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Article Excerpt
OPERATOR: Good morning. I'm Christina, the Chorus call operator for this conference. Welcome to the Julius Baer 2008 full year results conference call. (Operator Instructions). At this time you will be put through to conference room, with Mr. Dieter Enkelmann, Group Chief Financial Officer, Mr. David Solo, Chief Executive Officer Asset Management, and Mr. Johannes de Gier, Chief Executive Officer Bank Julius Baer. Thank you.
DIETER ENKELMANN, GROUP CFO, JULIUS BAER HOLDING AG: (Audio in progress). Has changed since the world -- in the world since we met last time here in July, in terms really nobody of us will forget the dramatic weeks in September and in October.
What has not changed is our strategy. Our exclusive focus on wealth management only, as a dedicated wealth manager, with a distinct client dedication, at low, tightly managed risk profile, a solid balance sheet, and a strong capital base. We avoided the market's major casualties. And we were able to further strengthen the franchises of our three businesses, Bank Julius Baer, Artio Global and GAM.
We achieved record inflows in our core business, Private Banking, in 2008, and with a net profit of CHF852m, we also achieved a good result given the difficult market environment. With the distinct fields of activities, own operating platforms and strong management team, all our individually branded businesses are well positioned to weather the difficult markets and to face opportunities for further expansion in those areas of the financial industry we consider attractive.
On the left-hand side on this work chart, you see how our Group is organized since the end of 2008, after the realignment of the former investment products division within the Bank Julius Baer. On the one hand, to further sharpen the private client focus of the Bank, by combining all client-oriented wealth and the relationship management functions and, on the other hand, by reintegrating the Julius Baer branded investment funds and institutional mandate business into the segment Asset Management.
The segment reporting has been adjusted accordingly, as well as some of the segment targets that were necessary due to the structural changes.
This shows the qualitative reconciliation from the previous segment structure on the left-hand side, to the new organizational structure as of the end of 2008, with the according segment reporting as shown on the right-hand side. All segmental information given in the entire presentation are referring to the new organizational structure. And I want here to apologize that we were not able to publish the restated 2007 figures beforehand and to cause you today some additional work.
I'm starting with the Group Assets under Management, on slide eight. Total client assets of the Julius Baer Group amounted to CHF338b at the end of 2008. Assets under Management totaled to CHF275b from CHF405b end of 2007 and, in addition, we had assets under custody in the amount of CHF63b in the Bank.
The decline in assets under management of 32% reflects this CHF94b, the severity of the downward pressure on asset prices last year in almost all investment categories and particularly in the second half of the year, and with CHF31b, the strengthening of the Swiss franc against most currencies, most pronounced in the last few days of the year. In local currencies the AUM decline was 24%.
Net new money in the Bank amounted to CHF22b, of which Private Banking contributed CHF17b, whereas net outflows in Asset Management amounts to CHF27b, since the asset management industry in particular faced a very challenging environment. As a result, net outflows amounted to CHF5b in 2008.
In order to enable investors to follow our asset levels, we provide every half year the breakdown of our assets in terms of investment currency and asset classes. What I want to show on this slide is the domestic impact in December from a sharply strengthening Swiss franc which reduced Assets under Management in this month, in December, by more than CHF20b, just by the currency impact. As you can see from this chart, some of the losses in terms of AUM were offset by currency movement in January again.
Group operating income, on slide 13 -- on slide nine, sorry, fell by 15% to CHF2.9b compared to 2007. Net fee and commission income declined by 20% to CHF2.2b on the back of lower average asset level, the changed asset and, in some businesses client mix, and subdued private client activity in Private Banking, most pronounced in the second half of the year.
Net interest income, on the other side, rose by 48% to CHF479m, thanks to higher average deposit levels, increased average lending to private clients over the year and higher net interest margins.
On the back of further strengthened client driven foreign exchange trading activities, the overall net trading incomes increased by 18% to CHF353m, despite an even reduced risk profile of our total trading activities.
Total income stood at a negative CHF94m, mainly resulting from market related position squaring in the fourth quarter in the investment portfolio which I will comment later on in the balance sheet section.
