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Executives

Boris Collardi – CEO

Dieter Enkelmann – CFO

Analysts

Daniele Brupbacher – UBS

Nicholas Heymann – Citi

Eleni Papoula – Berenberg

Martin Leitgeb – Goldman Sachs

Stefan Stalmann – Autonomous Research

Kilian Maier – MainFirst Bank AG

Bruce Hamilton – Morgan Stanley

Jeremy Sigee – Barclays

Giles Broom – Bloomberg News

Julius Baer Group (OTCPK:JBAXY) Q2 2014 Earnings Conference Call July 21, 2014 3:30 AM ET

Boris Collardi

Good morning Ladies and gentlemen. Welcome to our first half year results presentation. We’re looking at very pleasing strong financial performance in the first six months of this year driven as you can see here by strong inflows resulting into improved profit and continuous solid capital position.

AuM increased to 274 billion that’s a new all-time high with 20 billion more than at the end of last year. This is helped by the first time consolidation of GPS where we increased our stake from 30% to 80% the current value of the asset in Swiss Franc is approximately 6 billion. We also had very strong net new money across the board from Switzerland to Europe including obviously our growth market, our emerging markets franchise of 7.5 billion that’s in essence as much as the full year 2013 and brings us back to the 6% net new money growth that we prefer to see rather than the 4%. As a result the adjusted net profit improved by 10% to 288 million, that’s the highest number we have ever had in half-year results. Capital position, we will hear more from Dieter later on continuous to be strong with the total capital ratio at 24% almost.

The IWM integration is entering now it's final stage. We have decided to share with you some productivity numbers, two relevant ones, return on asset as you know for the first half year for the group was at 95. The Merrill former bankers have been contributing at a production of 84 basis point and that’s within now reach of the end 2015 target of 85 basis points. Also when it comes to net new money we have seen that once the transition activities are completed and bankers are not occupied with taking care of repapering and transferring clients they can also concentrate on going back to client, getting additional assets and getting new clients on Board.

The number you will see later on is that the former Merrill bankers have been growing on their book of business at the speed which is in excess of 10% net new money growth.

The assets at current market value that we are reporting from the IWM transaction are at 56 billion of which now by July 21, 50 billion are booked on JB platforms so the gap between reported and managed or booked is actually closing in very nicely. Some people will be asking I’m sure where is it that we land in terms of total assets. We still have number of assets to transfer, the last part however the bigger chunk still resides with the transfer of the Merrill GSP franchise in India, which today is a book of business in excess of $5 billion.

The right sizing as we have always announced the synergies being very important corner stone of this transaction are coming through actually this year faster than the leaner target. We have a right sizing of approximately 400 full-time equivalence for the full-year. We have already realized in the first half 263 and that’s in addition to the 300 we had done already in the prior year.

The cost income ratio of the group at 70.8 -- we are basically here talking about the adjusted cost to income ratio trending back on track to target range of 65 to 70. As business momentum is gaining speed we see ourselves very well positioned for further growth and you’ve seen this morning we announced interesting small transaction which is the acquisition of the book of business of Leumi Bank in Switzerland, and in Luxembourg, Dieter will talk about this in many detail and that’s also on the back of a strategy cooperation agreement. We see clearly that the next phase of consolidation is kicking in Switzerland and this is surely on the back half of Category 1 but also we will see of Category 2 banks. What we’re showing today is a possible template of what is yet to come.

So once again very pleased with the first half here. We’re seeing now that the Merrill transaction is starting to move from project integration mode into a real business mode and is trickling down the bottom line.

With this I would like to hand over to Dieter Enkelmann.

Dieter Enkelmann

Thank you Boris. Good morning. The presentation is as usual on the adjusted basis which has the analysis of the underlying business performance. This excludes the M&A related integration and restructuring expenses and the M&A related intangible amortization and last year in 2013 it also excluded a one-off 29 million charge in relation to the withholding tax agreement between Switzerland and the UK which obviously did not recur in 2014.

The reconciliation from the IFRS, the adjusted result as presented here is on slide 14 and the full IFRS result can be found in the half-year consolidated financial statements.

After an uncertain start to the year, the first half of 2014 was characterized by a positive performance in most investment categories. Equity volumes also picked up after a slow second half of last year. However, then on a negative note FX volatility continued the downward trend that started last summer which had a negative impact on FX trading volumes in the marketplace.

Now to the results. Assets under management went up to CHF274 billion, an increase of 20 billion or 8% since the end of last year and the increase of 57 billion or 26% since the end of June last year.

The year-to-date increase came on the back of an excellent net new money result of 7.5 billion, 7 billion from acquisitions and the combined market and currency impact of just over CHF5 billion. At the end of June, AuM included 56 billion assets under management from IWM at current market values. The monthly average AuM which is important for the calculation of the gross margin was up 24% year-on-year and including assets under custody of 98 billion, total client assets increased to 7% to CHF372 billion.

Net new money added 7.5 billion at the high end of our target range and as Boris already said basically as much as in all of 2013. This was driven by continued inflows from all growth markets, as well as from our onshore businesses in Germany and Switzerland and it was very encouraging to see that the former Merrill Lynch RMs already contributed 2 billion to this number.

The European cross border inflows are more than offset by the continued tax regularization on legacy assets. To the bottom of that slide the total RM based increased by 19 RMs in the first half comprising of 50 net new hires and 16 join us from GPS, which was consolidated for the first time in April and a net reduction of 12 RMs from the former Merrill Lynch advisor base.

Operating income increased 15% to 1.2 billion somewhat below the increase in average assets. But the increase in commissions and fees and interest income was partly offset by a decline in trading income. Commissions and fee increased 25% basically in-line is the increase in average assets under management to 746 million. The like for like commission fee increase was actually somewhat higher. As last year all income allocated from Merrill Lynch related to the assets that were still booked at the Bank of America platform had been recognized in this slide and of course this is now declining every month.

Net interest and dividend income went up by 26% partly on a 30 million increase of dividend income on trading portfolios which as you know for accounting reason is booked in this line, see also the footnote on this slide for further explanation. Excluding this underlying interest income was up 18% to 284 million and then if one adjusts for the mere effect of the dividend income then the underlying trading revenues came to 287 million [ph] a decline of 18% reflecting the lower FX volumes following the decline in FX market volatility as explained on the second slide.

