EFG International AG (EFGN) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. A very warm welcome this time from our Zurich offices. It's the EFG International First Half 2020 Results Presentation. And as usual, obviously, in these quite unprecedented times, but still, I'm happy to be joined by Giorgio Pradelli, CEO of EFG International; and Dimitris Politis, CFO of EFG International, for our presentation. As usual, I mean, I expect the disclaimer on our slides to be read. We obviously will have the presentations of both gentlemen. And afterwards, we have enough time for Q&A. So with that, I hand over to Giorgio for his introductory remarks. Thank you.

Thank you, Jens, and good morning. I also would like to welcome our audience that is joining via webcast and/or telephone. As Jens mentioned, given the coronavirus situation today, there is no in-person event, and we are webcasting live from our offices here in Zurich. The structure of our session today is, as usual, in a few minutes, Dimitris will make a detailed presentation about the financial results for the first half of 2020 of EFG International. Before that, I will walk you through the key achievements over the last few months and the key highlights that are relevant to be emphasized. Now I think that we can all agree that the last few months have been unprecedented in many ways, both for us as individuals, for our clients, for our colleagues and also for the society at large. At EFG, we are very pleased on how we have managed this crisis. And I would like to make 3 key points upfront in my introductory remarks. First of all, this crisis has been a live stress test for our industry, and EFG has demonstrated a solid and resilient business, both from an operational standpoint, but also from a financial standpoint. But not only we focused on managing and weathering the storm, we also continued to execute our growth strategy amid this pandemic. We have maintained our growth momentum with strong NNA growth. And finally, we have delivered a robust financial performance. Let me go through and elaborate on some of these key points. In terms of operational resilience, I think that we have done extremely well. We have continued to deliver uninterrupted high-quality private banking services. We have leveraged and accelerated our new digital capabilities that are critical in these times where, at the peak, we were almost 90% of our colleagues working from home, was critical to maintain the relationship with our clients to improve the customer experience in these unprecedented times. In terms of financial resilience, actually, our liquidity has improved both in terms of loan-to-deposit ratio and in terms of LCR, and our capital ratios are actually very strong. This reflects the conservative balance sheet management approach that EFG is known for. Finally, also what has been extremely resilient has been our loan book, which demonstrated its high quality, and we had virtually no losses out of the loan book. As I said, not only we weathered the storm well, but we continue to keep the course and maintain the growth momentum. We were able to grow our NNA on an annualized rate of 5.5%. This is at the top end of our target range, which is between 4% and 6%. And actually, we have accelerated this growth in the second quarter of 2020. We are very pleased because the investments in the various growth initiatives that we have initiated a year ago in 2019 are materializing, and our NNA contribution is very balanced between existing CROs, new CROs and the new locations that we opened last year in Milan, Dubai and in Lisbon. This is a testimony of our EFG distinctive business model that is focused on clients with impartial advice and first-class private banking service. This shows that our business model is competitive and attractive. We continue to grow. We continue to hire new CROs. We have hired 28 new CROs in the last 6 months. Obviously, we focus on teams that are competent and experienced. Clearly, the pace is not as last year. But given the unprecedented times, we are pleased with these developments. In terms of the financial performance, we have increased our IFRS net profit year-on-year by 10%. And in terms of the IFRS operating profit, which is basically what management can really control, the growth has been higher at 27%. The underlying profitability has been impacted by exceptional one-off items like the settlement with the Italian tax authorities and we have experienced some pressure on margins. We have maintained our good track record in managing expenses, and our underlying operating expenses are down 5% on a like-for-like basis. But what is important to remember is that, since the end of 2016, when we acquired BSI, we have reduced the aggregate cost base by almost 30%. We will accelerate in this direction. And today, we are pleased to report that we have executed 3 transactions in the context of our footprint rationalization. We will focus on our core businesses. And today, we will report that we have sold our onshore business in France, our onshore business in Chile and we are exiting the Guernsey booking center, transferring our business to other location. Clearly, as part of the rationalization of our footprint, we will continue to invest in the locations that will bring superior growth. And in this context, we have increased the stake in Shaw and Partners from 51% to 61%. You might recall that we acquired a 51% stake a year ago. So to sum up and close, again, the 3 key points I would like to emphasize are: that amid this coronavirus pandemic, our business demonstrated to be extremely resilient and solid; we managed to maintain our growth momentum; and we have delivered a robust financial performance. With this, I'll pass to Dimitris for a detailed presentation of the financial results. Dimitris?

