Vontobel Holding AG (VONN) Earnings Call Transcript & Summary

Ladies and gentlemen, a very warm welcome, and thanks for connecting to Vontobel half year results conference. Thank you also for taking the time in this quite special circumstances. I am here together with Martin Sieg, our CFO, who will move on to different things in life after today's conference. I will say a few words of appreciations at the end of our conference. I am also here together with Thomas Heinzl, our new incoming CFO, who will take over after today's presentation. Despite the special circumstances, we will follow more or less the regular script. So I will kick off with the highlights about half year closing. I will then also comment the status of our transformation into a pure-play, buy-side investment firm where I will focus on the long-term levers for growth. After that, as usually, Martin will share with you the details and all the numbers on half year closing. And then I will be back very quickly on targets and on outlook and how we have started into the second half year. After that, we will all be happy to have your questions. So let me kick off with the most important point of view from my point of view. Our transformation into a pure-play, buy-side investment firm is: a, on track; b, it has proven to be very resilient and robust during very unprecedented times; and c, it lended itself very nicely to organic growth, and it will continue to do so going forward based on our 4 strategic levers. Now let us turn to the facts and figures that underpin this assessment, and let's turn to Page 4 of our presentation. So our advised client assets have rebounded nicely to CHF 218.6 billion in advised client assets. Assets under management are back to CHF 193.4 billion. We have been -- we are very happy with the trust that clients have put in us so our net new money is at CHF 7.4 billion, which translates into an annual growth rate of 7.5%, above our own ambitious target range. Operating income is flat at CHF 623 million with a higher income quality and slightly up on a recurring and adjusted basis. Profit before tax is up by 4%, respectively, 6% on an adjusted basis. Group net profit, due to an uptick on the tax side, is flattish at CHF 129.2 million translating into earnings per share of CHF 2.18. Return on equity remains resilient and strong at 13.4%, a bit below our own target, but I would say at very decent level given the current environment and also against the backdrop of another step-up in our capital position with CET1 at 13.8% and Tier 1 at 20.2%. Let me list a few key points for the half year numbers. As I have stated in the introduction, the strategic realignment announced in December 2019 is largely implemented and completed, and I think the performance of H1 confirms the viability of this strategic direction. We have been resilient during the corona crisis. We have been fully available seamlessly at the disposition of our clients, both from a presence perspective as well as technically with all our processes on a global basis. And I want to extend a very big word of appreciation and thanks to all our team members and partners within Vontobel, who have done a really remarkable job during lockdown and during COVID. We're also very happy on -- about the very strong technical platform in which we had invested consistently over the last years, so we could now leverage on some of the facts like that all our workstations are globally run on a Swiss private cloud. Our digital onboarding process is live and working, so the investments toward smart technology have started to pay off as well during COVID. Strong net new money, as we already saw, we have 7.5% growth. Worthwhile to mention, positive across all asset classes. So net new money in both fixed income, equity and multi-asset class that obviously also contributes further to the diversification of our business, but obviously also implies a different business mix, but which is more stable and more resilient through the cycle. Good return on assets with a very large proportion of stable recurring commission income, and Martin will shed a lot more light both on the levels as well as on the composition of our margins. Recurring revenues in our core business is even slightly up due to higher average assets under management. Transaction-based revenues, obviously, positively impacted by market volatility, but to a lower degree than perhaps in some industry perspective as we have a higher -- much higher degree of assets under mandate, and as also the Lombard loan penetration of our Wealth Management book is lower and, therefore, there was less need for high transaction activities. On the risk side, we protected our conservative risk profile also during COVID. No credit losses, which is a strong proof point for both the conservative approach on Lombard lending as well as for the soundness of our operational processes. And also going forward, no exposure to corporate lending. We are not exposed to the looming impact on European and Swiss banks due to the expected recession. Therefore, also risk-weighted assets are in line with end-December 2019 numbers. So much for the highlights on the half year numbers, let me turn to the strategic levers going forward. First point I want to stress is our announcement of last December is not to be seen as a U-turn, but as a further, though significant, but simply as a further sensible step on our journey towards becoming a pure-play, buy-side investment manager. We have been successfully on this journey now for more than a decade, delivering growth in advised client assets of 11% on an annualized compounding basis and, therefore, doubling the natural growth that was provided by the global market for wealth. We now turn to that next phase to become this pure-play investment manager, and we stress 4 strategic levers. We are both client-centric and investment-led. We see this as 2 sides of the same coin by truly understanding the needs and requirements of clients and answer their requirements with convincing investment propositions. We believe in technology. Technology enables us to be more relevant, to be more specific, to be more proactive in the client experience. And it helps us to distribute our content and our offering on platforms, ecosystems, which would not be accessible without technology. And we are committed to our great people. We are powered by people. People will continue to make the difference in our industry. And actually, the more investment-led you are, the more client-centric you are, the more technology-driven you are, the more important people are and we are aware of this fact. In order to reap the full benefit of this strategic direction, we have also adjusted our operational model as shown on Page 8. So we have moved away from the classic silos that our industry was used to and have built an organization where client needs meet our capabilities and investment propositions directly. Therefore, we have structured our distribution efforts in 4 client units: Asset Management, and the other