Reports

Deteriorating Markets Squeeze Julius Baer Margins

Jackie Bennion, 21 November 2018

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A larger than expected drop in client activity in Q3 has hit gross margin and cost/income ratio at the private bank.

At the end of October 2018, Julius Baer's assets under management stood at SFr395 billion (US$397 billion), an increase of 2 per cent year-to-date, but recent deteriorating markets have hurt the private bank's margins.

Net new money growth came from the June acquisition of Reliance Group in Brazil, and a small net gain on currency. But these were largely offset by turbulence in the market and waning appetite, the bank said in its 10-month financial review, released yesterday.

Most of the impact on AuM came in October, when many stock markets fell as a result of worries about escalating global protectionism and rising US interest rates. The bank, which operates in a number of regions and has made Asia a major revenue generator, said that net inflows remained strong, in spite of a further drop in client activity, at close to 5 per cent annualised for the 10-month period. This is below the mid-point of the 4–6 per cent target set by the bank. It said that all regions recorded net inflows, with strong contributions from clients in Asia, the UK and Germany.

Clients turn cautious after confident summer

Lower client activity mixed with volatile markets brought gross margin down to 87 base points for the 10-month period. This compares with 91 base points in the first six months of 2018, and 90 base points for the full 2017.

The margin declines pushed the cost/income ratio up to 69 per cent to October 2018, breaking through the bank’s expected 64-68 per cent target range for the period. Baer assigned the changes to a drop in client activity in Q3 - far more pronounced than it had anticipated back in June.

To offset revenue flux driven by a loss of market appetite, the group is cutting discretionary spending and taking steps to improve efficiency.

It plans to close offices in Panama and Peru and discontinue services to clients from selected countries in non-core areas, but It did not specify in which countries.

The Zurich-based group said that ratios remain comfortably above the bank’s floors of 11 per cent and 15 per cent respectively, and well above the regulatory baseline of 8.1 per cent and 12.3 per cent respectively. The tier-1 leverage ratio stood at 3.8 per cent, again comfortably above the regulatory 3 per cent floor, the bank said.

At the end of October 2018, Julius Baer’s assets under management stood at SFr395 billion. Financial results for 2018 will be published on 4 February 2019.

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