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

Ladies and gentlemen, welcome to the Julius Baer 2026 Half Year Results Presentation for analysts and investors. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. The presentation will be followed by our Q&A session. At this time, it is a pleasure to hand over to Alexander van Leeuwen, Head of Investor Relations. Please go ahead, sir.

Good morning, everyone. Welcome to the Julius Baer Half Year Results Call. I am Alex van Leeuwen, Head of Investor Relations. We are joined today by our CEO, Stefan Bollinger; and CFO, Evie Kostakis. Before starting, I would like to flag the important information provided on Slide 2 of the presentation. It is now my pleasure to hand over to Stephan for his introductory remarks.

Thank you, Alex. Good morning, everyone, and thank you for dialing in today. Let me start by giving you my take on our half year results. It has been an intense but highly productive first half for Julius Baer. Overall, we delivered a very strong operating performance, which was driven by exceptional client activity, especially in the first quarter. The results also reflect the depth and breadth of our capabilities and the ability of our team to help clients navigate complex markets and capture opportunities. Now, let's have a look at the figures. Asset under management reached CHF 547 billion, up 5% year-to-date, the highest level in our history. Net money amounted to a solid CHF 5.7 billion, which we achieved despite the ongoing implementation of our revised risk and compliance framework. We generated a record half year net profit of CHF 673 million, a like-for-like increase of 32% year-on-year. Our gross margin expanded to 87 basis points, and our cost income ratio improved to 62.6%, as we delivered further positive operating leverage. Capital generation remained strong with the CET1 ratio increasing to 18.5%, underscoring our solid capital position and financial resilience. Regarding capital distribution, I would like to reaffirm that any further share buybacks remain subject to approval FINMA. We continue to have an active and constructive dialogue with FINMA, but the time line is ultimately there. In short, we have no further update at this point. As you know, the first half also marked the start of our new 2026-2028 strategic cycle. We continued to progress steadily on our strategic priorities and are in execution mode on all 5 pillars: Growth, efficiency, risk and compliance, technology, and last but not least, our people agenda. First, we launched our growth program in February, and we are pushing to unlock organic growth. Front to back, everyone is involved. At the same time, we continue to progress on the implementation of our revised risk and compliance framework. On the operational side, our focus is on simplifying end-to-end processes taking a risk-based approach and leveraging technology, including AI. One example of how we apply a risk-based approach is the work on streamlining the client onboarding process in Switzerland. Among many use cases, an example of how we leverage AI is the work we did on material improving name and media screening. And on the fifth pillar, we progressed on the culture transformation agenda with emphasis on performance and ownership. Overall, I'm proud of what the team achieved and where we stand. Of course, there's still a lot of work ahead, and it's crucial we all remain focused on executing with discipline. With that, I hand over to Evie, to walk you through the financials.

