Vontobel Holding AG (VONN) Earnings Call Transcript & Summary

Good morning, everybody, and a warm welcome to Vontobel's Presentation of the Annual Results 2022. I am here together with our Chief Financial Officer, Thomas Heinzl, welcome. And we do this now for the first time, also based on the feedback that we got from you basically by starting a little bit more of an interactive experience for all of you guys. [Technical Difficulty] 2022, let me share with you first couple of highlights and updates on strategy. Then I will ask Thomas to go through the detailed numbers, and then I will be back with the outlook. And then obviously, after that, Thomas and I will be most happy to take your questions. So 2022 was a challenging year for pure-play, buy-side investment firm. However, fully consistent with our business model, we have delivered a satisfactory set of numbers. On top of that, we have demonstrated disciplined execution, both in achieving milestones and then implementing key steps towards our Lighthouse journey as well as in protecting our conservative risk appetite and navigating challenging years in terms of volatility in risks; another proof point for our risk awareness also in the long-term perspective of our firm. Let's look into the solid financial performance. Very strong outstanding Wealth Management results, 5.6% annualized growth, industry-leading organic growth, third year in a row, a little bit more color from my side, highly diversified across quarters, highly diversified across the different business areas coming from the focus markets in the developed world that we focus on and coming in with very high quality as discretionary or advisory mandates, posting on top rock-solid margins. Digital investing clients, we are obviously exposed to investor sentiment and investor sentiment was low in 2022, has normalized to the trajectory we saw before the extraordinary year of 2021. On the asset management side, in line with the industry headwinds, as a high conviction active asset managers, our outflows were in line with other similar industry players saw. As we have announced last year, we have taken measured sensible steps to protect our strategic flexibility and to make sure that we will be in a position of strength to seize the opportunities that this kind of environment will undoubtedly create. We have reported on the Investor Day against the delivery against the business from '20 to 2022. We delivered on all key steps, including organic and inorganic growth. We have also announced the business plan for '23 and '24, which will be based on capitalizing on our strengths. One of our strengths is very clearly our balance sheet and our capital position. Despite the fact that we have digested the full SFA acquisition, our CET1 ratio increased to 16.7. The capital position and the constructive outlook into the future of our business model brings the Board to proposing a stable dividend of CHF 3 to the AGM. Let's look at a couple of numbers in more detail. Assets under management, we are facing the worst drawdown in global capital markets, down by 16% to CHF 204 billion. Net new money aggregated at the sum of outstanding flows in Wealth Management and within industry position, asset management flows at minus 2.1%. Operating income stands at CHF 1.285 billion, pretax at CHF 267 million, group net profit at CHF 230 million. Return on equity double-digit 11.2%, dividend as proposed to the AGM and as a commitment to the future at CHF 3. How do these numbers stack up in the long-term comparison? These numbers actually still are a top 10 result in the history of Vontobel. And given the environment we had faced, another proof point for the key drivers of our long-term value creation. We think and act long term. We are focused on our key strengths. We deploy a conservative risk profile as we have shown again in a world of war and huge volatility in 2022. We have acted with foresight and ahead of the curve, and we are disciplined in our execution. The backdrop that we faced in this year, and you see here the yearly returns from a 50-50 portfolio, 50% U.S. stocks, 50% U.S. Treasury as a proxy for global capital markets, the worst drawdown since the 30s of the last century. And not only the worst drawdown, also one of the fastest. So as a pure-play investment firm, we were faced with a very fast workout of revenues during 2022. But how did we navigate against this backdrop from an investment perspective? We think we navigate reasonably well. We are confident that the consistency and the quality of our track record and our investment styles gives us the opportunity now to move confidently in the new year. As we have seen now a stabilization towards the end of last year and a highly increased engagement level from clients going forward and especially on the fixed income side, we expect to turn into positive territory in the flow side very fast. So quality of investment performance is robust and consistent with what we have promised to our clients as our business results are consistent with our strategy and our positioning. This quality of our investment-led promise also underpins our next step in the business plan towards our Lighthouse. We face different trends in the changing world, inflation, Central Bank Hiking, we expect continued growth in private markets. We are respectful about the geopolitical environment. We expect clients to continue to expect an even more digital hybrid client experience. And we need to answer to these trends and do these changes in the environment with a strategy that is based on our strength. This is what we have shared with you in detail on the Investor Day, our 4 priorities to 2024, delivering future proof investment solutions, navigating the new regimes, providing access to our clients to private markets, which we will execute in 2023, delivering best-in-class private client experience. We start from a very strong basis of strength in our private client business and we will continue to personalize and to further enhance our service models and offer more flexibility to our clients. Making further progress in the U.S., we consumed the acquisition of SFA. All our products from London and from Zurich are available to you as investors. We have won a first institutional mandate. So we have everything in-stock that we need in order to make further progress in the U.S. and the environment obviously, asks for an enhanced focus on scaling value creation on the capital efficiency side but also on operational excellence. What we implement across all priorities and we as a firm is our commitment to sustainability. We have been early movers in this field, we have been implementing sustainable investment strategy since the '90s. However, together with the Board, we have sharpened our commitments to the area of sustainability. We label this in 6 commitments. The first 3 is our homework. We address the E with a path to net zero, the S with our commitment to our employees and team members in terms of diversity and inclusion, and the G with stakeholders like you to provide you all the transparency in order to challenge and engage with us. The next 3, as an investment firm, we pledge to advise our private clients on the opportunities and challenges of ESG investing while respecting their own futures and their own definitions of their destinies. As a discretionary manager, in our investment solutions, we pledge to incorporate ESG considerations into our active decisions. As a firm, rooted in Switzerland, we are aware that we operate on a license granted by society. So we will commit to the community engagement that is respectable in this context. This was it from my side with an update on strategy where we are. I now hand back to Thomas, our Chief Financial Officer, for the detailed results, and then I will be back with the outlook. Thomas, please.

