Earnings Call: H1 2020

Jul 20, 2020

A very good morning to all of you, and welcome to Julius Baer's half year results. We hold this today in a virtual version as we are getting used to, but I am sure that you will still feel our passion and our energy. Julius Baer has achieved outstanding results in the first half year of twenty twenty. This is due to 3 factors: our unique and strong focus on wealth management that left us undistracted from our clients our highly resilient organization, agile and nimble in difficult times with solid infrastructure and excellent risk management and our very strong business performance in all dimensions with our ability to take advantage of market volatility. And through our excellent coverage, we were able to win new business and capture flows. In February, we have announced a new strategy that will carry us into the next decade. We have been relentlessly focused over the last 6 months to implement and to transform our organization despite the COVID situation. We have advanced our front unit design, delivered on new solutions and essentially completed the cost side of our productivity program for 2020. We have also continued to build our future and resolve legacy issues vigorously. As we move into the second half, we are well prepared from a business perspective. Asset levels have recovered, and we are ready to capture volatility in the market through our business model. We use also the situation as an accelerator to change our business. This is about technology, for example, digital onboarding and identification, but also about an agile way of working and the change of our culture. With this summary, I hand over to Dieter for the financial results. Thank you, Filip, and good morning. As usual in our presentation, the results are shown in the adjusted basis. A reconciliation is as usual provided in the appendix and in the more comprehensive alternative performance measures documented on our webpage. Of course, these 1st 6 months were extraordinary, and we all know what happened. But it's first to briefly highlight what was particularly relevant for our business. After a good start into the year, towards the end of February, the stock market started a sharp decline, lasting about 4 weeks. That decline ended and reversed as abruptly as it started, driving a strong recovery for the rest of the period. The volatility in this period rose to exceptionally high levels, especially in March April, as is clearly shown in the second graph, which kept our credit team very busy, working with our credit clients to successfully avoid any meaningful damage and drove client activity to levels we had not foreseen for a very long time. Central banks everywhere reacted strongly, and U. S. Interest rates dropped sharply, as is shown on the 3rd graph. This had ultimately a negative impact on our net interest income. A final development important to mention is that throughout the period, the Swiss franc continued to strengthen. This had a further negative impact on client assets and is also important due to the currency mismatch in terms of revenues and costs, especially for the U. S. Dollar exposure. Moving on to Slide 7 on the results. Starting with the development in client assets. AUM came down to €402,000,000,000 a year to date decline of €24,000,000,000 or 6%, as continued positive net new money of €5,000,000,000 was more than offset by a negative market performance of €16,000,000,000 and a negative currency impact of €12,000,000,000 Following the deep decline in March, monthly average AUM, important for the margin calculations, was €404,000,000,000 down 1% from a year ago. Net new money reached €5,000,000,000 or 2.3 percent annualized, a somewhat lower rate than a year ago, but a slight improvement from H2. We saw solid inflows from clients domiciled in Europe, especially in Germany, the U. K. And Ireland and Luxembourg and Asia, and there, especially Hong Kong and Japan. It was also pleasing to see net new money in Latin America turning positive, supported by healthy inflows from Mexican and Chilean clients. Net new money would have been higher, well over 3%, without the negative impact of Lombard deleveraging in March April and some further net outflows in Kios. Revenues grew by 9% to 1 €900,000,000 driven by a strong increase in client activity, partly offset by a decline in net interest income and an increase in provisions for credit losses. Commission and fee income was up 8% to over €1,000,000,000 Obviously, we saw a very significant rise in transaction driven income. Recurring fee and commission income decreased slightly by 1%, but that was entirely in line with the decrease in average AUM. The contribution from Kairos declined following a decrease in AUM and much lower performance fees. Net interest income declined by 19% following the sharp drop in U. S. Interest rates. On the positive side, despite a clear rise in deposit volumes, the fall in rates led to a decrease in deposit costs of €132,000,000 which outstripped the negative effect of a €112,000,000 decrease decreased income on loans. However, the interest income on our treasury portfolio declined by €70,000,000 also because the average size of the treasury portfolio in this period was smaller than a year ago. Net income from financial instruments, what used to be called trading income, grew by 71%. This followed a sharp increase in market volatility as highlighted earlier, leading to a strong increase in client activity in FX derivatives and Precious Metals Trading and to arise in income from structured products. Other income went from €31,000,000 positive to €31,000,000 negative as we saw €49,000,000 in credit provisioning in the first half. Of this €40,000,000 only €2,000,000 linked to just one position was directly related to the high volatility environment in March April. Of the remaining EUR 47,000,000 in credit provisioning, approximately €44,000,000 were due to an increase in individual provisions for some legacy cases, and approximately €3,000,000 was linked to the overall portfolio following a change in the economic assumptions. The gross margin on Slide 10. The analysis shows clearly the effect of higher client activity with the trading income gross margin increasing by 11 basis points to 26 bps and the transaction driven component, leading commission and fee income, jumping by 6 basis points to 16 basis points. The recurring fee component declined by 2 basis points, would have been stable, excluding the impact from Kairos I mentioned earlier. Net interest income gross margin fell by another basis point from the level in H2 and is now 3 basis points below the level of a year ago. Please also note that the other income contribution was negative. Without the provisions for credit losses, the gross margin would have been 94 basis