Thank you, Stefan, and good morning, everyone. As usual, before turning to the results, I'd like to begin on Page 7 with an overview of the key market developments during the first half of the year, as these will help frame the context for our performance. Despite the shock in March, global stock market indices were up meaningfully, albeit with quite a wide dispersion of returns. For example, while the NASDAQ was up 20%, the SMI was up just 7% and Hong Kong and India were actually down more than 10%. Bond markets were a little changed. And while the Swiss franc strengthened slightly versus the euro, the franc saw some modest weakening versus the dollar. Prices for precious metals show significant swings, especially at the end of January, when both gold and silver, following record peaks experienced their sharpest 1-day sell-offs and most extreme intraday swings in decades. In terms of Central Bank interest rates, we saw the ECB hike by 25 basis points in June, the first time they raised rates since September 2023, whereas the U.S. Federal Reserve kept rates unchanged for now after 3 consecutive 25 basis point cuts in quick succession in the second half of 2025. The Swiss National Bank kept rates at 0. The third set of graphs on the bottom left of the page shows that the shape of the key yield curves continued to normalize. Finally, stock market volatility, as measured by the VIX, increased in the first quarter with a spike in March before normalizing in the second quarter. Moving on to Slide 8, which shows assets under management up [ 5% ] to an all-time high CHF 547 billion on the back of positive market performance, continued net new money and the stronger dollar. Monthly average AUM, important for the margin calculations, grew by 7% year-on-year to CHF 526 billion and with assets under custody up 10%, this brings total client assets to just shy of CHF 650 billion. Proceeding to net new money on Slide 9. A bit similar to what happened in H2. We started the period slowly but picked up some momentum in the last 2 months, ending with net new money of CHF 5.7 billion, and that's a 2.2% annualized run rate. Growth continues to be weighed down by the ongoing rollout of our revised risk and compliance framework. That said, every region added inflows with Western Europe, including Switzerland, delivering particularly strong results. Most of the inflows came from RM still delivering on their agreed business cases, typically over a 3- to 4-year horizon. And on average, they're performing right in line with our expectations. And on the topic of client leverage, after pausing in the first 4 months, we saw clients starting to take on some leverage again in May and June. So now let's go to revenues on Slide 10. Compared to the underlying result a year ago, thanks to the record high AUM and the exceptionally strong client activity in the first quarter, operating income grew by 12% to CHF 2.276 billion. Net commission and fee income grew 12% year-on-year to CHF 1.279 billion, largely driven by the 7% year-on-year increase in average AUM and a rise in brokerage commissions. Net interest income rose 80% to CHF 130 million, driven largely by lower deposit rates, resulting in total interest expense dropping 21% to CHF 714 million. Despite higher average loan volumes, interest income from lending fell 16% to CHF 529 million, impacted by lower rates. In Comvest, income from the treasury portfolio edged up 2% to CHF 270 million, supported by slightly higher balances. Net income from financial instruments at fair value through profit and loss grew 9% to CHF 876 million. The boost came mainly from strong performance in FX and metals trading as well as structured products, especially in the first quarter, before moderating in Q2 as conditions settled. On [indiscernible] swaps, income dipped slightly despite higher average volumes as the yield spread between U.S. and Swiss rates compressed compared to last year. On Slide 11, we regroup the IFRS revenue lines in an alternative way with the aim to better reflect the 3 key business drivers, i.e., recurring income, interest driven income and activity-driven income. For the definitions and how we derive this alternative split from the IFRS view, please refer to the appendix. I note that the treasury swap income figures are -- we use are based on management accounts. What this alternative view shows clearly is how the 12% year-on-year revenue increase was driven mainly by higher activity-driven income, which grew by 30% to CHF 710 million and by recurring income, which rose 10% to CHF 984 million. While the jump in accounting net interest income was tempered by lower treasury swap income there by emitting the growth in interest driven income to 2% or CHF 593 million. On Slide 12, we show the same in gross margin terms. The year-on-year increase in gross margin from just over 83 basis points to almost 87 basis points is essentially the result of the 5 basis point increase in the activity-driven gross margin to 27 basis points. and a 1 basis point decrease in the interest-driven gross margin to 23 basis points, with the recurring gross margin holding stable at 37 basis points. The exit gross margin in the last 2 months, i.e. May and June was 80 basis points, of which somewhat more than 37 basis