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

Ladies and gentlemen, welcome to the Q&A for analysts and investors following the release of Julius Bär's interim management statement. I am Mathilde, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The introduction will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Alexander van Leeuwen. Please go ahead, sir.

Good morning, and welcome to this IMS Q&A call with CEO, Stefan Bollinger, CFO, Evie Kostakis and in light of the completion of our credit review, our CRO, Ivan Ivanic. The reference document for this call is the interim management statement or IMS, for the first 10 months of 2025, which was published as a media release this morning. As stated in the immediate release, the IMS is as usual based on unaudited management accounts and the numerical information provided in the IMS is based on non-IFRS alternative performance measures or APMs. For that, I also refer to the APM section at the end of the release where you will also find the usual cautionary statement. That cautionary statement also applies to the information provided verbally in this Q&A session. We aim to end the call latest at 9:00 Swiss time and therefore, we would like to ask you to limit yourselves to maximum 2 questions, please, so that other analysts also get a chance to ask their questions. With that, it is now my pleasure to hand over to Stefan.

Thank you, Alex, and good morning, everyone. Today's IMS is an important milestone in managing through our transition year 2025 for 2 reasons. First, we delivered a strong operating performance, which confirms we are on the right path in the execution of our strategy. And second, we concluded our credit review, which allows us to put legacy credit issues behind us and turn the page. Let me start with a few remarks on the results of our credit review conducted under the leadership of our new CRO, Ivan Ivanic. As you know, we announced additional loan loss allowances of CHF 149 million. These relate to a subset of positions amounting to about CHF 700 million, predominantly within our income-producing residential and commercial real estate book. All these loans were originated before 2023, and we have decided to manage them down. As for the size of those allowances, they are appropriate and adequate and reflect the thorough review, which was undertaken. Most importantly, they are fully in line with the overall shift in our strategy, as announced in June. And with our revised risk appetite framework, which we finalized over the summer. I am personally very pleased that this marks the completion of the credit risk review and allows us to draw a line under our legacy credit issues. The credit risk review is behind us. We have a well-defined risk framework and a strong risk management team in place, which will be completed with the arrival of our new Chief Compliance Officer, Victoria McLean by end of February next year. As a result, Julius Bär is simpler, stronger and fully focused on the future. Our results are underpinning that. As you can see, we have delivered strong operating performance in the first 10 months of the year. Our assets under management reached a record CHF 520 billion, the first time in our history that we have crossed the CHF 0.5 trillion mark. We managed to attract net client inflows of about CHF 12 billion despite the further derisking of our business. And we continue to optimize our footprint with the opening of Abu Dhabi and Lisbon. Our operating leverage is back into positive territories for the first time since 2021. And our capital position has further improved with the CET1 increasing 210 basis points since the start of the year. Today, thanks to the decisive actions taken we can now put our energy back where it belongs into serving clients and delivering sustainable, predictable and high-quality growth. With that, I'll give the floor to Evie for her take on the operating performance.

Thank you, Stefan, and good morning, everyone. In the first 10 months of the year, we generated close to CHF 12 billion of net new money despite the further derisking driven by continued inflows across our key markets in Asia, Europe and the Middle East. Together with rising global equities and despite the headwind of a much stronger Swiss franc, we saw a record client asset print and strong underlying year-on-year revenue growth. Our gross margin has remained broadly stable year-on-year at around 83 basis points on a like-for-like basis. And importantly, operating leverage has improved with the underlying cost-to-income ratio at 66%, down a full 5 percentage points so far this year. This partly reflects disciplined cost management and the early benefits of our efficiency program which remains on track to deliver CHF 130 million of gross savings on a run rate basis by year-end, exceeding our original target by CHF 20 million. And also very importantly, as Stefan mentioned, our capital position strengthened further with a CET1 capital ratio of 16.3% at the end of October, up 210 basis points since the start of the year. Let's leave it at that in terms of introductions and in the interest of time. Let's now move straight to Q&A.

[Operator Instructions] The first question comes from the line of Anke Reingen from RBC.

Firstly, can you please clarify your comment you seem to make on Bloomberg about when you would be ready to start discussion about share buybacks? Are you basically saying you could start before February or you would start -- you would only ask if not asked before February. If you can maybe just clarify what you're specifically referring to. And then on the net new money trends, are we still very much on track around the 3% for this year? And what are relationship manager trends in the last couple of months.