points. Moving on to expenses. Total operating expenses remained stable year on year at CHF 1,200,000,000 despite a very strong increase in revenues. Personnel expenses were up 2%, whilst the staff cost development was helped by an average 1% lower staff level. There was an increase in performance related remuneration accruals following the strong rise in revenues. Severance costs linked to this year's cost reduction were CHF 19,000,000 compared to CHF 17,000,000 a year ago. Channel expenses fell by 5%. While there was an increase in non capitalized IT spend, the development in China expenses benefited from a €21,000,000 decrease in provision losses and from the fact that the €20,000,000 we were still spending on project Atlas in H1 last year have now fallen away. Depreciation and amortization went up by 6%, reflecting the rise in IT investments in recent years. And as a result, the cost to income ratio improved to below 67%. As a result, adjusted net profit was up 34% to €524,000,000 a new record for Julius Baer. Earnings per share were up even a bit more by 36% as the share count relevant for DPS calculation came down following the buyback. IFRS net profit also reached a new record of €491,000,000 Our guidance for the adjusted tax rate is unchanged at 15% for the next few years, following the Swiss tax reform and the much increased contribution from the Asian platforms. And in the table on the left hand side, you see that our pretax margin improved to 31 basis points and our return on CET1 capital to 36%. Moving on to the balance sheet. Since the end of 2019, we see the client's partial move into cash reflected in a 5% increase in deposits. The loan book declined by 4% as loan but lending decreased. And as a result, the loan to deposit ratio dropped to 61%. And the increase in excess deposits led to higher amounts deposited by us at Swiss and European Central Banks as well as an increase in the treasury portfolio. Finally, on slide 14, capital. The CET1 ratio came in at 13.9%. CET1 capital build was €100,000,000 despite €112,000,000 negative translation differences, of which about half due to the 28% decline in the Brazilian rise and despite €77,000,000 spent on the buyback until we were asked in March to pause it and despite the €44,000,000 negative impact from the remeasurement of the defined benefit pension obligations. Please note that whilst we were asked to split our 2019 dividend into 2 payments, we continued to accrue a dividend for 2020. Risk weighted assets went up by SEK0.8 billion, mainly on the introduction of SA CCR, which by itself added €800,000,000 at the start of the year. That's a new FEMA rule. And due to a €200,000,000 rise in market risk weighted assets following the increase in market volatility. At these levels, Julius Baer continues to enjoy a very strong capital position, both in terms of absolute levels and in terms of the cushion above the regulatory floors. With this, I have come to the end of my presentation, and I hand back to Philippe. Thank you very much, Dieter. Let me start with what has enabled us to deliver such outstanding results through our pure wealth management business model, fully focused on serving our clients and with a tightly managed risk profile. There are two points I'd like to briefly highlight, our resilience and our ability to create value. Our first priority was to keep employees and clients healthy and safe at all times, With measures swiftly taken in Asia, then Europe, then the rest of the world as the pandemic swept, less than 1% of our staff have been infected, thanks to the work from home and the split operations we put in place. Stable operations were ensured at all times with more than 90% of employees being able to work from home and rigorous safety measures in place in all offices. Transaction volumes have peaked impressively at almost fivefold the daily average of 2019 with uninterrupted client service. This reflects our continued investments into our scalable infrastructure, into our platforms and processes, and this strong backbone enabled us to be fully focused on our role as advisor to our clients. Our value in such times comes from the proximity to our clients and helping them to make rational decisions. Our relationship managers report to me that they have been even closer to clients than before with even more touch points than before. Interaction has shifted rapidly from physical to remote. Obviously, the phone has been our primary use primary means of communication, but RMs and experts were able to hold secure client meetings through other technologies like WebEx. Our digital channels like e banking also attracted much higher activity, for example, a close to fourfold number of trades via our mobile app in March against the average of 2019. Despite the turmoil, we stayed true to our investment convictions and kept our asset allocation stable at all times, watching closely the markets and ongoing stimulation measures. This proved to be the right strategy and led to strong investment performance. As an example, our global excellent mandate outperformed its benchmark by almost 10% in the first half of this year. And on a side note, mindful of the impact on the world around us and our relative position of strength, Julius Baer has supported emergency relief efforts designated to help the most vulnerable members of those communities in which we are rooted. And we have also kept or even enhanced support for cultural institutions such as the Elphylharmonie, Berghier Festival, the Art Dubai or the Berlin price for young artists. COVID-nineteen has within just a few weeks already forced the world to rethink many of the old habits, conventions and truths that we have just taken as given. And some of those changes are here to stay in the way we interact with clients, in the way our employees work and in the way we work as a company. We have embraced this situation as an accelerator for our own transformation, and let me give you two examples for that. With clients going rapidly digital, we have immediately shifted more than €15,000,000 of projects funds to the acceleration of our digital transformation with one objective, immediate applicability. And so in July, our pilot for digital onboarding, including video identification, has gone live in Switzerland, and that's just one example. We have expanded the digital interaction channels for our clients, including secure WhatsApp, which will go live next month and the direct distribution of expert insights via digital channels. These are just a few examples and more functionality will be added in the second half of this year. This progress was possible thanks to the can do attitude of our employees. Not only have they adapted to the new situation, they have also lent their creativity to transform the way we work and do business. And so we have harnessed this momentum through bottom up co creation with the global thinkathon in cooperation with our long standing partner, the F10 Accelerator. More than 300 participants in 60 teams have delivered us with additional ideas and priorities for the months to come, for example, on how to improve our end and client connectivity or how to optimize nice workspace planning in a remote work. All that I've just mentioned fits into the context of our strategy, which we announced in February. To recap, we are addressing the industry wide structural challenges of margin erosions and cost pressures with 3 thrusts that will enable us to redefine wealth management for the next decade. 