ones, and I will get back to them in more detail. And we have concentrated our expertise in Centers of Excellence. The most important and key one, obviously, our investment organization that rests and will rest anchored in our multi-boutique approach comprising more than 300 investment professionals located from New York to London to Zurich to the emerging Asian investment hubs. Structured solutions and treasury, which continues to provide risk management offering to our clients and the market-leading offering in B2B structured investment solutions. And obviously, technology, which underpins all endeavors across our firm. We also strongly believe that this brings the benefit of giving every specialist an area where he can truly feel at home, but at the same time, a level of collaboration that makes it possible to produce the solutions our clients are looking for, and it's also a work environment that attracts the next generation of talent. All our client units tap into significant and growing pools of assets and fees. Asset Management, obviously, remains focused on the very well-known client groups, from pension funds to plan bundles, to insurance companies, to the global banks and global buyers of investment funds. Our asset class specialization, our boutique approach and our global sales model has proven to be very successful and very robust. We continue to invest in regions, U.S., Asia, Japan and additional European countries, and we continuously develop the global bank client segment. On the Platforms & Services side, we focus on smaller intermediaries, IFAs and external asset managers in a selected number of markets to whom we bring the overall offering of Vontobel, and we continue to provide to be the leading B2B provider of structured products, including our market-shaping platform territory. Wealth Management will continue to be an employer of choice for the best RMs in the industry. We continue to invest in our footprint. We continue to invest in selected focus markets. As an example, our recent announcement of our local advisory and service hub in Milan. And we have the breadth and the capabilities to address increasingly also ultra-high net worth individuals with an investment-led offering. In Digital Investing, we have pooled everything that touches the client digitally. Everything that reaches out directly to the self-directed client to the end investor on digital channels has been pooled in this client unit. We have a very strong public distribution footprint in Europe, Switzerland and in Hong Kong, and we will build from that position of strength. This position of strength is further underpinned by the current diversification of the book of business, as shown on Page 10. So very strong international diversification when we look into client domicile with 90% of the business from our focus markets. And a true proof point to our positioning as an investment firm, over 86% of assets are under mandate, so either discretionary or advisory. So we have largely moved on from being solely an execution custody or leverage platform, which was the old banking model. Core for that journey going forward is, obviously, our ability to produce convincing investment solutions. What you see on Page 11 is the most diversified book of business Vontobel has ever displayed. So with a strong footprint on the equity side with 2 boutiques, fixed income, 2 boutiques and the large book of multi-asset, obviously, also incorporating our offering for Wealth Management clients. On the behind, this multi-boutique approach are these 300 investment managers. And to give you a small example on the trust and the endorsement we get from clients in H1, Vontobel has been #2 in pan-European fund flow, so a very strong endorsement by our clients. Another key offering is our ability for structured products, both in Switzerland as well as in Europe and Asia, where we have been able, during the crisis, during a crisis of extreme stress, during COVID to expand market shares in each and every market where we are present. It's obviously not only the breadth and the diversification, but also the quality of the book of business we have, and we continue to enjoy strong medium- and long-term performance. We have all witnessed a phase of severe market stress, and we all remember days when gold, government bonds and equities all went south. So obviously, these phases of liquidity stress are not always the best to recognize and discern quality. But we're very happy that all our investment processes have proven to be robust, have proven to be repeatable and investment returns and performance quality is in line with our expectations going forward. And we will see through this phase of market dislocation. And I think the flows that were positive both in Q1 and Q2 are testimony to this conviction. On top of the performance quality, it's also important that your capabilities are anchored in areas of global capital markets where clients see future return potential and where client demand is. And we think we have a very well-established capabilities in significant pockets of demand. Emerging markets, which is given global GDP and global demographics, very strong contender for midterm to long-term growth, we are one of the most distinguished emerging market managers both on the equity side as well as on the debt side. In fact, we are very happy and proud about it. ESG is increasingly becoming a global phenomena and is increasingly going mainstream. We have been ready for that since the early '90s where we started, and we are recognized as one of the leaders in ESG, running more than CHF 30 billion in ESG-compliant assets. And we are also being recently nominated by one of the leading industry associations as one of the leading Swiss provider of ESG solutions. Fixed income. What COVID has shown, lower interest rates are here forever. They are here at least lower for longer. And obviously, in that environment, both multi-strategy funds as well as credit-linked strategies are key. And the success of our 24 Asset Management boutique is testimony to that with strong results for investors, strong protection for our clients and also strong net new money. Multi-asset, a key component already in our flows and also one going forward as, obviously, portfolio construction has become very demanding for clients as expected returns in all classic asset classes are lower. We have now crossed the 3-year benchmark in our 3-alpha proprietary investment approach that we offer exclusively to our Wealth Management clients. We're very happy with the track record and we're very happy with the level of endorsement, both on the advisory as well as on the discretionary side. So strong match between client demand and proven capabilities, which is a sound basis going forward. That's it from my side on an update on where we are on our transformation to this pure-play investment firm and what the key levers for future growth are and will be. With that, I'm happy to hand over to Martin, our CFO, for the financial results in more detail.

