Julius Bär Gruppe AG (BAER) Earnings Call Transcript & Summary

Ladies and gentlemen, a very good morning to all of you on this unnaturally warm almost spring day out there if the weather was a little bit better. Warmly welcome to Julius Baer's 2019 results and our strategy update today. It's my great honor to be here with you today for the first time as the CEO of Julius Baer. But without any delay, I hand over to Dieter Enkelmann for the results 2019.

Thank you, Philipp, and good morning from my side. As usual in our presentation, the results are shown on the adjusted basis. In 2019, the adjustments were larger than in previous years due to the CHF 153 million provision, which we announced in December, linked to the claim by BvS in relation to events that, a long time ago, allegedly took place at Bank Cantrade, which UBS acquired in 2005 from UBS; and the CHF 99 million goodwill impairment related to our investment in Kairos, which we announced in November of 2019. A reconciliation is, as usual, provided in the appendix, and as of today, also in the more comprehensive alternative performance measure document on our website. Moving to Page 5. 2019 was characterized by a solid recovery in the stock markets, contrasting to the decline in 2018. U.S. government bond yields had risen substantially in 2018, but came down again in '19. In the summer months, the U.S. curve was still partly inverted, but it showed modest steepening towards the end of the year. Also in the first weeks of 2020, it has become partially inverted again. A third trend worth highlighting is the continued weakening of the euro versus Swiss francs. Fortunately, our euro revenues versus euro cost mismatch is smaller than in the past, but it still had some impact. Moving on to the results, starting with the development in client assets on Page 6. AuM increased by CHF 44 billion or 12%, driven mainly by market performance of CHF 45 billion, net new money of CHF 11 billion and the negative currency impact of CHF 6 billion. Monthly average AuM, important for the margin calculations, went up by 5%. Net new money on Slide 7. The growth in our core wealth management business was 4.1%, despite some outflows related to the client documentation review project and the wider application of negative rates on larger Swiss franc and euro deposits. We saw excellent inflows from a number of different regions, with particularly strong net new money coming from our business with clients in Asia and Europe. However, overall, net new money was 2.8% as a result of outflows at Kairos. As we highlighted during 2019, the Kairos outflows initially followed the underperformance in 2018 and were subsequently driven by a number of key manager departures in 2019. On Page 8, operating income. They were essentially stable at CHF 3.4 billion. Commission and fee income was up 1%. Recurring fee and commission income increased by 1% as the benefit of higher average AuM was partly offset by a somewhat lower contribution from Kairos and modest fee pressure on non-bespoke discretionary mandates. Transaction-driven income was slightly down. Before I continue with the other income lines, it is important to point out there was a realignment between net interest and dividend income and what used to be called net trading income to bring it more in line with common market usage. As a consequence, we will show new line items, net interest income and net income from financial investments. In the appendix, we have 4 slides showing the changes. The results for 2018 has been realigned accordingly. Net interest income in the new aligned format declined by 2%. This was the result of an increase in interest income from loans at higher average rates and an increase in interest on the treasury portfolio on higher average volume despite a decrease towards the end of the year. These 2 positives were more than offset by an increase in the cost of deposits following the increase during 2018 in U.S. dollar noncurrent accounts. Net income from financial instruments declined by 4%. This followed a decrease in market volatility, mainly linked to structured product-related income. The gross margin on Page 9, the analysis shows that the 4 basis points decrease year-on-year was quite evenly spread over the different components. The commission and fee margin declined by 2 basis points, of which 1 basis point was from a modest decline in recurring income. Moving on to expenses on Slide 10. Total operating expenses grew by 3% year-on-year with around CHF 60 million of the targeted CHF 100 million cost-reduction program already in the 2019 P&L. Personnel expenses came down slightly as lower bonuses more than offset the effect of 3% increase in average staff levels and the inclusion of the CHF 19 million of severance costs. Whilst average staff levels were higher year-on-year, the year-end level was down 1% as a consequence of the cost-reduction program, which more than offset the first-time inclusion of the 76 staff from NSC in Mexico and the internalization of over 100 formerly external staff. So excluding these 2 impacts, staff levels were down more than 240, delivering the bulk of the CHF 100 million cost reductions. In the analysis of general expenses, it is important to note that we applied IFRS 16, which is related to lease accounting for the first time in 2019 and that we saw a sizable increase in provisions related to legacy cases. If you exclude these two, then the underlying increase in general expenses was 3%, mainly driven by the finalization of the client documentation review project, which is now completed, and an increase in non-capitalized IT spend with a slight acceleration in Q4. Excluding the impact of the IFRS 16 shift, the sum of depreciation and amortization went up by CHF 15 million, mainly driven by higher IT-related amortizations. As a result, the cost/income ratio stayed at around 71%, close to the level of 2018, but in this period, with a 4 basis point lower gross margin and clearly a meaningful improvement from the 74% in the second half of 2018. As the cost increase was below the increase in average AuM, the expense margin improved by another 2 basis points and is now 5 basis points lower than in 2016. In summary, on Page 11, the benefits of higher AuM and improved expense margin and the lower tax rate were more than offset by a lower gross margin and the mentioned higher provisions related to the legacy cases. As a result, adjusted net profit declined by 5%. The adjusted tax rate improved to 15.8%, and our new guidance for the tax rate is around 15% for the next few years, following the Swiss tax reform and a much increased contribution from our Asian platforms. IFRS net profit was down 37%, greatly impacted by the BvS provision and the Kairos noncash goodwill impairment I mentioned before. Moving on to the balance sheet on Page 12. Since the end of 2018, we saw a 7% increase in the loan book, driven by a 10% increase in Lombard lending and a 5% decline in the mortgage book. At the same time, client deposits increased by 2%. And the loan-to-deposit ratio, therefore, increased by 3% points to 66%. Finally, on Page 13, capital. The CET1 ratio was 14%, up approximately 120 basis points since the end of 2018, despite the impacts from the majority acquisition of NSC and the Swiss pension fund. CET1 capital build was CHF 0.1 billion, whilst risk-weighted assets decreased by CHF 0.9 billion. Credit risk-weighted assets declined by CHF 0.8 billion, following the decrease in mortgages and the reduction in the treasury book towards the end of the year, which, together, more than offset the effect of the strong growth in Lombard lending. Market risk-weighted assets went down by CHF 0.6 billion as a result of the decline in market volatility. With this, I have come to an end of my part. And I hand over to Philipp for the strategy update.

