Julius Baer's (JBAXY) CEO Boris Collardi on Q4 2015 Results - Earnings Call Transcript

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Julius Baer Group (OTCPK:JBAXY) Q4 2015 Earnings Conference Call February 1, 2016 3:30 AM ET

Executives

Boris Collardi - Chief Executive Officer

Dieter Enkelmann - Chief Financial Officer

Analysts

Daniele Brupba - UBS

Tomasz Grzelak - MainFirst Bank

Holger Alich - Handelsblatt

Peter Casanova - Kepler Cheuvreux

Ralph Atkins - Financial Times

Nicholas Herman - Citigroup

Willis Palermo - Goldman Sachs

Stefan Stalmann - Autonomous Research

Hubert Lam - Bank of America

Jon Peace - Nomura

Bruce Hamilton - Morgan Stanley

Andrew Lim - Societe Generale

Huw Van Steenis - Morgan Stanley

Jonas Floriani - KBW

Boris Collardi

Good morning, good morning, bonjour, Bonjourno. Welcome to our 2015 Results Presentation. I’d like to start with our usual summary, where 2015 I guess has been a year that you could look at in many different ways.

We’ve made progress on I would say almost all fronts with the operating results improving strongly, AuM up CHF300 billion new record high. And that’s despite as we will see in Dieter’s presentation approximately CHF10 billion negative currency impact.

Net new money, we could post another year within our target range at 4.2%, CHF12.1 billion and that’s coming from all regions.

The gross margin was maintained at CHF94 billion, I’m sure we will discuss later on the difference between the first half and the second half and what is the right run rate. That led to an improvement of the cost income ratio of close to 300 basis points down to 67.2. And all of these elements taken into account, this leads to a record underlying net profit of CHF701 million that’s up 20% year-on-year. And here I’d like to say explicitly excluding the U.S. provision.

Now, the U.S., that has been a recurring topic for all of us here, over the years, we reported to you an increase in our provision on the 30 December. We’re pleased to report today that we could reach a resolution with the DoJ. And now it’s only pending the court hearing that will take place very shortly. And then we can once in for all put this issue fully behind us.

If we take this provision of $547 million U.S. into account then our adjusted net profit decreases down to $279 million. And then Dieter will give you all the details about the reconciliation, also down to the IFRS result.

So, if I look at 2015 and the topics that we’re putting behind us and the strong operating performance, I think this concludes big phase of transformation for Julius Baer Group. I will come back to that in my remarks later on. But we believe we’re very well positioned for the next phase of growth of our group.

The IWM integration, we will report for the last time today on it, that’s closed, it’s done, successfully integrated. We have renewed leadership in two of our key markets, our home market Switzerland and our second home market Asia, that’s approximately shy of 40% of our asset base, so we’re having renewed energy and we’ve revalidated our strategies.

And we’re continuing to invest, and I think that’s one of the things that probably is, quite unique to Julius Baer whilst we’re continuing to be active on the M&A front. In the past we’ve continued to invest into organic growth. We will continue to do so through enhancements in client experience, I’m talking here about Your Wealth, strength and focus on the investment culture with the creation of a new division, I’ll come back to that and technology investment where our platform renewal is on track.

We will hear that this next phase of growth is framed also into new cost income range of 64% to 68%, an increase in dividend, that’s second in the row that we’re announcing, this time increase by 10% to CHF1.10 for 2015 that we will propose. And we’re giving for the first time a payout in terms of guidance payout of adjusted profit in terms of dividend of 40%. And we’ll be happy to give you more detail on that.

So, progress on many front closed many of the issues of the past, best positioned for the future. I believe today, we can say we’re entering the next phase of growth for Julius Baer.

And I’d like to hand over to Dieter to give you more details about the numbers and how we’re entering into this 2016. Thank you. Dieter?

Dieter Enkelmann

Thank you, Boris and good morning. The presentation is as usual on the adjusted basis which excludes the M&A related restructuring and integrated expenses as well as the M&A related amortization of the intangibles. Additionally, we have shown some figures excluding the $547 million, U.S provision to support proper analysis of the underlying business performance. And where we have told this in the presentation, it’s clearly flat.

Then the reconciliation from the IFRS to the adjusted profit will be shown in this presentation. And of course you find the consolidated financial statements with numbers in the IFRS on the operating expenses.

On page 7, one of the main external influence in fact has clearly have been last year, the significant further strengthening of the Swiss Franc following Swiss National Bank’s decision to remove the pick in January. This negatively impacts on a net basis by the end of the year, the asset on the management by almost CHF10 billion as I will show in the next slide.

The related impact on the revenue was to some extent compensated by the high volume in currency trading in January. We supported the gross margin at the start of the year. And then also the high FX volatility and the relatively high stock market volumes in H1 of 2015.

But as you can see from the lower part of this page from the two graphs, the second half of the year was characterized by a decreasing FX volatility as well as also decreasing stock market volumes on the major exchanges.

Now to the result on slide 8. AuM grew CHF9 billion or 3% to almost CHF300 billion. The increase came on the back of CHF12.1 billion in net new money and net positive acquisition impact of CHF7.4 billion, a slightly negative currency adjusted market performance of CHF0.9 billion. And to mention negative currency impact of CHF9.5 billion or almost 3%.

Compared to the same period a year ago, monthly average AuM, important for the gross margin calculation was up 6% to CHF288 billion.

In the context of AuM, it might also be useful to take a final look, I suppose, I mention that’s the last time report separately on the IWM figures. At the AuM, we added from that acquisition over the past years.

As you know, we targeted to get assets from a range between CHF57 billion to CHF72 billion, the process started in February 2013. And the client assets started to come over to our platform in batches.

And based on the total value of these assets at the dates they were transferred, on the basis that was also the basis we paid the 1.2% acquisition price to Merrill Lynch to Bank of America, we were at CHF58.6 billion at the end of 2015 following the last transfer of the Indian business in September. The upper part of that’s light. And then when including the market impacts, net new money and the fact that we decided to reclassify some of the assets that we transferred as AuC then the total AuM from the IWM acquisition at year-end 2015 stood at CHF60 billion or about 20% of the group’s total assets, client assets.

Slide 10, back to our - to the AuM development, after some slow down, net new money, generation improved significantly towards the end of the year in November and December taking the full-year net inflow to 4.2%.

Net new money was driven by continued inflows from all six regions with strong contributions from Asia, the Middle East and Israel as well as our domestic businesses in Monaco, Germany and Switzerland. And then helped in particular by the U.K., so the U.K. domestic business, the European cross-border business, so positive flows despite the continued tax legalizations on legacy assets that led to outflows from French and Italian clients.

On slide 11, operating income grew by 6% to CHF2.7 billion. Commission fees were essentially flat year-on-year as the reduced client risk appetite in the second half impacted brokerage income.

Net interest and dividend income as usual excluding the dividend income on the trading portfolio was down slightly by 1% to CHF572 million. And then, this was offset by lower interest rates on trading portfolio holdings - sorry, the benefit came here from higher loan and treasury income and lower deposit expenses. And it was offset by lower interest rates on trading portfolio holdings, the negative Central Bank deposit rates we have to pay in Switzerland, France and Germany. And an increase in the costs for the hybrid that issued, we added this one piece last year in Singapore.

And then the third element, the underlying trading revenues grew by 44% to CHF575 million mainly supported by the mentioned higher FX volume especially in January.

On page 12, the gross margin remained at 94 basis points but the charge-offs that was a big difference between H1 and H2, with gross margin falling from the 99 basis points in H1 to 88 basis points in the second half.

This half-on-half decline was driven by lower client activity and reduced FX volatility leading to a 6 basis points half-on-half decline in the commission and fee income and in 8 basis points half-on-half decline in the trading gross margin. On the positive side, the contribution from interest income was up 3 basis points half-on-half.

