Julius Baer Reports Client Trading Boosts First-Half Margins

Julius Baer Group Ltd. (BAER) said increased client trading boosted margins as Switzerland’s third-biggest wealth manager integrated Merrill Lynch businesses acquired from Bank of America Corp. last year.

The gross margin, which reflects how much the bank makes in revenue on managed client assets, rose to 102 basis points in the first half of the year, from 98 basis points in the year-earlier period, the Zurich-based bank said in a statement today. A basis point is one-hundredth of a percentage point. Julius Baer jumped the most in 21 months in Zurich trading.

“First-half results were better than expected, supported by stronger revenue from increased trading volumes and client activity,” Teresa Nielsen, a Zurich-based analyst at Vontobel Holding AG, said in a note to clients.

Julius Baer has said the wealth units purchased last year may boost client assets by as much as 72 billion Swiss francs ($76.6 billion) by 2015. While the bank makes acquisitions to compete with larger rivals, the Merrill Lynch business outside the U.S., which was unprofitable in 2011, may increase margin pressure in the second half, Julius Baer said.

Julius Baer rose as much as 6 percent and was 5.9 percent higher at 42.11 francs at 3:44 p.m. in Zurich. UBS AG shares gained 2.8 percent after Switzerland’s largest bank reported second-quarter profit of about 690 million francs and net inflows of about 12.8 billion francs in wealth management.

Photographer: Valentin Flauraud/Bloomberg

A sign sits outside the offices of Julius Baer Group Ltd. in Geneva. Close

A sign sits outside the offices of Julius Baer Group Ltd. in Geneva.

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Photographer: Valentin Flauraud/Bloomberg

A sign sits outside the offices of Julius Baer Group Ltd. in Geneva.

Profit Margin

Julius Baer’s pretax profit margin rose above 30 basis points as client interest in foreign exchange services helped more than triple net trading income to 185 million francs, according to the bank.

Net income dropped 30 percent to 114 million francs from a year earlier as Julius Baer reported 99 million francs of integration and restructuring costs. Julius Baer increased its estimate for the cost of the Merrill acquisition to about 455 million francs, from 400 million francs because of higher expenses related to transferring clients to the Swiss bank’s systems, Chief Financial Officer Dieter Enkelmann said.

The gross margin on the reported Merrill assets was 93 basis points and the acquired businesses will weigh on the combined figures in the second half, the firm said. Merrill Lynch’s non-U.S. international wealth management units recorded a pretax loss in 2011 with a cost-to-income ratio of 114 percent.

Integration

“Growth in the underlying business may suffer as management attention is focused on the integration, but the deal is on track and the results so far are encouraging,” Andrew Stimpson, a London-based analyst at Keefe, Bruyette & Woods, said in a note to clients today.

Assets under management declined to 218 billion francs at the end of June, from 220 billion francs in April. Julius Baer added 24 billion francs in the first four months of this year as the bank absorbed businesses in Switzerland, Uruguay, Chile, Monaco and Luxembourg.

A total of 47 billion francs of Merrill Lynch assets have been transferred to date, the bank said. More than 1,000 Merrill Lynch employees, including 272 client advisers, have joined Julius Baer.

“On the back of a recovery in client activity and better cost efficiency, our group markedly improved its operational performance,” Chief Executive Officer Boris Collardi said in the statement. “We made tremendous progress in the integration.”

Net Inflows

Julius Baer reiterated the firm is cutting more than 1,000 jobs at the combined businesses as it seeks to boost earnings from the Merrill transaction by 2015.

Net new money at Julius Baer was 3.4 billion francs in the first six months, representing 3.6 percent annualized growth. That missed the firm’s 4 percent to 6 percent target range.

The Merrill businesses in about 20 locations will help “stabilize” Julius Baer as a crackdown on offshore tax evasion pushes European and American clients to pull money from Swiss bank accounts, Honorary Chairman Raymond Baer said on May 30.

Julius Baer is one of at least 12 Swiss banks under investigation by the Department of Justice for allegedly helping Americans hide money from the Internal Revenue Service.

“I’m hopeful that now we should have reached the final chapter hopefully in this negotiation,” Collardi told reporters on a conference call today. “We are in a position to basically settle a U.S. fine,” the CEO said, adding that he expects to know more about the size of a financial penalty later this year.

Legal and consulting costs related to the U.S. tax matter climbed to 54 million francs, Julius Baer said.

The firm also made a provision of 28 million francs because the tax raised from the offshore accounts of British clients, under a Swiss-U.K. agreement that started this year, won’t cover a 500 million-franc guarantee payment made by Swiss banks. UBS set aside about 100 million francs after an accord that settled a dispute over tax evasion by wealthy Britons.

To contact the reporter on this story: Giles Broom in Geneva at gbroom@bloomberg.net

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

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