Thank you very much. A warm welcome from me, and I'll take you straight to the key page with the summary, which is Page 7 of the presentation. As usual, this page gives you the gist of what has happened. In terms of business development, as Giorgio said, strong NNA at CHF 4.2 billion for the first 6 months. Annualized growth rate of 5.5%, which is at the top of the 4% to 6% target range that we have set ourselves through the targets that we communicated in 2019. AUMs are down by 3.9%, obviously negative market movement, negative currency movements, the same way that the entire industry has been reacting. We closed at the end of June with CHF 147.8 billion of assets under management. Very pleased to see that Continental Europe, Latin America and U.K., our 3 regions, which are running at growth rates which are exceeding the target range. Also very pleased to report that Switzerland and Italy has done a very big step this first half, and they're growing just below the target range limit. Again, as Giorgio said, we continue our hiring of new CROs. This is part of our ongoing business, and we have hired, signed or approved 28 new CROs during the first 6 months. In terms of profitability, IFRS operating profit is up to CHF 66.5 million. This is 27% up versus last year. IFRS net profit is at CHF 34.8 million or up 10% versus last year. The underlying net profit decreased to CHF 37.7 million. I'll come back to that to explain exactly what are the one-offs that we had this year, which is the settlement with Italian tax authorities, whereas we had some benefits from one-off gains in the previous period. And in terms of cost evolution, we still are managing costs down, another 5% year-on-year on a like-for-like basis. And this time, it comes mostly from general and admin costs, which have decreased by 8% year-on-year. In terms of the legacy issues, we had a positive impact from life insurance by CHF 5.3 million. And in terms of capital position, core capital ratio of 15.3%, total capital ratio of 19.1% and an underlying gross capital generation of 60 basis points for the first half of this year. I will skip the next page, which is Page 8, where we have all the numbers, and I'll go straight to Page 9. As Giorgio started his presentation, this has been a very different time compared to other times. So it is worth starting the presentation and talk a little bit about the balance sheet. We usually have the balance sheet at the end of the presentation. But it is worth noting that, despite what happened in the market and what happened in general in terms of operations, we increased our liquidity coverage ratio, the LCR. We are down now at 190% versus 182%. We actually increased our deposits during this period. So overall, the balance sheet is very liquid. It was very liquid before. It's even more liquid now, and this allows us the opportunity to grow the business going forward without any constraints. The capital position, as I said, is 15.3% on core capital and 19.1% on total capital. I'll come back to the movement between the periods. It's largely from one-off items and, to a large extent, is because of the introduction of new rules on the calculation of risk-weighted assets. And the other point to note, although it's not on the page, is that in terms of expected credit losses, we recorded a mere CHF 2.6 million expected credit loss in the P&L for the first 6 months. This is 1 basis point on our loan portfolio, which is a highly secured portfolio. It's almost 100% fully secured portfolio. And that gives you also an indication of the conservative approach of this pure-play private bank. Going to Page 10. This is more about business development and profitability. As we discussed, CHF 4.2 billion of net new assets for the first 6 months, 5.5% annualized growth rate. And you'll see also the trajectory on the right-hand side on the operating profit, the IFRS operating profit, we have been consistently growing this operating profit line over the last 3 years, and we are 27% up versus the first half of 2019. Page 11 gives you more information of between underlying profit and net profit -- IFRS net profit. You'll see comparing the 2 bars on the right that the IFRS net profit, as we said, grew by 10%. If you adjust for the provision on the Italian tax matter, that comes to 42%, which is more a like-for-like description of how net profit has been improving. Just a note on the Italian tax matter. This is a settlement we reached with the Italian tax authorities over the last month, I would say. The amount that is recorded, the CHF 9.9 million, refers to the cost for -- to EFG for settling this matter, the cost to EFG stems from ex-BSI clients and refers to the period between the acquisition of BSI and the end of 2018. Obviously, there were other costs in the settlement for the years prior to the acquisition of BSI by EFG, but these were taken care of as part of the indemnification clauses in the acquisition of BSI. The life insurance portfolio was a positive CHF 5.3 million, as you see on the left-hand side of the page. That was against a loss of almost CHF 28 million in the first half of 2019. I think we're pleased to see that the life insurance portfolio is delivering consistently some positive results. This is what we expect going forward. As we said, we have a significant gap between the carrying value of the portfolio and the total death benefit of the portfolio. So we do expect that over the next years, which are going to be between 5 and 7 years, we should be recording on average a profitability, although we do note that this is a very volatile investment in the way that it gets valued. Finally, as a note on the Taiwanese insurance company legal case, we have some court hearings coming up in the second half of the year in multiple jurisdictions. And obviously, we will update you if and when on the developments if they are material in any way. Going to the next page, we go in a bit more detail on the business development and the NNA growth. You see the CHF 4.2 billion of NNA; markets negative by about CHF 5 billion; currencies by about CHF 4 billion, pretty much standard compared to the entire reaction of the market and the impact from that. The only thing I would like to note is that, if I were to take the net new assets on a 12-month rolling basis, so if I add also the second half of 2019, the NNA for that 12-month period is over CHF 9 billion. This is over 6% growth in that period. So we would also be exceeding our 4% to 6% range if we were to look on a 12-month rolling basis. On Page 13, as you see on the left-hand side, is the same page that we presented on the 13th of March 2019 as part of our strategy day 1.5 years ago. We always said that, in order for us to grow, we need to take advantage of all 3 levers that are available to us. So existing CROs, new CROs and opening up new locations, new business initiatives. We are very pleased to report that all 3 of the levers are now working. They have been working since 2019. If you look at the right-hand side of the page, we have broken down the NNA growth into these 3 different buckets, and you see it's a very balanced approach. I think the other thing that you need to note is that, if you take the new CROs and the new business initiatives, so this is what we really added from a business perspective over the last 1.5 years, the net new assets over the last 18 months have been CHF 6.5 billion, of which about CHF 2.5 billion came in the first half of this year, and the momentum is strong. Also to note that this performance is with several of our new CROs only joining in the second half of the year 2019. So it's not that the -- all the CROs have had the opportunity to fully deploy their business. So we are looking forward to a continuation of this balanced NNA growth in the future going forward. Page 14, it is our usual page on the regional breakdown. You'll see the very high growth rate for Continental Europe, 11.2% annualized for the first half of the year. In this case, we have both existing locations