1st, shifting the focus in how we lead the company from an asset gathering led strategy to sustainable profit growth second, sharpening our value proposition for our ultra high net worth and high net worth clients and for our intermediaries and bringing the whole bank to our clients in a holistic approach and third, accelerating investments to make human advice more scalable investments in technology, infrastructure and data in the client experience, but also investments in top talents. This transformation is today in full swing. Excellent progress has been made over the past 5 months and let me cover 2 areas. 1st, evolving the value proposition of our clients. In line with our ambition to provide holistic advice and following the reorganization on 1st January, we have now upgraded our client coverage model with enhanced market head responsibilities and with a new scoping of front roles. We accelerated internal training starting with all assistant relationship managers. We have also upgraded our front organization with a dedicated front risk management function and deployed additional 30 employees just for that. We have substantially enhanced our product range. True to our priority on private markets, we have launched 3 private equity solutions in the first half year for broader distribution. And on July 10, we announced the hiring of a global direct private equity investments team. The topic of yield enhancement was important and for example, we managed to raise CHF870 1,000,000 within 1 week for a single fixed maturity fund invested in dollar denominated corporate and sovereign bonds with focus on Asia. This just as an example for the placement power we have in our client franchise. We also concluded large structured real estate transactions as part of our financing offering for private clients. This reflects our sophisticated capabilities in this area. And we are demonstrating continued drive to localizing our offering. We have rolled out fee based advisory models in the Middle East, and we upgraded our offering for Swiss domestic clients. Finally, in line with our focus on ESG, we are developing a new impact investing platform, which is focused on the overuse of natural resources and the underuse of human resources addressing 6 of the United Nations' Sustainable Development Goals. The first product on this platform will be a fund on the blue economy and will go live in Q4 this year. The second area of strategy execution is our productivity program. We have started to streamline our organization as early as in February, and therefore, headcount reductions targeted for 2020 are almost completed as of today. Impact will be phased from the second half of this year. To reduce our geographic complexity, we have been able to implement our footprint reduction in the Bahamas as a sale transaction, offering continuity to clients and to employees alike. We have also addressed local situations in Uruguay where we simplified our business and in Egypt where we closed and the geographic review continues. In addition to the revenue related activities that I have already mentioned, we have also successfully and systematically started to reprice unprofitable client relationships to create value for both sides. These productivity measures together are key to achieving our midterm targets for end 'twenty two, and those targets are unchanged and herewith reconfirmed. We are building the future of Julius Baer and also resolving the past. FINMA, the Swiss regulator, has announced in February its findings on the closure of the enforcement procedures in matters of FIFA and PDVSA. Julius Baer has over the past more than 3 years taken comprehensive measures to remediate the past and redefine the way we manage risks. We have concluded the Know Your Client Upgrade Program Atlas with more than 100,000 account records reviewed and re documented. We have reconfigured risk management structures in the frontline and in the compliance organization. We have enhanced our anti money laundering and transaction monitoring processes and systems. We defined a new risk management and tolerance framework and introduced a new client risk rating methodology. Combined investments in upgraded risk management and systems and infrastructure over the past 5 years exceeded CHF150 1,000,000. These combined measures over the last 3 years have also led us to exit more than CHF10 1,000,000,000 in client assets. This has substantially changed our risk profile and all of this together underlines our commitment to structural change. As we are going forward, we continue to address legacy legacy issues resolutely and constructively together with our regulators and the authorities. While these legacy issues will take time to be resolved, they all go back to the same shortcomings and we are committed to resolving them completely. Past and present measures, together with our shift in strategy and our culture, should not only allow us to put past issues behind, but are truly the key enablers for our future success. Let me conclude with an outlook for the second half of this year. Our eyes are on our clients and on our business. Continuing operational success and maintaining resilience are key as the COVID situation will continue and create volatility. We will be as close to our clients in the second half of this year as in the first half, helping them with advice and solutions. We are adjusting our solution offering to respond to the changes in the environment, especially the compression of the dollar interest rates, looking for new cash alternatives and investment opportunities together with our clients. And we continue to manage our risks stringently in credit in markets as we have done very successfully in the first half of this year. Equally key will be the delivery on our strategic programs. At the core is the revision of our front compensation model, aligning it fully with our strategy quantitatively and qualitatively and keeping it highly competitive. We will provide you with details on this as we go through the second half. We will also continue our work on client coverage model