Maybe I'll just start and then Evie can add. In terms of the share buyback, what I was saying earlier at the media call is that we have completed some important milestones. Obviously, the conclusion of the credit review. We have done significant upgrades to our risk organizational processes. And with the appointment of our Chief Compliance Officer we now have -- we're going to have completed our new risk organization at the end of February. What I was referring to is that this means that we're not quite there yet to ask FINMA for a share buyback. And the earliest we'll do so if you can think about this is end of February that will even be a position to contemplate. But from my point of view, there are a number of things that we still need to work through on our side before we can ask them. And ultimately, of course, it's their call and to let us do this again.

On your questions around net new money and trends in relationship managers. So net new money landed at 2.8%, a little bit short of our 2% guidance. It's possible that we will land at similar levels for the full year. Let's see how the next couple of weeks stack up. Since the end of October, we've seen some more inflows above that CHF 11.7 billion. But let's see what happens until year-end. As you know, our net new money does continue to be impacted by ongoing client derisking, which is continuing on a linear basis as well as the stringent low performer management we've been deploying in the context of the efficiency program. As you know, we clearly focus on onboarding high-quality net new money with ensuring long-lasting client assets. And we reiterate our guidance, given the strategy update in June, we aim to gradually improve our net new money growth potential to 4% to 5% by 2028, supported, of course, by continued efforts in hiring quality RMs, and of course, a reactivation of our seasoned RMs. And now that's a good segue into the relationship manager trends. On a net basis, the number of RMs remained stable since June, and it will be fair to assume we will end the year at a similar level. However, on a gross basis, we continue to execute on our strong hiring pipeline in the last 4 months. We've added 50 high-quality relationship managers and another 30 associate RM, and this is very, very important to build internal talent. And as we already indicated in the first half, based on today's outlook and current pipeline, I think it would seem fairly reasonable to assume a gross onboarding number of around 130 for the year -- for this year. For next year, as we disclosed in the strategy update on a gross basis, our current plans are to hire more than 150 RMs per year over the strategic cycle.

The next question comes from the line of Ranjan Amit from JPMorgan.

The first one is on the credit review. If I read the statement, it says the charges reflect forward-looking risk, possibility of tighter customer refinancing during the process? Should we see these charges as conservative with potential for write backs, et cetera, in the future if these things don't materialize? And the second one is on costs, where the cost/income ratio progression is quite positive. Can you please talk about some of the drivers here? Has the adviser compensation model been approved? And any other things which are driving this positive progression, please?

Thank you for the question. Look, I would be very hesitant to characterize any provisions as conservative. That's not an IFRS term, as you know, we've characterized these provisions as appropriate, adequate and forward looking. I will pass on to my colleague, Ivan Ivanic, to give you a little bit more color. And then I'll take the cost-to-income ratio question.

Yes. Thank you, Evie. So look, we benchmarked our entire credit book against our new strategy that has been announced in June and against the revised risk appetite that has followed on after that announcement and strategy, and we decided to manage down a subset of residential income producing and commercial real estate mortgages. Now these positions will be managed down in an orderly and disciplined manner, respecting our contractual obligations working in a consensual way with our clients with the main goal to protect shareholder value. And so on the basis, I would say and I would just repeat what Evie said, we consider them adequate, appropriate and forward-looking.

Thank you, Ivan. And on the cost-to-income ratio, Amit. So the underlying cost-to-income ratio improvement over July to October is a result of both strong revenues and lower costs. On the revenue side, it mainly comes from treasury swap income, where we had 22 basis points of gross margin contribution and other commission and fee income, where we had about 11 basis points of gross margin contribution. On the cost side, this reflects the positive developments from the cost program, which we're executing at pace, including a lower average number of full-time employees, very stringent, nonpersonnel expense management, including better demand management and tight vendor control as well as internalizations. But please note that over July to October, we have also seen lower costs to achieve, including restructuring costs than expected and some seasonality in the summer months, things like lower holiday accruals. Hence, the 63% cost/income ratio for July to October should not be extrapolated for November to December as the seasonality effect will be reversed, then we will likely book higher CTA versus July and October.