Thank you very much, Dieter. Ladies and gentlemen, let us now talk about how Julius Baer will be successful in the next decade and how we will create and write a new chapter in our 130 years of history, the chapter in our company and the chapter in wealth management. We start this chapter from a unique position built on 4 pillars: our pure focus on wealth management with no conflicting business lines; our solid foundations, our history and balance sheet; our international network and expertise; and yet, despite our size, our highly personal approach in serving clients. The combination of those factors makes us the leading independent wealth manager today and the only large player purely focused on wealth management. We have, in the last decade, defined pure wealth management. During this decade, we have consistently and successfully pursued a growth strategy led by asset gathering in equal parts through acquisitions and the hiring of new relationship managers. This has given us critical mass with more than CHF 420 billion of assets under management, presence in 25 countries, almost 1,500 relationship managers and more than 1,000 investment, credit and wealth planning specialists. The environment in which we have executed this strategy since 2009 has been marked by the longest bull market ever and strong wealth creation. As we turn into the 2020s, new secular dynamics are unfolding in wealth management. First, client needs are structurally shifting from wealth creation to wealth preservation and from individuals to families. Complexity rises and expectations rise, calling for even broader capabilities and deeper expertise in wealth management. Second, and on top of this generational change, most pronounced in Asia is gaining momentum, where globally CHF 30 trillion of assets will handle -- be handed over from generation to generation over the next 20 years. That future generation is looking beyond just the pure management of assets and is interested to give meaning to their wealth. At the same time, the economics of our business have changed. Commoditization, combined with negative interest rates in European key markets, result in strong margin pressure. Wealth management needs to counteract this by finding new ways to create value for clients, through solutions, through advice, through services and new ways of sharing this value with our clients. Last but not least, more complex regulations, changes in technology and increasing competition are driving up structural costs of doing business. Yet, wealth management remains an attractive industry. Personal wealth continues to enjoy high single-digit growth rates in most markets and generally develops faster than GDP. Long-term relationships, regulation and economics create barriers to entry for new players, both traditional ones, but also technology-led ones. Julius Baer is excellently positioned to play a leading role in the industry, and we have all it takes to capture future opportunities. In this next decade, we aim to be the most admired global wealth manager, the best holistic and trusted independent adviser for wealthy private clients and families, the most entrepreneurial place to work for top talent in the industry, relationship managers and experts alike, financially strong, solidly capitalized and with robust risk management and a most attractive pure-play and internationally diversified investment for our share and bondholders. To achieve and consolidate this position, we need to radically change how we execute. Let me talk you through in the next minutes how we will sharpen our value proposition for sophisticated high net worth and ultra-high net worth clients across the globe from historically grown individual client management to a distinctive and coherent segment value proposition, through services, through delivery and the right coverage model, how we will accelerate our investments in human advice and in technology from building the foundations to delivering a state-of-the-art client experience and how we will shift our leadership focus from an asset-gathering strategy to sustainable profit growth. Julius Baer will offer our 2 core segments, high net worth and ultra-high net worth clients, a distinctive, unique value proposition. We will serve those clients individually, as families and over the generations. We will be at our best, servicing clients with a high degree of complexity. The more complex the needs, the better. We aim to be their trusted advisers and maximize our share of wallet with those clients. High net worth individuals, contrary a bit to industry trends, will be served in a personal way with a dedicated relationship manager. We will offer unrivaled breadth of solutions and possibilities to customize based on technology that supports this scalable customization. To our ultra-high net worth clients and families, a segment in which Julius Baer has, today, more than CHF 150 billion of assets under management, we will be true wealth architects, combining our global coverage, unrivaled access to expertise and an ability to deliver highly bespoke solutions, in combination of our open architecture with our balance sheet. And we do serve our clients directly as well as through selected intermediaries. And with intermediaries, we aim to build long-term partnerships across their entire life cycle. Julius Baer has already one of the most comprehensive solution ranges and pools of expertise in the entire wealth management industry. We will invest even more moving forward to make it even more relevant for our clients and capture new market opportunities. Let me just highlight 3 areas of innovation. Our digital asset offering in collaboration with SEBA, taking initial steps, very first steps for our clients to benefit from the future tokenization of assets and the associated trends. Our structured lending and risk transfer solutions for ultra-high net worth individuals, including cash flow-based or pre-IPO lending, and our growing impact investment product range, alongside sustainability and philanthropy, where we will launch new solutions this year. Investments in this context happen both at the local and the global level. We add local market expertise and the regional investment views across core markets, and we drive global thought leadership as we have just done through the global wealth and lifestyle report or our next-generation research and investments. Julius Baer has, today, approximately 1,500 relationship managers organized in almost 200 front teams. We will accelerate the transformation of our front organization to achieve greater impact for our clients and provide distinctive service to our 2 segments, even while we continue serving high net worth and ultra-high net worth individuals from the same integrated teams. To do this, we will enhance the roles in our front teams around the relationship manager. We will dynamically bring together flexible teams of experts and specialists ready to address specific client