Based on the best efforts approximation, the gross margin on the former IWN client assets, that’s the little box on the right hand side, was approximately 88 basis points for the full year, above the target of 85 basis points that we had set out to achieve in 2015.

To the operating expenses on slide 13, excluding the U.S. provision, the underlying operating expenses were up just 1%, significantly below the 6% increase in revenues. Staff costs increased by just 2% CHF1.2 billion, mostly average staff levels were unchanged, which partly reflects the impact of the additional cost measures we took early 2015 to help mitigate the impact of the strengthening Swiss Franc as well as the impact from the further IWM reductions coming from 2014.

At the same time, around 180 new colleagues joined from the acquisitions, from Leumi, IWM India as well as France South towards the end of the year.

The fact that staff costs were up 2% while, average staff levels were flat, it’s mainly driven by slight increases in performance based compensation, share based payments and the pension contributions.

Excluding the U.S. provisions, general expenses were down 2% to CHF562 million, again reflecting IWM synergies, the additional cost measures taken in 2015 as well as a slight decrease in validation allowances non-U.S. provision and losses in 2015 compared to the previous year.

As a result, the cost income ratio improved to 67.2% in the middle of the 65% to 70% target range we had set for 2015. However, looking at the half-year development, the sharp decline in the gross margin from H1 to H2 means that the cost income ratio increased from 64.7% to 69.9% in H2, and would have been obviously significant above 70% if we not taken the additional cost measures early 2015.

As a result, on page 14, the adjusted net profit was down CHF52 million to CHF279 million. And however, if you exclude the U.S. provision impact, the underlying pre-tax profit improved by 18% to CHF830 million and to underlying pre-tax margin to 29 basis points just below the target we have set also for 2015 of reaching at least 30 basis points. And as the tax rate also improved, the underlying net profit was up 20% to the mentioned CHF701 million.

On slide 15, you will find the usual reconciliation from the IFRS profit to the commented adjusted and underlying profit, of the now 6 non-cash client book amortization lines coming from the various acquisitions. The UBS related one came to an end in November, and will fall away fully in 2016.

As the strong increase in underlying operating profit was more than offset by the U.S. provision, the IFRS net profit decreased strongly to CHF123 million.

Now, on slide 16, moving to the balance sheet. It grew by 2% to CHF84 billion, driven by the client deposits that increased by 5% to CHF64.8 billion while the loan book grew on the asset side by 8% resulting in a still very strong loan-to-deposit ratio of 56%. Please note here, referred to the lending side, they’re all secured by collaterals of the total loan 77% are Lombard loans and the rest are mortgages, mostly here in Switzerland. And then the available for sale portfolio grew by 14% to almost CHF17 billion by the end of the year.

Page 17, risk-rated assets increased to CHF19 billion, an increase of 13%. This increase was driven by the 8% loan growth I just discussed, the 14% growth in the AFS portfolio. These two were also partly driven by the stronger dollar, strong dollar towards the end of the year, then by a change in the treatment of certain credit collaterals at the start of the year imposed by the Swiss Regulator and also due to higher market risk-rated assets steaming from FX volatility and interest rate exposure towards the end of the year.

Total capital decreased to CHF3.7 billion and Tier 1 and CET1 capital to CHF3.5 billion following the U.S. provision as well as a negative pension obligation revaluation, unrealized available for sale losses and the negative currency translation differences following the strengthening of the Swiss Franc.

In 2015, we also successfully issued the already mentioned S$450 million of additional Tier 1 Securities to the Singapore market, the local market. That’s also listed in Singapore. And we cancelled the preference shares we issued in 2005.

As a result, the total capital ratio at the end of the year at 19.4% and the Tier 1 ratio at 18.3%, comfortably above our capital flows to which I will come back anyway on the next side.

On the Basel III fully applied basis, that’s the right-hand side of that slide, and assuming the lower Tier 2 instruments are not replaced this Basel III compliant capital then the total capital ratio was 17.2%, the Tier 1 ratio of 16.9% and the CET1 ratio 12.2%.

Moving to slide 18. Now, that the U.S. situation is almost fully resolved, and the IWM integration successfully completed, we felt we were in a good position to update our capital and dividend framework.

Our regulatory minimum capital requirements have not changed. These are in the box up left and are summarized here, on the three levels. By taking into account these regulatory requirements as well as the interest of our clients, the Tier 1 investors and the shareholders we concluded that our 15% floor for total capital continues to be appropriate, so representing approximate 3% above the regulatory minimum.

Also with a stronger focus on the Basel III on CET1, we felt it would be more appropriate to set the floor at CET1 rather than just on Tier 1. Applying the same 3% but for as for the total capital ratio, takes our new floor for the CET1 capital to 11%.

The proposed dividend for 2015 is 1/10 per share, an increase of CHF0.10 or 10% over last year’s dividend, reflecting the improved underlying result and is despite the U.S. provision.

At 1/10 per share, the payout ratio measured on the underlying profit is about 35%. And going forward, we have the intention to increase the ordinary dividend payout to approximately 40% of adjusted net profit.

And then, these are the last three bullet points, and that’s justified by significant events. The per-share, ordinary dividends should be at least equal to the previous year’s ordinary dividend. And of course at all the times, the board in its proposal will consider business and market environment and the outlook as well as any near-term significant investment requirements or opportunities in the marketplace.

And then from time-to-time, the board will also consider the possibility of a special dividend or share buyback if this is justified by the situation.

On page 19, we have also taken a fresh look at our operating targets. In 2015, we met again our targets for net new money. We clearly met the targets for the cost income ratio despite the negative impact from the euro. And we came very close to meeting our pre-tax margin target but unfortunately the gross margin did not work out in our favor in the second half of 2015. And as a result of the decreased gross margin, and despite further progress on the cost side. We didn’t reach the pre-tax profit margin target in 2015.

So, therefore we concluded, it would be appropriate to reset the medium term cost income ratio target from 65% to 70%, up until now to 64% to 68%. This should help then to reach at least 30 basis points in the pre-tax margin. And for net new money, we stick to the 4% to 6% target for the foreseeable future.

And by the way, in setting these operating targets, we have assumed that the Swiss Franc exchange rate does not change in a major way from where it is today.

And with this, I give back to Boris.

Boris Collardi

Thank you, Dieter. Thanks for all of you for your patience to let us navigate you through all this different numbers. I would like to spend the next 10-15 minutes to talk about where we’re going from here.

You have seen this before. I wanted to share with you as we’re entering the next phase of growth, what’s our appreciation of our environment. As you know, private banking is driven mostly by four pillars. What’s happening in the financial markets and I think we’re seeing that the financial markets are continuing to be very interesting. I think we’re at an inception point entering into a new paradigm for the financial markets. So I think that something we need to briefly discuss.

The regulatory environment changes are clear, we know what’s coming on to us. On the client side, clearly we’re seeing demanding clients, we’re seeing clients that want to interact more with us. And finally, on the competition side, we’re seeing that there are two categories. Those that have a clear business model that have put the transformation behind us and those that are still in the transformation phase to achieve the business model that they want to have.

Understanding this environment allows us also to give you a bit an idea of how we’re going to deploy our resources.

On the financial markets, we’re coming slowly, it may take another six months or 12 months, but it’s not important on a three to five-year horizon to the Central Bank put - automatic put to the markets. Sure, we’ve seen last week the Japanese Central Bank still intervening and rhetoric of Mr. Draghi. There is still presence of the Central Bank in the market but I think the market anticipates and I think December with the rate increase by the fed that was the kick-off of this next phase to come.

We’re expecting Central Bank action over time to reduce. And when that happens, as a result, we will see increased volatility in the markets. And I think that’s what we’re seeing now in January, not only due to that also due to other factors, but we believe that we’re entering in the phase of increased volatility. And increased volatility ladies and gentlemen is good news for us as an institution because it means we can do what we’re here for, what we get paid for, which is guiding and advising our clients on how to best deploy their financial resources.