like Luxembourg and Monaco doing very well. We have Dubai here also adding to the growth. In Latin America and the U.K., you see that the rates are 8% and 7%, respectively. Again, very strong growth. Switzerland was about flat in 2019, and now it's growing at 3.8%, just below the mark of the 4% to 6%. That is a very strong improvement. And finally, just to note that there is a negative NNA figure for Asia Pacific at minus CHF 0.6 billion. This is due to deleveraging. We had a lot of deleveraging as clients went risk off mostly in Asia. You see it's about CHF 1 billion of deleveraging in Asia. If we neutralize that, Asia is also still growing at 2.8% despite the impact from the deleveraging and the market volatility. Go to Page 15. Mandate penetration, which includes advisory mandates, discretionary mandates and funds, increased to 48% from 47% at year-end. Arguably, it was not the best year to increase mandate -- the best period to increase mandate penetration while the markets were so volatile, but still we had a small increase. The increase is due to 2 main factors. One is a very solid performance by our discretionary offering, but also an increased penetration of digital tools, which helps the CROs do their job and be more effective and efficient with clients. This, namely, is the investment advisory tool. We are rolling this tool out to all the locations. In the first half of the year, it was rolled out to the Americas. Asia is following up in the second half of this year. And by then, we will have covered most of our CROs and our clients with the ability to talk to them and interact through this digital platform. At the same time, we are expanding on our funds offering to complement existing strategies. And obviously, ESG is becoming more prevalent at this point, and we are increasingly taking into consideration ESG criteria in the overall investment process. Page 16 is our normal page on CRO performance. You'll see that we closed the year with 629 CROs and another 186 in Australia for a total of 815. We are now at 601. These departures were really planned from last year, so there's no real change in our process at this point of how we hire and how we manage CROs. You'll see at the bottom of the page at the left, the large investment we made last year. We're still making the investments this year, but it is at a lower rate than what we're doing last year, which was exceptional. I think the most important point to note and it also shows in the way that the NNAs are printing that we discussed in the -- a few pages ago is that the CROs hired in 2019, in aggregate, as a class of 2019, have achieved a positive net contribution in the first half of 2020. So the people, the teams that we hired in the last 12 months of 2019 are already profitable in 2020, which gives us a lot of confidence in terms both of our ability to hire quality CROs, to manage them properly and to actually get a bottom line result as quickly as possible. If you look at the bottom right of the page, in terms of AUM per CRO or the load per CRO, it has increased by 32% since 2015. It has increased 6% over the last year. This is -- if you were to compare the CHF 224 million per CRO, which is the 2019 figure excluding Shaw and Partners, and the comparative, which is the CHF 238 million, which excludes just the CROs that we hired in the first half of 2020. Moving to Page 17. We go to more the profitability lines, and what we've seen is that the revenues in -- and this is underlying operating income for the first half of 2020, came in at 50 -- CHF 555 million compared to CHF 576 million in the previous year. Previous year included a one-off of about CHF 14 million from the revaluation of our SIX participation. I think the key message from this page is that we are improving our quality of revenues quite substantially compared to the previous period. We see a very solid increase in commission margin. Commission margin is up 17% year-on-year. If I were to neutralize for the Australia acquisition, it would still be 12% year-on-year. We see increasing penetration of the high-value products and services in our revenues. We saw client activity increasing in the first half. It was not just because of the COVID situation. The increased client activity started already from the beginning of January, and we're also seeing increased client activity towards the months of May and June throughout the period. So I believe that this is here to stay. And also, we are taking repricing actions, which are already yielding results in the first half of 2020. I'll come back to the repricing actions because this is a theme that I would like to explore more in a page later on about also what we expect going forward. There is a drop in the combined figures for net interest income and net other income, and the reason for that drop is the decline in reference interest rates. It's mostly, for us, it's the dollar rate that matters, also a bit of impact from the British pound, but mostly the dollar. The reason that I'm combining the 2 lines is that because of the way that we manage our swap book, some of the negative impact from lower interest rates doesn't print in the net interest income line, but prints in the net other income line. But having said that, it is fair to say that, even after adjusting for this accounting treatment, that our performance in the net other or trading income has been muted. The performance -- the muted performance comes from our global markets unit, mostly on negative asset revaluation. But what I would also like to stress here is that this result is also a function of us being a pure-play conservative private bank. In that respect, we have a very, very limited fixed income trading portfolio. We do not have an equity trading portfolio, which we trade on a proprietary basis. We do not manufacture structured products internally. We distribute manufactured products, which are manufactured by third-party providers. So in that respect, our ability to take advantage of opportunities in market volatility, such the ones that happened in the market during the coronavirus crisis, is not something that we can actually capitalize on. For us, the bread and butter of what we do is the commission line. Obviously, we do lending and we do other balance sheet operations. So the interest income line is very important. But for us, the key driver of the business is how do we drive, how do we increase, how do we improve our commission margin revenues. And this is also the crux of the repricing actions that we are taking at this point. As a note, we'll talk about footprint optimization actions a bit later on. But overall, these actions will improve the revenue margin as we move along. And just for your information, some comparability information, the -- excluding Shaw and Partners, the revenue margin is 3 basis points better. So it is at 79 basis points for the first half of the year. And excluding also the loans, the margin is at 92 basis points, which I believe is one of the highest in the industry. Going to Page 18, talk about costs, a bit of a more straightforward discussion. We have been consistently reducing costs the last 4 years. We're about 30% lower since the acquisition of BSI. And during the course of this year, we reduced costs by another 5% on a year-on-year basis and on a like-for-like basis. And what I mean for a like-for-like basis, I exclude the new investments. We have reduced costs even in nominal terms. So we went from CHF 492 million in the first half of '19 to CHF 485 million in the first half of 2020, mostly on managing down G&A costs, which are down 8% year-on-year. We have also started executing on the international footprint rationalization. This was something that was announced late last year. At this point, we are pleased to be able to report that we have agreed for the disposal of our operation in Chile and for our operation in France. This makes it a more tangible thing for you to understand in terms of what we are doing. And we have also agreed the exit from our