with strategic client planning, with client reviews and virtual teams of experts. And last, we are starting already today to prepare for a new normal of post COVID business using what we have learned in the past couple of weeks as a catalyst for change. We started to perpetuate remote work, balancing physical presence and remote activity and adopting even more agile ways of working in IT. To summarize, we are entering the second half of twenty twenty in a position of strength. We are fully focused on the needs of our clients in challenging times, and we are pursuing our transformation with a great degree of confidence. With this, I'd like to end my presentation and move to Q and A. We will now begin the question and answer The first question comes from Isabelle de Porreva from Morgan Stanley. Please go ahead. Good morning. This is Isabelle from Morgan Stanley. I have three questions, and they're actually all on the NII, because it looks like there were a few different moving parts this quarter there. So let me start with the deposit front because it looks like you've been able to reprice a lot of the expenses out despite the balances increasing. So can you give us some color on where you are on that rotation out of term deposits? And if you see any more scope to deposit to reprise the costs out in the second half of the year? So that was the first question. Then on the second question, it's similar but on the loan side. Do you see any scope for the interest income from loans to recover? For example, if loan value go up, if we get any market recovery or you reprice any of them? And then finally, I had a question on the bond portfolio contribution, because I saw that the size of the book increase, but the contribution was still down €70,000,000 So could you tell us if the bulk of the headwind from the lower reinvestment yields is now in the price? Or if you expect more to come? And also, do you see any scope to optimize the NII and deals by maybe investing in longer duration or a different mix of assets? Thank you. Good. Thank you for the question. I thought it's the first one. I mean it will go further down. There are still some term deposits, but all the remaining term deposits in U. S. Dollar will go to current accounts. And therefore, what we pay for deposits will come to a very small amount ultimately. So that trend continues. But of course, the big chunk is already out as you can see from the analysis of the net of the interest income. Then on the loan, you asked about the recovery. Of course, already in May June, the volume has gone up again, the lending volume. And if the asset levels of the clients go up, then we expect that the penetration loan versus AUM stays stable and therefore the loan, loan but lending would also go up. Pricing in this period has been stable, even slightly increasing in terms of margin. So that's on the positive side. Then on treasury, as I said, I mean, the average volume of H1 compared to last year is lower. If you look at the end end of June treasury volume, it's already higher than the average and therefore that should have some positive impact. Then also the mix changed in the portfolio. We have less U. S. Dollar and more other currency, especially euro. And we lengthened the duration of the treasury portfolio during this period. So there is, I would say, cautiously positive outlook on the treasury portfolio income. Thank you. So just to summarize, would you say that NII has now dropped or would you expect it to drop in the second half? You mean in terms of basis points? I would say it's out of the level of May June where the full impact is almost in. I would say it should be rather flattish development, yes. The next question comes from Jeremy Sigee from Exane BNP Paribas. Please go ahead. Good morning. Thank you. Two questions, please. The first is, I just wondered if you could talk a bit more still on the revenue side. On Slide 10, you showed the recurring fee income actually fell a bit more, it's down from 37 bps to 35 bps. And I just wonder if you could talk about your expectations for well, firstly, are there any specific factors within that? Or what your expectations are for that recurring fee income going forward? Do we need to expect a continuation of these sorts of declines? I know that's a long standing question, but I just I thought your disclosure there was interesting if you sort of talk about that. And then the second question is on a different topic. I just wondered what your thoughts were about when you might be able to restart share buybacks or if that remains politically difficult, whether you would look at the dividend as an alternative mechanism for reducing capital surpluses? Thank you. I'll start with the second half. Our thank you for the question. Our share buyback and dividend policy and strategy is unchanged. We have temporarily halted share buybacks on the request of the authorities and expect to resume that once that temporary suspension is lifted. The same as Dieter said before, we continue to accrue a dividend also this year for next year. Maybe Dieter, you want to say something on the first question? Yes. Thank you. On the first question on the recurring fee in terms in basis points on page 10. I mean, as I said in explaining it, the difference that the downturn of 2 basis points came entirely from Kairos that had less average AUM and a lower gross margin than in the second half and in the first half especially first half of twenty nineteen. Taking away this impact, the recurring fee income in basis points would have been flat. The next question comes from Andrew Rehme from Societe Generale. Please go ahead. Hi, good morning. Thank you for taking my questions. So I was wondering if you could give a bit more color on the set of the trading the other trading income from financial assets at fair value. Obviously, you've had some good results there. But specifically, that amount from hedging, could you tell us how much that contribution was? And then secondly, you described Hong Kong as your second market, but obviously in recent weeks, we have U. S. Sanctions on the territory and specifically on Chinese individuals. I was wondering if you could describe if there's any impact, if any, on the way you do business there now and going forward? Thank you for that. Let me start with Hong Kong. I think Asia is, as we have always said, our 2nd home market. And obviously, Hong Kong is a very strong hub in there together with Singapore. We've been very close to our clients over the last few years. And obviously, I think our clients are very deeply rooted in that region. And we haven't seen any major moves of assets out of Hong Kong during that time. And while I cannot comment on the current events, it is clear that we will continue to invest in that market and will