The other ordinary result increased by 51% to 28 million helped by higher licensing income from Swiss and Global.

The group gross margin came to 95 basis points, a decline compared to the same period one year ago as the rate of IWM business in the overall gross margin calculation increased significantly into 2014. Compared to the second half of 2013, the gross margin improved by four basis points.

Contribution from commission fees was 57 basis points unchanged on the year ago but up two basis points compared to the second half of last year. Interest income was essentially stable at 22 basis points, while trading income contributed 14 basis points down 7 bps from a year ago but up three basis points from H2.

The actual gross margin split between the ex-JB [ph] business and the Merrill Lynch business booked on our platform is not precisely measurable anymore but using extrapolation, we would estimate that in the first half of this year the standalone Julius Baer gross margin was approximately 97 basis points, this is in this box on the right side and IWM gross margin about 84 basis points up significantly from the H2 period of last year as the negative asset transfer effect from that period started to disappear during the first half of 2014.

Adjusted expenses increased by 16% to 882 million reflecting the further transfer of the IWM business since June last year. Staff expenses increased by 21% to 592 million driven by a 31% increase in average staff levels.

General expenses increased 11% also mainly due to the further IWM integration. As a result the cost income ratio came to 70.8% up 1.5 percentage points from H1 2013 but an improvement of 2.5 percentage points versus H2 of last year and obviously also a big improvement from the cost income ratio we reported in the IMS for the first four months.

Perhaps one thing worth mentioning or pointing out here that the application of the new IAS 19, the accounting rules for the pension funds introduce a new element of volatility within the reporting period as the valuation of the pension fund takes place at the closing of each period, so in June and December.

This half year this resulted in a slightly positive impact at the end of June and if this had been spread evenly over the period, over the six months then the cost income ratio for the first four months would actually have been slightly below 73%. As a result adjusted net profit improved to CHF288 million, a 10% increase over the same period one year ago and up 32% over the profit in H2 of 2013.

Increase in EPS was 8% versus H1, 2013 and about 29% from H2 reflecting the increased weighted average share count after the further transfer of shares out of escrow to Bank of America as part of the purchase price for the transferred assets.

On this slide, we show the usual reconciliation from IFRS result to documented adjusted profit. There are three non-cash amortization lines of which the UBS-related one will end next year in 2015. The largest single reconciliation item is, of course as planned the IWM integration cost which was close to 60 million in H1.

IFRS net profit came to 179 million, an increase of 56% on the same year a period a year ago as mentioned before; the UK provision did not recur. The operating results improved and as to IWM integration expenses were lower than in the same period last year. And compared to H2 the IFRS net profit increased by 143%.

Moving on to the balance sheet, since the end of 2013 the size of the balance sheet increased by 2% to 74 billion. This growth came mainly on the back of 6% increase in client’s deposits to 55 billion. The 6% was a bit less than the 8% increase in AuM and this reflects a relative shift in client assets from deposits to investment funds as you can also see on the asset composition which is the last slide in the appendix of the presentation.

Loans to our private clients were up 11% to 31 billion resulting in a slightly increased but still conservative loan to deposit ratio of 56. The loan book grew a bit faster than AuM and this partly reflects a decent credit take-up by former Merrill Lynch clients. Please note here that all of our lending is secured by collaterals of the loan book, 23 billion is in the form of Lombard loans and 8 billion in mortgages mostly here in Switzerland.

Moving on to the capital ratios, risk weighted assets increased to 16.2 billion. Total capital increased to 3.9 billion and Tier 1 capital to 3.6 billion helped by the successful placement of the 350 million of additional Tier 1 securities at the end of May.

This additional capital was placed to balance the diminishing capital recognition under Basel III of the so-called old style capital instruments which are the pref shares issued in 2005 and the lower Tier 2 instruments issued in 2011.

As a result the total capital ratio went up to 23.9% and the Tier 1 ratio to 22.4% comfortably above our capital targets of 15% for total capital and 12% for Tier 1 capital respectively. The Basel III full applied basis, the total capital ratio was 20.3% and the Tier 1 ratio 19.8% and the CET1 ratio 16.3%.

As Boris already mentioned in his introduction the IWM integration is developing well. On this slide, one sees the AuM development overtime since we started the transfer process in February last year and including the transfers that took place in July of this year subsequent to the June closing.

Based on the value of these assets at the date of transfers which is the upper part of the slide AuM reported increase to 54.5 billion of which 74 billion is AuM booked and paid 1.2% to Bank of America. Under these definition the target is still to get to at least 57 billion next year. The lower graph shows development of these assets at current market values. On these basis the value of AuM reported this today 56 billion and the value of AuM booked on the Julius Baer platforms today is 50 billion.

On the right hand side we show that in the first six months the applicable closing continued as planned, with Ireland taking place in April and the Netherlands in May. The applicable closing for France is foreseen for sometimes in the fourth quarter and the larger transfer in India will most likely occur in Q2 of next year.

This slide shows the development of the KPIs compared to the target related to the Merrill Lynch transaction. In terms of net new money we had initially not expected much yet for 2014, so it's very gratifying that the former Merrill Lynch RMs contributed already 2 billion in the first six months.

The extrapolated gross margin as mentioned came close to hitting the 85 basis points that we had set as a target for next year so that was certainly also an excellent development in H1. Due to the rapid integration the cost base has very quickly become inseparable and not measurable but on our estimate it is clear that the first six months implied cost income ratio for the IWM business on our platform would have fallen below 90% and therefore well on its way to the 70% target for next year as the further synergies come through.

Our focus for the IWM transaction last year was very much on the asset transferring and shifted this year much more to the right sizing of the business. As we elaborated in February in relation to the IWM integration our 2014 staff reduction target is in the 550 to 650 range on the gross basis and approximately 400 people on a net basis, the difference coming from Merrill Lynch staff still transferring to Julius Baer during 2014.