business in Guernsey and the transfer of that business in other EFG booking centers. This is a consolidation play, which will produce cost savings by consolidating 1 booking center into other existing booking centers. Going to Page 19, a little bit more on the balance sheet. I will not go through that page in a lot of detail because we have discussed it. It's a very liquid balance sheet. It's a very high-quality loan book. And just as a note, again, the life insurance element, it's recorded, as you see on this page. And you can refer to Pages 38 and 39 at the back for more useful information on the life insurance portfolio. Page 20 gives you the picture on capital adequacy. We've gone through the figures before. You see there's a slight increase in risk-weighted assets between CHF 10.1 billion at year-end '19 and CHF 10.4 billion in the first half of the year. The reason for the increase is the new regulation, the Standardized Approach-Counterparty Credit Risk, or SA-CCR as it's known. This has increased risk-weighted assets by CHF 400 million. Actually, it increased by CHF 200 million at inception, which was the 1st of January of the year. And then the amount increased by another CHF 200 million because of market volatility. We have bought back approximately 600,000 shares in the first half of the year, and we concluded our share buyback program in June this year. And just as a note, the capital ratios include an accrual for dividends, both for the second tranche of the dividend for 2020, which will be decided by a general meeting to be held in the fourth quarter of the year, and also a steady accrual for a 2021 dividend based on 2020 profitability. On Page 21 is the bridge of the capital position. You will see that we generated 60 basis points of gross underlying P&L and equity impact. That's on the left. The risk-weighted assets didn't really move, excluding the impact of new rules. The dividend accrual consumes 40 basis points during the first half. And then we have more of the one-off items. So as we said, 40 basis points down because of new rules. Some non-underlying P&L because the accounting of the life insurance portfolio is different under Swiss GAAP, which is the basis of capital ratios than IFRS. We have the acquisition of the additional 11 -- 10% in Shaw and Partners, which is 10 basis points. And we also have a currency translation impact of 40 basis points. In reality, you should also -- part of that currency translation difference should be viewed in conjunction with the risk-weighted asset decrease of 0 on the left, but we've just left it separate for simplicity reasons. Again, the currency, obviously, is one-off given to more currency volatility, and the new rules is one-off from the introduction of new rules. Going to Page 22. Again, this is one of the pages that we used for the presentation in March 2019. And we had portrayed on this page all the subactions that we would like to put forward. The checks in blue are the ones that we were there already at the end of year 2019. So they just repeated. The checks in green are new ones, the ones that we're adding this year. So you see that we are accelerating our digital solutions. We've added another check for Shaw and Partners because we acquired the extra 10%. And clearly, Switzerland back to growth is very important. And the fact that we're already achieving it in 2020 rather than '21, '22 is also very important because it's the biggest driver of growth, given it is the biggest region that we operate. I think the critical bit to discuss is the part in the middle, which is in the red box. Obviously, our expectations when we announced the strategic plan in 2019 were different in terms of AUMs, interest rates, market impact. We are now in a situation where we have challenging interest rates, we have a lower AUM base than we were expecting because of the market valuations, and we also have a strong Swiss franc. And in our mind, that means that we need to react. The key 2 actions reacting are to add repricing actions and to accelerate the cost management actions. Obviously, the new environment is more challenging on the revenue line, and the reaction that we have is both managing the revenue line, but also adding more effort to the cost line. I'll come back to that in a couple of pages. But on Page 23, we try to give you also a picture of a more recurring profitability, trying to strip out some of the one-off items. So if you look at first half of 2019, we had an exceptional gain from a SIX valuation, and we also had a reversal of our ECL charge of CHF 9.9 million. So the adjusted figure would be CHF 52 million. In the first half of 2020, we have a provision for the Italian tax matter, which is, confusingly, again, CHF 9.9 million. But we also have a muted performance in our global markets, which we estimate about CHF 10 million, which means that a real recurring adjusted figure would be the CHF 57.6 million that you see on the right. This means that, on a like-for-like basis, after the adjustment, we'll be growing by about 10% year-on-year. Page 24 gives you our expectations for the way forward. So on the left-hand side, you see the same figures that we just discussed. So we see our starting point for the first half of 2020 is about CHF 60 million in reality. And what we see is we see a strong NNA momentum, and we also see that our AUM levels at the end of June are higher than the average AUMs for the first half of the year. This means that our revenue base should be higher like-for-like going forward. So this is a positive, in our view, in terms of the development of the revenue line. Clearly, the interest rate environment is going against us. There are going to be headwinds. We know that. We can actually calculate how much it's going to be, given the interest rates and the timing of the asset repricing. And this is the reason that we have the next 2 blocks, which are the positives. One is revenue management actions. Revenue management actions is a set of actions that covers many points. One is the high-value products and how we manage to accelerate the penetration of high-value products. We are revising our pricing and the services that we offer so that the pricing is in line with the value that we offer. And again, we discussed earlier that we've had a very good track record in cost management over the last 4, 4.5 years. The question is, why did we have this good track record? The main reason is because we had a lot of people focusing a lot on costs and making sure that we deliver. We have not placed the same amount of effort and the same amount of diligence on repricing over the same period over the last 4 years. This leaves more low-hanging fruit. This gives us the opportunity to promote actions that should have and are having even short-term revenue benefits. So we believe that the revenue management action plan will mitigate in part the interest rate environment that we have to face. On the cost management actions, there are 3 broad ranges. One is incremental actions. We've been reducing costs 5% a year. We will continue managing cost down on an incremental basis. There are always pockets, of course, that you can handle and reduce. The other 2 broad areas is the rationalization of the international footprint, where we expect to eliminate approximately 5% of our cost base. We will do that by the end of 2021. Just to make sure that we are clear, the elimination of the -- rationalization of the footprint means that there might be cases where there are also revenues that do not follow. So this does not translate 100% to our profit benefit. Whereas the last action that we have on this list, which is the optimization of our setup on our 8 main booking centers, is a pure cost reduction. And here, we target to reduce costs by an additional 5% of the underlying cost base, again, over the next 18 months. So both actions have a time frame, which goes until the end of 2021. On that note, I'd like to thank you very much and pass the floor back to Giorgio for his closing remarks.

