Julius Baer Profit Drops on U.S. Tax Dispute Provision

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Julius Baer Group Ltd., Switzerland’s third-largest wealth manager, reported a 78 percent drop in first-half profit and a weaker capital position after it set aside money for a U.S. tax settlement.

Net income fell to 39 million Swiss francs ($40.5 million) from 178.3 million francs a year earlier, due largely to a $350 million provision for a U.S. tax dispute, the Zurich-based bank said in a statement on Monday. Lower profit, foreign-exchange movements and an increase in pension liabilities depleted capital, prompting analysts to query whether the company will increase dividends in future.

“Capital erosion was disappointing,” said Eleni Papoula, a London-based analyst at Berenberg with a hold rating on the stock. “That means less scope for returning capital to shareholders and less room for acquisitions, especially as we still don’t know whether the preliminary U.S. provision will be adequate.”

Julius Baer announced the provision for an eventual settlement with the U.S. Justice Department to resolve a four-year probe of offshore accounts for Americans last month. While that was expected, the strengthening of the franc and changes to rules on how Swiss banks calculate risk-weighted assets prompted a surprise weakening of Julius Baer’s Tier 1 capital ratio, according to Dirk Becker, a Frankfurt-based analyst with Kepler Cheuvreux.

“It’s not a precarious capital position, but it’s not as comfortable as it used to be,” Becker said, citing a decline in the Tier 1 regulatory measure to 13.4 percent from 16.3 percent a year earlier. “Julius Baer will have to boost real earnings in the second half in order to pay a 1 franc dividend.”

Tax Dispute

The shares dropped as much as 3.4 percent and were down 1.7 percent to 53.2 francs at 4:43 p.m. in Zurich trading. The Bloomberg Europe 500 Banks & Financial Services Index rose 0.5 percent.

Chief Executive Officer Boris Collardi said he’s “very hopeful” the tax dispute will be closed this year.

Profit excluding the U.S. provision increased by 34 percent to 384 million francs, according to the company.

Client assets under management totaled 284 billion francs at the end of June, compared with 289 billion francs reported for the end of April, the company said. Gross margin, or revenue compared with managed assets, was 99 basis points by the end of June, after exceeding 100 basis points in the first four months.

Julius Baer is seeking acquisitions to tap new wealth in emerging markets and diversify from Swiss franc-denominated business, Collardi said in a Bloomberg Television interview. The firm also wants to continue to grow without “interference” from firms seeking to buy the bank, he said.

Julius Baer also said it acquired a 40 percent stake in NSC Asesores, the largest independent financial advisory firm in Mexico. It didn’t disclose a value for the transaction.