On the regulatory environment, clearly the road travel is longer than the road that is ahead of us. I think we have a clear framework where we’re going with automatic information exchange. As we all know FIDLEG is in consultation. That should provide a good base for equivalence.

But I think if I summarize the three things that we need to be mindful of, that the three challenges but also opportunities, we’re talking here about market access, we’re talking here about level playing field and we’re talking about no-Swiss finish.

And I think if we go by these three principles, we should be able to gain back status quo, where it becomes predictable for us to do business and move away from this reactive environment that we’ve been in, in the last few years.

Market access is important for us. We made a small analysis recently that in Switzerland, about one third of the assets under management, so one third of the 3.1 trillion of assets under management are today from client domicile in Europe, which we want to continue to serve. This is our historical clientele in the best way possible, so cross-border, like it is possible with Germany, also in the rest of the countries.

So, market access I think will keep us busy in the next three to five years. How to achieve it, that’s the big question. And we will I think have different discussion around how do we do it bilaterally versus financed [indiscernible], so again it’s basically market access directive maybe on the under sector or more in general for services within Europe. I think that’s something that will keep us busy.

The no-Swiss finish and level playing field is absolutely clear. I think it’s been given to us now that we want to play by international standards. And therefore, we need to participate in elaborating them, we need to participate in applying them. But I think what we should not do is go ahead of the standards and create our own or try to apply them in a way that would go beyond what is reasonable.

On the client front, what we’re seeing is that on the back of the previous two trends, a closer relationship of the client to the bank. Somebody this morning asked me but how can it be that despite there is no more banking secrecy, all Swiss banks are growing in terms of assets under management, I think that proves the point ladies and gentlemen that we’re not only there to survive and to compete, thanks to banking secrecy but also due to the quality of advice.

And ultimately the performance that we’ve given to client protecting their assets and growing their assets over time. And I think we need to continue to invest in that. Our clients are demanding that and I think the opportunity for us to talk more often to the client is positive news. And it’s something that we should take on-board also in the years to come in our strategy.

So, this is not only technology investment e-banking but that’s also cross-border market access. That’s one of the reasons for example why we decided to invest in Luxembourg.

And finally, competition, as I said, we’re clear where we are on our business model. We do not anticipate to, change our business model. We think that this is a business model that our clients like. And if our clients like to do business with us, then I think we’re in a good spot.

I think the competition will I think the underlying trend will continue to consolidate and there will be opportunities. Obviously not everything that shines is gold, so we will take a careful look at targets and we will try to give honest feedback when we’re not interested or when we’re interested I’m sure you will know.

With this background, on one page only, I would like to share with you what we’re going to do. I think we’re entering the next phase of growth of our group in the position of strength. We put behind us an intensive phase of transformation.

And for those of you that have covered and followed Julius Baer, I would almost say its 10 years phase where we started with the SBC Wealth management integration. We now completed and closed successfully the IWM, the Merrill transaction. So right now we’ve digested everything that we had in front of us. And as Dieter showed to you, the financial results are there to conclude the reporting on the IWM transaction.

We’ve reached the final agreement with the DoJ. I think after six years I can thank you for your patience for that. We will now have the court hearing shortly. And then we will publish the bank and the DoJ the final documentation with the detail of the agreement. I’m sure there will be questions about this later on. I can just tell you that the basis of our current agreement is that we don’t disclose any detail about the agreement until, it’s published. But I’m sure we will cover that in a minute.

As I said, the regularization of Europe is mostly completed. We’re only left with the last pocket of Italy. And it’s actually done, it’s just that it has to be yet reflected maybe in some measured outflows this year. But looking at this phase of transformation, 10 years on, we’re CHF300 billion of assets under management in over 50 locations. We have 1,200 bankers in the market with the name-card of Julius Baer that can be looking at a firm in great financial forum with an exposure both to growth markets as well as basically the mature markets, so very good profile for growth and returns also moving forward.

This is the reason why we want to focus the firm on further organic growth. We’re very well positioned across all markets. We have franchise we have bankers covering the vast majority of all the markets. All of them have a growth mandate. We’ve renewed leadership in two of our key markets I talked before about Switzerland, it’s today our single-largest market. We’ve renewed our commitment in terms of resources and in terms of focus to Asia, with also there a new leadership.

We’ve seen that after we’ve removed the, I would call it the break on hiring from the IWM integration, last year, we could recruit again over 100 relationship managers net, and that’s excluding acquisition. And we will continue to play an active role in attracting the top talents of the market. I think today Julius Baer is the best address for a first-quality relationship manager.

Not only we’re investing into relationship manager but we’re also investing into our capabilities for clients with the roll-out of Your Wealth, which is well on track. We’re seeing a very good take-up rate from the clients. They’re very interested to deal with us in an even more structured way to be able to be given the best advice and the best service from the bank in a structured way, in a tailored way is a new service model. And we will be reporting probably in our half-year that will be one year from the announcement where we are.

You’ve also seen in January, we made another very important structural decision but the reason for that is very simple. We believe that now with this wave of transformation, the group is best positioned also to deliver on investment culture. I think it’s important that our clients know that we have one team of people that focuses only on managing money for them. And I think this is the reason why we created this new division with new gentlemen Mr. Bonzon that will be joining us on February 1.

We believe it’s even more important to have this division and its strong focus on the back of what I mentioned before, that we will go into a very dynamic and volatile market environment.

And finally, our platform project is on track. We have now the first version of Temenos T24 installed in Asia. The development team is doing now the development of the requirements that we could capture from our team. And we will have a fully functioning platform in Q1 2017 in Asia.

Now, the acquisition of the Commerzbank in Luxembourg has also given us an additional team with a fully functioning T24 platform on the latest version with some of the key interfaces we needed. And this also reduces our execution risk on the project. We have now over 30 people, IT and operation specialist that know how to run and develop T24. They will be deployed as soon as we are done with the closing of the transaction on to the project in Julius Baer as well.

So, as you can see, ladies and gentlemen, we are closing a chapter and opening a new one. And we look forward in the years to come to cover this chapter with you. There are lots of challenges. I think we all agree. But also there are lots of opportunities and we will do our utmost to capture these opportunities like we’ve been able to do in the past 10 years.

With this, I would like to open the floor to the Q&A. And thanks again. We start directly with Daniele.

Question-and-Answer Session

Q - Daniele Brupba

Yes, good morning. It’s Daniele Brupba from UBS. Thank you for the presentation. Can we briefly come back to the gross margin and specifically slide 12 to 50 basis points. Could you elaborate a little bit why that is down sequentially quite a bit? And in that context, also what do you expect the impact of Your Wealth to be particularly on the fee income margin?

And then, secondly on Lombard loans, if I remember correctly, that was CHF25 billion at the half-year stage and it’s probably around CHF28 billion now. How much of that is consolidation and how much is increase, real increase and also then the reflection in net new money, because net new money I think reaccelerated since the end of October if we compare it to the 10-month trading statements, that’s quite positive.

And very lastly, obviously January last year wasn’t a normal year, January this year isn’t a normal year, and we are aware of that. But could you just share your most recent observations of how the business has been doing so far this year?

Boris Collardi

Dieter, I will take the third one. First, briefly and then we’ll do the second and the first whenever you’re ready. So, on January, Daniele, I don’t know why but actually last year in January we had relatively interesting start of the year. And looking back comparing this January, also interesting start of the year to last year is different. It’s actually very volatile, uncertain but different.

Last year was really targeted at Swiss Franc and that dragged down. I would almost call it, it was a local effect, obviously dragged us down, much stronger Swiss Franc against all the other currency. But it was something that we had to deal with on the back of the strength of the Swiss Franc.

This January, is market sentiment across the board. And it’s quite interesting, as you know I was in Davos for a few days. It was interesting to observe the behavior of group of people put together into a room. And there was that cartoon once where the guy the trader starts to say, bye, bye, bye and then it finishes at the other end would sell. It was a bit that feeling.