Thank you very much. I will now provide the update, the details on the financials. Before we start, I would like to remind you that we are comparing all the numbers to a record year. While we said it last year, memories are generally short. 2021 was the best year we have ever had. 2022 was a challenging year for investors and the investment industry. With rising inflation and interest rates, declining markets, the war in the Ukraine and increasing geopolitical tensions general, Vontobel also felt the impact of this. That results in a revenue decline to 1.8 -- to CHF 1.285 billion or 16% versus the record 2021. But don't forget, key drivers of our business model are financial markets investor and investor sentiment, both of which have suffered significantly throughout the year. We have reduced our cost by 5%, but the revenue decline outpaced the cost reduction, which led to a decline in our group net profit to CHF 230 million after a record CHF 383 million last year. Cost-income ratio increased to 78%. The ROE easened up to 11.2%. But let's dive into the individual drivers. Assets under management, what you can see, assets under management, we had a steep decline of 16%, being almost back to the 2019 levels. The root cause of the decline is clearly visible. The market development explains 15% of that decline. Net new money contributed negative 2%, FX a bit more than 1%. In general, FX wasn't a big driver in this year and SFA increased the assets under management through the CHF 6.2 billion acquisition to CHF 204.4 billion. Moving into assets under management, the net new money by the client unit. Assets under management in Asset Management declined by 25%, which was driven by market development and outflows, as we have said earlier. Wealth Management lost 3% to CHF 93 million, including the CHF 6.2 million AUM from SFA. Without the SFA, it would be roughly a 10% decline. Net new money in Wealth Management, let me start with Wealth Management, was outstanding at 5.7%, and more than the absolute number of CHF 5.4 billion, we're very happy about the fact that the inflows were of very high quality. They were mostly stemming from developed countries. A high share of inflows went into the mandate and the inflows were very consistent across all the regions and across all the quarters. Net new money in Asset Management has experienced significant outflows of 7.4%. Here the main contributor were clearly the equity boutiques, in particular quality growth had substantial outflows. But there was also some, call it, bad luck at work. TwentyFour Asset Management lost CHF 2.5 billion through the LDI situation in the U.K. end of September. Outflows that had in principle, nothing to do with TwentyFour. And here, we are expecting a significant part of these outflows to come back over the course of the year. The good news overall here is that we saw a slowdown of the outflows into the year-end and the flat January. Operating income, trading result decreased by 31% to CHF 338 million. Notable here is that the second half was even more difficult than the first half. In the second half, the revenues basically normalized to 2019 levels or to the 2019 trend. However, the last day seemed to indicate that we have found the bottom here. Net fee and commission income has reduced by 15%, which is pretty much in line with the AUM reduction. And net interest income, as expected, has developed well. The growth was 65% year-over-year or if you look at it half year over half year, in the second half year, net interest income has more than doubled. The key driver was obviously the balance sheet business, deposits and loans. And on the deposits, we have mostly Swiss francs followed by U.S. dollar and euros, where we saw a substantial effect of interest rate rise only after September kicking into our P&L. Looking through the operating income by client unit reflects the picture from before. Asset Management is down to CHF 475 million. Wealth Management has remained resilient, mainly through the acquisition of SFA and digital investing has reduced by 40%. Now let's take a look into the margins. I'll start with the right-hand side with Wealth Management, because here it's relatively obvious what happened. What you can see is the recurring commission income has remained stable. The commission income, which is nonrecurring or trading driven, has been reduced and the gap has been filled by net interest income. So net interest income has more than compensated the reduction in the transaction-based margin decline. On Asset Management, our margin reduced by 5 basis points to 37 basis points from 42 last year. This number is, of course, below our long-term aspiration of 40 basis points. But what happened? The key drivers of the revenue of the reduction are a change in product mix and net new money. It's the #1, and that explains roughly 3 basis points. Performance fees have vanished over the course of the year. They would explain another 1 basis point in