OREANDA-NEWS. Boris F.J. Collardi, Chief Executive Officer of Julius Baer Group Ltd., said: “Our business momentum has improved since the first quarter of 2016, leading to increased inflows and record assets under management of 311 billion Swiss francs. The refocusing on organic growth, without disregarding acquisition opportunities, is starting to pay off. The strengthened client-facing organisation and the significant relationship manager hiring successes will bolster the Group’s ability to grow its client asset base and achieve the medium-term targets in line with Julius Baer’s focus on long-term and sustainable value creation.”

AuM up 4% to record high, despite negative currency impact

Assets under management grew by 4%, or CHF 12 billion, to CHF 311 billion. The increase in AuM was the result of a net positive acquisition impact of CHF 8.6 billion following the first-time consolidation of Kairos Investment Management SpA (Kairos), net new money of CHF 5.5 billion (3.7% annualised) and positive market performance of CHF 1.6 billion, partly offset by a negative currency impact of CHF 4.0 billion.

After a slow start to the year, net inflows accelerated towards the end of the period, resulting in an (annualised) net new money pace of 3.7%, close to the Group’s 4-6% annual target. Net new money was supported by continued inflows from Asia, the Middle East and Central & Eastern Europe, from the local businesses in Switzerland, Germany and Italy as well as from the cross-border European business. These inflows were partly offset by slow momentum in Latin America, by some client deleveraging in Asia, as well as by the tail end of the regularisation of legacy assets in France and Italy.

Assets under custody were unchanged at CHF 86 billion.

Lower year-on-year client activity, but compared to H2 2015 a recovery in trading income

Operating income rose to CHF 1,425 million, an increase of 1%, below the 6% growth in monthly average AuM (to CHF 301 billion). This increase was helped by a positive fair value adjustment of CHF 39 million resulting from the acquisition on 1 April 2016 of an additional 60.1% stake in Kairos. As a result, the gross margin for the Group declined from 99 bps in the first half of 2015 to 95 bps. Of the total gross margin, 2.6 bps are due to the Kairos fair value adjustment. However, when excluding the latter positive impact, the gross margin nonetheless improved by 4 bps from the 88 bps achieved in the second half of 2015.

Net commission and fee incomecontributed CHF 739 million, a decrease of 7%. The reduction was driven mainly by a decline in brokerage commissions, reflecting the lower transaction volumes following reduced client risk appetite compared to the same period a year ago.

Net interest and dividend income rose by 33% to CHF 510 million, which included dividend income on trading portfolios, up from CHF 122 million to CHF 180 million. Excluding this item, underlying net interest and dividend income grew by 26% to CHF 330 million. This increase was driven by a 12% year-on-year growth in loans, higher credit spreads and an improvement in treasury income, which outweighed the negative impact from a rise in interest expense on deposits and debt issued as well as the net impact from negative interest rates.

Net trading income fell by 46% to CHF 118 million. Including the aforementioned increased trading portfolios-related dividend income, underlying net trading income decreased by 12% to CHF 298 million. This decrease is explained by the fact that in the first half of 2015 trading income had benefited extraordinarily from the elevated FX volatility and volumes following the Swiss National Bank’s decision on 15 January 2015 to discontinue the minimum exchange rate of CHF 1.20 per euro. Compared to the second half of 2015, underlying net trading income improved by 26% thanks to an increase in FX volumes throughout most of H1 2016, particularly in June following the result of the Brexit referendum in the UK.

Other ordinary results, which among other items includes brand licensing income, income from associates, rental income and net gains/losses from the disposal of financial investments from the available-for-sale (AFS) portfolio, grew by CHF 43 million to CHF 58 million. This increase is largely attributable to the aforementioned Kairos acquisition-related positive fair value adjustment of CHF 39 million.

Adjusted operating expenses: lower provisions more than offset investments in growth

Adjusted operating expenses fell to CHF 940 million, a decrease of 27%, mainly due to the fact that the first half of 2015 included the H1 2015 US provision of CHF 326 million. Excluding the H1 2015 US provision, the adjusted operating expenses declined by 1%.