needs, and we will tailor the client experience, the service delivery with our solutions to both client segments. We also accelerate investments in technology to power human advice. Specifically, we will increase IT investments by approximately 20% for 2020 and '21. This will create new revenue opportunities and increase efficiency. The main shift is from the modernization of our back end to investing into client value-enhancing technologies at the front end. And let me give you 3 areas of examples. To create new revenue opportunities, we will accelerate our investments in AI and data, for example, in predictive analysis on client retention and share of wallet potential. To facilitate scalable tailoring of discretionary mandates and a consistent and scalable advisory process, we continue to invest in our mandate designer, DiAS, which will deliver both increased revenue and enhanced margin. And to increase quality and efficiency, we are reengineering processes, for example, our workflows in risk management and anti-money laundering and drive robotics in mid- and back-office processes, again, delivering margin benefits. In order to excel in wealth management, we believe we also need to move beyond just managing wealth. Julius Baer, with our more than 100,000 client relationships globally, is ideally positioned to be a facilitator, providing our clients with a platform to create value beyond banking. Our global Young Partners program brings together the children and the grandchildren of our clients. Our U.K. Entrepreneurs program brings together clients and prospects that share the same challenges and the same opportunities. Our vision is to build cross-generational communities, spaces in which they can share and exchange but ultimately, also co-create content and business opportunities together with us. One last key thrust. It's all about people. We will continue to attract the top entrepreneurial talent in the industry across the board. We will continue to focus on relationship managers but equally on experts and specialists. We will further invest in skills and training, for example, training more junior relationship managers and continuing to attract top talents, and we will upgrade our incentive and compensation systems and align them with our financial targets, our entrepreneurial aspiration but also with our risk standards. This all crystallizes into one big shift to uncompromising focus on sustainable profit growth. Profit is the most holistic measure of success, and we set a very clear growth target of more than 10% per annum over the coming cycle. Profit encompasses 3 input factors that we will manage and balance: assets, and therein included, of course, net new money, as an important input factor and the raw material for value creation with the client and the bank. We will manage this as an input factor but no longer as a target per se. Margin, and specifically, in our industry, gross margin stabilization in an environment of margin erosion by creating value for clients, driving cross-selling and realizing a fair price for our services and ultimately, costs through our efforts to increase productivity and efficiency. How do we operationalize this strategy for profit growth? Julius Baer is engaging now over the next 3 years into a comprehensive program to expand client value and revenues, to improve productivity and efficiency and to drive a more integrated and inclusive culture. We aim to deliver more than CHF 150 million of revenue improvements through an enhanced offering and global rollout of fee-based mandates, systematic review of client opportunities, deepening of our markets and credit capabilities and improved value realization through pricing. We are starting a CHF 200 million cost program with full impact in '22 to create the basis for this. The bulk of measures will be taken in 2020, and the impact, net of restructuring costs, will start to materialize in '21. This will include a further simplification of our organization. Front- and back-office structure has already started last year, the review of our geographic footprint based on future growth potential. We have already taken one key decision, which is to close our booking center in the Bahamas. Further optimizations will be decided in the first half of 2020. This all will be complemented by improvements in operational efficiency and excellence across the board. Overall, we estimate that in 2020, this will imply a 300 reduction in the number of jobs in the entire group. In addition, we will further and uncompromisingly strengthen our corporate values and our robust risk and compliance culture. On that note, we have concluded Project Atlas this -- last year, which involves the reviewing of data of all clients globally. And the new standard of KYC quality, which we will bring into the future, enables us now to control client risk much better, while at the same time, offering us opportunities for more targeted service and advice. We will focus on profit growth and the accompanying measures and put that focus into a new set of targets for the coming 3-year cycle, 2020 to '22. We specifically aim to achieve a more ambitious cost/income ratio now at 67% or lower by 2022, a pretax margin of 25 to 28 basis points, a new pretax gross profit growth target, focusing on the outcome rather than on the input factors. Assuming no meaningful deterioration in markets or FX, we will deliver more than 10% growth per annum in adjusted pretax profit over the cycle. And supported by active capital management, we will deliver over 30% of return on CET1. Our dividend and capital return framework remain unchanged and reflect our strong capital generation. Ordinary dividends will distribute 40% of adjusted net profits. This can be complemented by share buybacks or special dividends, and our ROCET1 target provides a clear incentive to continue to actively manage our capital base. The current CHF 400 million buyback program will run until end February '21. Let me summarize. We are and want to be a leading global wealth manager, and we will continue to shape our industry in the decade ahead. To achieve this, we will dynamically modernize our institution as we enter into the next 130 years of our history. We will strive to be most relevant to our clients through our distinctive value proposition, coverage, solutions and value add. We will provide an entrepreneurial environment for the top talent in the market and jointly own our clients in our business. We will foster innovation within our industry in wealth management but also beyond managing wealth. We will cultivate and leave a sound and robust risk and compliance structure, and we will shift from an asset-gathering strategy to clear focus on sustainable profit growth. Taking all these steps together will help us to become the most reputable and admired brand in wealth management. Thank you very much for your attention. And we will now be open for your questions. Who would like to start, please?

