Company Reports

Wide-moat Julius Baer reported its worst half-year results in over a decade as the fallout from its exposure to embattled property group Signa forced it into a loss-making position for the second half of 2023. However, we applaud the decisive steps that Julius Baer has taken to address the issue. It announced a full impairment of its remaining total exposure to Signa of CHF 606 million and intends to completely exit the so-called private debt lending business of which the Signa exposure forms part. Julius Baer also confirmed that CEO Philipp Rickenbacher will step down. We took heart from the solid underlying performance and Julius Baer's unchanged medium-term guidance.

The strong secular trend where very wealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place. The demand for bespoke financial planning and wealth management services will continue to be strong. However, we anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding their presence in the wealth management market.

We are dropping coverage of some of our European banks and asset managers. We will no longer be reporting on Santander, Credit Agricole, Julius Baer, Unicredit, Intesa Sanpaolo, Mediobanca, Amundi, KBC, DWS Group, BBVA, and Schroders. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

The strong secular trend where very wealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place as asset prices continue to benefit from low interest rates. The demand for bespoke financial planning and wealth management services will continue to be strong. We do however, anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding its presence in the wealth management market.

Wide-moat Julius Baer reported a 17 % increase in net adjusted profit to CHF 508 million for the second half of 2021, missing the CHF 560 million estimate from the poll of analysts conducted by S&P Capital IQ. However, the CHF 1 billion that Julius Baer reported for fiscal 2021 was in line with our expectations and marks an all-time high for the firm. The results confirmed that trading conditions would be more challenging in 2022. Costs could prove difficult to contain in the current inflationary environment, and with revenue growth expected to slow down, the challenge for Julius Baer is clear. Julius Baer should, however, still generate significant free cash flow, and management increased the dividend payout ratio to 50% of earnings from 40% previously; it also confirmed that it would look to repurchase CHF 400 million of its shares during 2022. We estimate that this implies generous total shareholder distributions equal to around 8% of its current market value. At 10 times forward earnings, Julius Baer does not look expensive. We maintain our CHF 69 per share fair value estimate and our wide moat rating.

Wide-moat Julius Baer reported slowing revenue growth in its interim management statement for the 10 months through Oct. 30, 2021. However, we remain confident that the firm can meet our CHF 1 billion net profit estimate for 2021, which would represent a 47% year-on-year growth in earnings. The decline in the gross margin that Julius Baer earns on the assets it manages on behalf of its clients was the major disappointment in the trading update. We maintain our CHF 69 per share fair value estimate and our wide moat rating.

After updating our model, we increase our fair value estimate for Julius Baer to CHF 69 per share from CHF 57 per share previously. We keep our wide economic moat rating. On a midcycle basis we estimate that Julius Baer can generate a return on tangible equity of 20%, comfortably ahead of the 8% we estimate for its cost of capital.

The strong secular trend where very wealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place as asset prices continue to benefit from low interest rates. The demand for bespoke financial planning and wealth management services will continue to be strong. We do however, anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding its presence in the wealth management market.

Wide-moat Julius Baer does not report full quarterly results, but in a trading update spanning the first four months of 2021 it disclosed a strong performance on some of its key metrics. From the disclosure we estimate that Julius Baer saw a 26% year-on-year increase in pretax profits compared with the same time period a year ago. It disclosed assets under management of CHF 470 billion at the end of April 2021 supported by net new money inflows of 4% annualised and strong global markets. Gross margins declined to 90 basis points from the 95 basis points it reported a year ago. Execution on its cost savings program saw the cost to income ratio improve to 60% compared with the 64% it recorded a year earlier. We maintain our wide moat rating and our CHF 57 per share fair value estimate.

Wide-moat Julius Baer reported net attributable profit of CHF 699 million for its 2020 fiscal year, 50% higher than the CHF 465 million it reported a year ago and ahead of the CHF 659 million we expected. Julius Baer also discloses an adjusted net profit number that excludes certain items it deems non-recurring or of a non-cashflow nature. The reported net adjusted attributable profit of CHF 955 million for 2020 was 24% ahead of the number Julius Baer reported a year earlier. Julius Baer also announced an increase in its dividend to CHF 1.75 per share--compared with the CHF 1.50 per share it paid during 2019. It also indicated that it will resume share buybacks with a new CHF 450 million buyback program that will commence in March 2021. We maintain our CHF 57 per share fair value estimate.

Wide-moat Julius Baer reported strong underlying fundamentals in its third-quarter trading update. Julius Baer only reports full results twice a year: from the measures disclosed by Julius Baer, however, we estimate that pretax operating profits are around 35% higher for the first nine months of 2020 compared with the same period last year, and we estimate strong revenue growth of around 10% year on year. Julius Baer disclosed a common equity Tier one ratio of 14.3% at the end of September, an improvement compared with the 14% common equity Tier one ratio it disclosed at the end of 2019 and well above the 11% self-imposed minimum common equity Tier one ratio. Subject to shareholder approval on Nov. 2, Julius Baer will pay the outstanding half of its 2019 dividend--CHF 0.75 per share on Nov. 6. It confirmed it continues to accrue for a dividend based on 2020 earnings. Depending on regulatory approval we believe Julius Baer should be able to pay a 2020 dividend of at least CHF 1.50 in April 2021. We maintain our wide moat rating and increase our fair value estimate slightly to CHF 57/share from CHF 55/ share previously. We believe Julius Baer continues to offer value, especially to investors looking for a stable, high-quality investment in European financial services.

