The Zurich-based institution likes to characterize itself as a pure-play private banking franchise. Now a large credit provision gives it both a black eye and serves as a warning to competitors.
Just after a so-called black Friday at the end of the week, Julius Baer experienced an even blacker Monday. As the private bank reported, it was forced to take credit provisions to the tune of 82 million francs. That by itself prompted the institute to warn that this year's net profit will likely come under 2022's.
The market reacted sharply, even mercilessly. Julius Baer shares were down by up to 7 percent in Monday trading. The reaction was logical from the point of view that it seems to be an unseemly look for a private bank to have problems with regard to lending. The bank considers itself a pure-play private bank with a focus on wealth management, which is generally light on the balance sheet side.
Most People Tend to Forget
Given that, most people tend to forget that Julius Baer has billions in lending. In the first half of 2023, they totaled 42.8 billion, down 4 percent from the same year-earlier period. Of that, 34.6 million was related to Lombard or collateralized lending and 8.1 billion in mortgages.
Security portfolios and real estate are an integral portion of a high-net-worth client's assets, and it is customary for private banking businesses to lend against them. The only thing, however, is that if nothing else it certainly puts a potential blemish in the term pure play.
René Benko in Difficulty
Things become very tenuous when the debtor is in difficulty. The bank did not say anything explicitly in regard to the questionable loans. However, various media reports indicate that Julius Baer apparently financed the purchase of the Swiss department store Globus four years ago by Austrian investors René Benko and his Thai partner. According to Zurich finance blog «Inside Paradeplatz» (German only) the outstanding loan was significantly more than 500 million francs.
The indications are there. Julius Baer said in its interim statement that it had booked credit provisions to the tune of 80 million francs after October 31. That was the same time that Benko's corporate and real estate empire, which is currently in difficulty, fell victim to losses and credit downgrades. If so, that may have prompted the bank to take action.
Lucrative Earnings on the Side
Whether it was Benko or not, the write-down should also be seen as a warning to competitors. Many do not only provide Lombard lending services, or collateralized loans pledged against portfolios of securities. Some of them also offer corporate advisory services to help wealthy corporate entrepreneurs with their business interests. That can often be a lucrative form of additional earnings, as long as the client's companies are successful and do not run into trouble.
When the wind changes direction, things can quickly turn awry, such as in the current environment, when many companies face higher interest rates and inflation. If nothing else, it certainly breathes life into the old phrase that a cobbler should stick to his last.
