021

Notes of caution rang out an update Monday from Swiss bank Julius Baer. Disappointing growth in customer asset caused typically optimistic CEO Philipp Rickenbacher to miss a zipper, causing its share price to react 5 percent lower.

The probable culprit was weakness in emerging markets, home to about half of the bank’s assets under management. Those concerns contribute to any top-of-the-cycle fears. Then lower valuations might help usher in the bank’s next act. A business built on transformation transactions is ready for the next one.

Private banking profits remain subject to the same pressure 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 predict well, but the latter will continue to weigh on profit margins. Along with lower trading volumes, gross margins fell to 82 basis points in the 10 months to October, 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 Swiss average.  Return on equity 2021 (%) and the Price to discuss multiple.

Cost cuts are helping to counteract this slippage. Rickenbacher has managed to drive the bank’s cost-to-revenue ratio of 63 percent, below the target of 67 percent for 2022.

Another way to promote profitability is to sell more high-margin alternative products. Swiss banks, including Julius Baer, ​​were forced to squeeze more out of their own balance sheets using structured products and Lombard loans (promised collateral backing). The bank’s transition to a new payment model for private bankers that will boost profitability is going smoothly.

Two cards.  The first shows Lombard loans (as% of total assets under management) for Credit Suisse Asia Pacific, Credit Suisse international private banking services and Credit Suisse private clients Switzerland, together with EFG International, Vontobel and Julius Baer.  The second graph shows Lombard loans as a% of total income and as a% of total taxable profit for the same companies.

Net new money rose 4.4 percent. Even lower than expected, assets under management in the year to October were still 12 percent higher than last year at SFr484 billion ($ 520 billion). Faster asset growth than peers propelled equities to near record highs. This puts the bank on a rich valuation of 3.5 times tangible book value.

Capital remains strong with a 16.7 percent ordinary equity level one ratio. Put spreads that leave about SFr1 billion in reserve, enough firepower for Rickenbacher to fund his next big deal. Should no suitable candidates emerge, more buybacks would offer music to the ears of shareholders.

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