Thank you, Dimitris. And building on what Dimitris just said in the previous slide, I'd like to focus now on the strategic priorities for the next quarters and the outlook that we expect. We move to Page 26, and let me be clear upfront. Our key focus areas will be driving the profitability higher. Clearly, we are facing with a challenging market environment. There are several trends that are converging. On one hand, our industry has been affected by structural pressures on revenues. On the other hand, the impact of the coronavirus pandemic on the global economy is expected to materialize in the coming months. Dimitris mentioned the extremely low level in interest rates. That is basically now 0 across all currencies. And obviously, we are a business in Switzerland expressing our financials in Swiss francs, but over 90% of our business is actually in foreign currency. So when the Swiss franc is as strong as it is now, clearly, this is -- these have a dampening effect on our business. Overall, the market remains quite uncertain and volatile, and this is getting also reflected on the risk aversion from our clients. We have seen deleveraging, and we also believe that now that the strong volatility of March and April, as concluded, we will see a softening of the number of transaction. For sure, if the key focus area is driving the profitability higher, we need to accelerate, as Dimitris already anticipated, our revenue management actions and our actions to increase efficiency so that we can deliver our 2022 strategic plan. Now we have achieved a breakthrough over the last 18 months in our growth. As we have mentioned, we are -- if you look at the last 12 months, we are actually growing at the top end of our range at around 6%. And now on the other hand, we need to contrast the pressure on margins, and we need to promote high-value products and services. I think, on that, we are quite well placed because the feedback that we have received from clients and bankers alike over this crisis has been extremely positive. Our business model is based on a partnership with the clients in a strong proximity with our clients. And clearly, we are sure that our clients will be prepared to pay the right margin for our value added. Now clearly, revenue measures are critical. We need to rebut this pressure on the margin. On the other hand, we will continue on our cost management measures. We will actually accelerate the rationalization of our international footprint. This has been already commented. And we will reduce our presence in low-yielding and high cost/income ratio locations. So as Dimitris said, the impact will not be one on one to the profitability in terms of this 5% reduction of the cost base. But obviously, this will have a positive impact in terms of the cost/income ratio. On the other hand, we can become even more efficient in our core locations. We are working on that, and we are very confident that, by the end of 2021, we will be able to reduce the cost base by another 5%. Last but not least, I think this crisis has accelerated in the industry, and we are no exception, the adoption of new digital solutions that are very useful on 2 fronts. Number one is with the interaction with our clients, client proximity, client interaction. And again, the -- this new environment is creating a new way of interacting with clients. The CRO, the banker remains at the center of this partnership with the clients. But clearly, we need to give to our CROs the best digital solutions to work effectively with our clients remotely. On the other hand, digital solutions can be extremely useful to reduce cost and increase efficiency. Now in taking stock of our performance in the last 6 months and looking ahead, again, I'd like to emphasize that our business is extremely solid and resilient. But at the same time, we have been able to maintain this growth momentum, which we want to, again, accelerate going forward. In the U.S., our businesses are called asset gatherers. And obviously, asset gatherers have to gather assets. And this is why, for us, growth is so important, not just per se, but in order to fuel profitable and sustainable growth. We can leverage our business model. And we can leverage, I believe, the strong competence and experience of our CROs. And finally, and I will close with this, we believe that we are on track to execute our 2022 strategic plan. We have concluded at the end of '18 our integration with BSI. We have had a breakthrough in terms of growth. We have had a strong track record in terms of cost management, and I am convinced that we will have a strong breakthrough in terms of driving profitability higher in the next quarter. With this, I close. And yes, I think we can open the Q&A session, Jens.