continue to develop our business from that platform. Maybe Dieter? Yes. On the first question on the referring to Node 3. I mean, as we said, there was much high volume client activity in FX. Precious metal was outstanding. If you look at the allocation of our clients on a rounder basis, the allocation to precious metal moved from 1% to 2%, which is quite remarkable. We are also in physical precious metal trading and there the fees were quite high as this market was really tight in March April. I mentioned FX. And then, of course, on the equity instruments, we had a lot of gains on the structured product side due to the situation and in general on derivatives as the volumes were high. So everything all the different components contributed to that good result. Do you find this behavior quite exceptional and surprising? I mean, usually, when you have a market correction, clients tend to lose a bit of confidence and they hold back and it seems to be quite opposite at this time around. Do you have any thoughts as to why things have changed? I think this was not just a market correction. I think first the market correction is probably the first man induced recession in the history of modern economics. And in that sense, I think the first half year took a different shape than previous crises. And the second is, I think everyone in the market is looking forward now to recovery patterns across the globe, which will happen. The question is just at what speed and in what place it unfolds. And this typically is a time where there is volatility, where there is also opportunity. And this is why we have seen client activity not just at the peak actually in March, April, but as far as into June to be at quite elevated levels. And with that, do you see any reduction, the amount of cash that your clients are holding? I think running into February 'nineteen have been at a very high level. So do you see those levels coming down? Probably not in the very short term. I think clients typically in those moments of shock, when they liquidate assets, they hold them in cash. We've been advising our clients to stay invested throughout that period, continue to do so. Any entries into investments have to happen slightly more cautiously, but we will see how the second half of this year plays out. That's great. Thank you very much. Next question comes from Anke Reneghan from Royal Bank of Canada. Please go ahead. Thank you very much for taking my question. The first is going back on net interest income. In the past, you told us we should look at trading and NII together to include the treasury income. And I just wonder where we stand at this in the first half relative to last year. And then in terms of the gross margin, I guess it was 95 basis points at the 1st 4 months decline. I mean, if my calculation is right, it's like 80 8 basis points in May, June. Would you think that's a reasonable run rate? Or is it obviously boosted by high levels of trading activity? And then just lastly, in your comment, you talk about where to tap to rebrand opportunities. I just wondered if you can elaborate, please. Thank you. Okay. On the first question, referring to the base ops we do from U. S. Solar into Swiss francs and then depositing them at the Swiss National Bank. As the spread has come down massively, the impact is about half of what it was in the first half of twenty nineteen. So the with a much lower contribution in absolute terms. So is the second question was referring to the net interest income or No, that's the total gross margin. Is May, June the gross margin, if I imputed from the first half? And obviously, what you said with the 4 months, I calculate 80 basis points. Do you think we should use that as a base for the second half? Yes, it was a bit higher. It was about 85 basis points. And of course, as you know, I mean, the monthly ROA can fluctuate. We had a much stronger June and a weaker May between these two. And as Filip says, client activity levels in June were again quite elevated and nicely coming in, whereas in May was a bit lower. May was actually the weakest month of this 6 month period in terms of revenues and also in terms of client activity. But I mean, as you know, this can recur or not recur mainly depending on external factors. So it's difficult to forecast. And then the third one is on the positioning. What was your third question, sorry? You mentioned in your statement that you're well prepared to reap opportunities. If you can please elaborate. I mean, are you talking about acquisitions or client organic growth or depending on the opportunity? Thank you. I think the primary focus is clearly on working with our clients. And I think the first half has shown that we do have the proximity even in times when we are separated and even in times when physical contact is hard to maintain. I think that the newly established communication channels with our clients will allow us to advise them very closely and to work with them on value generating transactions in the second half of the year. I think that's the primary element. We've also seen that we continue to attract funds and we've seen that we continue to attract talent. We've been able to hire on a specific basis, but still we've been able to continue to hire even throughout the first half year, which was quite exceptional under those circumstances. And I think that gives us great confidence that for the second half of the year, we are well prepared. The next question comes from Patrick Vinter from Bloomberg News. Please go ahead. Hello again. Two questions from me. So the first one, to what extent do you think that the lower loan volumes, which I guess translates into low income and lower interest rates, will be a drag on your business in the second half? I know you've spoken a bit about volatility and how that potentially could help you, but just broad brush, could you give me a sense of how difficult it will be to replicate the first half? Because obviously, it was an extremely profitable period for you. That's question 1. And then I'll stick with profitability for my second question. So for banks, it's been a fairly good first half and so I've seen huge profit given the social impact of COVID. That almost really becomes a thing of concern. So in that context, what's your thoughts about distributing bonuses? And if you do opt for a lower bonus despite giving a fantastic year, what are you going to do with the extra money? I'll go for the first one. I mean, if I understand your question focuses entirely on net interest income. As I said, I mean, lending loan book lending already started in May June to grow again. So if levels continue to be where they are or if they're rising, then we see that people reinvest and therefore the loan but lending should grow. That would be one area of recovery for net interest income. Then of course, the shape of the U. S. Dollar yield curve, it's a bit less flat than last year. If it would steepen a bit more, that is always positive, especially for the treasury income. So as I said before, we should in terms of base points have seen the bottom and flattish. And of course, there is potential for recovery depending on the market situation. As to the debate on bonuses, I think three thoughts. First, I do believe that a meritocratic compensation system where pay is truly linked to performance, not just in a quantitative, but also in a qualitative way is per se something good and something positive and something creating the right level of equality also within the company and the right distribution with shareholders. 