And Amit, on your question on the new compensation framework for relationship managers. We have revised the compensation framework as part of our culture transformation. In the summer, we implemented a new relationship manager compensation framework. Basically, it aligns the incentives of the relationship managers with that of the bank and hence with our shareholders. We have also updated our scorecard for senior managers, all in light to make sure that we have the right incentives and we create the right accountability and ownership in the first line of defense.

We now have a question from the line of Ben Caven Roberts from Goldman Sachs.

Just 2 please. First, a follow-up on the credit provision. So could you please just shed a bit more light on the CHF 149 million effectively and how you expect that to materialize what you really see driving that provision in terms of how it would materialize into loan losses? And then comments around your level of confidence regarding the rest of the loan book, just given I see you note that it's predominantly related to those income-producing residential loans, but the rest of the book seems resilient. And then maybe second question would just be to reconfirm on the DOJ that, that is still something you're expecting to get the benefit of op risk in the CET1 that you'll book at the end of this year.

So on the credit provisions or the loan loss allowances, we will be booking them all in November. I pass on to my colleague, Ivan for some further color on the loan book.

So look, as we said in the statement, this approximately CHF 700 million book is predominantly income-producing residential and commercial real estate. The collateral is mostly located in Switzerland. The rest is in Western Europe. And there are several positions, let's just say about a dozen. The spread here is somewhere between 100 and 150 basis points. The reason why we're doing this is because since these loans have been initiated before 2023, the wealth management business case did not materialize. And so these are mostly or at large lending relationships. The provisions are considered adequate and appropriate as I keep on repeating and we are planning to manage them down in a consensual way working with our clients, respecting our contractual obligations. And as I said before, our main goal is to protect shareholder value. Now with regards to the rest of the book or to the other parts of the book, so the total book size is about CHF 42 billion, so not much has changed, of which Lombard is CHF 34 billion and a subset of those CHF 34 billion, about CHF 4 billion is in structured Lombard. Now the difference between standard Lombard is that this is listed diversified and liquid collateral, where structured Lombard is also listed but more concentrated and less liquid. And when I look at the remainder of the mortgage book, which is CHF 9 billion total in size. The LTV in that book is overall just below 50%, and it is at large a residential owner-occupied mortgage book in Switzerland.

Thank you, Ivan. And on your second question, Ben, as we said in the full year results earlier this year and the half year results, we do expect the operational RWA that's associated with the loss from 2015 to roll off of our operational loss database as of December 31 of this year, and this will have a positive CET1 pro forma impact of more than 100 basis points.

The next question comes from the line of Giulia Miotto from Morgan Stanley.

I have 2. First of all, the new Chief Compliance Officer, who starts in February. What is the risk that the first thing she does when she starts is launching yet another review of client books, which may lead to, let's say, some further clients leaving and therefore, impacting the net new money rate for next year? And then secondly, on the FINMA enforcement action, what is left there? Because now the credit review is complete, you have a Chief Compliance Officer, changed the remuneration policies. So what is left and then a small ask, since you are changing things and improving things, in case you are considering moving to quarterly reported that will be welcome from our side. Thank you.

Okay. Giulia, let me start with the easier with the 3 questions. Unfortunately, reporting, it is under consideration. However, we haven't yet decided to pull the trigger yet. I'll leave it to Stefan to comment further with the full year results if and when we might move to that. But it is something we have been discussing and we have taken your feedback. Maybe, Stefan, do you want to address the first question?

Yes, absolutely. And look on quarterly reporting, it's just a matter of prioritization. And I hope you understand that we're focusing on other things, and we will want to be more on steady state before we contemplate doing that. I mean in terms of your question on the new Chief Compliance Officer, I would say, first, of course, I'm very pleased that we're going to have our risk organization complete with a distinct risk compliance and legal functions. And that's a really important step forward. Second, I would say, de-risking is an ongoing and continuous process in wealth management, particularly if you think about AML risk that is inherent in cross-border wealth management. So you're never done. And I would also highlight that we have done a lot already to think about our new risk appetite statement where we naturally have self impose some constraints on what type of risk we want to take. We have created a lot more accountability and ownership in the first line. I talked before about the compensation changes and all the culture transformation we are doing. So overall, we feel very good about the status of where we are and where we're going.

And just maybe on the second question, I mean, look, it's hard for us to comment. What we can say is that we continue to have a very active and a very constructive dialogue with our regulators, and we're working very hard to build a relationship of trust by being proactive and transparent. It's a top priority for Stefan since his arrival, but I think it would be not appropriate for us to comment on any enforcement proceeding.

