Julius Baer Drops on Weaker Margins; U.S. Probe Erodes Profit

  • Company reports worst gross margin since CEO started in 2009
  • Bank's annual operating income misses analysts' estimates

Julius Baer Group Ltd.’s gross margin in the second half dropped to the worst since Chief Executive Officer Boris Collardi took the helm in 2009. The shares fell.

Revenue divided by client assets narrowed to 88 basis points for the six months through December, compared with 93 basis points in the second half of 2014, as Julius Baer integrated new businesses and client appetite for risk was subdued, according to a company presentation on Monday. Chief Financial Officer Dieter Enkelmann expects “margin pressure everywhere,” he said at the presentation.

“The extent of the decline is unexpected, especially as it doesn’t seem to be abating,” said Michael Kunz, an analyst at Zuercher Kantonalbank in Zurich. “2016 is probably off to a poor start in terms of gross margin.”

Julius Baer fell as much as 4.2 percent and was down 2.6 percent at 42.11 francs at 1:15 p.m. in Zurich trading, valuing the company at about 9.42 billion francs ($9.22 billion). The shares have fallen 13 percent this year.

Assets under management increased 5.6 percent in the second half to 300 billion francs and the gross margin was 15 basis points below where it was after Collardi took over in 2009. The bank’s investors have been waiting to hear how it will deploy capital once the company resolves a years-long U.S. probe into how Americans hid money from the Internal Revenue Service in Swiss accounts.

Julius Baer has reached a “fair resolution” with the Justice Department and doesn’t expect cooperation with the U.S. government to be a drag on future earnings, Collardi said on a call with reporters without being more specific. “We’re entering the year in a position of strength,” he said.

Julius Baer said last month it set aside $547 million to cover the U.S. penalty and expected an agreement in the first quarter. Net income slumped 67 percent to 121 million francs in 2015, mainly due to the expected cost of the U.S. case, the company said in a statement. Operating income rose to 2.69 billion francs from 2.55 billion francs a year earlier, missing an average estimate of 2.73 billion francs by 20 analysts surveyed by Bloomberg.

Julius Baer plans to grow its ordinary dividend payout ratio to 40 percent of adjusted net income and will increase its dividend to 1.10 francs a share for 2015 from 1 franc a year earlier, the company said in the statement.

“Investors will be looking carefully at the new capital structure to gauge how the company will manage its new payout goal and satisfy management’s hunger for deals,” said Jonas Floriani, a London-based analyst with Keefe, Bruyette & Woods Ltd. Floriani has an outperform rating on the stock.

The CEO would like to buy a large company with clients in regions where it already operates such as Asia, the Middle East and Europe, Collardi said in a Bloomberg television interview. Some under-performing large banks have wealth-management units and these may come up for sale, Collardi said at a presentation in Zurich. He ruled out again acquiring BSI SA, the Swiss private bank that BTG Pactual Group is trying to sell, and didn’t name specific acquisition targets.

After deciding last year to impose charges on institutional clients to hold franc deposits, Julius Baer is considering a similar policy on holding euros, to offset the impact of negative interest rates, Enkelmann said. So far the bank hasn’t passed on the costs of negative rates on Swiss National Bank sight deposits to private clients, apart from in exceptional cases, Enkelmann said.

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