2nd, I do see that many, many of the individuals in our companies together with ourselves as an institution are doing our part in providing relief and support to communities out there. That includes also a lot of voluntary work in different parts of the world. And the 30s, we will see at the end of the year, obviously, where the quantitative targets will ultimately come in and then a decision on variable compensation would have to be taken based on that. Can I just return to the first question? So thanks for the information about the trends in net interest income and the trends in non bond lending. But broad brush, could you if I can just once again ask, what's your feeling about the second half? Will it be difficult to replicate what you've done in the first half in terms of overall cost? That's rubbing the crystal ball probably on your as well on our side. What we do see obviously is as fast as we have seen deleveraging, for example, in Asia, as fast we are seeing early signs of releveraging. Now that's exclude a clear re leveraging also on the Lombard side. So I believe this is and remains very hard to predict. Okay. Thank you. Next question comes from John Peace from Credit Suisse. Please go ahead. Yes. Hi, everyone. I had a question, please, on costs. It looks like the cost income ratio bumped up to about 72% in May, June after the 6 64% in the 1st 4 months, which might have been a touch higher than expected. So I just wanted to understand to what extent were you getting ahead of the curve on variable comp in H1? And maybe you have some tailwinds on general expenses in H2. Basically, can you get the cost income back below 72%, you think, in the second half of the year? Thank you. Let me give the longer term answer, maybe Dieter, a bit more the year on year perspective. I think we've been very cautious on costs in the first half year. We still had some benefits from the program of last year coming through obviously. And at the same time, we continued the restructuring along the plan that we laid out at the beginning of this year, where there have been restructuring costs, but actually no benefits yet. And obviously, there was some benefit on the general expense side from lower T and E and then and some expenses on the other side also in technology. So I think there has been quite a mix of elements that came into the cost result. I think the overall philosophy is still one of caution and we want to very tightly manage costs, not just for this year, but on a 3 year cycle towards our 2022 objectives. Yes. And on the 6 months period, it was a bit kind of if you look at May June, we had some bookings related to project alluded by Filipe in his presentation, where the non capitalized part was booked in May and some other projects and some portion of the restructuring expenses. So May June are not representative for the next second half. Then what you have to bear in mind, we have relatively high holiday accruals still as the employees took not holidays in the 1st 6 months on normal patterns, which is driving up the holiday accruals so far. That's on the negative side. And on the positive side, of course, throughout the 1st 6 months, we had much less travel costs than entertainment and some but limited lower marketing expenses than last year. So with the yes, just to one side. On the restructuring expenses, I expect that the amount €19,000,000 in the first half, in the second half, which will be much lower, for instance. Thank you. Is it possible to quantify those project bookings too, just to give us an idea of the distortion? Yes. This will be maybe compared to the average of the rest of the half year, EUR 15,000,000. About EUR 5,000,000. Yes. And then you have holiday accruals. So it's always difficult. There are so many factors driving the personnel and general expenses month after month. The next question comes from Herman Nikola from Citigroup. Please go ahead. Yes, good morning. Most of my questions have been asked. I just have a couple of questions please. On the net interest income, just was curious if you could just help us with the exit net interest margin from the first half or rather the net interest margin percentage of assets over 1,000,000 in June. It's about 15 basis points, a reasonable estimate there. Secondly, on your balance sheet management, I guess, having near zero interest rates starts to challenge the traditional private banking model with the funding structures where loan to deposit ratios have historically been far less than 100%. So clearly in the first half the LDR declined, but looking forward, do you have any thoughts about what would be the most economical thing for the LDR to trend? I guess, is that would that be up? And how far up? And then finally, on the compensation, was the variable comp under the new comp model? I'm just curious if you could help us with how much variable compensation rose in the first half? Thank you very much. On the first one, the short answer, your estimate 15 bps as the kind of last 2 months net interest income margin is correct, yes? So I can compare that. Then the second question, I'm not sure whether I understood. I mean, it depends a bit. As Filip says, we have now more deposits on our balance sheet, partially because people sold securities, partially because fiduciary investments with other banks came back. They normally are in term deposits. If people do not or cannot invest in term deposits, they come back on current accounts on our balance sheet. These were the 2 driving elements. And then it's just a matter of how much the loans are growing against that deposit situation. I guess, I was wondering, would you push loans more aggressively then because you can make a lot less money now on treasury? Yes. But that's pushing loans is difficult. I mean, normally people take out loans if they want to invest or have financing needs. It's that's relatively difficult to push as a product. And on the compensation, I think the accrual of compensation throughout the year has not changed from the general practice