Thank you very much, Zeno. Good morning, ladies and gentlemen. I would like to start my presentation by looking at the development of advised client assets on Slide 15. For Vontobel as a wealth and asset manager, advised client assets form the basis for the continuous generation of fee income. Consequently, the volume and composition of those assets are important factors determining our success. Advised client assets were down significantly at the end of March compared to the level at the start of the year, but recovered during the remainder of the first half of 2020. As of June 30, 2020, advised client assets totaled CHF 219 billion, coming close to the level at the start of the year of CHF 226 billion, as you can see on the left-hand side of this slide. The decrease of 3% or CHF 5.5 billion in assets under management was driven by negative FX impacts of CHF 4.5 billion as well as negative market performance of CHF 8.4 billion. This was a big part, offset by strong net new money generation of CHF 7.4 billion, corresponding to 7.5% growth annualized, exceeding our ambitious target range of 4% to 6%. Let's have a closer look at the net new money flows in the first half of 2020 on Slide 16. Confidence into the quality of our investment solutions is reflected by the strong net inflow of new money. Our institutional clients, in particular, with their high demand for our investment products demonstrated their trust in our long-established, stable investment processes and our investment expertise. In Asset Management, our expanded global sales network also had a positive impact on the growth of net new money, which totaled 11.5% on an annualized basis in the first half of 2020, significantly exceeding our target range of 4% to 6%. Platforms & Services, the second area serving institutional clients, also achieved good inflows. It offers services for financial intermediaries, especially external asset managers and banks at CHF 0.4 billion, or 4.8% on an annualized basis. Growth in net new money in Platforms & Services was within the target range of 4% to 6% in the first half of 2020. At the same time, private clients around the globe adopted a mood of caution during the market crisis caused by the corona pandemic. In addition, health-related measures as well as travel restrictions that were necessary due to corona significantly hampered the acquisition of new money from private clients, and this also impacted on growth in net new money. Therefore, total net new money in Wealth Management was CHF 0.3 billion corresponding to an annualized growth rate of 1%, which is below our defined target range. As you can see on the chart on the right-hand side, net new money was well diversified with all asset classes recording positive flows, especially fixed income continued to attract very good inflows despite market flows in the industry, generally being hit hard during the corona crisis. Please turn to Page 17. Assets under management comprised around 70% institutional assets and 30% private client assets at the end of June 2020. Compared to the end of 2019, assets under management declined by 3% as strong net new money partially offset FX effects as well as negative market performance in all asset classes. Compared to June 30, 2019, AUM increased by 4%. The average assets under management in the first half of 2020 reached CHF 191 billion, exceeding the average of CHF 180 billion in the first half of 2019 by 6%. On the institutional side, assets under management declined by only 1% in the first 6 months of the year, as the boutiques in Asset Management continued to attract strong inflow of new money. The development of private client assets of minus 5% compared to the end of 2019 not only reflected difficult markets, but also the general mood of caution among wealthy private clients. The chart on the right-hand side gives you an overview of our well-balanced asset base. In recent years, we successfully managed to broaden our asset base in terms of asset classes. The assets under management are well diversified by asset classes. At the end of June 2020, CHF 106 billion or 55% of assets under management were invested in multi-asset class products, 23% in fixed income products and 22% in equity products. Let's have a look at the gross margin development of the different client units on Slide 19 (sic) [ Slide 18 ]. Overall, recurring commission income was very stable in all asset-linked businesses, contributing 89% of commission income. This figure is testimony to the business model of Vontobel as a wealth and asset manager. While contributing to the long-term growth at low volatility of revenues, in an absolutely exceptional semester like the first half of 2020, in more trading fee-based model would have been more profitable. We are, however, convinced of the long-term superiority of our model, and envisage no changes at all in this respect. In Asset Management, the gross margin of 42 basis points was down slightly year-on-year due to minor shifts in asset class composition as well as due to lower performance fees. In the business with external Asset Management clients and Wealth Management clients, transaction-based income increased and compensated for lower interest income related to lower United States dollar rates. Let's take a closer look at the development of operating income on Slide 19. Operating income was flat year-on-year. On an adjusted basis, when excluding the effects of the one-off SIX dividend in the first half of 2019, operating income increased by 1%. Revenues of the divested brokerage business were fully compensated. If we adjusted operating income also for those revenues, it would have increased by 2%. Commission income, representing the largest income component at 67% of total operating income, was up by 2% or CHF 6.9 million. 