And when you think of it, fundamentally, we didn’t find out anything new in the last six weeks that we didn’t know when we closed the year. So, fundamentally nothing really much has changed. I mean, did we know that the renminbi would devalue, yes, we did know, we could have known that so, why is it a surprise now.

Oil price, sure, what we’ve seen is that it has bit correlated with all the other asset classes, so it pulled down everything. But I think I put it back to sentiment. Because the lower oil price as we know for global macro is not a bad thing. I mean, if you look at energy bills in Europe, in many places of the world, all the way to go down to Indonesia or India, that’s a good thing. Okay, obviously for the producing country, it’s not good news, especially those that have structural I would say high reliance on oil.

But overall, if you ask me, the year macro has started in a very rocky way this year but more driven by sentiment and fear than by fundamental. So I think we will see a pick-up very soon.

Now, because there hasn’t been a clear trend, I think if you look at stock exchange or even FX volatility, we haven’t seen a huge pick up as like we saw last year because people were so shocked last year they had to take action. Now, they’re still waiting to decide whether the market is going to go up or further down. So the transaction volume has been reasonable but not extraordinary.

Dieter Enkelmann

Coming back to your question on the gross margin on slide 12, I mean, there is actually not really much more to say what I mentioned. The client activity went down coming from the first half this was affecting the brokerage volumes. The volumes of structure product issued, trading in FX, equity trading and trading in bonds.

And therefore, then affecting the blue-part on page 12, the fee and commission income as well as the trade income. So it was just a gradual decline towards the end of the year, a bit I have to say, December was again a bit stronger months, but especially October/November were quite weak following what happened in Asia before.

Then on the lending growth, on the Lombard lending, yes, it was also some increase towards the year end. We had some Lombard loans given and some as always was related to net new money but not above the average compared to a longer period. Therefore, we just believe this is a continuation of the solid growth of the Lombard portfolio.

Boris Collardi

And I would just add to that sorry, I mean, just that we live in a real world, when the market is volatile, clients are also very careful to increase leverage. So the maturation of some Lombard transaction is the result of several months of discussion. So it’s not like today you can pick-up the phone and you call the clients and say, why don’t you have a bit of a Lombard loan and we increase your exposure. I mean, it’s real, it’s business related, it’s calculated and it’s collateralized. And it’s the result of a thorough analysis.

Daniele Brupba

Can I just follow-up very briefly on the 50 basis points, just on the percentage I get it right. So, what you’re basically telling us is that the transaction driven part of the fee income was down and sort of the AuM linked revenues were okay, and probably should even be?

Dieter Enkelmann

That’s right. If you look at the recurring part of that, 50 basis points, compared to 56 basis points that was more or less flat. But all what this is kind of activity driven was down.

Daniele Brupba

Thank you.

Boris Collardi

Next question.

Tomasz Grzelak

Good morning everyone. Tomasz Grzelak, MainFirst Bank. Just one very short question on risk-weighted assets; in particular a credit risk that went up almost CHF1 billion in H2. Could you give us more color on the drivers behind that? Thank you.

Dieter Enkelmann

Yes, I mean, it’s as I said, it’s based on the lending and the treasury portfolio on the asset side, and both went up is primarily or it was partly U.S. dollar driven because a lot of these two, the Lombard loans as well as the treasury portfolio is in U.S. dollar and if the U.S. dollar against Swiss Franc goes up then the balance sheet lengthens. And this then leads to higher risk-rated assets. That’s the primary reason for this.

Holger Alich

Thank you, I’m Holger Alich from German’s business daily Handelsblatt. Two question if I may. First one on net new assets isn’t that number a cause of concern because if I put out the new acquisitions, I come up with a number 4.7 organic, and I’ve just learned that you are blasting up your Lombard loans. So, at the end of the day your growth is fired by acquisitions and by no new loans but real new assets coming from clients compared to other private banks. So isn’t your growth, do you consider your growth unsatisfactory, what may be the reason for that, your organic growth excluding loans and acquisitions first of all?

And secondly, there are some concerns around the FIFA issue, one ex-client manager has been arrested in the United States, and now they fear that your bank might be to put down in that corruption inquiry with perhaps coming up more juridical issues. So what is your feeling up today on that? All banks have been contacted regarding that topic that’s clear, but you are the first bank where it’s known the client manager has been arrested. So could you elaborate a little bit on this? Thank you.

Dieter Enkelmann

Thank you. I take the first one, I mean, first of all, I have to say compared to some other banks we do not include the lending declines in the AuM. So, when we talk about AuM, these are really cash and client securities that are in our deposits and not the lending. And lending gets only into net new money and AuM if let’s say, if you grant a Lombard loan CHF10 million, he takes out CHF5 million cash, goes away, it’s not net new money, and CHF5 million is for investment that’s done net new money and even.

And if you do this analysis, as I mentioned earlier, this was not over proportional in 2015. Hence, therefore we have given that the negotiation is ongoing we’re satisfied by the net new money we achieved in 2015.

Boris Collardi

And there was another underlying question, how much of acquisition is in net new money. Just that we get all the facts clear.

Dieter Enkelmann

If we do acquisitions and we pay for the business or the goodwill like in the Merrill Lynch case Fransad or the Leumi, then these would flow in this net acquisition lines, the CHF7.4 billion and not via the CHF12.1 billion the net new money line. So that’s strictly kept separate.

Boris Collardi

I just want to make sure we get this one right for Holger. Any other follow-up question on net new money Holger or is that clear, because that’s very important. We are satisfied with net new money given the qualifications that Dieter has made.

Holger Alich

Part of the net new money is Lombard loans, if the Lombard loan is reinvested for example for buying new assets. So, what is the - do you have the number that reflow from credit you give to a client that is reinvested and then accounted to assets under management. Do you have that number for net new money just to point?

Dieter Enkelmann

No, I don’t have the figure.

Holger Alich

Okay.

Boris Collardi

Now, look, that’s a number we don’t disclose. But I think Dieter made it clear, it hasn’t been higher than it usually is as part of our second half-year lending activities. With regards to FIFA, look, we’ve been mentioning in the indictments. I think that’s a public document. Investigation has been launched also for us internally and that has led to us dismissing an employee.

Now, this is current proceeding and you will appreciate that we cannot really comment much more than that. As to fears or whatever, I don’t want to put words in your mouth to what you were mentioning Holger. I mean, there is no reason to have any fears. There are facts and we’re collaborating with the authorities like we did for the U.S. case. So there is not much more we can say anything else as a speculation at this stage, Holger.

Dieter Enkelmann

Next question.

Peter Casanova

Thank you, Peter Casanova, Kepler Cheuvreux. Quick clarification, Boris you mentioned the two whole markets and if I understood correctly, Switzerland and Asia together make roughly 40% of total AuM?

Dieter Enkelmann

Yes, that’s slightly less, yes. So, Asia is between 20% and 25% and then you can deduct how much Switzerland is.

Peter Casanova

Okay, thank you very much. And another one on the tax rate, having benefits little bit of our lower tax rate this year. Now, if you go into the new growth phase, I would expect that you make mainly growth outside of Switzerland or in high tax regions. Would that mean that we should assume a rising tax rate over time?

Dieter Enkelmann

No, I would expect that the tax rate in the foreseeable future is between 16%, 17% and then it can go a bit up, depending as you say Peter, where we make the profit. But both Hong Kong and Singapore have a lower tax rate than Switzerland. Currency, where we have more business as we have there, the U.K. business booked is also much lower than Switzerland. And we have tax carry-forwards in Germany where we might even on the legal entity base move to profitability into coming years. And then also we have large tax loss carry-forwards in the U.K. that should support this.

