JULIUS BÄR GRUPPE AG Interim Management Statement for the first nine months of 2020[1]
Considerable improvement in profitability driven by continued active client engagement and cost-reduction initiatives - Foundations in place for renewed growth at Kairos; goodwill impairment to impact Julius Baer's 2020 IFRS financial results
Zurich, 19 October 2020 - Julius Baer's strong performance in the first half of 2020 continued in the third quarter of 2020. Supported by ongoing active client engagement, operating income was considerably higher in the first nine months of 2020 than in the same period a year ago. At the same time, the cost-reduction initiatives drove operating expenses lower. As a result, profitability improved significantly. The Group continues to benefit from a strong capital position as well as a solid and liquid balance sheet.
Further recovery in assets under management
Assets under management (AuM) stood at CHF 413 billion at the end of September 2020, an increase of 3% since the end of June 2020, as the stock market recovery that started in March 2020 continued into the third quarter of 2020. Since the end of 2019, AuM are down 3%. Net new money inflows rose considerably in the third quarter of 2020, resulting in an annualised growth rate of close to 4% for the first nine months of 2020 (compared to 2.3% for the first half of 2020 and 2.8% for the full year 2019).
Revenues supported by client activity
After an exceptional increase in market volatility and trading volumes had driven the gross margin to a very high level in the first four months of 2020, it fell back towards a more sustainable level in May-June 2020. In the third quarter of 2020, the gross margin remained at close to the level of those two months, with an essentially unchanged contribution from client-activity-driven income and a slightly lower contribution from net interest income, as loans grew less than AuM. As a result, the gross margin in the first nine months of 2020 was just over 89 basis points (bp). This compares to 92 bp in the first half of 2020 and 82 bp for the full year 2019.
Improvement in cost efficiency
Following the 2019 cost-reduction programme and the initial impact of the measures taken in the first half of 2020, operating expenses in the first nine months of 2020 were lower than in the same period last year. The adjusted cost/income ratio for the first nine months of 2020 improved to 66.1% (down from 66.6% in the first half of 2020 and 71.1% for the full year 2019) and the adjusted pre-tax margin for the first nine months was 30 bp (compared to 31 bp in the first half of 2020 and 22 bp for the full year 2019).
Solid capital position
At the end of September 2020, the Group's BIS CET1 capital ratio stood at 14.3% (up from 13.9% at the end of June 2020 and 14.0% at the end of 2019) and the BIS total capital ratio at 20.2% (end June 2020: 20.0%; end 2019: 22.1%), thus well above the Group's own floors of 11% and 15% respectively and significantly in excess of the regulatory requirements of 7.9% and 12.1% respectively.
The BIS total capital ratio at the end of September 2020 does not yet reflect the proceeds (in October 2020) of the recently issued AT1 bond in the aggregate nominal amount of USD 350 million (with a coupon of 4.875% per annum) or the impending redemption (in November 2020) of all the outstanding AT1 bonds issued on 18 November 2015 in the aggregate nominal amount of SGD 450 million (with a coupon of 5.9% per annum).
Subject to shareholder approval at the EGM on 2 November 2020, Julius Baer will make its second distribution to shareholders of CHF 0.75 per share (consisting of a distribution of the "statutory capital reserve" of CHF 0.375 and a dividend of CHF 0.375 per share) on 6 November 2020. At the request of the Swiss Financial Market Supervisory Authority FINMA and in support of a joint effort in the face of the challenges of the COVID-19 crisis, Julius Baer had amended its original 2019 dividend proposal by splitting the distribution of CHF 1.50 per ordinary share into two equal distributions of CHF 0.75 per share. The first distribution of CHF 0.75 per share was made on 25 May 2020.
The Group has continued to accrue a dividend for the current financial year in line with its dividend policy.
Progress on strategic initiatives
At the end of September 2020, Julius Baer completed the sale of its Bahamas operations to Ansbacher (Bahamas) Limited, a local wealth management company. This step was part of the Group's programme to reduce complexity. The terms of the transaction were not disclosed.
In September, Julius Baer further launched the roll-out of a new compensation framework for its relationship managers (RMs), aligned with its strategic target of sustainable profit growth. This framework will be effective in major markets as of 1 January 2021, and subsequently rolled out to RMs globally across the Group.
Update on Kairos
After a period of stabilisation at the Italian asset and wealth management company Kairos Investment Management SpA (Kairos), part of the Julius Baer Group, an updated business plan and new entrepreneurial ownership structure have been developed. A select number of key investment managers of Kairos will become minority shareholders, with Julius Baer retaining 70% ownership. Under the leadership of a new soon-to-be-appointed CEO, the team will further develop and implement the revised business plan. With these steps, a solid foundation has now been put in place for Kairos' renewed and sustainable long-term success.
The outflows at Kairos have diminished over the past months, resulting in AuM of CHF 5 billion at the end of September 2020. Nevertheless, in light of Kairos' overall financial performance and the rebased business plan, which also reflects the economic uncertainties related to the potential impact of the COVID-19 crisis, Julius Baer has announced that the goodwill on its investment in Kairos will be further impaired and the amortisation of the value of client relationships acquired through its investment in Kairos will be accelerated.
This will lead to a non-cash charge of EUR 177 million (approx. CHF 190 million) to be reflected in Julius Baer's 2020 IFRS financial results.
[1] Based on unaudited management accounts. This media release contains certain financial measures that are not defined or specified by IFRS, the definitions of which are provided in the Alternative Performance Measures document available at www.juliusbaer.com/APM.
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