It's Daniele Brupbacher from UBS. I wanted to ask about, obviously, the targets, and you do deemphasize net new money. I think the set of targets are clearly group targets, and I would argue that they are not really directly applicable at the RM level. And you made that comment on Slide 17 that you upgraded the incentive and compensation system. So I would be really interested to hear how you changed the steering, let's say, measurement of the individual RMs because we -- I think, if I remember correctly, there were basically 2 models in the past. It was a discretionary and more an entrepreneurial model. Have you changed the KPIs? How do you measure it? And have -- what have you actually changed? And then probably just secondly, really -- sorry, it's a bit a simple question, but just start to the year, what have you seen? What's the trends? How does it feel like compared to a year ago or versus the end of last year?

Thank you very much. I think profit, in our view, is the most holistic measure for success. And probably, there's 3 components. There's assets, and obviously, net new money. But it also has, most important, revenues, especially in an environment where there is a challenge on the margin and, of course, cost. And focusing on profit allows us to holistically manage and to balance those 3 factors. And ultimately, this is, as you're saying, happening at the group level, but this has to happen at the regional level and has to transcend down to individual relationship managers. Obviously, the balance of those 3 factors might be individualized for some markets. And some market environments are more conducive to growth, while other market environments are more conducive to margin environments. We are upgrading, as we speak, our compensation and incentive systems, and we will develop and deliver this throughout this year. And as for the start of this year, it's a bit too early to make strong indications. I think the books are not fully closed yet on last month. I take, overall, a constructive stance as we go into 2020 with all the challenges that we have out there, obviously. Please?