Boris Collardi

It’s not by design that we’re trying not to make money where the tax rate is higher and we make money, I mean, that’s just by virtue of how our business is directed now. And I think in terms of profit incremental, what we’re seeing coming from Asia is at a lower tax rate just simply because taxes are in Hong Kong and Singapore lower than they are in Switzerland.

Unidentified Analyst

[Indiscernible]. I have three questions. First, is there any consequence out of the U.S. tax case regarding bonuses or persons? Second, is there any risk in European country in taxes, let’s say in Germany you made a deal, is there any risk in France or somewhere else?

And third, a personal question to Mr. Collardi. You’re now into your seventh year as CEO of Julius Baer. What can motivate you going forward?

Boris Collardi

I think that’s the best question you’ve asked me in seven years Mr. Herzig [ph]. Look, with regard to the U.S. tax situation, clearly it will have a consequence. I think we will disclose that specifically pertaining to remuneration. With our remuneration report, I can now really tell you, I expect my remuneration, the remuneration of my executive team and the remuneration of the board of director to go down in 2015 versus 2014. So, we have taken stock of that.

With regard to your question on European counties, Germany, as we’ve seen and I read the press like you do has been in Europe most aggressive or most persistent with regard to pursuing [indiscernible] as we say it. We do not see that happening with the same level of hostility from other countries. So pertaining to JB, I do not anticipate that we will have another type of this settlement of the past with any of the other countries.

Also, specifically, we haven’t had, if I look at France, historical business in France, so I would say the historical business of Julius Baer was more towards Northern Europe and specifically Germany.

And for me, after seven-year what motivates me, that’s an interesting question. Because if you think of it, we’ve achieved a lot, and some people may say, okay, there are things that have not been done to the level we should have and everything but the fact is 10 years later or seven-years into my tenure, the bank today is in a stronger position than it was before. And I personally feel that there is still a lot to be done.

I think in terms of what we want to do for clients, to clients, there is more to be done. I think the initiatives that we’ve launched like Your Wealth or now the creation of new investment management division is something that we would like. And I personally am following very closely the developments in these two topics that we would like to bring to our clients. I think we can do better when it comes to clients as an industry but also as a firm.

Secondly, I’d like to see the technology transformation through. It’s actually quite interesting, I came to the firm as the Chief Operating Officer, so technology reported to me for a while directly. And I think also there with the size that we have today, we deserve a system that will bring us really to the forefront.

And lastly, I think just for our employees, for our clients, for our shareholders, the next chapter of growth hopefully I would call it undisturbed chapter, with the legacies behind, should be very exciting. So, I’m fully motivated.

Dieter Enkelmann

Next question.

Unidentified Analyst

My name is [indiscernible]. Thanks for taking my question. I have three of them. The first one, your dividend proposal is 35% of adjusted net profit vis-à-vis a new target payout ratio of 40%. I was wondering whether this is to be understood as a cautious outlook for financial year ‘16.

And second question, your stress test, your new target ratio of CET1 11%, do you have a stress test target ratio as well? And the last question, and your medium-term target cost income ratio of 64% to 68%, what this medium term mean is it two to three years? Thank you.

Dieter Enkelmann

I start with the last question. I mean, we always since 10 years give out medium-term targets meaning three-year time horizon. So we aspire to in three years or on that rate it is third year to stay in this range, 64% to 68%. So that’s the same as the last set of targets.

Then in terms of the dividend compared to the adjusted profit, I mean, this year the adjusted profit is much lower following the U.S. charge. So if you calculate the payout ratio, it’s almost 100%. So, we say despite the U.S. provision, we give 35% of the underlying profit. I mean, that takes a bit at into perspective.

And on the CET1 target, of course, internally and also with the FINMA we have to run stress scenarios on the capital base. This is yearly process, which then follow out several times during the year. And of course, the ultimate levels which we cannot cross or the flow assortment or the regulatory capital requirements.

But we believe that in a normal environment and please keep in mind that we have a relatively low risk business model as well as a low-risk balance sheet. We should manage to not go below that floor.

Ralph Atkins

Hi, Ralph Atkins from the Financial Times, two quick questions. Firstly, in the presentation you highlighted the particularly strong contribution to cross-border European business from the U.K. Could you give figures for that and explain what’s driving that?

And secondly, could you just give an update on where you think consolidation in Swiss Banking is going to go this year, Credit Suisse have said they want to be part of this drive that, will you be as well? Thank you.

Boris Collardi

Look, we’ve been talking about consolidation for a while. If you look at historical numbers of private banks in Switzerland, you’ve seen every year a number of banks between 5 to 10 get into this consolidation trend. We see no reason why this will change. The revenue environment continues to be challenging. The cost side continues to be structurally increasing.

I think what gave it a little bit of a pause was the fact that lot of banks were implicated in this U.S. resolution. I think now category 2 banks as we’ve seen last week are completed. So I think if anyone wanted to envisage your transaction, they would be free to do so again starting from 2016 onwards.

And for us, we will continue to pursue the same M&A strategies as we’ve had in the past, which is to complement our market strategy. So we will be looking at Swiss consolidation. Anything that comes up of a good size, high quality or good quality, at a reasonable cost, that is accretive for our shareholders will look at that.

The second one is market entries and consolidation in market entries. I think you’ve seen last year, we made an initial investment in a stake in Mexico so to support our growth strategy. And lastly, I think we’ve been talking about the famous big elephant, but as we know the big elephants, they don’t cross the road that often. But it’s actually quite interesting to see if you look at our environment analysis, there is a cluster of large banks that are not doing well these days.

And some of them are in wealth management. And that wealth management part of their business is not significant. This is not going to be the part that is going to turnaround their business model neither is going to improve their capital position. So who knows, reactively, maybe something will come onto the table in the period that we described.

Dieter Enkelmann

Yes, and then back to your first question on the U.K. clients on page 10, we talked about the cross-border business. So, out of Switzerland into the U.K., I mean, it’s always difficult to say what are the factors driving these but I see at least one internal, one external factor. First of all, since 2014 we have a real presence in London, a large office. We are sizeable players, so the brand recognition certainly should go up. That’s number one.

And then the external factor, as you’ll remember, U.K., was one of the currently entering into this withholding tax agreement with Switzerland, which makes the kind of the situation creator for the clients and the banks how to transact and how to get the clients. And that might also have helped to grow that business this U.K. domicile clients. But there might be other instances which, I don’t know.

Unidentified Analyst

[Indiscernible]. Mr. Collardi, what makes you so confident that you can enter into a new phase of growth especially in Switzerland in such a saturated market? And what are the measures that you’re going to take for that?

Boris Collardi

Yes, look, as people will tell you and sports people of highest level confidence plays a big role in achieving what you want to achieve. Look, we’re very well positioned. Julius Baer is today become a household name in many jurisdiction, in many different markets. I think over the last few years we’ve been consistent, we’ve delivered on our promise.

So I think in the eyes of our clients, our future clients, we’ve stayed mostly I didn’t want to say entirely but mostly out of trouble. We’ve proven to be a reliable partner. We have had a team people that are accountable that have been around for a while. So, I think the mix of factors of good financial stability growth and I would say confidence is a strong mix also for a market like Switzerland.

Now, clearly, with the renewal in the market leadership for Switzerland, we’re going to go even deeper in our expansion industry market be it in terms of the closeness to our clients, be it in terms of the product and services, be it in terms just of the culture and the language that we speak in that organization as we’re doing in Asia, as we’re doing in other parts of the world.

So, I think we have the best of both work, we have the international expansion and at the same time really the local client closeness.

Dieter Enkelmann

Then, maybe you should also keep in mind that in Switzerland we have relatively speaking a low market share. So there should be potential to go higher. And there is more and more focused offering for ultra-high-net-worth wills and we also want to target more entrepreneurs here in this market as Boris said, as we do it for quite a while for instance in Asia.