points from recurring income, well over 21 basis points from interest-driven income and slightly less than 23 basis points from activity-driven income. By the way, in the appendix, you can find an overview of the gross margin development on the basis of the IFRS split. Now let's move on to operating expenses on Slide 13. Costs reached CHF 1.462 billion, an increase of CHF 36 million or [indiscernible] well below the 12% growth rate in revenues, i.e., delivering healthy operating jaws. The increase was driven by personnel costs, which were up to [ CHF 31 million ] or 4% to CHF 974 million, driven by a 1% year-on-year rise in average headcount and higher incentive and performance-related compensation. The rise in headcount was largely driven by further internalizations as part of our cost improvement focus as well as a one-off technical FT true-up in H1 related to the treatment of long-term absentees. General expenses held steady at CHF 371 million. This included provision and losses of CHF 37 million, up by CHF 1 million or 3% year-on-year. When excluding provisions and losses in both periods, we saw a 1% year-on-year decrease to CHF 333 million. This reflects a balance between higher spending on technology investments, which rose as part of platform modernization initiative in Switzerland and significant cost savings achieved through efficiency measures and internalizations. The sum total of depreciation and amortization was unchanged at CHF 117 million. The costs in H1 included CHF 7 million cost to achieve related to the new efficiency improvement program with fiscal year savings of CHF 11 million already benefiting the P&L in the first half of the year. Gross run rate savings of CHF 60 million have already been implemented by the end of June. As a result, expense margin improved by 3 basis points year-on-year to 54 basis points. And thanks to the cost management and, of course, the elevated gross margin, the cost-to-income ratio came down by almost 6 percentage points to 62.6%. However, it is important to note that this outcome benefit from an exceptionally favorable revenue environment, one that we do not expect to repeat regularly in our planning. Additionally, we are continuing to roll out significant investments over the next few years. For these reasons, I would caution against extrapolating the year-to-date strong cost-to-income performance into the near future. Slide 14 summarizes the profit development. Thanks to the all-time high in AUM, the pronounced [indiscernible] activity and the improved operating leverage, net profit reached a record high half yearly level of [ CHF 633 million ]. In terms of IFRS net profit, that meant profits more than doubled year-on-year. But considering large items impacting the results a year ago, the like-for-like increase was 32%. The pretax margin improved by 6 basis points to 31 basis points, while the return on CET1 capital increased from 28% to 32% despite a very significant buildup in capital as we will see in a few slides. Our forward tax guidance for the current strategic cycle is unchanged at between 18% and 20% and takes into account the current expected impact of the implementation of the OECD minimum tax rate in different jurisdictions. On to the balance sheet on Slide 15. Our balance sheet remains highly liquid with a loan-to-deposit ratio of 61% and one of the highest liquidity coverage ratios in Europe at 344%. And Year-to-date, the balance sheet grew 8% to nearly CHF 117 billion. The main driver was client deposits, up 8% to CHF 72 billion. On the asset side, loans rose 5% to CHF 44 billion with Lombard lending up 7% to CHF 36 billion, while mortgages edged slightly down 2% to CHF 8 billion. The treasury book also expanded up 50% to CHF 18 billion, supported by growth in both fair value through OCI assets, up 13% to CHF 10 billion and bonds at amortized costs, which rose 17% to CHF 8 billion. As there was relatively little change in the Swiss franc exchange rate versus the key currencies, the FX-neutral changes were not meaningfully different. Turning to the capital development on Slide 16. Julius Baer finished the first half of 2026 with a significantly stronger capital base. CET1 capital rose by CHF 0.4 billion to CHF 4.3 billion, a 9% increase at year-end. During the same period, risk-weighted assets grew to CHF 23.3 billion, an increase of 3%, driven by increases in credit risk positions and market risk positions. Overall, this translated into a CET1 capital ratio of 18.5% a 1.1 percentage point increase over the past 6 months, reflecting the highly capital-generative nature of our business model. The risk density was 20% at the end of June and we've slightly reduced our guidance for the cycle to 21% to 23%. Finally, on Slide 17, a quick review of the development in the Tier 1 leverage ratio as a result of the CET1 capital development and the impact of the USD 350 million AT1 redemption in April. Tier 1 capital increased by 2% to [ CHF 5.6 ] billion. The leverage exposure increased by 7% to [ CHF 120 billion ], basically in line with the growth of the balance sheet. As a result, the Tier 1 leverage ratio declined somewhat to 4.7%, but clearly remains very comfortably above the regulatory floor of 3%. With that, it is my pleasure to hand back to Stefan.