reduction. And finally, there are some technical items, which are the [ third -- the fifth basis point; third point and the fifth basis point ] of the reduction, which explain also another 1 basis point, half of which will be one-off. In essence, in Asset Management, the margins reflect outflows from higher risk and higher margin products, both in the equity and debt area, for example, emerging markets and inflows to the lower-margin multi-assets base. Looking at the operating expenses, we have reduced our operating expenses by 5% to CHF 1.18 billion, so cost has come down 5% overall. Most reduction is coming from personnel costs, which were down 11%, and we had a slight increase in the general expenses. That was driven basically by normalization of travel and entertainment with COVID falling away. Of course, travel picked up again and some increases in nondiscretionary IT spending, such as data costs, licenses and so on. Hence, the cost income ratio snapped back above the 78%, which is significantly above our target. We are fully committed to that target and to getting the cost income ratio back to 72%. However, it will be very difficult to pull that off in the next year. Nevertheless, we work on various measures. We have already put measures in place in Q1, which was basically a reduction of variable compensation, a freeze of headcount growth and some IT budget adjustments. Those have delivered the CHF 50 million reduction or roughly 5% of the cost base. Additional measures of CHF 65 million gross exit rate, which we have announced after Q3 will be put in place in this month, which is also slightly above 6% cost reduction. And those are basically mostly coming from standard measures, which I would call standard house cleaning, which is reviewing the external spend, productivity increases by improving our processes and by improving our setup, and the last one is strictly focused on the strategy and the alignment of our business portfolio. That's, for example, the reason why we have reduced our -- why we have run down or shut down our business, Wealth Management business in Hong Kong. And do not forget, we're not only working on cost, of course. No one else shrunk to greatness. So what we are focusing on is a significant focus on revenues in areas, in particular where we are underasseted, where we have lost assets and where we can regain revenues without additional investments. What I wanted to mention here is, well, of course, the second round of cost reduction of CHF 65 million will have some costs to achieve because we will have to do some investments in order to realize those cost gains. Moving on to capital. First and foremost, our balance sheet and our capital position is very strong. Total capital ratio and CET1 ratio are all up, and they're significantly above the regulatory and the internal requirements. CET1 capital generation overall was 2.1 percentage points, including all the adjustments for treasury valuations in the OCI and everything included. The impact of the SFA transaction was roughly 1.8 percentage points and then another 0.2 percentage points were added by the cyclical capital buffer for mortgages, which the SMB has introduced for all Swiss Banks as of end of September. Overall, the risk-weighted assets were down CHF 400 million. CHF 100 million were added from the SFA integration. As we have presented in 2020, we have now implemented a substantial part of our capital-light approach and significantly reduced our risk-weighted assets from 2020 -- end of 2020 to now by 15%. While we're going to continue to optimize our balance sheet, we expect our RWAs to develop more in line with the business development in the future. On the dividend, the chart generally speaks for itself. There's 2 important remarks that I would like to make. First, given a difficult year with an unprecedented speed of market decline, we generated a positive economic value, so we generated shareholder value. Second, as a consequence of the strong capital generation, the BOD proposes a constant dividend to the AGM of CHF 3 despite that being a very high payout ratio of 73%. Overall, if you look at what you see here, this means we had 11 years of stable or rising dividends, and we paid out more than CHF 1.5 billion to our shareholders, all at the same time while increasing our shareholder equity from CHF 1.6 billion to CHF 2 billion. Summarizing -up the KPIs and the targets. There's no denying that 2020 was a difficult year for Vontobel. But I would like to repeat 3 key messages. First, don't forget all the comparisons are against 2021, which was a record year, the best year for Vontobel ever had. Second, we've taken measures to bring our cost income ratio and with it other P&L and other productivity KPIs back towards our long-term target of 72%. And finally, our capital position remains very strong and hence we will propose a constant dividend of CHF 3 to the AGM. That's all from my side. I hand over to Zeno for the final remarks.