Too operating expenses came down by 7%, to CHF1.86b, partly helped by the strengthening of Swiss francs against major currencies. Despite the overall increase of staff by 6% to an end-of-year level of 4,335 FTs, personnel expenses were 9% lower, at CHF1.27b, on the back of lower performance-related compensation which decreased proportionally with the decline in pre-bonus profit.
General expenses, including all valuation adjustments, provisions and losses, were down 4%, to CHF527m, in spite of higher expenses due to the extended network of Bank Julius Baer. And as a consequence the cost/income ratio for the Group increased to 61.6%, up from 56.7% in the previous year. With operating income negatively affected by the lower asset levels, all agencies intensified their efforts to adjust the cost base.
Bank Julius Baer, in the new organizational structure, contributed CHF629m to pre-tax profit, which is a decline of just 10%, whereas Asset Management's contribution of CHF527m came in 33% lower than in the previous year. Accordingly, profit before taxes for the Group fell by 25% to CHF1,082m year on year. Taxes amounted to CHF230m, which represents an almost flat tax rate compared to the prior year.
Net profit was therefore down also 25% to the mentioned CHF852m, where as EPS decreased only 22% to CHF4.12, owing to our share buyback program executed in '07 and '08.
At this point I want to remind you that all results discussed in this presentation, as well as in the published business review, are excluding integration and restructuring expenses as well of the amortization of the intangible assets which are both related to the 2005 transaction. Including these positions or these expenses, net profit for 2008 in the annual report amounted to CHF661m, after CHF940m in 2007. There is a detailed reconciliation between IFRS profit and so-called adjusted results in this presentation on slide 55.
The collapse of Lehman Brothers and the following dramatic weeks impacted our second half result. Net profit fell by 33% compared to the first half on the back of lower average asset levels, subdued private client activity, as well as the market-related position squaring in the investment portfolio, partly compensated by growing interest income in treasury and lower performance-related accruals across the different businesses in the second half.
With this, I would like to move over to the balance sheet. The total asset level declined slightly by CHF700m to CHF46.2b at year end, partly also driven by the appreciation of the Swiss franc. Client deposits, expressed in Swiss francs, went up by CHF0.9b to CHF25.3b as clients moved from other asset classes into cash and cash equivalent products, especially following the market turmoil in September.
Normal lending and mortgages on the asset side granted to clients, which is part of the line item loans to customers, ended at the same level as at the end of 2007, resulting in a very comfortable loan-to-deposit ratio of 0.38, underlying the sound liquidity situation of the Group.
We continued to manage our investment portfolio in a balanced manner, yet with a conservative risk profile, by reducing unsecured placements as practical as possible, and replacing them with more repo and higher cash position with the [SMB] at year end.
Following the turmoil in September, changing massively the landscape and the environment, we sold some positions from our available for sale investment portfolio. And we realized losses or we hedged the positions in order to prevent the balance sheet from further deterioration of these positions. Structured products, shown here on the liability side, year on year came down approximately 50% in volumes.
Let me say a few words to the position, goodwill. The two segments, Bank Julius Baer and Asset Management, carry a goodwill balance, also on the 2005 transaction. We obviously carried out a goodwill impairment test at year end and also performed sensitivity analysis. No impairment resulted from this analysis. However, we will have to monitor the situation given the turbulent market environment.
Total equity was up by 2.4% to CHF6.6b at year end, whereas core capital, in the definition of Basel II, increased by CHF200m, or 9%, to CHF1.9b. And then BIS Tier 1 capital, which includes our hybrid capital, grew by 8% to CHF2.1b compared to the end of 2007. These improved capital positions also need to be seen against CHF299m we spent in 2008 to repurchase approximately 4.4m owned shares on the second trading line as part of the repurchase program.
The risk-weighted positions, according to Basel II, ended, by coincidence, just slightly off the level of the end of 2007, still calculated in 2007 according to Basel I. The year end 2008 level of risk-weighted assets represent a decrease of 5% compared to mid year as a result of lower risk positions.
Based on the discussed improved capital positions and the risk-weighted assets, our core capital ratio stood at 12.2% at year end, and BIS Tier 1 ratio at 13.6%, therefore the Julius Baer Group continues to enjoy a very strong capitalization. And, as can be expected given the Group's business model, the leverage ratio, which is total assets over total equity, is, with 23 times, relatively low.