At the end of June purely in relation to the IWM integration, 260 staff had left the payroll and other 103 redundancies has been communicated which will impact the payroll over the next few months. Total redundancies realized therefore stood at 363 and on a net basis 263 as 100 IWM staff joined in first six months of this year therefore putting the right-sizing progress well on track. As the IWM gross margin so far this year is well ahead of our initial expectations, the implied extrapolated cost-to-income ratio for IWM in 2014 as mentioned can be expected well below the 90% which we had guided for previously and in 2015 we will continue the focus on efficiency opportunities which would get us to our target efficiency levels next year and we will certainly try to drive more productivity and efficiency improvements out of the business beyond 2015.

As Boris mentioned Bank Leumi is exiting the Swiss and Luxembourg based private banking business and as part of that we have assigned new strategic operation agreement between Julius Baer and Bank Leumi to enhance the service offering to the clients of both sides.

As part of this cooperation agreement we will transfer -- we do a business transfer in Switzerland. The Swiss business of Leumi has currently 5.9 billion assets under management and approximately 30 RMs. This Swiss transaction is anticipated to be EPS neutral in 2015 and low single digit accretive in 2016 based on the assumption that we transfer about 75% of the Swiss Leumi clients to Bank Julius Baer. The capital impact is expected to be in between 60 million and 70 million, this includes the price for the goodwill, required capital and the transaction and the integration costs and we expect that the majority of the Swiss Leumi clients will hit our platform by the end of 2014 or in the first quarter of 2015.

We also signed an intention to acquire the subsidiary in Luxembourg, which currently has CHF1.3 billion assets under management and 8 RMs. This is subject to due diligence; contract negotiations and then obviously also the required regulatory approvals.

The total goodwill payable on the two transaction is 10 million in cash and the transaction will further increase Julius Baer’s exposure to growth markets in particular to Latin America and Israel. With this I give it back to Boris.

Boris Collardi

Thank you Dieter. Let’s go a little bit through some of the business update region by region. Switzerland continues to be strong, continues as a whole market to be the most solid pillar of our group. We have now for the Swiss market very strong dedicated product offering and segment specific marketing activities you may have seen me announce recently even launching the key client initiative with new nomination within our group to take care of those high net worth individuals in Switzerland. We dispose in Switzerland, as our largest market, of the critical mass for that.

We have also been launching a bit earlier on this year Julius Baer market link which is a state of the art trading market access platform. We’re now coming out of the family and friends phase, we’re rolling it out to clients that would like to access their account through the state of the art platform.

We see that continuously our brand is improving on its spending and rankings in Switzerland with the brand value boasted year-over-year and that’s this inter-brand survey by 19%, the highest increase among the Top 50 brands in Switzerland and I think I would like to finish by saying that the Phase of integration of IWM in Switzerland is completed and therefore also the redundancies in Switzerland are completed.

Let’s move on to Europe, Germany. The local business is continuing to show very strong business momentum. We have further significant inflows, the business is so well on track that we’re looking at reaching on the standalone German business breakeven on the operations by Q4 of this year. On the financial accounts it will look like we will still have a loss because what we’re booking also in Germany which is Julius Baer Europe is also the cost of the integration of the additional businesses but if we look at the pure profit contribution point of view analytical accounting Germany standalone will be breakeven by the end of this year.

The IWM transfer is continuing well. Netherlands and Ireland were transferred in Q2. I went to visit them, we hosted the first client meetings, a very good echo, very strong support by clients. The UK domestic portfolio management business was transferred just 10 days ago with the high transfer rate, the product offering in the UK has now been enhanced to serve really the domestic market you see here is as in mortgage offering.

The Luxembourg integration also is completed. We also visited Luxembourg, Spain, very good business momentum and Spain has another leg to come in Q3. You may have seen Bank of America decided to close their Italian operation. It would have been any way back to back transfer to Kairos, but the size of the business does not warrant the complex transfer process and therefore that reduces the complexity of the transaction.

Overall the tax regulation is progressing well. We’re well on track that by the end of next year we will also have regularized the situation for our French as well as our Italian client for which we expect anytime soon an announcement of a voluntary disclosure.

Going over to Eastern Europe, Israel, Middle East and Africa you can see that in Eastern Europe we have further healthy inflows. There has not been rushing to the gates as some of the people could have expected and I think that’s something that when I talk to colleagues is the general trend here, good quality, healthy inflows. We have been able to add a few teams here and there across the different location that we book clients from or we advise clients from.

Israel very good business momentum in the first half here, the strategic cooperation agreement with Bank Leumi will further add to our visibility in Israel and I think the takeover of the business of Leumi will add to our stock of clients in this region.

Middle-East and Africa with the Merrill integration being completed. We have now few new location and added substantial critical mass to our Dubai operation. I think we’re very well positioned to further grow in this very interesting part of the world. We have started for the first time also to look at local offering, things like Sharia compliant investment solutions. Asia-Pacific integration is completed with the exception of India.

We’re seeing that the transfer rate was in excess of 80%, the profitability improvements are really strong. Right now the operating performance of Asia is very pleasing and we’re seeing that Hong Kong and Singapore are firing on all cylinders. We received, I think, in Asia once again Best Boutique Private Bank Of The Year as well as Best Private Bank from External Asset Managers Choice 2013.

What is now left to do in Asia so the whole business is back on strong growth is the integration of the Merrill franchise business in India and the timing couldn’t be more perfect with the new Prime Minister the momentum, the enthusiasm in India is back and we’re looking forward to take over the business. I was there 10 days ago and the clients, we had a kick-off event with clients, the clients are looking forward to come over.

Just as an indication, this business has today in excess of $5 billion and is one of the largest domestic on-shore wealth management businesses in India. Latin America we’re in the final stages of onboarding businesses in Hawaii, Chile and Panama. The legal entity transfers have already been done and we’re continuing to expand our regional center in Panama on the basis of the IWM location we took over.

In Brazil for the first time we consolidated the GPS, we increased our stake and that’s obviously before we knew the results of the World Cup but you may have seen in the last few weeks Brazilian market is picking up and I think this is also a part of our business profile that we go and make maybe investments in some of the markets when they are less hot than they have maybe historically be but we’re confident that Brazil would turn out again into very positive territories as a market as we’re seeing the first drives [ph] of it.