of previous years being extremely mindful of the profitability of the business and creating the right equilibrium between employees and shareholders. The full impact of the new compensation model in the front line will only come to bear from coming years. Okay. Thank you. The next question comes from Hubert Lam from Bank of America. Please go ahead. Hi, good morning. Most of my questions have been asked. Just two more questions. Firstly, on RMs, number of net RMs fell by, I think, 11 during the first half year. What was the number of new RM hires that you have during this period? And when do you expect the total RM headcount to stabilize? And also sorry, and what is your target in terms of gross RM hires per year? Next question is on Kairos. It feels like the situation at Kairos remains under pressure. Can you let us know in terms of what's the current assets under management at Kairos? Do you expect it seems like you've also had further outflows from that in the period. Do you expect that to continue? And when do you expect the situation there to stabilize? And if you just get an update on the KAIRS asset? Okay. Let me take a quick stab at both first. In terms of hiring, as we said in February, we did not set out an explicit hiring target anymore. But obviously, we continue to hire top talent in the market. We do this for this year, still also based on the recruiting efforts from last year, and we continue to do it for the years to come. In that sense, I cannot give you a very specific target point where we want to be with the net RMs moving forward. As to Kairos, we said also at the beginning of this year that Kairos is a strategic part of Julius Baer as is the Italian market. We have been working very closely with them to reduce the outflows that we had seen still following the events of the last years. I think this has been so far successful also throughout this year where outflows could be reduced. Still the macroeconomic environment of any Italian business, and that includes Kairos, was horrible. And I think Italy has been heavily affected by COVID-nineteen. And we continue to work very closely with management to put in place all the necessary measures to implement the plan as we laid it out. Italy is going to continue to be a core market for us moving forward and we will continue to invest. Yes. And just a few information. For instance, performance fees, of course, dropped significantly. So therefore, the gross margin, which used to be well above €100,000,000 last year came down below €100,000,000 and the average assets in the 1st 6 months of this year were about €6,000,000,000 Outflows have slowed down towards the end of the 6 months period. But of course, at the beginning, we're continuing also due to the situation particular situation in Italy quite a bit. Thanks. The next question comes from Daniela Popocher from UBS. Please go ahead. Good morning. Thank you. You mentioned you are still reviewing a few locations. Could you just give us an indication as to how significant that is, the number of locations probably and the size in terms of AUM? And on Ultra clients, last year, I think it was with half year results, you disclosed that this is around EUR 150,000,000,000 in terms of AUM. Can you give us an update there how much that is? And in general, in terms of revenue initiatives, the EUR 150,000,000 revenues, are basically now the people and systems in place to really generate those EUR 150,000,000 revenues? Are we there? And when would we expect to come those through? I know it's by 2022, but just of profile. And just lastly, I mean, we talked a lot about costs, and I appreciate there's a lot of moving items in the cost line, and you mentioned all those. But net net, is it probably fair to assume that you expect that you try to keep costs flat on a net basis this next year? Or how should we think about it? Thanks. Okay. Thank you. Let me start with the location review. Obviously, I think taking an entire booking center out of our network like the Bahamas was clearly a major move. I wouldn't expect any major moves in terms of booking centers moving forward. But still, we are looking into our advisory locations across the globe. And we will communicate as we go on further measures if they're needed. In terms of the Ultra clients, there is no quantitative update, but what I can say is that Ultra clients have not lost in relevance. On the contrary, I think we continued to develop our market in that segment very constructively. On the revenues, I put explicitly a few points into the presentation to demonstrate elements of products, of solutions and of revenue driving activities. We are having a very strong eye on revenues. As you know, revenues are the consequence of different elements along the value chain. It's the products and solutions, obviously, but then it's the front coverage, it's the interaction, it's the channels. And we're working at this from a completely holistic perspective. There's enormous emphasis on the revenue topic across the firm, and we plan to deliver on our objectives on that trajectory to 2022. And the same goes for costs. I think again, I think our horizon there is 'twenty two. We want to have a proper trajectory there. Obviously, with all the ups and downs, the volatility that can happen in between, but I hope you've seen from our result in the first half year that we've taken a strict stance to cost and we'll continue to do that moving forward. Yes. And I think we can I can confirm again as said in the presentation? If you exclude the performance based accruals, costs already went down from H2 to H1, and I expect this trend to go to continue into H2. Good morning. Thank you for taking my question. My first question is about the onboarding of new relationship managers and clients during the first half of the year, particularly during the lockdown? What were the main challenges you faced in onboarding ARMs and clients? And then as a follow-up, maybe do you expect some kind of pent up demand or pent up net new money coming through in H2, given that potentially some client onboarding has been delayed? And then my second question is regarding how do you or have you treated your relationship managers, which have not achieved their business plans now during this period? Have you been more generous with them? Or have you even been more stricter? And know the last question was over again. With respect to onboarding of RMs and clients, that's an interesting question. Obviously, the onboarding of clients has also continued throughout the first half year. So we have generated net new money from existing clients, but also from new clients. But obviously, under more difficult circumstances, I think there we see a constructive stance also of the regulators when it comes to procedural elements like client