To finalize the Group part, let me make a few comments on the capital management side. Based on the good result and the strong capitalization, the Board of Directors proposed to the AGM in April an unchanged dividend of CHF0.50 per registered share.
The share buyback program 2008 to 2010 of up to CHF2b will be continued, obviously taking into account our target BIS Tier 1 ratio of 12% and the market environment.
And, as previously announced, we intend to proceed with public listing of Artio Global Investors in the US in 2009, subject to market conditions.
And with this comment, I hand over to David Solo for the Asset Management review.
DAVID SOLO, CEO ASSET MANAGEMENT, JULIUS BAER HOLDING AG: Good morning. 2008 was a uniquely difficult environment for the asset management businesses, particularly ones that emphasize long equities and hedge fund strategies, as ours do. If you look at the development of assets under management, you can see that the assets dropped by 45%, or I think probably more appropriately, 36% if you look at the drop in local currencies.
As I believe I've highlighted to you now for the third year running, these high quality businesses will not be immune from overwhelming market movement and client sentiment though, as I will discuss later, I actually believe that post the 2008 crisis our core, strong franchisers are actually better competitively positioned because of their strong relative performance and risk control through the turmoil.
The business therefore suffered with the equity market declines, and are better than average, but still negative performance in our hedge fund strategies. Client flows, as I think you know, were modestly negative through the first half and, in fact, all the way through August, and then suffered significant deterioration after September and October's market turmoil and the massive equity market declines, as clients became very risk averse and there was massive noise around hedge fund strategies, illiquidity and suspensions.
Nonetheless, our superior risk and liquidity management will undoubtedly have enormous value to the franchise for the future, perversely meant that many clients often came to us to seek liquidity that they needed as opposed to competitor funds that might have been less liquid or performing less well. Also, as you know, we have a significant traction of our assets in dollars, sterling and euro. And the negative currency impact of that was approximately 9%.
So, overall, the Assets under Management suffered a 24% decline, driven by performance, and another 13% from client redemptions, all of which came from Julius Baer Asset Management Europe and GAM.
Looking at the details of the financials, revenues were down by 24% which, you will note, exceeds the drop in average asset levels. And the reason for that is because in '07 we had about CHF95m in performance fees versus approximately zero in 2008. So if you adjust that out, the revenues dropped by 19%, which is essentially the same in the drop in the average asset level, which makes sense.
Personnel expenses were down. Is the mike working? It seems to be kicking in and out?
Personnel expenses were down about 20%, largely because of the drop in performance related compensation. And though we did do headcount cuts later in the year, that did not meaningfully impact the results because they happened so late in 2008.
You'll also note, possibly surprised to see the total headcount for this area grew from 2007 to 2008. And that's entirely driven by the Asset Management Europe business, the prior Investment Products division of Bank Julius Baer, given the fact that until recently it was pursuing an aggressive expansion strategy.
Margins, as you can see, held up quite well given our strict pricing discipline of our products. And the main challenge obviously will be the fact that we're starting 2009 with much lower asset levels and therefore much lower revenues than we had the prior year.
The cost reduction programs are already underway and will now be undertaken in the recently reintegrated Julius Baer European businesses. I will note that these cuts are unlikely to match the drop in revenues given that overdoing cost cuts right now would damage our core capabilities within our quality franchises and therefore significantly impair our ability to create shareholder value in the medium term.
Going onto the ever-present pie chart. This one shows the breakdown of our products, first by the three main business areas, and then within each business area by client type. I'm going to go through this quickly. I think the things worth commenting on are, first, if you look at GAM, you'll notice a relative increase in the size of assets in the institutional slice and in the GAM private clients, which means directly managed private clients. And that is because we had much more rapid deterioration or outflows from the assets that came from referred private clients or from clients of third party distributors.
I think the conclusion here is clear. When we, GAM, can get directly in front of the clients, which we can do with our institutional clients and we can do with our direct clients, we were almost always able to talk to people correctly into the fact that it was the wrong time to sell assets just as all other investors were panicking. It was much harder to do that through third...
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