We now have a question from the line of Hubert Lam from Bank of America.

I've got 2 questions. Firstly, on flows. So if I look at the July to October flows and I back it out, it's about 2%, 2.5% annualized. So how much of this weakness here is due to derisking and deleveraging as we probably expect that Asia would probably be pretty strong. So just wondering around what's going -- the dynamics within the last 4 months? And also, where are we in the client de-risking process? Should we expect more to come in for the rest of this year? And how much also into 2026. So that's it, a question on flows. The next question is on the credit provisioning. So any assets under management that are associated with the loans winding down and will there be any impact on risk weightings just because of the losses you're experiencing in 2025?

I'll start with the second question. So in terms of AUM attached to this subset of loans in the portfolio, we have decided to manage down is de minimis. In fact, it's less than CHF 170 million. In terms of the risk density of these exposures, it's around 100%, Ivan before referenced that most of these have a spread between 100 and 150 basis points. So you can well imagine that by managing these down, we are bringing capital to redeploy in our standard Lombard book, which has a risk density of around 10% or a traditional mortgage book, which has a risk density of around 38% and comes at a spread at the lower end of the portfolio we're managing down. So much better risk reward in terms of profitability going forward. Now your questions on flows. You're right, in the July to October period, we did about CHF 3.7 billion, which is 2.3% on an annualized basis. We still saw some releveraging. In fact, we saw about CHF 0.9 billion of deleveraging from July to October. And year-to-date, we're about at CHF 1.3 billion. I wouldn't read too much in terms of idiosyncratic derisking, as we've said, that derisking will continue on a linear basis and it's something that's hard to time. So I wouldn't read too much into that.

The next question comes from the line of Mate Nemes from UBS.

I have 2 questions, please. The first one would be still on the credit review and provisions. So it sounds like the CHF 149 million charges came out at least partly from the finalized credit framework and risk appetite that you did over the summer, i.e., after the June Capital Markets Day. Could you confirm better bit this new framework and risk appetite, you are not doing any, let's say, lending activities without a strong wealth management case. That's number one. And number two, if you could talk a little bit about the delta between gross and net hiring, perhaps also beyond this year. So it seems like you're on track for 130 RM hiring this year. But Evie, you mentioned that on a net basis, it's broadly flat in terms of RM numbers and the situation should remain the same by the end of the year. When can we expect to have net hiring also going substantially higher? Is that simply a function of the derisking exercise that you are doing this year and that means next year, you should be on a firmer footing and you can grow RM numbers sustainably?

On the first question, with respect to our new risk appetite tolerance framework, which we finalized over the summer. Indeed, one of the key tenets is that we lead with wealth management and not with lending. But I'll pass it on to Ivan to give you a bit more color.

Yes. Thank you, Evie. So first of all, you asked whether these provisions have happened after the June Investor Day. And the simple answer is yes. And the reason why is because we have benchmarked our entire book against the new risk appetite framework, which has followed the announcement of that new strategy. And probably, rather than going into too many details with regards to what exactly has changed in the policy, let me give you an example, imagine, we have a client with, say, CHF 50 million in asset under management and they want to diversify their investment strategy into a commercial or income-producing residential real estate, and the request alone of about CHF 20 million, that is certainly a deal that we would look at. However, if there is a client with, say, CHF 5 million and they want a similar loan amount of, say, like CHF 50 million or CHF 20 million or whatever else, this is a business that going forward, we will no longer entertain. And that's probably the main change and the best way to explain this.

And on the gross and net hiring dynamics in the outer years for relation managers, Mate, let me just remind you that we have been running a pretty substantial cost program this year, which has entailed an intensification of low performer management. We've also radically transform the front operating model, and that has led to some moving pieces. And hence, the numbers that I quoted before in terms of relationship managers on a net basis for this year, for the outer years, as we said in the June strategy update, we are looking to hire in excess of 150 RMs per year, and that will translate to a positive net number of RMs year-on-year. That's what I can say right now. And maybe to give you a little bit more color in terms of our relationship management base today, we have about 401 RMs that are on business case. So that's roughly 31% of the total RM population. We're very pleased with the business case achievement rates of these relations managers on business case, they've -- they're tracking at around 71%. And as you know, we plan the numbers at 60%. So if we can continue to excel in doing quality hiring, I'm confident that next year, things will look good.