Thank you very much. So a quick recap. We have delivered a set of numbers that is in line with our positioning and with a very difficult market environment for a pure-play buy-side only investment firm. We have done everything -- we have taken all the decisions required to protect our strategic flexibility and to protect our ability to harvest the opportunities that may arise in this kind of environment. Everything that has happened in the world only confirms our positioning as a pure-play investment firm with a focus on developed markets with a client-centric and investment-led approach. Our capital strength gives us the backbone to profit from opportunities in this environment. How have we started in the new year, and what will we focus on in H1 2023? Our key target is to work with our clients on the opportunities that this changed investment environment brings to the table. And what we see is investors are coming back to the table. We see an increase in client interaction. We see an increase in client sentiment and our pipelines, especially also on the institutional and wholesale side are building up. This confirms what we have seen already in December with a flattening out of flows and the neutral start into the new year from where we are confident that we will be able to build going forward. The rest of the start into the new year on the revenue side and on investor activity was constructive as well. We will implement the cost measures as we do this in order to protect the long-term focus and the long-term flexibility. We will execute on the 4 strategic priorities, bringing future-proof investment solutions with access to private markets in 2023 for our clients with an improved -- further improved private client experience, progress in the U.S. and the commitment to the scalability of our business model. With that, we are at the end of what we wanted to bring across. We are very happy and looking forward to taking your questions now.