We have increased our stake in GPS, actually GPS like for like in local currency doubled in the last three years but if you bring this back in Swiss Franc with the Real’s depreciation then the growth is less strong. GPS has offices that headquarters in Sao Paulo but also has an office in Rio. They have in excess of 100 employees, very strong franchise based on the investment management open architecture and no proprietary products, so same DNA as JB. So they are now fully integrated.

I would like to finish on something very important. We have been asking for a lot of patients on the Merrill transaction, it's been almost now two years since the announcement in August. We look back at the complex transaction but we’re now coming slowly to the last straight line to the end of it and you can see here that the dark blue and light blue lines are coming together. We have now already assets that we manage from this transaction of CHF56 billion of which 50 billion are already booked. This gap will close as we have more asset transfer coming through.

The gross margin is for us ahead of our expectation of a 85 end of next year with 84 already now. Dieter disclosed the number of more than 2 billion of net new money in the first half of this year coming from former Merrill bankers, that’s a substantial contribution and that’s a growth rate on the assets that they are managing of more than 10%. The synergies are more than on track with 263 FTEs net which have already been realized. So we have another 140 to do in the second half of this year and we’re continuing to focus on that.

The transaction cost could be narrowed down and now reduced as we’re coming slowly to an end down to 435 and we can see in the first half clearly the profit contribution is kicking in. So we’re keeping the eyes on the ball the next 6 to 9 months to complete and wrap up the transaction as I said the last big effort is the transfer of India which has been kicked off and we’re committed to realizing 2015 the full potential of this transaction that we should by then see entirely in our numbers.

That leads me once again to confirm that we believe we will be reaching our mid-term targets in terms of cost income ratio, pretax profit margin and obviously net new money.

Great. With this I would like together with Dieter to open the floor for any questions you may have.

Question-and-Answer Session

Daniele Brupbacher – UBS

I just have two things I wanted to discuss briefly; one is on lending, and one on costs. On the lending side, it looks as if Lombard lending was quite a success in the first half, and I think it's up around 2.5 billion. Was that a positive surprise to you? And can you talk a little bit about, from a regional point of view, the breakdown where that came from? And was it in any sense concentrated from a client or regional point of view? And what was also the pattern throughout H1 was it front loaded or evenly spread? And lastly on that one, it looks like you have quite a healthy margin on loans, probably more than 100 basis points, if my calculations are correct, which I think is quite high for a collateralized book. Could you just talk about your sense for the sustainability of that margin? So that's on lending. And then on costs, it's a short one. You obviously gave a lot of details on headcount targets and reductions, which is helpful for us to model the numbers. But on the non-personnel costs side, to me at least, it was a positive surprise. Could you just give us a little bit of a better feeling for how sustainable that is, the non-personnel line, and how much more reductions we can probably expect there, as well? Thanks.

Boris Collardi

Let me just brush on both and then Dieter can go into the details. As you recall we said also part of the Anagram [ph] transaction that the IWM franchise at the lower loan penetration. So obviously once the bankers have been transferred over to the JB platform we have made the entire product range available to them from investment product as well as lending products. So part of this strong increase you see comes from new colleagues that have been able to offer new credit solution to their existing clients. And Dieter can then tell you a little bit some more qualitative information about this in -- with regard to reduction we have guided you on targets but there are also some big reduction in the number of other areas, take for example Merrill Lynch Bank Suisse, we’ve the commission the entire IT operations the entire back office and IT systems. We’re constantly looking at premises where we can bring people together for example if you take Merrill Lynch Bank Suisse, to stay on this example, we’re returning the entire building back to the owner so we basically put everybody into our existing premises.

Dieter Enkelmann

Okay let me give few more flavor on the Lombard lending. First of all it was even more less evenly spread from January to June. I suppose that also on the back of the Merrill Lynch integration where they sold actively more Lombard lending to the clients, a little bit also then on the mortgage side but that’s only started. In terms of regions it's Asia which obviously as you know was fully integrated by the end of last year. It was Europe also very strong and then the rest just across the Board in all different jurisdictions. In terms of the spreads I mean your calculation on the 100 basis point is not correct, it's somewhat lower but what we have served and I think we already told in February but both on the Lombard side and particularly on the mortgage side here in Switzerland we’re able to rather increase the spreads.

It's quite a favorable market situation especially here in Switzerland on the mortgage side but also I would say in general on the lending we were able to increase the average spread we can achieve over the past 12 to even 18 months.

Then on the general expenses as Boris mentioned Geneva is a big contributor where we closed down the operations that’s part in April but fully in May and June. It's the platform, it's the building, it's of course a lot of order contracts where we had costs and that’s the same in lot of other locations where we have from the integration savings in Asia for instance on a lot of different things on outsourcing, on financial information purchases, Bloomberg’s and so and so forth.

Boris Collardi

Next question?

Unidentified Analyst

I have three questions. First regarding the U.S. settlement could you quantify the probability that we reach an agreement until the end of the year? And second will the assets that you just acquired with Leumi will be part of this settlement? And the third question is the price of Leumi also subject to how much of the assets under management will be booked on our platform?

Boris Collardi

I will do the first one -- first Dieter and then you can take over the Leumi side. I mean the U.S. situation in our assessment is as follows and we are continuing to repeat that. Every bank situation is different and I think you will be able as more and more of the cases are settled to compare the statement of facts and see who did what, when, who was proactive, what documents, how I would say transparent the collaboration was and I think that’s a fundamental difference that will lead then to eventually settlement amount. We continue to believe that we have been cooperating. I mean as you know we approached DoJ at the time and I’m talking as early as 2009 when we decided to exit the U.S. business. So we’re talking now about almost five years ago, it's quite some time back and so we continue to believe that we will find a fair and equitable resolution.

As to your precise question of what is the probability that we put of reaching an agreement by the end of this year, I think the fact that CS final settlement as a Category 1 bank has unlocked again the Category 1 negotiation so the probability is certainly quite high that the settlement will take place this year.

And then to your second question what is the context of the Leumi part of the U.S. side because Leumi because Leumi, as you know, is also Category 1 bank. On the Suisse side of the transaction, we only take over as the [ph] clients and client assets and therefore the legal entity stays behind with Leumi so this is not even touched by potential U.S. settlement of the Leumi Group.