[Operator Instructions] We now have a question from the line of Jeremy Sigee from BNP Paribas.

Can I just press you a bit more on the comments you're making about seasonality and costs? Just either qualitatively what you're expecting to pick up in cost to be in November, December? Or I don't know if you want to give us a sort of idea of a run rate at the second half. So if it was 63% in July to October, what should we normalize to for the second half as a whole?

All right. Thanks for pressing me further, Jeremy. Okay. Look, definitely, you should not extrapolate the 63%. There will be some seasonal costs that hit in November and December. So my best case from where we stand today is, on an underlying basis, somewhere below 69%.

For the half year, that's for the second half?

For the full.

For the full year?

Yes.

The next question comes from the line of Stefan Stalmann from Autonomous Research.

I wanted to get back to the credit risk provisions. Are the loans actually Stage 3 and are those stage 3 provisioned and are those new Stage 3 loan...

Stefan, sorry to interrupt your line is not very clear. If I -- let me try and translate your question because you're cutting off a little bit. You're asking whether these loans are Stage 3?

Yes, indeed and if there were already Stage 3 loans or whether those are new stage 3 loans. And I hope you can hear me, but I also wanted to ask about the recent media reports about BAER using Temenos for its new core banking platform. Can you give us any hint on the investment volume of that project and the timing?

Yes, super. Thank you. So let me start with the loan loss allowances. These are predominantly performing loans with increased credit risk. There's a small balance that are impaired, Stage 3, you will see the movement of exposures, loan loss allowances by lending products, so mortgages and Lombard in the equivalent of Note 21B in our annual report. So that's question number one. And question number two, on the IT infrastructure. As we said in our strategy update in June, we intend to upgrade our core infrastructure in Switzerland and Guernsey. As you know and appreciate, we don't comment on individual vendors, but we are looking in the long run to harmonize our operating model, hence, you can draw your conclusions from that. And with respect to investment volumes, they are embedded in the cost-to-income ratio targets that we laid out as part of our midterm plan in the strategy update.

[Operator Instructions] We now have a question from the line of Nicholas Herman from Citi.

I have a couple of questions, please. So thank you for the clarification on the full year cost-to-income ratio of less than 69%. Can I just ask you, I mean that still implies a level of cost that is notably below consensus for the second half. So just wondering, is that going to be -- appreciate the July to October costs are always seasonally lower, and we shouldn't extrapolate this, but just wondering whether the -- on a full second half basis, whether that's a good base for future years or whether available compensation is particularly low, for example, in terms of accruals. And then my second question, please. You said that year-end -- by year-end, the number of relationship managers will be stable versus the end of October. So clearly, the rate of turnover of relationship managers has remained elevated. Can I just confirm that you still expect double-digit attrition next year, please? In percentage terms, that is.

Yes. Super. Thank you, Nicholas. So on the second question, I would say, high single digits in terms of attrition. We've done -- we've intensified low perform management this year, but I expect that to normalize next year, so high single digits. And in terms of the outlook for costs, look, we're currently finalizing our planning cycle, and we will provide a comprehensive update on strategy and financial outlook at the full year results in February. Until then, I think it's good to reiterate the framework that we shared both at the strategy update and the half year. Transformation and franchise investments will be front-loaded with associated costs coming through in 2026 and beyond. So of course, while the recent cost-to-income ratio developments are very encouraging, the road to sub-67% remains back-end loaded. So the biggest set both investment and payoff lie ahead in '26 and '27.

We have a follow-up question from the line of Ben Caven Roberts from Goldman Sachs.

Apologies. It was just a clarification to check that below 69% for 2025 was on an underlying basis. I think you've already answered that.

Yes, it is.

We have a follow-up question from the line of Nicholas Herman from Citi.

Since we're at the tail end of the call, I just thought, I'd sneak in a third question, please. Just how much income-producing real estate is remaining in the book following the write-down of this CHF 700 million?

So the total amount of residential income producing and commercial real estate is about 1/4 of the mortgage book. And this includes the CHF 700 million.

Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Stefan Bollinger for any closing remarks.

Thank you all for your questions and your attention. As I said before, today, Julius Bär is stronger, simpler and fully focused on executing on our 2026 to 2028 strategic cycle. I'm looking forward to speaking with you again at our full year results presentation in February. Thank you, and have a good day.

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