The strong secular trend where ultrawealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place as asset prices continue to benefit from low interest rates. The demand for bespoke financial planning and wealth management services will continue to be strong. We do however, anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding its presence in the wealth management market.

Wide-moat Julius Baer Gruppe reported net profit of CHF 491 million for the first half of its 2020 fiscal year, a 43% year-on-year increase; which is in line with the consensus estimate for the quarter collected by Visible Alpha. Julius Baer exceeded all its 2022 targets in these results already. We believe the second half of the year will see softer results as the very strong brokerage revenue results, as well as strong trading revenue growth, are likely to be more muted. Investors looking for safe dividend prospects should look no further than Julius Baer. We believe Julius Baer will declare a CHF 1.50 dividend for 2020 when it releases its full-year results in the first quarter of 2021. At Julius Baer's current share price that translates into a dividend yield just shy of 4%. We remind investors that Julius Baer is also trading cum dividend of CHF 0.75: this is the second half of the 2019 dividend that Julius Baer will pay out in November 2020. We view Julius Baer's earnings visibility as high due to its limited exposure to credit risk. We increase our fair value estimate to CHF 55, from CHF 51 previously.

The strong secular trend where ultra wealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place as asset prices continue to benefit from low interest rates. The demand for bespoke financial planning and wealth management services will continue to be strong. We do however, anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding its presence in the wealth management market.

European banks have never been this cheap. Ever. Even at their 2008 nadir, investors believed European banks were worth more than they do today. The average multiple of European banks fell by half after the 2008 global financial crisis, which was justified as their profitability was also halved. There is no indication of such a step change in profitability happening now. It seems investors are fretting about the prospect of large-scale asset impairments, which may force banks to once again pass the cap around for a capital injection. We published an Observer, "Impact of Coronavirus on Credit Quality, Capital Adequacy, and Profitability Is Manageable; European Banks Remain Undervalued" on July 6 to explore the valuation, credit quality and capital adequacy of European banks in more detail.

We have recently updated all our European banking models to incorporate the effects of the coronavirus. We now forecast that the median bank that we cover will book a 38% earnings decline in fiscal 2020 compared with 2019. We then, however, forecast a solid recovery in 2021 and 2022, with median earnings growth of 31% and 17% respectively. A sharp median increase of 125% in loan-loss provisions is the main driver of the expected decline in earnings, but we also anticipate that median revenue will decline by 4%. Importantly, we do not believe that any of the European banks we cover, with the exception of Deutsche Bank, will record a loss for 2020.

The strong secular trend where ultra wealthy individuals grow their wealth ahead of the growth in global GDP is set to remain in place as asset prices continue to benefit from low interest rates. The demand for bespoke financial planning and wealth management services will continue to be strong. We do however, anticipate that fee margins will remain under pressure as competition increases with many financial services firms expanding its presence in the wealth management market.

We estimate the suspension of the payment of the final 2019 dividends will conserve EUR 21 billion for the 14 eurozone banks that we cover. The median eurozone bank in our coverage list will boost its common equity Tier 1 ratio by 0.6% to 13.4%. The banks that pay interim dividends, Benelux and Spanish banks, will also suspend dividend payments for first-half 2020 at least. Currently, it isn't clear what banks in the Nordic countries and United Kingdom will do. All three of the Swiss banks will still pay out final dividends for 2019, Credit Suisse has suspended its share buyback program, while UBS is unlikely to extend its buyback program into second-half 2020. KBC, Natixis, Intesa Sanpaolo and Mediobanca will see the greatest boost to their common equity Tier 1 ratios, with an estimated 1% increase.

Our European banking coverage list has an average exposure to oil and gas equal to 33% of common equity Tier 1 capital. Three banks with significant oil and gas exposure do boost the average significantly, however. Natixis, Credit Agricole, and ING have oil and gas exposure equal to 134%, 105%, and 82% of their respective CET1 capital bases. On the other end of the spectrum, Julius Baer, Handelsbanken, Intesa Sanpaolo, UBS, Lloyds, and KBC have oil and gas exposure equal to less than 10% of their capital bases.

Wide-moat Julius Baer reported net profit of CHF 465 million for fiscal 2019, a 36% year-on-year decline. Two nonrecurring events did, however, have a material impact on results. On an adjusted basis, profit before tax came in at CHF 917, which was slightly ahead of the CHF 894 million we had penciled in for 2019 and 6% lower than the CHF 977 million Julius Baer booked in 2018. Julius Baer's updated guidance is slightly less ambitious than previously, calling for a midcycle return on common equity Tier 1, or roCET1, of greater than 30% compared with a return of 32% expected previously. Julius Baer is currently generating a 27% roCET1, but it is worthwhile to contextualize this, as recently as 2017 Julius Baer was generating a 32% roCET1. Julius Baer remains one of the European banks with the greatest capacity for organic capital generation, improving its common equity Tier 1 ratio to 14% by year-end 2019 compared with 12.8% at the end of 2018. We maintain our wide economic moat rating and our fair value estimate of CHF 56 per share.