In Luxembourg as I said the we intend to acquire the legal entity, subject still to due diligence, the negotiations, and obtain regulatory approvals and it's obviously clear that we would only sign and close such a transaction once Leumi had settled with the U.S. If this would not be the case then we would probably would have to deviate from the plan and also do an asset transfer and just get the clients.

Boris Collardi

Next question. If there is no more in the room for the time being -- there is one more.

Unidentified Analyst

I have more general question, in view of the fact of rising cost in regulatory matters some people suggest that fully fledged wealth management doesn’t make sense under assets under management of let’s say CHF3 million. Under that amount you’ve more simplified solutions with bonds and so I wonder would you agree with that view?

Boris Collardi

Are you talking from a client point of view that it doesn’t make sense to tailor make a portfolio below 3 million? That’s an excellent question and I think that’s hopefully once we move away from all these topics like U.S. and European regularization, one of the big topic that should be leading the discussion in wealth management and this is basically the industrialization or how do we run book of business catering to the different client geographies and I think one of the key aspects as we have seen MiFID, and the upcoming FID-like proposals, is clearly that you will need to have a lot more intelligence as an organization, as a bank to serve the right clients with the right product, with the right process, the right investment process moving forward and it will probably mean that if you do not dispose of this capabilities that are -- maybe supported by technology to assess what is the right product for the right client in the right geography then you may have to start to lumping some of the previous investment solution that you could do on the tailor made basis for smaller clients into bigger structures like funds.

But the answer is not yet given, what is the right level. I think we can still work on what we call this rule engine that gives us the possibility of qualifying what type of investment is appropriate for what type of client and that should be able still to provide what private banking in Switzerland is all about, it's tailor made solution for each client at the right price.

Unidentified Analyst

I have two questions, first about U.S. Have you enough capital, if the fine will be very high. We have speculations above 800 million. The second question, in your -- of your report there is an entry about France that you’ve been under mis en examen, meaning that there is a legal approach of the French authorities against you. It sounds like UBS, it is similar, what you’re expecting in France? Thank you.

Boris Collardi

As to the first one I think we stay by our statement that we believe we have the resources to satisfy U.S. settlement. I think the amounts that are out there in the market they are speculations, we have no way today to tell you in what range our settlement will be. As I said before we continue to believe that it will be fair and equitable and that every bank situation is different. We have not noticed a change in tone or attitude since the CS settlement.

The entry in France is mis en examen which is that judges checking particular former client situation that seems to have been involved in fraud scheme and we’re cooperating with that investigation and we will put the record straight when we will be given the opportunity, it is no way something similar with the UBS situation. We’re not talking here about cross border banking in this context. It's a former client that has left the firm for a quite some time and there is an investigation going against this client and there has been a request. So information of the context in which we had qualified this client as a client at that time.

Next question? There is no one more in the –

Unidentified Analyst

You described the Leumi transaction as a possible template of what is yet to come. Could you elaborate on that a little bit? And just refer more to your own business or do you see that as an industry-wide trend? Does it have to do with consolidation? If you could elaborate a picture a little bit on that. Thanks.

Boris Collardi

I think when I refer to template we think that is something that could be a new reference point for the next way of transactions coming as banks of Category 1 but also of Category 2 are going to go through their settlement and as you know we’re always trying to be a bit of first movers. We were first mover in the transaction structure with IWM in announcing, we would only be paying for assets that would be transferred and I think here is the first transaction that involves a Category 1 or a Category 2 bank. I think we’re going to see as banks start to settle that they will also make decisions about the future of their Swiss business and I think there will be further consolidation activities. I think we will see mergers between players in Switzerland. So I think the next 12 to 18 months will be quite interesting, I would call it almost a next way of consolidation in Switzerland.

Dieter Enkelmann

The differentiating feature is really the asset transfer here in Switzerland that the banks stays with the seller and we only take the clients -- some of the clients. But obviously all the legal entity, liabilities, stay back with the seller and don’t come over to the buyer.

Boris Collardi

I think that’s a great way of structuring such transaction, so liability stay with the seller.

Dieter Enkelmann

So we go to the telephone. There are seven questions. Please go ahead.

Operator

The first question from the phone comes from Mr. Nicholas Heymann from Citi. Please go ahead.

Nicholas Heymann – Citi

I have three questions, please. The first one, I just wanted to -- your 1H 2014 revenue margin was only 1 basis point below the first four months, which suggests some resilience in May and June. Could you give some color on the performance for the last two months, please? The second question in light of a higher fee margin, do you -- are we seeing some investors re-risking? And then third question is just about tax regularization and how, particularly in France, they're still to come. Could you just give a little bit of color behind your exposure in France and Italy, relative to the issues you've faced in Germany? Thank you.

Boris Collardi

I think Dieter wants to answer the three questions but unfortunately we couldn’t hear you acoustically. Do you mind repeating your questions may be closer to the phone?

Nicholas Heymann – Citi

Can you hear me now?

Boris Collardi

We can hear you better and maybe ask the first question and then we can tell you if we heard it.

Nicholas Heymann – Citi

So your 1H 2014 revenue margins were only 1 basis point below those of the first four months, which suggests to me some resilience in May and June. Could you please add some color on the performance for the last couple of months of the quarter -- of the half year? And then the second question was the fee margin was two basis point -- well, increased somewhat. Are we seeing some investor re-risking? And then the third question was you were discussing -- you described how you have Italy and France to come on regularization. I just wanted to -- I was wondering if you could provide some color on your exposure to France and Italy related to the issues you faced with Germany, please. Thank you.

Boris Collardi

I will start answering the third one and Dieter will, I’m sure will be pleased to take on the first and the second. With regards to France as you know there is currently the possibility of regularizing your offshore assets through this (indiscernible) fiscal. This is something that the clients are taking very seriously. We’re hearing across the other colleagues in the industry here in Switzerland that many clients have decided to take on that route and repatriate or regularize their assets through this possibility. There were speculations in May that this window would be closing. It has not been closed and we’re continuing to encourage clients to take on this route as we already did in the past and I think that’s why you’re seeing that today the vast majority of French clients are regularized or are in the process of being regularized.