[Operator Instructions] We have as a start, the question from Daniel Regli from Credit Suisse.

I have 4 questions to be concrete or -- no, sorry, 5 even. 2 on Asset Management. First, I would want to hear what makes you optimistic that you will be able to turn the flow picture in asset management soon? And then second, on your gross margin ambition of 40 basis points. Can you please remind me how much of this do you expect to come from performance fees or put differently, what part is the management fee margin you are expecting? And then on digital investing, with the Q3 update, you said that you are back to 2019 levels in digital investing which would have meant about CHF 80 million for H2. And now your actual result was even below this. Can you talk about what happened in the last 3 months of the year? And in particular, what are your expectations going forward from digital investing? And then one question on the balance sheet. Your balance sheet seems to have shrunk a bit, particularly the deposits have come lower and so has the cash position. This is -- I'm a bit surprised by this given higher interest rates. I would have expected clients moving more into the deposits rather than out of the deposits. Can you talk about these moves and what this means for your NII guidance. Maybe I'll stop here and come back later with more questions.

Yes. Thank you very much. I will take the Asset Management question, and then Thomas will cover DI and also the balance sheet and the NII guidance, does that work? So flows actually, one of the key components or the key changes is that fixed income is back. Fixed income was better last year. And obviously, with the most significant drawdown in fixed income markets, probably we have -- all of us have seen. And on top, that very specific external event that Thomas has mentioned, with the LDI situation, after the debacle of the mini budget in the U.K., which hit us on very specifically on fixed income flows. However, what we see now going forward that actually now investment-grade portfolios with 4 year duration have implied yield of 8% to 9%. So what we see is that global investors look at their asset allocation, global investors can achieve significant targets that they have again with fixed income investing. And our offering has always been geared more to the upside on the yield side. So we are -- in many of our products, we are a spread house. We are credit risk takers, and we do that very well. And clients know us for that. They respect us for that. And I see client engagement flow, and I see a significant buildup of the pipeline. That's one point. Other point is, as you know, on the equity side, we have significant capabilities on the emerging market side. And after decades of difficult relative performance of emerging markets with developed markets, there is talk in the industry of renewed interest in debt. And also there, after having been bettered for our quality focus, many of the strategies show an improved profile in terms of risk/reward. So that's another possible source. The third possible source is what has -- what we have again done in 2022, we remained true to our convictions, which means that we stuck to our investment styles and in our -- to our investment convictions and long-term institutional investors appreciate that. So we also see an increased dialogue on the very institutional side of the business. And we believe in an environment where interest rates and inflation will be in a relative situation that clients need to continue to invest in order to grow the real value of their portfolio. So this is the overall picture. And we have a constructive outlook into the new year. In terms of the 40 basis point ambition, we stick to that. And you can check our history way back. Performance was never significantly above 1% and 1 basis point. And we have not changed the pricing of our product. So performance is plus/minus 1 basis point on a yearly basis. So we expect to achieve the targets with the business mix and the management.

Good. On digital investing, yes, it is a bit -- Q4 was a little bit below. But don't forget that was basically driven by what happened in December. The whole year was a grind down for all of the retail investors. We've discussed this a lot. Last year was basically driven by the retail investor. And what happened is the market was grinding down step by step. So retail investors, right, they went in, and then they lost money again. They went out. They went in again as soon as markets recovered, lost money went out again. So we believe there was a certain fatigue into December and into the end of the year. But what we see already now is the 2019 guidance is not bad because in January we have seen a slight recovery again to the levels where we would expect it. So I would assign this to a dip in the December and to a fatigue of investors, particularly retail investors trading with digital investing. On the balance sheet, let me start with the client deposits. Yes, the balance sheet shrunk because the deposits shrunk, a very simple reason for this. We have decided to -- instead of increasing the pricing on -- in generally on the deposits, we have decided to go for some other measures. We have put in place some term deposits, but what you can also see, we have done some private placements because that is cheaper capital, right, from the position. And you see private placements went up from the CHF 450 million to almost CHF 1 billion to a bit more than CHF 1 billion, and that was driven by the AT1 plus the private placement. That is cheaper money for us to refinance the asset side for the time being. And so as part of optimization, that's what we did. We are now looking into this and see how we strongly push term deposits to keep clients on. But there is a bit of pressure on the margin of the deposits. The last question, I think, was about the cash position. What you can find here is it moved from the cash to financial instruments at fair value, which basically means we deployed cash as soon as we had a positive interest rate environment again. And that's it.

I think his last question was on NII guidance.

The NII guidance, I would look into the second half, by and large, and that is something that we -- where we would expect that we can keep it. There were some extraordinary things in the second half, but I would look into the second half as a rough guidance.

Thank you, Thomas. And Daniel, that answer your questions?

Can I maybe follow up with one quick follow-up on the digital investing? You talked about that January coming back to levels where you would expect it. What is the levels you would expect? Are we back to 2019 levels? Or do you expect even beyond 2019 levels?

For the time, we expect 2019, but January is always a good month. So it's a bit difficult to figure out. We need to see a little bit more into the year, what is happening, because January is always a good month. And then -- but the month is roughly in line with what we would have expected this year soon. Let me not say 2019 level, but the trend that continued until 2019. We had a slightly rising trend. And then what happened in 2020 and 2021 were extraordinary years. And now we're back on to that trend line. Perfect. Then we move on to Samarth Agrawal from Citi.