89% of commission income is recurring, which, as mentioned before, demonstrates the high quality of Vontobel's revenues. In the first half of 2020, interest income represented only 6% of total operating income. Interest income decreased by CHF 8 million, reflecting the one-off SIX dividend of CHF 6.9 million in the first half of 2019 and lower United States dollars interest rates. Trading income was down by 1% as higher volumes could not fully compensate the increased hedging costs to maintain a cautious risk appetite. However, we have the different client units performed under the new positioning as a pure client-centric investment manager. Please turn to Page 20. In Asset Management and in Wealth Management, the higher average asset base compared to the first half of 2019 led to higher revenues. In Asset Management, the higher asset base, thanks to the quality of products, the robust investment performance and strong net inflows of new money led to an increase of 4% in operating income compared to the prior year period. The systematic client focus and the ongoing enhancement of the advisory process in Wealth Management are reflected by further growth of 2% in operating income to CHF 216 million, despite the very difficult market conditions. Digital Investing benefited from high demand in leverage products, resulting in an increase in operating income by 4%. At the same time, Platforms & Services felt the risk awareness of clients related to structured investment products. Operating income, therefore, decreased by 5% to CHF 73 million. The positioning as a client-centric investment manager becomes also visible by looking at operating income by Centers of Excellence. In the first half of 2020, nearly 78% of revenues were generated investments, up 4% year-on-year. 23% of operating income stems from Structured Solutions and Treasury. Operating income in this Center of Excellence was slightly down despite good trading volumes in leveraged products as it was negatively impacted by lower demand in structured investment products and increased hedging costs. Now let us turn to Vontobel's expense side on Slide 21. Operating expense declined by 2%, driven by lower direct expense in client units and Centers of Excellence. From a cost category perspective, lower operating expense was driven by reduced general expense and depreciation. The impact of the lockdown were visible in this context with a 34% reduction in travel and representation costs, public relations and marketing expenses in the first half of 2020. At the same time, technology costs rose slightly on the back of ongoing investments in technology. Personnel expense were down 1%, in line with the average FTE despite implementation costs of our new organization model recognized in the first half of 2020. Looking at the development of pretax profit on Slide 22, you can see that it reached CHF 156.1 million in the first 6 months 2020, up 4% year-on-year. The cost-to-income ratio improved slightly driven by somewhat lower expenses. At 74.7%, it still stayed above the target of below 72%. The trade-off between growth ambitions and cost efficiency remains a challenge. We have always emphasized that Vontobel would not forgo long-term opportunities for growth to achieve short-term cost savings. Therefore, despite the difficult market environment, we are continuing to invest in all our businesses, while, of course, pursuing an entrepreneurial approach to cost management. Adjusted for one-off items, pretax profit increased by 6% compared to the prior year period. One-off items in 2020 were limited to the CHF 4.1 million of costs for the realization of synergies in the different business areas from the new -- for the new strategic setup announced last December. Synergies are captured mainly in Marketing & Analytics. When taking constant currency rates, the pretax profit would have been up by 10% or by 12% even on an adjusted basis as the Swiss franc strengthened and 60% of revenues are generated in other currencies. Additionally, costs are more concentrated in Swiss francs. Slide 23 summarizes the financial performance of Vontobel in the first half of 2020. Group net profit declined slightly to CHF 129.2 million. In this context, it is worth mentioning that taxes were up by 46% year-on-year. In the first half of 2019, Vontobel benefited from deferred tax assets in Germany and the U.S. tax refund. These effects helped to drive the first half 2019 tax rate down to 12.3%, while the first half 2020 is in the expected range with a 17.3% tax rate. Group net profit, excluding minority interest, was CHF 121.6 million, minus 2%. Earnings per share were CHF 2.18, minus 2% or flat on an adjusted basis. Return on equity decreased by 13.4% in the first half of 2020 -- excuse me, decreased to 13.4% in the first half of 2020 compared to 14.3% in the first half of 2019. Our midterm target is to achieve a return on equity of at least 14%. Let's now turn to Page 24. The CET1 capital ratio at the end of June 2020 was 13.3 -- 13.8%, 0.3 percentage points above the CET ratio at the end of 2019. The total capital ratio was 20.2%, up from 19.9%. Both ratios significantly exceed the minimum requirements defined by FINMA, which are a CET1 ratio of 7.8% and a total capital ratio for a category 3 bank, including Vontobel, of 12%. Vontobel will maintain its solid capital position that significantly exceeds regulatory minimum requirements. Vontobel's very solid capital position is also reflected by the equity ratio of 6.1% and the leverage ratio and Basel III of 4.8%. With that, I'm at the end of my remarks. Thanks for your attention. I will hand back to Zeno.

