At the end of October 2018, Julius Baer Group’s assets under management (AUM) stood at CHF395bn, a year-to-date increase of CHF6bn, or 2%.
The positive contributions to AUM from net new money growth, the acquisition (in June) of Reliance Group in Brazil, and a small positive currency impact, were largely offset by adverse market performance. Most of the negative market impact on AUM occurred in October, when many leading stock markets suffered significant corrections.
Net inflows were robust and, despite further client deleveraging, remained close to 5% (annualised) for the first ten months, just below the mid-point of the medium-term 4–6% target range. All regions recorded net inflows, with particularly strong contributions from clients domiciled in Asia, the UK and Germany.
As highlighted in July, clients adopted a more cautious stance on the back of a challenging market environment. Throughout the third quarter, this led to lower levels of client activity, before volatility and volumes picked up again in October. As a consequence, the gross margin for the first ten months of 2018 decreased to 87 bp. This compares to 91 bp in the first six months of 2018 and 90 bp for full year 2017.
As a result of the decline in the gross margin, the cost/income ratio for the first ten months of 2018 rose to 69%, exceeding the targeted 64-68% range. The increase was driven by the drop in client activity in the third quarter, which was more pronounced than expected at mid-year. To offset the impact of the market-driven revenue fluctuations, the Group has initiated further cuts in discretionary spending.
While the achievement of the cost/income ratio target in 2018 will depend largely on market conditions in November and December, Julius Baer is taking additional steps to improve its efficiency, with the aim to reach the target in 2019.
As part of its strategy to focus on core markets, the Group is prioritising its presence, client offering and growth investments accordingly. Year-to-date investments in core markets include the opening of new offices in UK (Manchester, Leeds, Edinburgh) and Germany (Hanover, Berlin) and the acquisition of Reliance Group in Brazil.
Julius Baer has also made targeted moves in defined growth markets, such as the strategic partnerships with Siam Commercial Bank (Thailand) and Nomura (Japan) and the recent opening of an advisory office in South Africa (Johannesburg).
At the same time, Julius Baer has accelerated its efforts to reduce complexity and exposure in its non-core markets, including the planned closing of its offices in Panama and Peru and the discontinuation of its services to clients from selected countries.
In the first ten months of 2018, BIS CET1 capital was affected by the acquisitions of Reliance Group (in June) and the residual 20% stake in Kairos (in January). In the last four months, risk-weighted assets went up, partly from an increase in the financial assets portfolio following further credit deleveraging, and partly from an increase in market risk. As a result, the Group’s BIS CET1 capital ratio declined to 13.0%, compared to 13.5% (fully applied) at the end of 2017.
Following the redemption (in March) of CHF250m of perpetual Tier 1 bonds, the BIS total capital ratio stood at 19.0%, compared to 21.2% (fully applied) at the end of 2017. At these levels, the capital ratios remain comfortably above the Group’s floors of 11% and 15% respectively, and significantly above the regulatory floors of 8.1% and 12.3% respectively. The tier 1 leverage ratio stood at 3.8%, well above the regulatory floor of 3%.