It's Daniel Regli from Octavian. I have a couple of questions. The first is also about the new targets. Can you maybe lead me a bit through what has changed in your base assumptions, which led to your new targets particularly? You have lowered your cost/income target from 68% to 67% now, but the pretax margin has been stable, other targets have been stable. So do you expect higher provisions? Or what was the reason for this, let's say, inconsistency in moves in your targets? And then the second question is about the costs. Maybe can you give me just a little bit an update about the Atlas Project? And how much should we expect the step down in costs for 2020 or 2019? And is this step down already included in your CHF 200 million cost savings target until 2022? Yes. I'll leave it with this for the moment [ and do the others ] later.

I'll take the first half and leave the Atlas question to Dieter. I think our lower-cost target reflects the structural adjustment on the cost side we are entering into with the CHF 200 million cost program. The underlying dynamics behind the margin is that we believe there is further deterioration of margin in the market. This is a general pressure in the industry of maybe roughly 1 basis point per annum. And we think we can counter that trend, and we can work against it, but that's the backdrop against which this target is formulated.

On the second question, in 2019, we spent about the CHF 40 million on Atlas, as we forecasted, and this will not recur anymore, and it's not part of the CHF 200 million.

Michael Kunz, Zurcher Kantonalbank. Sorry to insist on the gross margin. We have seen declining gross margins across the industry for quite some time now, and everybody wants to counter it through more sophisticated products, through more mandates rolled out, et cetera. What makes you confident that you can improve it against the trend right now? And where would you source those higher-margin products, let's say, you mentioned pre-IPO financing and things? And the second question refers to relationship managers. You had a decrease, actually, during last year. Can you give us a certain indication how the mix is between risk managers that you were kind of happy to let go and risk managers that were, how to say, lured away by the competition? And following to that, the third question. As you mentioned, more team approach and joint responsibility. Is this also a measure that kind of that makes it easier then to defend clients if somebody gets tempted by a competitor?

Thank you. I think what makes us confident that we can hold and actually increase revenues with our clients is simply the success in the past. And we have been conducting service model rollouts in advisory over the last few years, where we have very successfully converted clients from a more transactional brokerage-type model into an ongoing paying-for-advice type of model. And we have mainly done that in Switzerland and in Europe and now started to attack other geographies. And the success of that model shows that if value is created, then clients will actually accept that and move into that direction. You talk about sophisticated products. I don't think it's a sophistication of product. I think the key to margin is the usage of solutions in the full breadth. This is why we have launched a few years ago also your wealth holistic advice, which has shown great steps towards a broader use of solutions on the asset management, the financing and the wealth planning side. And we plan to further continue that. Our front transformation is going to help us bring those solutions even better to clients. Let me make a quick statement on the team before I leave it to Dieter for the relationship manager numbers. Yes, I do believe teams, of course, have a degree of retention value. I think they even more have a degree of service value for clients. And serving clients through teams, having the right expert and specialist together, will create the better experience for clients and help us having long-term client relationships.

On the RM question, on the levers, I would say, about 2/3 of the RMs that left in 2019 were asked to leave and about 1/3 left on their own or were internally taking on another job. And that's a bit higher proportion of people we have asked to let go as in previous years due to the cost program.

Maybe we switch to 2 questions or 3 on the phone.

The first question comes from Anke Reingen from the Royal Bank of Canada.

Just coming back on the gross margin, please. Can you please tell us what you've done so far in terms of charging deposits? And I was interested to see that the deposit base continued to increase in the second half. How much of the benefits have already come through? And how much room do you think you have to support your gross margin? And then secondly, on your capital return policy, is at the 40%. But then you stressed a couple of times that you have room for active capital management. Do you have like a total payout ratio in mind longer term, especially once the buyback runs out in 2021?