Boris Collardi

In that context, we have high expectations also on our new leadership for Switzerland that comes from the entrepreneurial from managing relationship with the entrepreneurial sector. So, that’s one of our segments of growth in the Swiss strategy.

Dieter Enkelmann

Okay, is there one more question in the room? Yes, here. And then we go to the telephone.

Unidentified Analyst

[Indiscernible]. Okay, about the consolidation in Switzerland, could be BSI an option?

Boris Collardi

Look, we’ve made it relatively clear early on that we were not really interested in BSI. So, it wasn’t an option in December, it isn’t an option today. We’ve also heard or learned from the market that BTG is in exclusive discussion with third party. So I think today it wouldn’t be even realistic for us even if we had an interest. But we don’t.

Dieter Enkelmann

Let’s take the first question from the telephone.

Operator

First question comes from Nicholas Herman, Citigroup. Please go ahead.

Nicholas Herman

Yes, good morning and thank you for taking my questions. The first is just a clarification. At the full-year ‘14 results you announced a CHF100 million efficiency program, with CHF60 million effective in 2015. How much of that CHF60 million is in the 2015 numbers?

My second question is on net new money, which was actually pretty solid in the second half and picked up the last couple of months. Have you seen any regions that have been weaker than others? And, also on a similar topic, have you seen any margin cost and how much of a headwind was that in the second half of 2015?

And, finally, can I just ask you on your gross margin and your outlook for that? I can see that you’ve kept your net margin target flat, while reducing your cost/income ratio. So that implies a lower gross margin. But you’ve also said that volatility is coming back. So why reduce the implied gross margin?

And, finally, as part of that, I mean, how do you expect the Your Wealth product to impact the gross margin? Thank you very much.

Boris Collardi

Yes, I just want to give two very quick highlights. That’s an interesting observation that you’re making. Don’t forget we’re continuing to invest quite massively across the board in transformation programs. So that’s also something you need to take into account and in your reasoning about gross margin and net margin transformation.

We’ve had the margin cost obviously, all of our clients serve the margin cost, actually extremely fast. So, we’re not really worried. We’re only in collateralized lending to people that have money. So there isn’t any cause for concern there and it hasn’t affected operations or business or results.

Dieter Enkelmann

Okay, let me just go the order, take the first one. So, out of the CHF100 million which we said we will save cost in both PE and TE, there are CHF60 million a bit more in the results of 2015, so that means that another CHF40 million incremental will come in 2016. But of course you won’t see it as related because on the other hand we also on a net basis want to hire more RMs from what Boris mentioned the CHF40 million net. We want to move up to CHF100 million which will have cost effect. But the CHF40 million, the measures are all implemented and the CHF40 million additional will come through.

Then on the net new money, I mean, that’s very volatile. I keep saying this since years, we have very strong months, very weak months, even months with net outflows. So the development into the end of the year was not an unusual one, and so there is nothing to worry on this.

And then on the gross margin, I mean, if you start from the bottom target, the pre-tax margin, where we say we want to achieve at least 30 basis points. Of course we removed the 35 basis points which we had earlier. But the aspiration is clearly that this is above the 30 basis points and therefore implicitly we don’t kind of, kept our floor and ROA targets on top. And as you know, I mean, ROA is like net new money volatile. It depends as you say on the client activity and that’s very hard to forecast how they come in over half years or even months.

Nicholas Herman

Great, thank you. And just one final thing, you said that you’re not so you’re not - just to confirm, you’re not worried about margin headwinds and, therefore, it’s not going to be much of a headwind this year either, in 2016?

Boris Collardi

I mean, there is always margin pressure everywhere. Then of course there is always a bit impact from the mix. I mean, we have more Asian assets than previously. And there the margin is more volatile but the main driver of the ROA going up and down as you have seen from H2 versus H1 is really declined activity in the different lines.

Nicholas Herman

Sorry, I meant margin calls.

Dieter Enkelmann

Margin calls, no.

Nicholas Herman

Yes, perfect.

Boris Collardi

And we keep on having real stress test scenarios, look at just January, all asset classes went down. And all of our clients are within the shortest time, their margin calls if they had any.

Nicholas Herman

Lovely, that’s really helpful. Thank you so much.

Dieter Enkelmann

Thank you. Next question from the phone.

Operator

Comes from Willis Palermo from Goldman Sachs. Please go ahead.

Willis Palermo

Good morning, and thanks for the presentation and taking my questions. I have three, on capital margins and AuM. The first one on capital, I was wondering if there was a change in priorities between what you were saying 2010 and the new era that you describe now. As before you were saying you were coming to return the excess capital and now you could return some, if there are no other opportunities.

And therefore, is for FINMA fine for you to return today the whole excess between 11% and 18.7% or would you have to consider the fully-loaded Core Tier 1 of 12.2%?

And the second question on margins. I would be interested for you to describe, please, the evolution of the implementation of the Your Wealth program since the start in September in Switzerland, and if you could share some numbers around it, such as the increase in mandate penetration and if you’ve converted as much clients as you wanted to.

And, finally, on the AuM side, I would be interested to have some numbers around Kairos, how much EPS accretion you estimate you will benefit from the acquisition of the 80% and if you expect to onboard more than the CHF8 billion disclosed in November as the Italian inflows are quite strong. Thank you.

Dieter Enkelmann

Okay, I take the first question, that’s also partly related to your last question. I mean, on the capital, I don’t think with the new policy we have changed the priorities or the focus. What we just said in this last bullet point on the respective slide that from time to time, like in the past, the board will look at the capital situation.

And if there is excessive capital and there are no opportunities in the market, we could consider to, pay that out via a special dividend or like in the past to run share buybacks. So I don’t see that we changed those priorities.

And then the particular question about the situation now and in 2016, you have to bear in mind that we bought out 60% of Kairos and then obviously afterwards we planned to do the IPO down to 51%, then we’ll have the closing of Commerzbank Luxembourg. And we have also to buyout 20% of GPS to 100%. And that altogether will have an impact of about 2 percent points on the capital ratios on a net basis both from the capital side and from the risk rated assets.

Boris Collardi

I just want to add two things, then, Dieter, so we expect to consolidate the full AuM of Kairos. I think Dieter made it quite clear. On Your Wealth, we’re progressing well. There is always question initially of gaining the momentum. We have now that momentum. As I mentioned in my introduction, we will give some first numbers in July presentation around Your Wealth.

So, what we’re seeing now is that there is up-selling in terms of higher margin service models among our client base. The sample even though is several hundreds of clients already I don’t think is 100% conclusive on how much that up-selling will be eventually. And that’s just on the annuity so that’s on the advisory fee.

What we cannot quantify just yet, is what is the impact on the transaction volume because we just have six months observation period on the small still sample of clients. But definitely it’s going in the right direction.

What is taking time, frankly, is to prepare very well our relationship manager, our bankers to have this discussion with their clients because it’s not only a technical discussion where you just have to sign a form, it’s really about defining how the relationship should be managed moving forward, what are the expectations and then papering it.

And that’s something where we’ve seen that some of the bankers need a refresh on how they have after having been for many, many years with the client how they have to approach that conversation. I think it’s not the similar to experiences that have been made by other colleagues when they roll-out also their approach to this new investment advisory model.

Willis Palermo

Thanks. That’s helpful. And when you think about the benefit from this offer do you slightly lower your top-line targets going forward, because you give a better cost income but a slightly lower pre-tax margin? Do you take into account the full benefit of it?

Boris Collardi

I think what we will see and I would say, we’re just for the time being not in a position to tell you how it will transpire over trickle down through the net margins in terms of increased investment activity. But I think structurally it will improve our advice base or our annuity based income. So I think when we formulate targets, we try to take many things into account.

I think the jury is out there to see what the markets will give us with regard to volatility translated into increased client activity. There is not an automatic correlation as we’ve seen in the last few months.

Willis Palermo

Thank you very much.

Dieter Enkelmann

Okay. Next question from the phone please.