Thank you, Martin. So I'm back with an update on targets and outlook. So as Page 26 shows, we are in line with our 2020 targets for net new money, for capital and for the payout ratio. I think especially the net new money target within this current environment is a very solid and strong achievement. Obviously, we could not match the top line growth revenue target in a COVID semi-half year, but we do not run this company for quarters or half years, but for the long run. Profitability-wise, we are pretty close to target, especially on the return. On equity side, we missed the increased target on cost-income ratio as we continue to balance investment in future growth with our commitment to entrepreneurial cost management, and we will continue to do so. As we have shared with you in the past 3-year targets, we went into a thought process how to move on from here, and we actually decided now to move to a 2-year cycle. That does not imply that Vontobel becomes more short term, the contrary of it. As we have now in a very clear and razor-sharp level defined our long-term ambition to become that pure-play investment firm based on 4 strategic levers, we learned from the experiences that then we become more agile and more faster in implementation if we set ourselves 2-year intervals on the journey towards this unmovable, unshakable long-term goal. And that's why we have implemented a 2-year planning cycle, and we will show -- share more details with you on our Investor Day in September. So we decided to continue with the same level of ambitions in our targets despite the impact of COVID. So we come back and commit to the same growth ambitions, both on the top line as well as on the net new money side. We also deliberately stick to a net new money target, and we also stick to the same profitability ambitions with a return on equity above 14% and a cost-income ratio scaling below 72%. We also stick to capital and dividend policies, so we stick to our CET1 and total capital targets, which we comfortably matched. And we also stick to a dividend policy that we will pay out under normal circumstances at least 50% of profit to you as our investors. How do we move on from here? Page 29 shows a very strong base, which is the current trust by our clients to us with the assets under management. We actually expect an environment, lower rates for longer, very complex risk and capital allocation decisions that the demand for high-class investment advice and high-class investment solutions will only grow. Saving as a method to move capital through time is dead. The only way to move capital through time is proper investing, and that's what we are here for. We also believe that technology will further enable our journey in all the dimensions I have already discussed and described. So we will continue to invest in our footprint in distribution in Asset Management. We are now in a position to serve the important segment of global banks in all the 3 major theaters: Asia, Europe and the U.S. On the Wealth Management side, we will continue to grow into additional segments, and we will continue to hire experts in this area, as we have just shown now with our move in Milan. And we will also update you further in H2 on how we further invest and deploy our ambitions on the Digital Investing side. How have we concretely started in July? We had a good start into the second half year. We continue to attract net new money. We continue to attract -- to generate organic growth. We see very similar patterns in our net new money generation ability as in H1. As usually, at this time of the year, I'd like to remind everyone of us that July and August and December usually happen in the second half year. I am confident that it will be the case also this year. Nevertheless, we are happy with the first weeks of July and how Vontobel has performed. So ladies and gentlemen, that's it from our side with an update on strategy and half year numbers. Martin, Thomas and I are happy to take your questions.