There is not a fixed deadline as of day that’s why it is spread over several months and I think you can see in the press from declaration of the French side, that they are very pleased with the results, the number of clients that are coming for. So I think in France, you will not see any big impact across the Board from anyone at one go but it basically trickles down over few months. With regard to Italy the situation is a little bit different, I think Italy knows the template of the Scudo. Obviously, they will not be doing a Scudo this time. They will do more of a voluntary disclosure and I think we will see what form and shape it takes in the next couple of months.

If it's not before by the end of this week then it will be after the summer as we know Italy goes on holiday now for the next 4 to 5 weeks and I think then they will be in a position to announce something with Switzerland and I think for the template for Italy will be more having a final date and people rushing to the gate maybe 2 to 3 months before that final date and the final date I think will be in 2015. So we believe that overall for all European markets the situation will be regularized by the end of next year. We’re proactive about this continuing to recommend and support clients in their regularization activities and the exposure as such is already being calculated into our 4% to 6% net new money growth rate so I don’t think we will see anything substantial there.

We may be a little bit more I would say affected in the quarter or in the months when Italy will have its final deadline that we do not know just yet when it will be.

Dieter Enkelmann

Referring to your first question about the revenues in May and June, I can confirm that we had quite good months following April. The revenues trending up with increased average assets under. So if you look at the full six months then April, May, June were good months, February was a particular bad months and stood out on the negative side. In terms of the second questions I did not fully understand your question. You were referring to the increase in the PBT margin? Making the link to client’s behavior. I think as the result proves --

Nicholas Heymann – Citi

Hello, can you hear me now? I was saying -- it's on fee margin. So I was wondering, are we seeing some shift from cash into funds, and some form of investor re-risking?

Dieter Enkelmann

Yes. I think clearly the trend clearly is on that investor taking more risks and this is just one example that some cash is shifted to investment funds but also then I look within in the bonds as I said earlier in the last few years, people tend to take more risk as opposed to less risk and therefore the transaction activities were quite good in April, May and June.

Boris Collardi

Thank you. Next question?

Operator

The next question comes from Eleni Papoula from Berenberg. Please go ahead.

Eleni Papoula – Berenberg

Just three questions; hopefully, very brief. Firstly, on personnel and general expenses, just to reconcile the comments earlier, I was also positively surprised by the improvement in general expenses and personnel expenses. I was just wondering, is there an element of seasonality in these expenses, or is 250 million general expenses that we are seeing in this first half the lower sustainable level going forward? So that's the first question. Then second question, will the net reduction of employee numbers in the second half impact the adjusted personnel line? Or is it included in the restructure expenses anyway, so we shouldn't expect to see an additional positive benefit? And then the third question is on Russia and the situation in Central and Eastern Europe. Are you impacted at all by what is happening there? And if you could quantify, if at all possible, your exposure in the region, that would be great. Thanks a lot.

Dieter Enkelmann

There is no seasonality in the personnel expense. They simply follow the number of FTEs as on our payroll but of course with the integration of the IWM business and also now with GPS, the mix of expenses per head has changed a bit. You need to take into consideration and then on the employee as you can see I mean the increase in number of FTE as compared to the end of last year if you take out the arrival of GPS, has not gone up like in the past and with the right sizing you should see a relatively flat development of the FTE numbers even a declining number towards the year end.

The cost to layoff the people is paid up by Bank of America, you remember as part of the transaction they setup an escrow account in the amount of $125 million which bears all the costs for laying off people on their side related to the transaction and on our side and then of course the benefit from having less people on our payroll will come through in the adjusted expense line.

Boris Collardi

Good. Let’s move on to the next question.

Operator

The next question comes from Mr. Martin Leitgeb from Goldman Sachs. Please go ahead.

Martin Leitgeb – Goldman Sachs

Two more questions from my side, please. The first one is on the IWM margin. And with 84 basis points, you're now very close to the 85, which you targeted for 2015. I was just wondering, now with the two years' experience you have in looking at these AuMs, do you foresee that the gap in between the gross margin for Julius Baer standalone and the IWM margin will narrow further, going forward; maybe further out in 2016/2017? Or other way around; is there any reason to see why these AuMs shouldn't have the same revenue margin as the Julius Baer AuMs? And the second question is with regard to Lombard lending, and just to follow up there. I think now about 8.3%/8.4% of AuMs are Lombard lending. If the market were to improve say in a blue-sky scenario, what level of Lombard lending would you expect to have in your portfolio? Could this, for example, double, go to 15%/16%? Or is somewhere around 12%/13% the right level to look at? Thank you.

Dieter Enkelmann

I will take the first question on the margin which as we said was surprisingly good with 84 basis points. I mean a lot of that is coming -- a good portion of that is coming from Asia where the integration was finalized by the end of last year and where the trading volumes were above what we expected already for the first half of 2014. To your question is there a reason why the assets coming from the IWM business should yield ultimately less than what we had before, so will the gap fully close? I’m absolutely with you on this that earlier -- I mean if you look at through a period of 2016 to 2017 these gaps might close because there is still a lot of product where, IWM, FAs were not able to offer like discretionary mandates in most part of the region. Lombard lending, our scope is larger than mortgages. They had no mortgage offering at Merrill Lynch, they can sell more structured products and so on and so forth so there is scope for improvement beyond the 85 target set for 2015.

Boris Collardi

Absolutely. I think as we have seen during the transition maybe one or the other banker also was less I would say aggressive as one could be or wish to be, also on pricing in general. So I think it will be overtime a mix of number of things, for repricing relationship but we’re talking about something ’15 – ‘16 when the transition has fully bedded down and then basically it's cross selling revenue opportunities products across the Board. Dieter do you want to take on the question on Lombard what is the level to be expected while I think we can say that Lombard remains a key product of a private banking relationship.

Dieter Enkelmann

Yes and Lombard is also an interesting product if you look at the capital involved from a risk weighted asset perspective, it has a very low level and therefore from an economic value add it's a very interesting product. I mean as we said before there was a catch-up impact on the Lombard landing coming from the IWM integration because they sold -- they were happy that they can sell it on a broader scope than at Merrill Lynch and you should expect that in future Lombard lending is growing more or less in-line with the asset under management growth.

