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Julius Baer Most Hurt by Kickbacks Ban, Morgan Stanley Says

Julius Baer Group Ltd. (BAER) would probably be the most affected by the elimination of retrocession fees, or kickbacks, that are paid to banks in Switzerland for selling fund products, Morgan Stanley analysts said.

A complete removal of retrocessions for all wealth management clients would cut total revenue by about 6 percent and pretax profit by 12 percent at Zurich-based Julius Baer, analysts Hubert Lam, Huw van Steenis and Bruce Hamilton said in a note yesterday. The impact at UBS AG (UBSN) and Credit Suisse Group AG (CSGN) would be equal to about 2 percent of group revenues and 6 percent to 7 percent of pretax profits for each, they estimated.

“We are taking note of the developments around retrocessions and that’s a topic we’re taking seriously,” Julius Baer Chief Executive Officer Boris Collardi told investors at a presentation on Feb. 4. He said it was too early to say how changes will affect pricing.

Jan Vonder Muehll, a spokesman for the bank, declined to comment further today.

A Swiss court ruled last year that banks can’t book retrocession fees on products sold to clients who have their wealth managed on a discretionary basis. Discretionary mandates make up about 10 percent of wealth-management assets at Credit Suisse, about 13 percent at UBS and about 15 percent at Julius Baer, according to the Morgan Stanley report.

UBS is Switzerland’s biggest bank, while Credit Suisse ranks second. Julius Baer is the country’s third-largest wealth manager.

Repricing Services

In the long term, the introduction of the second Markets in Financial Instruments Directive, or Mifid II, or another form of regulation may ban retrocessions altogether “given the ongoing push for reforms on investor protection,” the analysts said.

Banks may be able to reprice their services to mitigate the effect from lost retrocession fees, the analysts wrote, adding that uncertainty over the issue may keep revenue margins “under pressure for longer.” They have an overweight recommendation on Credit Suisse and UBS and equal-weight on Julius Baer.

Julius Baer took a “small provision” as part of 10.2 million francs ($10.9 million) set aside for various legal risks in 2012 as it assessed the situation concerning the court decision on retrocessions, Chief Financial Officer Dieter Enkelmann said on Feb. 4.

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net

To contact the editor responsible for this story: Frank Connelly at fconnelly@bloomberg.net

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