Julius Baer: tough markets matter more than rate rises

Old-school saxophonists deployed sharp elbows to avoid the spots on stage that muffled their playing. Too bad that Julius Baer, co-sponsor of the Montreux Jazz Festival, is stuck in its own acoustic dead zone. The Swiss private bank, which just published weak half-year results, is stumbling through the changes like other long fund managers.

Tumbling markets reduce fee income from client portfolios. Smart improvisation can soften the impact, but cannot negate it.

One variation in tone, which this week’s chorus of bank results will echo, is greater emphasis on lending. Rising interest rates make this more remunerative. Julius Baer, for example, estimates that an increase of 1 percentage point in US rates alone would add about 3.5 basis points to its gross margin. This rose to 81 basis points for the half year.

But Julius Baer is more of an asset manager than a bank. Over half its gross margin derives from fees and commissions. These have slipped as assets under management slumped 11 per cent to SFr428bn.

Chief executive Philipp Rickenbacher believes Julius Baer is through the worst. Clients are chipping in net new money again. A freeze on hiring new staff — apart from the relationship managers who bring assets with them — should keep a lid on costs.

This bellwether for the Swiss private banking industry finished the second half with decent core equity tier one capital of 15 per cent. That equates to SFr820mn of spare capital, enough to cover immediate buyback commitments.

Julius Baer says it has the world’s most valuable wealth management brand. Lex is sceptical of such calculations. But franchises do matter. The business has a strong proposition in an industry undergoing secular expansion.

Near term, cyclical challenges create dissonance. The shares, down by a quarter so far this year, are a relatively pricey 2.4 times tangible book value. They will stay under pressure. Central bank rate rises appear too small to tame inflation. Markets remain fragile. Wealth management companies hunt for a sweet spot that, for the moment, does not exist.