I hope you are able to hear me?

Yes, we are.

Awesome. So I have several questions, I think 5 currently. I'm happy to ask more, I mean if we get time. So first one is on Wealth Management. I mean a small follow-up. Can we confirm run rate NII margin there? And the main question is, I mean, what percent of your deposits are in call and time deposits? And I mean what level of switching do you anticipate if rates increase by, say, another 50 bps? So that's the first question. My second question is on basically your fee and commission side. Basically, the recurring margin fell again this time, right? I mean, we are seeing several peers raising their target for recurring fee margin. So your mandate penetration is quite high already. But I mean, can you do more on pricing and mix? Or should we expect a gradual decline in recurring fee margins. Third is on asset management flows. With gaining theme around China reopening across asset managers, do you see that clients are becoming more active this year? And how are your clients positioned currently to themes on China reopening and in general about that sentiment? Fourth is on pipeline. So I mean, you mentioned that fixed income is back. But I mean, barring fixed income, performance looks weak in equities and multi assets. I mean, with only less than 50% of equity funds in top 2 quartile, I mean what gives you confidence about a better picture in this year? Last one is on M&A. So your balance sheet is solid. And earlier, you were pretty constructive on consolidation opportunities. So I just want to understand what are you seeing in the market currently? And what is the visibility and your ability to deploy surplus capital. Yes, that's all.

Good, a fair set of questions. I will start with asset management flows, pipeline and quickly comment on M&A. And then I would ask Thomas to take the Wealth Management run rate and the recurring fee commission. Is that...So China reopening, yes, a big topic. I would say it's probably also globally in the macro sphere before the tragic events of the last couple of days, the positive surprise this year, but it was not only the reopening of COVID, but actually also a strong messaging around a certain U-turn on tech regulation, gaming, things like that and even a certain U-turn about in the language with the dialogue with Western parties, especially the U.S. So we see investors reentering a dialogue on China. We have actually all the product capabilities available. We run stand-alone China equity product, we run emerging market global with China included, and we run emerging market excluded of China. So we have all the product capabilities available, all of them very consistent coming from the same investment processes, asset quality growth for [ mtx ]. And we put that disposition at the decision of our clients. But what we see currently is actually a strong positive sentiment on the investor side around the China question. Then pipeline, we do 3 things. So 1/3 fixed income, 1/3 multi-asset class, 1/3 equity. What we see on -- so fixed income, I already commented, I can only confirm that. Multi-asset class, a significant part of our business is in mandates and not in the funds that we see in our mandate business is in very strong shape. That's one of the reasons. And on the equity side, we have become very institutional in our deployment and institutions look very much into style consistency, and we see a lot of support there from institution clients, and we have a number of yet very small but very promising fund products on the thematic and on the impact side that do not yet change the numbers on the aggregate level, but where we see strong potential to improve the picture going forward. That's on the pipeline. On the M&A, we have been, I would say, very consistent over the last 10, 12 years in executing on M&A. We have also clear targets what we want to do on the M&A side. So for example, what we have done with SFA is fully consistent, reinvesting, buying additional volumes on markets and capabilities that we have. It's like what Thomas has said on where do we focus on the revenue side. We focus on the revenue side where we are underasseted relative to our capabilities. So the platform we have built can do much more. So we would also if possible, underpin this with acquisitions. Large scale cost-driven consolidation transactions in Switzerland, we're less optimistic that there is a lot of that left in the marketplace that would fit our needs for quality, our needs for relative size, our needs for coherence in culture, our needs for availability. So we would rather see books or add-on acquisitions on the wealth management side. On the investment capability side, we concentrate on thematic impact and/or private markets. On the private market side, we are obviously aware of the different pricing characteristics of this asset class, and we would be very committed to protecting the interest of our shareholders, but there are -- there is a lot of -- how shall I say, there is a lot of movement in this market. If it's helpful for the first 3 questions, then I hand over to Thomas.