Thank you, Evie. Our financial performance in the first half of 2026 reflects good progress against our midterm targets, which we reconfirm today. There's still work to be done and we remain fully focused on delivery. Now let me summarize the key takeaways. We achieved a strong operating performance in the first half of 2026. The which confirms the strength of our business model and momentum in the execution of our strategy. The implementation of our revised risk and compliance framework continues. We are making steady progress on all our strategic priorities with a particular focus on reigniting organic growth and on driving culture change. Before we go into Q&A, I would like to take a moment to thank Evie, given today marks our last results call together. Evie, you have been instrumental in repositioning Julius Baer for long-term success. And on a personal note, I'm deeply grateful for your support since I joined the bank. This is a quite good bye, given the upcoming hand over to Pete, but I want to sincerely thank you and wish you every success in the next chapter of your career. With that, let's transition to Q&A.

[Operator Instructions] Our first question comes from Anke Reingen from RBC Capital.

The first one is just on the IM target. I think for the IMS dates, you told us that the number you expect to be higher by year-end. Can you just give us an update on where you think the relationship manager could at the end of the year and if you still target the [ 150 ]. And then just on the guidance on net new money, continued -- or the commentary about net you had to end the 2027 flows. Do you sort of -- I mean, given you already can give us that comment now. Is there like a target AUM base? Do you think that's at risk from your review to get a sense of how much of a headwind we should expect in 2027. And do you still expect net new money to be higher '27 than '26? Or is that too early to say?

Thank you very much for the questions. Let me take the first one. So we ended the first half of the year with 1,247 RMs. On a gross basis, we have onboarded 47 RMs with further 14 hires already signed and expected to start in 2026 and advanced recruitment discussions ongoing with more than 50 candidates. So we're very pleased about the pipeline. I wouldn't focus too much on the slight net decrease at June end because if you include the [ 40 RMs ] who've already signed the development would have been flat at June-end, RM levers are mainly driven by continued disciplined exercise stringent performance management. And I would also say that in terms of gross hiring, given the challenging environment we have, particularly in the Middle East, we would now expect to hire around 120 or so RMs in 2026. That said, we still expect to see a slight net increase in the total population of RMs by year-end.

On your question about the 2027 net new money guidance. In order to frame this, let me take you back to our strategy update in June last year. We are very focused on repositioning our business for the future, focus on quality, core wealth management, which can yield predictable, repeatable and sustainable performance for our shareholders. On the back of the new strategy that we announced in June, the Board approved a new risk and compliance framework last October. And since we have been working on implementing it. As it stands, we indeed anticipate that the impact from the implementation of the revised risk and compliance framework will carry over into 2027. As you know, we're in the wealth management business and derisking takes time, especially if you think about clients that have a complex setup, illiquid investments and other circumstances that means that it takes time to exit that. And ultimately, of course, we want to do these exits in an appropriate manner for the impacted clients. Therefore, we should expect some continued headwind into 2027. At the same time, the situation will normalize in 2028. This exercise obviously doesn't help flows in the short term, but it will lead to an improvement of the quality and long-term sustainability of our book. So my view is short-term pain for long-term gain. I'd also mention that at the same time, we are ramping up our growth initiatives. And while this takes some time, we expect some positive impact in 2017 already. So all in all, derisking will be normalizing on one hand and our growth initiative is bearing some fruit on the other hand, which is why we're very confident about our 2028 target. And in terms of how to quantify this, at this point, we reiterate the guidance we have given in May that net new money for 2026 will be below 2025. And we told you this morning, we expect it to spill over into '27, but it's too early to quantify the impact. It's impacting predominantly existing clients, but of course, also probes.

The next question comes from Ben Caven-Roberts from Goldman Sachs.

Two from me, please. First, just on personnel expenses and the cost income dynamic. So, if we look at the adjusted operating income, I think that was up 12% year-on-year and then personnel expenses were up 4% year-on-year. So would you see that's the right balance if we think net relationship managers are down slightly, as mentioned? I know that's a function of ongoing performance management measures. But if you're looking at the pay-for-performance culture and how it currently stands and within that personal expense line, if there's more moving beneath the surface and between different cohorts of the business? And then secondly, just net new money. Is there any other color you'd give on the regional split, particularly interested in how you see dynamics in Asia following some recent policy measures in Hong Kong and Mainland China.