Thank you for the question, Anke. On the first one, on charging negative rates, I would say, we are now around at 35%, 1/3 what we charge what we potentially could. But as we said earlier, we do it client by client. If a client is highly profitable but we could, from our rules, charge negative rates, then we don't do it. So it's an assessment on the client base. And we increased to that level in May. So in the second half, the full effect is already in the net interest income line. And the second one, I mean, we do have a target on the dividend payout, which is to -- which is 40% of the adjusted profit. And then as we do now complement from time to time, these share buybacks could also be a special dividend, but there is no target on the overall payout, just on the dividend.

So coming back to the first question, when you said you're already charging 35% of what you potentially could charge, how much is the total base as percentage of your total deposits?

I don't know. But I think we charged -- [ go on ahead ], you can read in Note 1 about CHF 25 million between Swiss francs deposits and the euro deposits. So you can do the calculation on your own.

One more question from the phone.

Next question comes from Jeremy Sigee from Exane.

Two questions, please. One is kind of linking a couple of points that have been discussed already, which is the lower net new money targets, but also the reduction in adviser numbers that happened during 2019. And I just wondered really what we should expect looking forward, whether your lower net new money or the lack of a net new money target signals less interest in hiring or less aggressive approach to hiring than we have been used to over the last 3 or 4 years. So that's my first question. And then the second question related to that is, I guess, also your appetite for acquisitions and what you see being available. Do you expect to find deals in the next year or 2?

Thank you for your questions. I think, in terms of asset growth, there are different sources of asset growth, and we obviously want to explore all those sources. Relationship manager hiring will continue also in 2020 and '21, even though without a specific target associated to it. We will put a lot of attention on the growth of share of wallet, so creating asset growth from our existing client base and working with them to attract a broader range of assets. And we will use all those diversified sources to continue growing our asset base. As to acquisitions, Julius Baer has been successful in the last decade in acquisitions and in integrations more than once. This is clearly a capability we have. We have always looked at the market, and we'll continue to look at the market. However, targets would have to come in the right geographies, our core markets, at the right quality and at the right price.

And on the adviser hiring, so the 80 number that you previously -- that your predecessor had talked about, so the 80 isn't really a number that we should think about anymore. Are you giving us -- is there another number that we should think about as realistic, if not 80, then a smaller number? Or you just prefer to have no target?

I mean -- yes. I think especially in 2020, it will be difficult, like in '19, as we run a cost program. So the net figure is -- will probably be much lower than the 80. But we still continue to hire, as Philipp said, in core market, in promising markets.

Taking the next question from the room.

Again, Daniel Regli from Octavian. I've got a couple of questions regarding the client behavior also in H2 '19. On one hand, maybe again, about the net new money number. Obviously, net new money from ex Kairos was quite encouraging in H2. My question is a bit how much of this was driven by Lombard lending, which obviously has increased towards the end of the year? And also, how much negative impact? Can you give us kind of an idea how much negative impact we have seen from the Atlas Project? So what would the net new money number have been if we wouldn't have had the Lombard lending and we wouldn't have had Atlas? And then the second question is a bit -- what is your sense about clients? Or what kind of questions you have about -- if you are discussing with clients on their margins or what they're willing to pay for your service, what is -- what are the worries of clients, particularly also in relation to now, we have seen quite a move, I think, clients more into equities again towards the end of the year? Now we are maybe running into a little bit of a correction. Is this kind of a downside for, let's say, longer-term discussions with clients what -- how they appreciate your value? And then the last question is on performance fees. I remember, in 2018, we had quite -- no performance fees from Kairos. And then in 2019, what was the contribution of Kairos performance fees in 2019 to the gross margin?

You take the first and the last -- first.

Yes. I start with the first one. Indeed, credit volume went up, as I've said. And therefore, there was also some portion of net new money coming from credit. It was not geared, especially to the second half. So it was throughout the full year, but it was also not over-proportional. So it was in, more or less, in the normal range. On the net new money, if you do add back what was related, outflows related to Atlas to this documentation review project but also to the negative rate, we started to increase in May, I would say, if you look at the 4.1%, we would have been closer to 5% with these 2 impacts. And then on the last question, performance fees from Kairos. In 2018, there were around CHF 24 million, and they were, more or less, double in '19.