Thank you, Giorgio, thank you, Dimitris, for your insightful presentation. So as said in the beginning, we're now moving to the Q&A session. So please, operator, let us know if we have the first question, and then we can address it accordingly.

The first question coming from the phone is from Nicholas Herman from Citigroup.

Can you hear me?

Yes.

Very good. I have 4 questions, please, if that's okay. So if I could just clarify, please. Firstly, on net interest income, following the U.S. rate cuts, could you confirm your exit NIM for the first half '20? That's NII as a percentage of AUM. I guess -- so I guess that would be the NII -- the NIM of the second quarter. And the second question is on your fee margin. And I note the comment from Dimitris about how it is the fee margin -- growing fees, which is the key here because of your narrower offering versus larger peers. I mean on the theme on the fee side, it looks like your advisory and management fees, the margin there has fallen to 23 basis points in the first half, and that is despite an increase -- a good increase, as you said, in discretionary mandates and an ongoing increase in mandate penetration. And it's quite a large fall versus the second half of '19. So I just want to understand what is going on there because it doesn't look like you are -- your pricing is materially different from peers. That's the question number two. Question number three is, I wonder if I could clarify, please, some of the maths on the cost. So I appreciate the updated guidance and outlook there that you've given. If I take your first half '20 cost base of CHF 485 million and I annualize it, I guess it's CHF 970 million. If I take off 2 lots of 5% and a little bit of G&A, then I come up with something like, I don't know, somewhere between CHF 860 million, CHF 870 million, CHF 880 million and then I apply some growth, it kind of sounds like you're targeting a 2022 cost base of about CHF 950 million. Is that something that sounds reasonable to you? And then the final question is, on Shaw and Partners, it looks like the margin there has remained flat at 40 basis points or even less than that. I'm just curious why that is because my understanding is that Shaw and Partners is a pure brokerage, and I guess I would have thought that we would be in a bit of a goldilocks environment for brokerage. So just curious why the margin there hasn't changed. Those are my 4 questions.