Ben, thanks a lot for the questions. So on the personnel expenses side, obviously, we had a fantastic development in our top line in the first half, which we are super pleased about. And in that respect, we've also reflected that in performance incentive accruals. In terms of the cost-to-income ratio dynamics. Of course, the 62.6% print is a very good print. And I note that in May and June, we had an exit cost-to-income ratio of 63%. However, if you were to ask me about the outlook for the year, as I mentioned in my opening remarks, I would not extrapolate that performance into the second half of the year. The reason is because we do expect to see some cost built up in the second half of the year. So from today's perspective, assuming an 80 basis points gross margin input factor, and this is not a forecast, just an input factor, happens to coincide with the exit margin we had in May and June for the second half of the year, I would expect cost-to-income ratio to be below 67%. I foresee an increase in costs in the second half, largely driven by 3 factors. Number one, we have front-loaded investments, particularly in relation to the ongoing renewal of our Swiss corp banking platform, along with increased amortization from prior year investments. These costs are expected to weigh in, in the second half with obviously longer-term benefits materializing on a back-ended basis. Number two, we see an increase in cost to achieve in terms of our efficiency program. We just had CHF 7 million for the first half of the year and we see that number picking up in the second half of the year as we tackle more structural elements of the cost base. And third, of course, we're going to be stepping up our spending related to the hiring of new RMs as part of our targeted growth strategy. So these investments, coupled with our ongoing focus on cost discipline are expected to drive long-term operating leverage and support the achievement of our target of a cost-to-income ratio sustainably below 67% by 2028. But as I've always said, it's not going to be a straight line.

The next question comes from Benjamin Goy from Deutsche Bank.

Two questions, please. First, coming back on the question on the regional split. And not only this half year, but consistently over the last years that Europe, Western Europe is very strong. which should be seen as a more mature market. On the other hand, Asia is solid, but not the outstanding performance. So maybe you can comment on those two regions. What is Europe doing particularly well and where Asia could accelerate. And then secondly, CHF 23 million of credit losses. Obviously, [indiscernible] things is a small number in particular as compared to the last 2, 3 years, but still it's above the, call it, run rate we had previously. So just wondering with less risk taking on the lending side, where we can comment whether they are -- this is the new normal or whether there are still some smaller cases, part of the cleanup pushing up number?

Thanks a lot, Ben. I will also answer Ben's question from before on net new money development by region. So as we outlined in the opening remarks, all regions contributed to net flows with particularly quite strong contributions from Western European markets, including, obviously, their home market, Switzerland. If I look ahead, we continue to expect strong contributions from all key regions. In the Middle East, we saw some impact from the effects of the war but we did see some normalization of flows, particularly in May and June. The RM environment there remains challenging. With respect to Asia, I would say that in May and June, in particular, when we saw a restart of releveraging after it had paused or ground to halt in the first 4 months of the year. We saw a very strong contribution coming from clients, from our Asian franchise. They accounted for about 60% of that releveraging. So that's the commentary on the net new money regional developments. We are very, very bullish in Asia. In the longer run, the pace of wealth creation there is just astounding, and we're -- our franchise is very strong, and we're there to capture the opportunities. Now in terms of the credit losses, we had CHF 23 million worth of credit losses in the first half of the year. These are primarily associated with the income-producing real estate portfolio that we earmarked for managing down, as we announced in November IMS last year. I wouldn't say that there's any unusual development there. In fact, the exposure has come down by 20%, which is a pleasing development. And then the other thing I'd note is the market has stress tested our Lombard book twice this year, once in January with an extreme volatility in the precious metals space. and then once again in March when the war broke out, and it has passed with flying colors. So we're quite happy with the performance there.

Maybe just to add to Ben's question on the Chinese regulatory developments. I was in Asia last week and obviously something discussed with the local colleagues. And the team on the ground sees this repatriation regulations, mainly as a formalization of the process on capital flows in and out of China. As you know, all the official regulated channels, Wealth Management Connect, Stock Connect to Hong Kong will remain fully open. And our team on the ground doesn't see any reason for concerns. In fact, as we just highlighted, we're very bullish on the long-term prospect of the regions. The region we celebrate 20 years on the ground, and we're doubling down the investments there.

