Julius Baer boss Boris Collardi appears to be doing everything right: a recruiting push is paying off, drawing applause from investors. finews.com goes looking for the fly in the ointment.
1. Growth Engine Kicks in
Julius Baer is clearly firing on all cylinders: newly-hired private bankers helped to bring in a whopping 10.2 billion Swiss francs. If finews.com were to undiplomatic, we would ask whether this is the money that UBS doesn’t want. Nevertheless, Julius Baer’s result underpins the shares – up more than 5 percent in early trading – and takes the sting out of spending on the new hires (see point 4).
Bright spots? Asia, Julius Baer’s second home market, as well as Latin America, the Middle East and Monaco, where the bank is presumably hoovering up assets from rivals like HSBC and Credit Suisse, who have left. Aside from the absence of home market Switzerland and wider Europe in the reading (see point 3), the private bank’s growth engine is running meticulously, if not leanly.
2. Idle Net New Money
As detailed in point x, the bank took in more than 10 billion francs in net new money from growth spots like Asia. But the private bank hasn’t been able to fully convert new money into lucrative growth: its gross margin slid by three basis points on the year.
The explainer? Julius Baer’s income rose by 12 percent, which is less than the 16 percent growth on average of its asset base. Conversely, the bank has money it – or clients – don’t know what to do with. Julius Baer will have to prove that it can make its consistently healthy net new money readings pay off, instead of simply holding idle funds.
3. Feeble Switzerland
Julius Baer’s Swiss growth is discreetly hidden among banner headlines on Asia, the Middle East and Latin American – for good reason. With market share in the mid-single digits, the bank has never been a powerhouse in its home market.
The high-profile hire of former Credit Suisse banker Barend Fruithof, who exited just months later, did little to change that, nor has his successor, Gian Rossi, had any a perceptible success so far.
Julius Baer would have to hit pay dirt in Switzerland to vault itself into the top league of wealth managers, and this would probably mean another acquisition. The market is rich with candidates, but few of them would fit Julius Baer’s criteria and views. Switzerland remains a promise that the bank has yet to deliver on.
4. Tightrope on Costs
At first glance, Julius Baer’s spending habits look as lavish as those of regular shoppers on Zurich’s tony Bahnhofstrasse: the bank’s spending on staff, for example, surged 22 percent. Upon closer inspection, 11 percent of the rise was due to a change in pension funds, which won’t repeat anytime soon.
Nevertheless, Julius Baer is in the midst of a talent war: instead of snapping up rivals or client assets, the bank has more recently gorged on hiring.
Ninety-seven private bankers joined in the last 12 months, alongside 250 other hires. The hiring gluttony is paying off: income is offsetting the spending rise. Julius Baer also benefited from fewer impairments and provisions in the first-half.
5. Digitization’s Price
The Zurich-based private bank has never been shy about splashing out, and investors should get used to spendthrift ways. Recruiting as well as infrastructure investments will continue to weigh as Julius Baer replaces its hopelessly antiquated information technology platform with one from Temenos.
The Swiss provider is also indirectly behind the bank’s 2015 purchase of Commerzbank in Luxembourg, which already operates on a Temenos platform. It remains to be see what Julius Baer will do with its recent investment in Swiss fintech Nectar, but the bank will keep spending money to join the 21st century’s technology.
6. No More Bromance Culture?
In the pale, male and stale world of private banking, Julius Baer has always stood out – for being particularly slow to promote female talent. CEO Boris Collardi, the husband of a former Singapore banker, is young enough to be aware of the benefits of hiring diversely, deserves points for recruiting another female top executive after Larissa Alghisi-Rubner.
The newest, Beatriz Sanchez, is a long-time Latin America private banker who most recently chaired Goldman Sachs’ business in the region. She is also involved in a Spanish money-laundering probe linked to her previous role at HSBC in Switzerland, according to Spanish daily «El Pais».
To be sure, Sanchez hasn’t been convicted of any wrong-doing and Swiss regulator Finma, which must green-light high-level hires, appears to have no objection to her role. Nevertheless, it is unfortunate that the tenure of Sanchez, who will move from Miami to Zurich for the job, is likely to be accompanied by the noise surrounding her past.
7. Thin Capital Layer
The bank posted a ratio of 11.9 percent under the hardest measure of capital, when calculated as if new Basel regulation were already fully in force. Julius Baer uses an unusual amount of lines to argue that it is above and beyond the 8 percent minimum requirement.
This is undoubtedly true, but misses a key point: client trust. Ten years after the financial crisis began, wealthy clients still prefer private banks to show an ample capital cushion, or even an excessive one. Clients want to feel that their assets are in safe harbor, and capital conveys this.
Clearly, Julius Baer believes its ratios are adequate by handily exceeding the minimum requirements. The bank has done little to reinforce its capital base: last year, it only raised capital by 100 million francs and trimmed its risk-weighted assets by just 2 percent.