Let me take your 4 questions. I will start with the last one, which is the simpler one. You're right. And the peculiarity of how we account for Shaw and Partners is that we do not include in our revenues the gross client margin, which is about 65 to 70 basis points. We apply -- we include in our revenues in our commission line the net commission, so net of the fees of the expenses paid to CROs locally there. So what we include is a net revenue of about 35 basis points. So what you see is what skews the revenue generated by -- the gross revenue generated by that business. And it's also the reason that we report -- if you look on the revenue page of the presentation, which was Page 17, we report the revenue margin with and without the Australian business just to show that because the way we have to consolidate on an accounting basis gives a bit of a misleading image in terms of the evolution of our margins. So obviously, it's a very good business on a gross client income basis. It's just the accounting that affects -- and as you say, the -- what we consolidated at the end of the day is something between 35 and 40 basis points. Now on the costs, you did a rough calculation. I think that I wouldn't like to comment on very specific calculations. I wouldn't tell you that you were off the bat by what you did obviously, there are more things coming in and also there are things coming in with a delayed reaction. So some of the cost actions that we have taken in this half have not printed yet, but I wouldn't like to comment more on that. On the exit NIM, it is lower than the average, obviously, that we've had in -- during the course of the first 6 months. I think it's a bit difficult to give you the figure because you also have the combination between exit NIM for NII and exit for NOI because a lot of the interest is actually printing in our net other income. But I would say that the difference that we're talking about is probably order of magnitude about probably 10% lower in terms of the exit NIM than what you see printing. Now final question, I was trying to figure out your comment about fees and why fees you believe are coming at -- are staying stable. I think that when you look at fees, you need to look at fees combined. It's not just the revenue side, but it's also the expense side that you need to combine. And so I think that what you'll see is that we have improved on the combination of the two. So I don't believe your point is exactly correct. We have been increasing our penetration of value-adding products. So I think that's the reason that we see more advisory management fees. The only thing I can think of that might be interesting is, if you compare to the second half of last year, then at the end of the year, we did have some performance management fees coming in, which are usually only come in at year-end, and that might skew a bit the figures. But otherwise, the trend is very clear on increasing the quality and quantity of our commission income line.

All right. That's very clear. Can I just ask a couple of follow-ups, please? So thank you, I wasn't -- I obviously missed that point in the performance fees. But just on Shaw and Partners, so can I just clarify then that, that is the 35 to 40 basis points that you book, that is basically fixed. So it doesn't actually change depending on the environment.

But it is fairly stable in the sense that the calculation you should have in mind is about 65 basis points charged to the client and then about half of it, just to be very broad, or a bit less than 40% -- more like 40% paid back to the CROs that operate in Australia. So your net is about 35 to 40 basis points.

In that case, basically, just an ongoing rate regardless of the environment.

It's like any...

Any other business.

Broking business, depending on the market conditions and the kind of products and services that are delivered to the clients. Obviously, what is charged to the clients, it is between -- usually, it is between 65% and 75%. But obviously, this can fluctuate according to the market.

And it depends on the -- because it is a brokerage business, it depends also on the trading volume. So there is -- what I'm talking about is an average annual, let's say, figure. It doesn't mean that all the months come in at 65 basis points.

And then just to clarify also, on the net interest income side, NOI, you said it's about 10% lower as an exit run rate. Is that a stable run rate from here pre-repricing? Or is there still some more pressures to come?

I think that, going forward, in the net interest income line, you'll see more pressure coming in from the interest rate environment. At the same time, you will see repricing happening in the NII line as well because, obviously, it is one of the areas that we're looking at in terms of managing the revenue side. So it's both about managing the lending side, managing the deposit side, managing negative interest rates. So there are actions that we are applying also to the net interest income line, and we expect them to have a positive effect. Actually, some of these have already started having a positive effect even in the first half of 2020.

The next question comes from the line of Andreas Venditti from Vontobel.

Maybe on the global markets, obviously, you talked about the muted performance and you said you estimated an impact of CHF 10 million. Maybe you can explain how you come up with this number or how we should think about it going forward, basically. Then on the sales you mentioned in Chile and France. Obviously, as you rightly said, it's not only cost going out, but also revenues. Maybe you could give us some guidance on how much AUM or revenues we're talking about here also to model that. Then on your net new money. For the first quarter, you stated in your brief update that it was 2.5% annualized. That's roughly CHF 1 billion, which basically means, in the second quarter, the performance was exceptionally good, more than CHF 3 billion, so more than 8% annualized. Maybe you can comment on that, whether -- what happened there, whether there was any large inflow pushing this? And yes, I'll stop here, and I might have some more questions later.

Will you take the NNA?

I'll take the last one.

Okay. The estimate for global markets is mainly a comparison of past performance and what we're expecting in this year's budget. So it is not -- that's the reason we put a round number of about CHF 10 million. And as I said, comings -- it comes mostly from -- of our positioning overall and the services that we offer. So it is not a -- fully scientific. It's an estimate of performance of that unit compared to what it should have done excluding COVID. So it is -- this is how we come up with the CHF 10 million calculation for the COVID gap. Now on France and Chile, the figures that you should be aware of in terms of AUM, we're talking on a combined basis of about CHF 1.5 billion to CHF 2 billion of assets under management. In terms of revenues and costs, we had already moved our Oudart participation into the held-for-sale category since 2019, so we have not been consolidating revenues and costs for that entity on a line-by-line basis. So you will not see an impact from that. And Chile is very small at this point, so it is going to be -- it's going to have a marginal impact on the figures overall. I think, Giorgio, if you want to take the NNA...