At 5,856 full-time equivalents (FTEs), of which 1,284 RMs as well as 144 Kairos employees, the total number of employees at the end of June 2016 was up by 9%, or 478 FTEs, from the end of June 2015, whereas the average number of employees increased by 5% to 5,682. In the first six months of 2016, the Group added 67 new RMs on a net basis, of which 20 joined through the acquisition of Kairos. The hiring-based increase of 47 RMs in the first half of the year is already above the total net recruitment of 40 RMs in all of 2015. This growth, as well as the increase in other staff, follows the strategic decision to accelerate RM hirings and to invest in strengthening other key areas of the business, such as Investment Management and Investment Solutions. Adjusted personnel expenses declined to CHF 623 million, a decrease of 1%. This result was helped by a positive impact of CHF 63 million resulting from the pension fund plan amendment in Switzerland. Excluding this, adjusted personnel expenses grew by 9% to CHF 686 million.

Adjusted general expenses fell by 53% to CHF 285 million. Excluding the H1 2015 US provision, the adjusted general expenses increased by 3%, below the 6% increase in monthly average AuM. This relatively low increase was helped by a CHF 24 million decrease in valuation allowances, (non-US related) provisions and losses to CHF 18 million.

The adjusted cost/income ratio2 remained at 64.7% (H1 2015: 64.7%; H2 2015: 69.9%). Without the pension fund-related impact, the adjusted cost/income ratio increased to 69.1%, following the gross margin decline to 95 bps and the Group’s accelerated investments in growth this year.

Adjusted net profit CHF 402 million – significant increase in IFRS net profit

Adjusted profit before taxes increased by 278% to CHF 485 million. Excluding the H1 2015 US provision in the first half of 2015, adjusted profit before taxes went up by 7%. The related income taxes were CHF 83 million, representing a tax rate of 17%. Adjusted net profit for the Group improved by 270% from CHF 109 million to CHF 402 million, and adjusted earnings per share for the Group by 272% from CHF 0.50 to CHF 1.85. Excluding the H1 2015 US provision, adjusted net profit for the Group and adjusted EPS grew by 5%. After considering non-controlling interests, adjusted net profit attributable to shareholders of Julius Baer Group Ltd. rose from CHF 108 million to CHF 401 million, and adjusted EPS from CHF 0.49 to CHF 1.84.

As in previous years, in the analysis and discussion of the results in the Media Release and the Business Review, adjusted operating expenses exclude integration and restructuring expenses (CHF 11 million, compared to CHF 10 million in the first half of 2015) as well as the amortisation of intangible assets related to acquisitions (CHF 34 million, down from CHF 65 million in the first half of 2015). Including the above items, as presented in the IFRS results in the Group’s Consolidated Financial Statements for the first half of 2016, net profit increased by 812% to CHF 362million, as the first half of 2015 was strongly impacted by the H1 2015 US provision. After considering non-controlling interests, the IFRS net profit attributable to shareholders of Julius Baer Group Ltd. grew by 828% to CHF 362 million, and EPS by 834% to CHF 1.66.

Balance sheet and capital developments

Since the end of 2015, total assets increased by CHF 3.6 billion, or 4%, to CHF 87.8 billion. Client deposits declined very slightly, by CHF 0.2 billion, to CHF 64.6 billion, while the total loan book grew by CHF 0.3 billion, or 1%, to CHF 36.7 billion (comprising CHF 28.0 billion of Lombard loans and CHF 8.8 billion of mortgages). As a result, the loan-deposit ratio rose to 0.57 (end of 2015: 0.56). In the same period, which included the acquisition of an additional 60.1% stake in Kairos for EUR 276 million (CHF 302 million), total equity attributable to shareholders of Julius Baer Group Ltd. increased by CHF 0.2 billion to CHF 5.1 billion.

At 30 June 2016, on a phase-in basis, total capital amounted to CHF 3.5 billion, of which CHF 3.3 billion CET1 capital. With risk-weighted assets at CHF 20.4 billion, this resulted in a phase-in BIS total capital ratio of 17.3% and a phase-in BIS CET1 capital ratio of 15.9%, well above the Group’s target ratios of 15% and 11%, respectively, and significantly in excess of the regulatory minimums of 12.2% and 8%, respectively.