Operator

Next question comes from Stefan Stalmann, Autonomous Research. Please go ahead.

Stefan Stalmann

Yes, good morning gentlemen and thank you very much for taking my questions. I have three questions, please. The first is coming back to your CET1 target. I’m still wondering a little bit of how to look at this 11% phased target. I mean, would you practically see any scenarios where you would get anywhere close to that, given that that would probably imply a look-through CET1 ratio of around 5%? Could there be an M&A transaction, for instance, where you would opportunistically run it down?

The second question relates to the new investment management division. Could you maybe sketch out these ambitions a little bit more? For instance, would you be willing to make further acquisitions here? Do you have any particular, let’s say, asset under management target? Is this largely a captive activity that is only made available or primarily made available to Baer wealthy clients or would you also consider running an asset management operation for third-party clients? And is this maybe something that could boost your gross margin if you’re basically adding to your value chain through more investment management capabilities?

And the final question regarding legal liabilities, it looks like the U.S. case is now done but you actually have a relatively long list of probably smaller cases adding up to five pages of disclosure. And you have about CHF24 million of legal reserves left, I think, after paying in the U.S. Do you have any measure of what the potential liabilities could be here? I think some banks are disclosing a number of potential, although not likely, legal liabilities. Would you have maybe something like this in the case of Baer? Thank you very much.

Boris Collardi

Dieter, you want to start with the first, the third? Yes.

Dieter Enkelmann

Yes, I mean, on the first one, on the CET1 ratio target of 11% or even total capital ratio, a target of 15%, we would certainly consider to go below these targets on a phasing-in basis, for instance if we do a large or larger acquisitions. But the regulatory minimum on both levels obviously is the absolutely floor. But that will be an extreme exception but in normal course of business we do not go below the same targets of 11% and the 15% on a fully applied basis.

And then the last one, on the legal liabilities, I mean, we always look, assess the cases where it’s more likely that we have to pay something or less likely. And if it’s less likely then we don’t take provision. And in all these cases that were in the report, it’s in our view less likely that we have to pay therefore we don’t not recognize an additional provision.

Boris Collardi

And to add to Dieter, our disclosure of potential liabilities is quite comprehensive, as you mention its five pages. I think we want to try to keep it shorter than our reporting on financial performance hopefully. With regard to the investment management division, let me just make one thing clear, it is part of the bank. So today, its only client is an internal client and that’s the client of Julius Baer, it’s the client of the bank.

And it will deploy the investment management or the portfolio management strategies that we’ve had in the past. It may create new ones and it may from time to time wrap some of the investment strategies into products, into funds that will distribute to our clients of the bank. This is something that we’ve already done in the past, in the small scale. It maybe that we do that even more moving forward.

Clearly, the idea, the model underlines a little bit what you’ve expressed where we would like to have really an investment boutique within Julius Baer made of investment professionals that are paid for investing money on behalf of our clients.

And if you like that thought with what we discussed before on Kairos, Kairos will fit in very nicely, we’ll have a very nice connects with this investment plan, it’s in division as being an additional boutique of excellence in managing money on specific strategies.

So, I would not exclude that in future we may even strengthen this business line and through Kairos, that today already offers its product and its investment strategies to third parties that may offer from time to time two other participants in the market investment strategies of Julius Baer Group that may or may not be called Julius Baer, that may also be run under the brand name of Kairos.

So it becomes a strong pillar of the group moving forward of investment culture and investment focus for our clients. And once I think our clients would be satisfied with that, we may open it to non-clients.

Dieter Enkelmann

Thank you.

Stefan Stalmann

Great. Thank you very much.

Dieter Enkelmann

Okay. Let’s go to the next question from the phone please.

Operator

Next question comes from Hubert Lam, Bank of America. Please go ahead.

Hubert Lam

Hi, good morning. Three questions from me. Firstly, on activity levels year-to-date, you said that transaction volumes have been reasonable. So I’m just wondering how does that compare to the 88 basis points that you saw in the second half of last year, does it seem - does that imply that it’s better than that so far this year?

Secondly, I just wanted a little more color in terms of how the impact of that Asia emerging market slowdown will have on your business. Have you seen any signs of de-leveraging, slowdown in terms of overall wealth creation? I know that you’re still maintaining the 4% to 6% net new money growth so you must be fairly confident. Is that mainly just due to market share gains? Or do you think that the market underestimates the amount of wealth creation that’s still happening in these countries?

Third, in terms of payout ratio you’re targeting 40%. I’m just wondering why that isn’t higher. Are you still trying to build some capital for M&A? Or do you feel that there’s going to be capital pressure going forward? And also, in terms of M&A, do you expect to do more acquisitions this year? Thank you.

Dieter Enkelmann

Okay, let me just start with the last one. I mean, with the payout, the signal that we want to, so, first of all we need to support the internal growth so the growth of risk rated assets, which follows normally the growth of the operating income and then as we say, the rest is for external growth.

And as Boris explained earlier, we see possibilities in the Swiss consolidation but there might be also consolidation elsewhere for instance in Asia, where assets come to the market. And where we would be interested and we want to have some of that excess capital available.

And then indicated as I said before, from time to time, the board would look at this excess capital position and if it’s excessive and there are no opportunities in the market, it could come back via special dividend or share buybacks to the shareholders. That’s the reason why we came to this 40%.

Then in Asia, how was the business affected? There was after the July to September period, there was some de-leveraging but not massively in Asia. We saw that the Asian reacted quickly, they went out of let’s say equities and derivatives to cash deposits went up.

On the balance sheet, but they’re still there and wait for reinvestment, and then Boris, you want to say something on the transaction volumes in January?

Boris Collardi

Yes. I mean, we’ve seen transaction volumes in January to follow the normal pattern of what we’ve seen in previous first quarter again, with the exception of January 2015, which was extraordinary. So, it’s quite interesting, when there is I would call it almost slow, it feels fast, but slow erosion of confidence, people are starting or they take time to build their opinion on what to do. So you don’t see that immediately happening translated in volume.

Whereas in January last year, we had a sharp decline, so people who wanted to take position relatively quickly, on the downside protection and basically repositioning themselves again on the upside on the rebound. So that’s why we’ve had all of a sudden very concentrated increase in transaction volume.

I think if markets would get more volatile structurally as I mentioned before, I think we’re going to have a good underlying support for good transaction volumes.

Hubert Lam

Okay. Thank you.

Dieter Enkelmann

Okay. Let’s go to the next question on the phone.

Operator

Next question comes from Jon Peace from Nomura. Please go ahead.

Jon Peace

Yes, thank you, good morning. So just a quick question about your new cost income ratio target, obviously where you end up in that range will be quite dependent on the revenue environment. But, other things being equal, as you think about your growth plans and your IT investment plans, how would you imagine you position within that range and how would it trend? Is there going to be any lumpiness to the progression? Thank you.

Dieter Enkelmann

I mean we would not have reset that target range to the 64% to 68% level or range if we would not be confident that in the three-year horizon, so between now and 2018 we would be able to get into this range. And that of course assumes that there is normal volatility on the client activity side which you anyway as I said no planned forecast that this takes into account, the spending on the technology side, on the platform side to benefit from Your Wealth.

And then of course, it’s a bit difficult to say whether this is a straight line going down or whether it’s up and down. But we’re confident that we can achieve in the current structure cost income ratio which is really in this range in 2018.

Jon Peace

Okay. Thank you.

Operator

Next question comes from Bruce Hamilton, Morgan Stanley. Please go ahead.

Bruce Hamilton

Hi there, good morning guys. Most of my questions have been answered, actually, but just on the net new money for the year. Obviously you indicated Asia’s 25% or so of the asset base. What proportion of the inflows was it? And was there a big sort of change H1, H2 in terms of proportion of net new money coming from Asia? Thanks.

Boris Collardi

I’m not sure I heard the question.

Dieter Enkelmann

Yes, I think we had the question before.