Boris Collardi

I think looking at my notes I see that we left out a question about Eastern Europe exposure before, apologies for that. I think what we’re seeing is a bit of standstill and everybody waiting and here I’m talking about clients in essence waiting to see what developments are. It's a bit of moving target. So we have seen some inflows of non-residents, so clients that are generally resident in one of the key location where we have an operation, London, Vienna Zurich, Geneva, Monaco. But we have not seen new business coming from Russia, everybody is waiting to see what is the next round of potential sanctions on one hand and secondly clearly there are some local domestic initiatives in Russia that are looking at, what they call it the off the offshorization; that's repatriating or understanding better who is the beneficial owner, the sum [ph] of the structure that way maybe using in the past by some of the Russian nationals and I think so the whole market is a bit on hold and this is something that is only indirectly impacting us. I mean the business we carry on this basically with domiciled clients in the various cities where we have operations.

Dieter Enkelmann

Next question please from the phone.

Operator

The next question is from Mr. Stefan Stalmann from Autonomous Research. Please go ahead.

Stefan Stalmann – Autonomous Research

A couple of smaller questions from my end, please. First, you mentioned that dividend income in the trading book was actually quite strong in the first half. Could you add a little bit of color on that; whether there was a particular reason, and whether this might be or might not be sustainable at these first half levels? Second, your operational risk-weighted assets are actually only up 2% year-on-year, despite the fact that your organization has become a lot bigger and more complex. And also, obviously, we're in a slightly more risky legal environment for many banks. Would you expect an increase, maybe a notable increase in this operational risk component? Third question, touching on the previous question, could you give a rough guidance how much of your AUM relates to Russian clients, please? And finally, obviously, with the IWM acquisition it's quite difficult to figure out what your operational leverage has been over the last 12 months on a like-for-like basis. If you had not made the IWM acquisition, how do you think revenue and cost would have developed at Baer standalone first half 2014 versus first half 2013? Thank you very much.

Dieter Enkelmann

I will take the first question if I understand correctly this is a question on the increased dividend income?

Stefan Stalmann – Autonomous Research

Yes.

Dieter Enkelmann

Which is a seasonal income that normally happens in the first half around the dividend season. It's a business that’s just behind structured products and trading activities with clients and therefore it goes up and down. I cannot say more, there is no particular reason for this.

Boris Collardi

I will take the third question while Dieter prepares himself for the second question, the exposure to the Russian clients of risk weighted assets. The Russia clients with us are in low single digit as a nationality so that’s not a domicile, state again as a nationality.

Dieter Enkelmann

On the operational risk I think or I guess you’re referring to the risk weighted assets following the operational risk, that is based on a formula we’re using to standard approach and it's measuring against the average of revenues from the last three years. So it's basically nothing miraculous behind it.

Boris Collardi

And our favorite question Dieter, standalone first half year. This is IWM integrated business, how would this look like?

Dieter Enkelmann

Of course you can look at it from two ways. You can just simply take out the revenues and the costs related to the IWM business or you could ask yourself how would the organization look like if you never had touched the IWM business which I think could have different outcomes but both this is guess-working. So the cost-to-income ratio, if you simply take out the figures from operating expenses the figures from operating income and expenses as we said, cost-to-income ratio below 90 but of course not down at 70.8, so taking it out on a purely calculatory basis to cost-to-income ratio would be below 70%.

Boris Collardi

Thank you. The next question on the phone?

Operator

The next question is from Mr. Kilian Maier from MainFirst Bank. Please go ahead.

Kilian Maier – MainFirst Bank

Firstly, on FX, there today was some news flow in the UK that the regulators there are looking into this on -- with more scrutiny. So question here, can you give us an update on what's going on at Baer? You still have not been approached by investigators? And secondly, more structural question, with all those investigations going on in FX, what's your view on margins in that business, going forward? The next question would be on an update on core banking platform. Over the next few years you'll probably have to, and you said that in the past, implement a new system, so maybe you can update us on your schedule here, if there is any change. And the last analyst technical question. The tax rate was a little bit higher in the first semester; does this have any impact on your tax rate guidance of, if I remember correctly, around 16% after the integration?

Boris Collardi

Okay. Maybe I will start with the first couple of question on FX. We have not been notified for any new contact with any additional regulators as you know. We have had our own internal in-house investigation that has not uncovered any I would say manipulation or any involvement on the FX topic. We’re been cooperating (indiscernible) in Switzerland with FINMA and I think so far we have not heard of anything not confirming the results of our own internal investigation. To your structural question about FX and I think what we’re seeing now is a bit of stand-still. Everybody counter-party with counter-party but also active clients or waiting to understand what are the new defined rules of the FX market before coming back in so there is a bit of a stand-still and therefore you see that reflected into the volumes. I think if you talk to any of the FX professionals and when we talk to our own very successful team in-house I think the conclusion is everywhere the same, FX needs to reinvent itself and I think once this phase of investigation will be closed and the conclusion will be drawn I’m sure FX will continue to be part of any asset allocation of any client active or passive and will be moving on to probably new standards.

So I think we’re seeing now temporary effect but there is some structural work that we will be involved once this investigations in general of the industry will be closed so that we can move on, on a new basis. With regards to the -- maybe Dieter you want to answer tax rate and because the core banking platform will be a longer explanation I think.

Dieter Enkelmann

On the tax rate if I exclude a few extraordinary items, is small. But adding together, then the tax rate would have been below the 18% and therefore I can reconfirm the guidance that we should see the tax rate in the foreseeable future between 16% and 18%.

Boris Collardi

With regard to the core banking platform I would like to start with the usual. We’re continuing to stay very confident with the ability of our Swiss Banking host to absorb any form of volume moving forward. So the trigger for us to do a platform project is again not a technology question but it is a question of scalability of our global operations now that the group has a different shape than it had before. We have a lot more business outside of Switzerland so it calls for a united platform across the different booking center. We’re talking about seven booking center. We have carried out the relatively detailed analysis which has led us to a number of conclusions that we could reach not longer than four weeks ago.

Number One, Julius Baer will make an investment in the next few years and that’s spread over several years into renewing its technology platform globally. So I think the first thing that is clear, decided is that we will have a standard system everywhere across all of our operations globally.