The next question comes Nicholas Herman from Citi.

Yes. questions. Just going back to the derisking, please. Could you just -- sorry if I missed this. Could you quantify the impact of the derisking in the first half form the revised risk and compliance framework? And I think you said it's too early to quantify. But I guess, just broadly, do you expect that rate to increase from here? And then just sorry, a final related question, does that impact of derisking in '27 mean that the progress on net new money will be more hockey stick now or are you still expecting a consistent part of the 4% to 5%? And then on the recurring margin, just curious if there were any performance related elements in your recurring margin in this period, which has been -- has expanded quite nicely. And I guess on a related note, have you -- you're already in the 37 to 39 basis points range. Does this make you more confident that you can get to the upper end of that range? Or I'm just kind of curious if you're how you're thinking now about the recurring margin from here?

Thank you, Nicolas. Let me start with the New Money question. You're absolutely right. we should think more of a hockey stick type of development, given by 2028, we'll have the higher derisking because of the implementation of the risk and compliance framework behind us. And of course, at the same time also, we will see the benefit of all the investments where we make on the growth side in terms of the specific impact, how to quantify given the effects both existing clients, but also prospects.

Nick, Evie here on the recurring margin, yes, we did a little bit above 37 basis points. We're happy about that. We've always said this is going to be a slow grind to get to the 39 basis points. The levers are well known. We talked about them extensively in the strategy update last year. What I would say is that we've had -- we've made -- we had quite some success in terms of our discretionary mandate flows. So discretionary mandate penetration has gone up to 17% from 16%, where it had dropped post the deconsolidation of a JV family office in Brazil. So yes, we like the development, the recurring margin. We are full throttle trying to do our best to get it up there. But as we've always said, it's going to be a slow grind.

On that, have you seen any impact on demand for private assets on the back of all the negative news flow? But I guess if penetration of private assets was to remain unchanged from here, would there be a lack of uplift in your recurring margin versus kind of the path that you set out in your strategic plan? And I guess, would you be able to roughly quantify that lack of uplift if private asset penetration were unchanged?

Look, there's a lot of moving parts. What I would say is that where we are in terms of our private market penetration, we have a lot of upside ahead of us, Nick. So I'm optimistic that we'll be able to get that gross margin associated with recurring up in the next couple of years. And I think, Stefan, maybe you have a couple of comments add?

Look, quite generally, I would say that in private markets, given there's a lot of money leaving the space that maybe you could argue should never have been there in the first place. This opens up opportunities for sophisticated high net worth clients like ours. And so we see lots of opportunities to take advantage of that, can think of private credit, I can think of some of the opportunities in Baer, but of course, also in venture.

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

I've got 3 questions. Firstly, on RM hires, can you talk about which regions are you hiring them from? Is there a focus in particular countries regions? That's the first question. The second question is about deleveraging to see a boost in May and June. Is this the start of where you think leveraging to come? And do you think this could be maintained? And lastly, just a clarification, Avi. I think you mentioned the exit margin in June. Did you say that NII interest given margin was 21 basis points? I just wanted to check if that was correct.

Thanks, Hubert. And thanks a lot for the question. So on the -- I'll start from the third one. On the gross margin for the exit rate for interest driven, it was well above 21 basis points. In terms of the releveraging that we saw in May and June, I think if you take into account the lately quite hawkish narrative that's coming from central banks across Europe and the United States and what the market is pricing in now in terms of potential rate hikes, I would be cautious to extrapolate the releveraging trend for the rest of the year. We don't do so in our budgeting. And as you'll recall from the strategy updates, that we did last year in London, we are -- we've put out those midterm planning targets, assuming a stable lending penetration at current levels. Then finally, the first question on RM hires, we are hiring across the board in all our key regions, with a particular focus in our key markets.

The next question comes from Amit Ranjan from JPMorgan.