Maybe one word about client behavior, and I look at this from a short-term and the long-term perspective. And the short term, obviously, I think coming out now, still out of the longest bull market in history. I think clients obviously have been climbing a bit to the wall of worry in the end. We've been always counseling our clients to stay invested as the cost of not being invested would actually have been higher. I think, obviously, the short-term event risks that exist on the political side, on the macro side, they are there. Even though such events, as tragic as they are, for example, right now, the coronavirus, they typically then lead to even more and longer stimulus so they might, in the end, even prolong the bull market. I think the key discussion we have with our clients, obviously on the asset side, is around having the right asset allocation and the right diversification. There have been no big changes recently. And then we have, obviously, broader discussions with them about how can you use the full range of solutions, including financing, but not cost-led, just adding to it to enhance the risk/return profile of the portfolio and wealth planning. And that's where a lot of the emphasis has gone in and will go in moving forward. The one in the back was first. The one who -- I'll take both of you. You first. You have the mic.

Yes. [indiscernible] Concerning your layoffs, could you describe where these people and which departments or countries these people have to leave? And I guess, it's not a -- none of relationship managers have to go, I guess. Secondly, concerning the investigation by FINMA. Do you have a feeling that FINMA were -- after looking at Atlas, will not say that you have to put up a supervisor? So do you have any comment on that? And do you have any idea when this investigation will be finished?

Thank you. To your first question, the reduction in jobs will be front to back. So it will affect front office, mid- and back office on a global scale. To the second question, yes, we have concluded Atlas at the end of last year and upgraded to KYC of all our clients. The investigation of FINMA that you're alluding to is still pending. And I do believe that the resolution of that is imminent. But that's all I can say about it.

Patrick Winters from Bloomberg. So I have a question regarding the investor base. From your conversations with them, are they on board with your plan to move away from asset gathering and moving to a different kind of strategy? And why is it the time now to move away from asset gathering? I guess UBS also seems to be doing a similar thing and focusing more on share of wallet and less on the total amount of assets. Why now?

As I've set out in the presentation, I believe this is a time where the secular dynamics in our market are changing, and they are changing in a market way, both on the client side but also on the external parameters. And I think margin pressure is just a reality in that -- in our industry, and we have to address this in a very consequent way through focusing rightly on revenues and the revenue potential. On the other side, costs have been sticky, and focus on cost is needed. And on the asset side, I think growing assets is almost [ quotated ] the easiest part if you do it regardless of the 2 other factors. But we exactly make the statement that we have to align our asset growth and balance that properly, both with margin and with costs. And in that sense, what we are doing and what we are planning is in the fullest interest of our share and bondholders. And in that sense, I think the markets can only welcome that. And we keep our capital policies and our management of that as it has been very sensible in the past. Let's take 2 more questions on the phone quickly.

The next question comes from Hubert Lam from Bank of America.

I've got 3 questions. Firstly, on your ROCET1 target. You've downgraded from more than 32% to 30 -- to more than 30%. Just wondering if you can explain why you've done that. Second question is on the cost/income ratio. You're targeting 67% by 2022. Just wondering if you could just give us the -- what your thoughts are in terms of the trajectory to get there. Do you expect the cost/income to improve gradually to that date? Or do you expect it to be relatively stable from where it is today, just given the costs are more back-end-loaded before coming down? So just thoughts around that. And lastly, on the ultra-high net worth client segment. It seems like you're focusing on it more now. Maybe you can give us some color in terms of how you plan on competing against the larger Swiss banks. What percentage of the flows that come from ultra over the last year or 2? And maybe also on the gross margin, how much lower the gross margin is put within the ultra segment versus your headline number?

I'll start with the third and leave the first 2 to Dieter. On the ultra-high net worth, this is not a new focus. This is a segment that we have been serving very successfully so far. And as we published from mid last year, more than CHF 150 billion of assets in that segment. Obviously, looking at it just from a gross margin perspective, that margin is a bit lower than what you would have in the high net worth space. That's also not unexpected. On the other side, this is a segment that actually is willing to pay for value added. I think the strategy -- our strategy hinges around bringing true and unrivaled expertise to those clients and do it in a completely unconflicted way, having structures, having credit specialists, having lawyers, wealth planning specialists, together with our client at one table and serving them out of one hand with one objective in mind and out of one P&L and again, combining our abilities in open architecture and our connection to the entire market with our strong and solid and deep balance sheet. And that is a very appealing value proposition to ultra-high net worth individuals.

To your second questions about the kind of the way from the cost/income ratio from where it was last year to the target in 2022, it's indeed, I would say, from today's viewpoint, gradually. Also, you have to take into consideration the restructuring costs that will impact the '20 and also a bit the 2021 result. But other than that, more or less a gradual improvement is on the plan. On the return on CET1 capital target, which we lowered from the 32% to 30%, this was a bit driven, or was driven, the slight decrease by a view that we will use more of the balance sheet so that the risk-weighted assets will be higher throughout this period. And therefore, the target is still a high 30%.