Boris Collardi

What proportion?

Bruce Hamilton

I was asking how much of the CHF12 billion of net new money came from Asia. So Asia accounts for 20% of your assets, but how much of the flow? So apologies if it’s been asked already.

Dieter Enkelmann

You mean from Asia? A good portion of the flows are coming from Asia.

Bruce Hamilton

Okay. Is that two-thirds?

Dieter Enkelmann

No, no.

Boris Collardi

No, no, it’s not two-thirds because you see, I mean, one of our earlier comment is that net new money comes from across the board from all the region. So Asia is not two-thirds but it’s significant enough. I would almost like to say to try to give you some guidance, it could be better. But it’s significant enough. And I’m hoping that in 2016 it will be better.

Bruce Hamilton

Got it. Thank you.

Dieter Enkelmann

Okay, next question.

Operator

Next question comes from Andrew Lim, Societe Generale. Please go ahead.

Andrew Lim

Hi, good morning. Thanks for taking my questions. I’m still very confused about what you consider to be excess capital. You’ve obviously given a new Julius Baer minimum here but that’s with respect to your phasing requirements.

And so are you really saying here that you are willing to see your CET1 phase-in ratio go down to, say, about 12% but, at the same time, see your fully loaded CET1 ratio go down to about 6% at the same time? I mean, that doesn’t really seem realistic. And so we’ve got a very big question mark about what really is excess capital at Julius Baer. And so if you could clarify that situation that would be much appreciated.

And then, secondly, on your decision to start up investment management again as a subdivision. I’m just wondering what the change is here in your thinking versus 2009 when you decided to split the private banking and investment management businesses. Why now do a turnaround in that? You seem to be doing very well with the status quo right now. Thank you.

Boris Collardi

I will answer the second question and then, Dieter, I may have to go because you know I have 11 o’clock presentation unfortunately. But on the investment management side, just to be clear, there isn’t a change in our thinking i.e. we’re returning into asset management. The change in our thinking is very simple. Our ISG division that’s our internal division that offers product and services to our relationship manager and by extension to our clients is almost victim of its own success.

Over the last few years, we’ve increased penetration of every single product and solution that we offer to our client across the board, so much so that today Investment Solutions Group, the ISG has become really very large. I mean, over 500 professional working in that division. And we feel that it has become so large that we want to reemphasize the focus on investment management. And therefore the basis of this investment management division is a spin-off of the portfolio management area from within the Investment Solutions Group.

So, it’s an internal structural measure with a change in leadership, with a refocus for our colleagues internally, this portfolio management colleagues to serve the private banking clients and the clients solely on delivering investment performance.

Dieter Enkelmann

Then on the other question, what we’re saying is that, the capital targets are on phasing-in which is anyway of the one or three quarter years is disappearing. So within this period let’s say if we were to transaction we would be happy to go, not happy but we would take into account that on a fully applied basis, the capital ratios would be below, let’s say 11% or 15% for this remaining phase.

And keep in mind, as we have not so much volatility in our business model, we generate capital, leave the U.S. sentiment aside, every month to replenish if we go lower on the capital side let’s say to cover an acquisition.

Andrew Lim

And, of course, with the phase-in of the deductions you should see the phase-in ratio narrow towards the CET1 fully loaded ratio within about three years.

Boris Collardi

Exactly. I mean, the fixing charge is in the half year and then you have basically one more charge, two more charges in ‘17 and ‘18, and as from ‘18 it’s together. So, and then of course, the targets are on a fully applied basis.

Andrew Lim

Of course, okay. Thank you very much.

Boris Collardi

Okay. Two more question left. Unfortunately I need to go because today we have a board meeting of the Swiss Bankers’ Association. And I’m supposed to hold the presentation since 9 o’clock this morning. So, I promised them I will be there by 11:00. We’re only left with two questions. Dieter, I leave this in your good hands. Ladies and gentlemen, thank you. And I will see some of you later on today. Thanks for coming.

Dieter Enkelmann

Let’s go to the last two questions quickly on the phone.

Operator

Next question comes from Huw Van Steenis, Morgan Stanley. Please go ahead.

Huw Van Steenis

Good morning, Dieter, pretty quick question. If the Swiss Central Bank would make negative deposit rate even more negative, what contingencies would you consider. And how also how is that, how that impacts your treasury management? Thanks.

Dieter Enkelmann

Yes, there is a bit difference Switzerland and abroad. We pay, in Switzerland on a net basis that means above the threshold we have, we pay negative rates. But this is only coming from U.S. dollar amounts, is whopping to Swiss Francs. So barely making, no loss, there is no net loss as supposed to Germany and France, where we have holdings with their respective Central Banks, where we have to pay on a net basis.

So, in Switzerland we started to charge institutional clients that have deposits with us from the custody business but not yet on private clients. And we consider whether to introduce charging private clients on Euro Holdings, especially from booking center, Monaco and Germany because there is no offset in the measure we can take in the euro area.

But so that the net impact if I add booking, earned on trading from the swaps from U.S. dollar into Swiss Francs, but the net impact from the negative interest rate charged by the National Banks is relatively small in 2015, and should remain also small in ‘16. So that’s not a major amount.

Huw Van Steenis

Okay, thanks.

Dieter Enkelmann

Okay. There is one more question left in the telephone.

Operator

Last question comes from Jonas Floriani, KBW. Please go ahead.

Jonas Floriani

Yes, thanks Dieter. Just two questions from my side, first one on the IT renewal, I mean, is there any more details you can share with us about the renewal of the IT platform both in terms of the size of the investment and the timeframe? I know you mentioned on the presentation that the renewals were on track. But I was just curious to understand what is the track here you are talking about?

And then the second question is looking at your slide 32, on the changes equity, I mean, looking at the line of other components of equity, do you have any visibility on those three lines going forward?

Dieter Enkelmann

Okay, thank you. I take the second question first. If you go to slide 32. So, you refer to the financial investments available for sale, that’s the fluctuation of our treasury portfolio, let’s say exposed to changes in interest rates. This is depending on the interest rates mainly the U.S. dollar rates, the mid-term rates as this is the growth of our portfolio. We don’t invest anymore at this point time in Swiss Francs and Euro.

So, for instance in January, when U.S. rates came down, the mid-term rates we have positive amount, should see a positive amount on that line. Then, the management of Defined Benefit Obligations, that’s related, that was all added in the first half where we moved down the discount rate by 0.5 percent point. And which led to higher liabilities and the consequence net of tax is this CHF98 million.

And then the FX translation difference was the consequence on the one hand from the Swiss National Bank decision. So this is the equity in mainly the booking centers, Monaco and Germany which is less averse due to the stronger Swiss Franc and the lower Euro. And the delta comes from the weakening reals where we have the equity in GPS. But that’s also on that line is difficult to forecast how Swiss Francs will develop against the other currencies.

Is there a last question here in the room?

Unidentified Analyst

Sorry, could you repeat, did you say you are considering imposing negative interest rates on German and do you say other cards as well, as results of S&B, just to clarify what you were saying? Thank you.

Dieter Enkelmann

It’s not targeting, it will not be targeting clients from certain jurisdiction, it’s more that we think about like many other banks that on Euro deposits that introduce a charge to offset the negative rate we have to pay and also to avoid that our clients from other banks, all clients we have move large amounts to us. But this will be considered, we look into it what will be the consequences. And of course it will be carefully implemented once we come to that decision.

But that’s in - for Swiss Franc deposit, we don’t charge, with a few exceptions, private clients. But we have started early last year like many other banks to charge institutional holders of deposits with our bank.

Euro would be, yes, that’s right. Because so far we don’t charge Euro, even institutional client, so that would be step number one. And then the next step could be if even that the charges are going down or going up, net more negative, also the private clients over time.

Dieter Enkelmann

Okay. Thank you very much for the interest. And we wish you a good day.

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