Yes, I'll take the question on the NNA. And it is, Andreas, correct that obviously we had, and I mentioned it, an acceleration in the second quarter which was quite good. There is nothing I will say that is an extremely large inflow that has changed, I will say, the nature of the business, but maybe only 2 points I'd like to highlight. One is that, since basically the end of the first quarter of 2019, we have introduced a pipeline process that is -- that has mobilized basically the whole organization from the global -- from the CROs, to the team leaders, to the heads of private banking and to the global business committee members and the regional business heads. This is a weekly process. It's quite intense, I would say. And it has accelerated in the -- in 2020, already was bearing fruits at the end of 2019. If you recall, also the fourth quarter of 2019 was quite good. And there, again as I said, we mobilized the whole organization. Clearly, for the flow business, which we include the deals and inflows up to CHF 50 million, I will say this is very broad-based from all the bankers, the CROs and the heads of private banking. And obviously, the global business committee is focusing on the deals that are, let's say, over CHF 50 million. The other key point to highlight is on Page 13 and is what we said with this balanced NNA growth, where not only the existing CROs have been performing extremely well, as you can see, basically CHF 1.6 billion in the half year, which is more than what the existing CROs have done for the full 2019, but also the new CROs that, as you know, many have been hired in the second half of last year. So they started really to produce despite COVID and the lockdown. And the new business initiatives that, for example, in the Middle East and even Lisbon, have been opened in the fourth quarter last year. So this is a combination of management actions, but again it shows how the CROs are very close to clients. And our model is competitive and attractive.

Perfect. May I have a follow-up on the sale of France and Chile? So on Page 24, when you talk about a 5% cost base from the rationalization of international footprint, obviously this will not come, if I understand correctly, from the sales of France and Chile. So it must be other actions then. Is that correct?

Correct.

And just to clarify. The 5%, that's not a net number, obviously. It's a gross number before investments in the business.

Correct. It's the actual cost base of what will be eliminated.

The next question comes from the line of Daniele Brupbacher from UBS.

I just wanted to ask on CROs. I mean obviously still some good hiring going on. The net number is still down slightly. Is this how we should think about the next couple of quarters probably, that you'll try to have this more like, let's say, balanced approach with replacing not-so-highly producing CROs with new ones? Is that sort of how we should think about it? And then just on Slide 17, you mentioned in the global markets context the relatively soft revenues from negative asset revaluations. Can you be just a little bit specific there? Does -- is this referring to, I think you mentioned, swap books; and how that works now if probably interest rates stay relatively unchanged at these low levels? I mean I guess that should be in the numbers, and from here onwards it's more stable. Is that a fair assumption? And then on repricing. I mean we hear a lot of repricing -- a lot about repricing possibilities or ambitions from various banks, but it's all hard to see the real effect in the actual numbers, so why are you confident you can do this now? Is it because everyone is doing it and it is harder for those clients to leave? Or why now? And what do you exactly mean with higher-value products? Is it things like barrier reverse convertibles or just the mandates in general? It would be just interesting to hear some more details there.

Thank you, Daniele. Maybe I will start with the first question, about CROs. And this is on Page 16, I think. The number is not very...

16, yes.

Page 16. And yes, you are right. As we clearly mentioned in the page, we will continue to hire teams that are competent and experienced and they fit with our culture and with our business model. So -- and we have hired 28. Clearly, the pace in particular in the second quarter was lower than last year, but this is also by design. If you recall, during the strategy meeting in March last year, we said that, gross, we would think about hiring between 70 and 100, but obviously in 2019 we did much better. So for the period 2019 to 2022, I think we are on track. On the other hand, we will continue to exercise our performance management; and our criteria are very transparent, are very clear. What are -- the targets that CROs, new CROs and existing CROs, have to meet are very clear. And clearly, if there are CROs that unfortunately cannot met those criteria, we will have to find solution and eventually part ways. So for us, if I can summarize what we are trying to do not only for the CROs but also in general, I would use the word load. We need to increase the load. We need to increase the productivity of the CROs. You see on the bottom right that over the last 5 years we increased by over 30% the load or the average AUM per CRO from CHF 180 million AUM per CRO to CHF 240 million, and this must continue and will continue. And the same thing, we are doing with booking centers and the locations where obviously we are trying to focus and grow the core locations where we have efficiency and strong growth prospects; and reducing the -- let's call it, the periphery that are -- where growth is lower, and efficiency also. I think this -- I don't know, Daniele, if this is clear. The second question, I think, Dimitris...

I'll take the second question. On the global markets, I think that the fact that the assets were revaluating downwards is what, to a large extent, did not allow us to meet the level of revenue that we would have liked. I will not go into details because there are many small things that do not work. I think what is -- what I want to make clear, and I think you referred to it, Daniele, as well, is the fact that for us this is a one-off event. It is not something which will lead to a continuous low level of revenues from our global markets. It is a one-off impact. And that's the reason we also adjusted that figure on page -- what was it -- on Page 23 of the presentation by CHF 10 million, trying to show what is the real sort of recurring profitability of the business of close to CHF 60 million. Now on the repricing...