[Operator Instructions] The first question comes from Nicholas Herman from Citi.

To clarify, first of all, you can hear me all right?

Yes, we can.

Great. And before I ask up my questions, can I just offer my best wishes to Martin Sieg for the next chapter of his career. I just want to thank him for the clarity of vision and explanations over the last several years, and we've appreciated working with you. In terms of my questions, can I just start, please, with net -- Wealth Management net new money? I just want to understand what's going on there. I would have thought that in an environment with low rating search for yield that would be incredibly conducive to advice as Wealth Management. But if I look at peers, you've significantly underperformed them despite the same COVID impacts. So I'm just curious to what clients -- what regions are you particularly subdued? And do you think you may be underperforming peers, please? That's question number one. In terms of question number two, Asset Management, your performance. If I look at the performance in equity, the 5-year track record is strong. But the 1- and 3-year records are weaker. If your clients, is it what 5-year or the 3-year though is more important? And at what point do you think that could potentially start to impact your flows there? Question number three on Digital Investing. Are you happy with the results in structured products trading? I mean from the metrics, I track, it looks like your structured products turnover in first half wasn't much higher versus prior periods. But both the Digital Investing and the Platforms & Services revenues were kind of flat year-on-year. So I just want to understand what's going on there. And finally, on capital, could you just explain about the risk, please? I'm surprised that particular market risk RWAs fell in the first half versus December and despite the significantly higher volatility that we've seen this year, not just in equities, but also asset classes.

Can you quickly repeat the last questions? I'm not sure we got it all.

Just on market risk dynamics, I'm surprised that market risk RWAs fell in the first half versus December, despite significantly higher volatility in asset classes, not just equity.

Sorry.

Was that, was that clear?

No.

Okay. I'll try one more time.

Yes.

I was surprised that market risk RWA fell in the first half versus December, despite significantly higher volatility across asset classes, not only equities.

Okay. I got the question.