The second one is that as we’re not a technology company we will acquire, we will buy a package, a standard package from the market. The good news is that there are several packages that could do the job so we have now come to the shortlist of two and we’re entering now into commercial discussion with both to see which one of the company, which one of the implementation approach has actually the best return for us with the least risk of integration and we’re not only talking about our own implementation risk, obviously we’re also taking into consideration counter-party risk how well the firm is financially all the way down to technology risk on what time of technology are they and how will they in the next 5 to 10 years upgrade their software. These discussions are progressing well and we probably planned the commercial part of this discussion will be concluded by the end of this year.

On ones that is decided we will carry out the detailed gap analysis between the software that we choose and the requirements of the firm which has been taken. We have basically done the inventory of requirements over the last six months and that will then be the kick-off of the what we call the platform project. You need to see the platform project not as a one-time big investment but as a continuity of the technology investments that we have made in the last few years and I think we can say from where we stand today, based on all the information we have. This will not be something that will come and hit the P&L in one time, actually to the contrary it will be part of our long term IT and operations investment and, therefore, should be hardly even visible in terms of P&L impact over the next few years. This would be a phased roll-out that we will cross finance in part also with reduction of investments into the old platform. So I think we will as we go by and we progress, give you always regular update but I think we don’t anticipate this to be a big bang approach with big announcement. I think this will be something we will update you on a regular basis as we go by our half-year results with them [ph].

Dieter Enkelmann

Next question please.

Operator

The next question comes from Mr. Bruce Hamilton from Morgan Stanley. Please go ahead, sir.

Bruce Hamilton – Morgan Stanley

I just had a couple of clarifying questions. If I look at the cost-to-income for the last couple of months, it looks as though you've got down to something in high 60%s, maybe around 68%, if I make a little adjustment for the pensions impact, so already well within the target range of 65% to 70%. Does it follow then that, assuming revenue margins were to stay somewhere around the current levels, we should be thinking that you're much more likely to be at the low end of that target range? Or, taking into account these comments on IT spend, is that the other factor that means it may be towards the upper end? And then the second question is just around surplus capital levels. Can you just remind us how to think about where the minimum capital will rest; what sort of buffer you would expect to run with and therefore, what you have available to absorb any fines and potentially to pay out excess to shareholders over the next few years? Thank you.

Dieter Enkelmann

On the cost-to-income (indiscernible) you’re right in April, May -- May and June cost-to-income ratio was below 70 but still I think the forecast of the target is that in 2015 we will be for the full year within the target range of 65% to 70%. The IT platform as Boris just explained should and will not have considerable impact in one or the other sides in the foreseeable future. As for spending, it's cash spending and you know that new investments in software and hardware will be capitalized and domiciled over certain period. The impact on the P&L should anyway be minimal as from today's viewpoint. And as we come at the more detailed planning we will inform you whenever there should be a special impact on the P&L.

In terms of the capital targets and buffers, we still run on the two targets to have 15% total capital ratio at all the time and 12% Tier 1 ratio. If you compare with the regulatory minimum, including here in Switzerland, this countercyclical could buffer. Then on the total capital ratio level this will be 12.2% and of course on a Tier 1 ratio 9.8% so much lower and we believe that this 15% total capital in the current environment we can run our business as also demonstrated by the client, a nice level of net new money in the first six months.

Boris Collardi

Great. Let’s go to the last question on the phone.

Operator

The last question comes from Mr. Jeremy Sigee from Barclays. Please go ahead.

Jeremy Sigee – Barclays

Just a quick follow up on the Leumi transaction, actually. In your planning and your profit expectations, what sort of pre-tax margin do you expect that portfolio to be able to achieve? Is it like the 25 bps that you target from the (indiscernible) business or is it more like 35 bps that you target for best standalone? What do you see as the likely future profitability on Leumi? And then linked to that, how much of a gap is that from the profitability that it's currently delivering for the current owners? And what are the key swing factors in you achieving the level that you think you can achieve? What needs to go right for that to come good?

Dieter Enkelmann

First of all it depends on how much in percent we can take over from the roughly 6 billion of assets under management here in Switzerland. As we say we expect about 75% which will give 4.5 billion assuming more or less the same gross margin that they can achieve like the Merrill business and then taking into account that the only take over the front, the client facing people and need to add a few cost on middle and back office. You can expect an outcome which is closer to the ING transaction than to the Merrill Lynch transaction. So it's quite a nice pretax profit margin.

Boris Collardi

I mean that’s a typically Swiss private banking business from its margin structure and just as a reminder this is the sum of the former Swiss Leumi business and the former Safdie business, which Leumi had acquired just a few years ago.

Jeremy Sigee – Barclays

And you can run those off your platform? It's a similar kind of business, there's nothing different or awkward about it?

Dieter Enkelmann

No. I assume it's a plain vanilla business. Also, from the products and services, we can cater for all the needs of their clients.

Boris Collardi

Great. I think there are no more questions on the phone. Any last burning question here in the room, there behind the pillar?

Giles Broom – Bloomberg News

It's Giles Broom from Bloomberg News. I have got two questions, firstly, can we expect you to report an IFRS loss this year? And secondly regarding the issues around Russia that you’ve already touched on, could you just give us a flavor of the type of interaction that you’re having with Russian clients at the moment? I mean are relationship managers meeting more often with their clients? Mr. Collardi, are you meeting personally with Russian clients at this difficult times to try and navigate a way through?

Dieter Enkelmann

It's an interesting question about whether we estimate the size of the U.S. clients, which we don't know, and, therefore the answer is expect the U.S. settlement as with result from today’s perspective should be positive.

Boris Collardi

Interaction with Russian clients, we have not seen a pick-up Giles. I think in general Russian clients, the first people that they talk to right now is not necessarily their banker but they talk also to companies that have helped them structure some of their wealth which is not necessarily in the first line -- the bankers' Russian clients -- I have not seen more or less in the last few weeks or months and as you know by now and that’s why you probably choose the word navigate, they are most of them onto their boat in Sardinia, or in the South of France. So I think there is a bit of a break right now. I think we will hear more when we will come back from summer break.

Good. I don’t see anyone wanting to ask any more question. I wish you the same weather as you see on this beautiful picture for the rest of the summer and we will see you very soon. Thank you very much.

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