Next question?

The next question comes from Stefan Stalmann from Autonomous.

I have, I guess, 3 questions. The first one, regarding your adjusted operating expenses, do you think that your adjusted operating expenses in 2022 will be actually lower than they are in 2019? Second question regarding your ambitions in structured lending. Could you maybe talk a little bit about how big your book currently is and what kind of potential growth we may see here and including potential capital consumption in this area that you just hinted at in the previous question? And lastly, you had quite a marked drop-off in your credit risk-weighted assets in the second half of the year, despite continuing loan growth. And it seems as if you have potentially shifted some securities out of the old AFS category into trading. Is this shift sustainable? Or should we expect this to reverse relatively quickly in 2020?

Yes. Maybe I'll just answer the last question. I mean, the shift or the decrease of the credit-weighted assets in the second half was, on the one hand, driven by the -- by lowering the treasury portfolio, which, of course, is not sustainable. We will invest whenever we believe it's a good time. So that's more a timing issue. And the second impacting factor throughout the year was the decrease of the mortgage lending. That has, because we don't have a model, a very high-intensity of around 40% risk-weighted assets. And as this was gradually going down, we had a relief on the credit risk-weighted assets. These were the 2 trends. The second one, the mortgage portfolio, I don't see that this will go up dramatically. Probably, we'd stabilize but definitely not a sharp increase again. Then on the structured lending, today, this is a very, very small portion of our Lombard book, the Lombard book being about CHF 40 billion by the end of last year, and we only have started doing some deals, smaller deals to the end of 2018, 2019. So that's very small currently. And it's also too early to say what is the full potential and how will it affect the risk-weighted assets. But of course, normally, they have a higher intensity than a straightforward Lombard lending. Whether the adjusted operating expenses in 2022 are lower than in 2019, of course, that has to do with a lot of factors. On the one side, the cost, the CHF 200 million we want to save that are clearly -- it would clearly imply a lower cost base. But then, of course, we have also -- we expect also asset growth, revenue growth. So therefore, the performance-based payment will go up. We bill higher outside of the cost program, as Philipp explained. So I think it's to work out. But there will clearly, from an FTE perspective, as Philipp mentioned, there will be less people by the end of 2022 than end of 2019.

[indiscernible] Mr. Rickenbacher, your new slogan, most admired bank, sounds somehow familiar. There was another bank close by that used that slogan a couple of years ago. They have some problems now. How come that you use that slogan? What is exactly the meaning for you? What do you want to realize? And maybe a little bit connected to that. The market reacts negatively today, this morning. Are you surprised that the share has gone down some percentage points?

Thank you for the question. I think admiration and reputation has multiple dimensions. I think there is obviously a regulatory part to it. There is a client part to it. I think we definitely want to be admired and reputated among our clients for the value add that we offer them. But it's not just the clients. It's also the employees. We want to be the right employer for entrepreneurial talent and offer them the breadth and the depth of opportunities that they have seen in the past and they can see in the future. And ultimately, it's also about adding value to society. I think this is a way of phrasing that. We address multiple stakeholders, and we will work for them to add and create value into the future. As to the share price in the short term, I think you in the room can comment that better than I can. I will take a long-term perspective on that. And as we have said before, we believe that this is the right strategy for the next decade for Julius Baer. Please?

[indiscernible] A quick question about your geographic footprint. You mentioned that you're looking at that. I'm just wondering, can you give us any ideas on which markets you have in your mind here apart from Bahamas? And also on this line, how is the German market doing? And what are your ambitions there? Can you give me some details? And more broadly speaking, would you agree that Baer has put too much focus on geographic expansion under your predecessor?

In terms of geographic footprint, I cannot give you much more details. I think it's known that, under my predecessor, a focus on core markets has happened. And I think that strategy will be continued moving forward. We will review locations in the first half of this year in light of their commercial potential and of their future growth potential, and we will communicate decisions as we do take them. As for the German market, this has been an important market and the growth market for us in the last few years. We have significantly invested in that market and expand it, and we plan to continue our investments and our developments in Germany as we move forward. Yes, please. The front.

[indiscernible] Yes. So I was wondering about your pre-predecessor. So the question was could you expect to process the [indiscernible]