identification and so on. And one of the reasons why we created why we advanced our investments in digital technology and created the client onboarding process digitally with video identification now in Switzerland is to prepare for the further future there. I think the big uncertainty obviously in the entire industry is how this will play out over the next half year and into next year. When will physical contact come back, which is still to some extent required in the onboarding process? And how fast can we substitute this with technological means? And we're working obviously on both routes. As to RMs, and that's true for all personnel, I think onboarding in these times has been challenging, but it was possible From the highest ranks to the lowest ranks, we've been able to on board people into the organization. We've become quite good at it, I believe, and people have been creative in networking and in getting in touch. We've digitalized also a lot of the first day experience at Julius Baer. Obviously, this cannot replace in the long run the embedding of individuals physical exchange. But I'm pretty sure that here we've been on a very fast learning curve. When it comes to treating RMs, I think performance management has always been part of Julius Baer's business and we've done that over time. This is typically an approach where we take a certain period of time in which milestones need to be met And we didn't have to stray from that tried and tested approach of managing individual performance. The next question comes from Adam Terrelak from Mediobanca. Please go ahead. Hey, good morning all. I just wanted to get back into NII and your management of excess liquidity. Deposits are up. Your cash at bank is up as well. I'm just trying to understand how much of that actually ended up in the cross currency swap. I know you gave the income line year over year is halved, but just want to know whether there's any additional volume there. And then whether that should room deploy more cash into the AFS portfolio or sorry, the treasury portfolio, whether we can have a bit of net interest income support from that? And then how you think about the management of the 2, particularly given the yield on the cross currency swaps come right down, but also the capital implications of deploying anything more into that treasury portfolio? Thank you. Yes. On the first one, as I said before, the volumes of these swaps went up. You're absolutely right. But as the spreads were continued to come down quite substantially, the net outcome in terms of what we earned on these swaps was much lower in H1 twenty twenty than compared to the 2 previous half years. And that probably that trend will continue. I don't think that the spread in the gross currency swap between U. S. Dollar and Swiss trends will go up again. Then on the treasury portfolio, you're right. I mean, we reinvested part of the money we got from the deposit side into the treasury portfolio. That's also why the end end amount was higher than the average. And depending on the development of deposits, we can continue on that. So as I said before, I expect that the treasury income is stable to even slightly increasing. And as you know, it's not mark to market. It's at amortized costs. So there is a lag effect always when we buy a bond, how it comes through the P and L. And can we have the volume of that spot, just for modeling purposes? I don't know. I don't know. I mean, this is fluctuating. These are mainly overnight swaps. So it's a highly fluctuating number. I don't know the end number or the average to be honest out of my head. Okay. The next question comes from Stefan Stalmann from Autonomous Research. Please go ahead. Yes, good morning, gentlemen. Thanks for taking my questions. I have 2, please. First one on credit quality. It seems that almost all of your loan loss provisions in the first half actually came from impaired loans that already existed at the end of the year. And I was wondering if you could explain a little bit why that is. You would think that if you have a Lombard loan that is impaired at a certain point in time, you would work that out relatively quickly, sell collateral and then move on. But it seems as if these impaired loans lingered for quite some time and they're still there. So a bit of color around this would be interesting. And the second point, very big picture question. Do you think that the COVID crisis will change anything fundamentally sustainably in the way that the Wealth Management Industry works in terms of, let's say, client behavior, in terms of preference for distribution channel, price sensitivity, competition and the like? Thank you very much. Let me start with the second question. I do believe that COVID indeed changes a few things out there. And some of those changes are to last, if I were to take a guess. Obviously, on the client side, I think prior to the 1st January this year, it would have been unthinkable to have an expert meeting in a digital format in front of many of our clients. Most of our clients probably would not have known how to use WebEx or any other secure channel. This has changed and I believe this is going to stay. And we will see more creative, more diverse ways of interaction moving forward. And obviously, I think we should make full use of that. This is not just a matter of avoiding travel and entertainment costs. It's really a matter of how do we bring expertise much better in front of our clients. Then at the level of employees, I think a few fundamental changes are all also bound to stay. I think we have all discovered not just wealth management, but the entire industry that actually a proper balance of working from home and working essentially from the office can produce outstanding results. And I do believe that the flexibility we gain from that will allow us to bring more people into the workforce. It will help on the diversity side. It will be beneficial, I think, to the further development of our business. And then last but not least, the way we work as a company. I think agility has been a big, big topic and we will continue on that path, especially on the technology side, it has served us well. But also a degree of cultural transformation coming from crises like that. And there's this element of trust that we can put into our employees in a remote working environment, those are important transforming factors for our business. We started to very closely work on them and also engage our employees on them. And I'm looking forward to bringing that into our transformation journey of the next few years. Maybe Dieter? Yes. And coming to your question about the credit impairments or credit provisioning, as you rightly say, these are credits that were running for quite a while, but there were trigger points on the side of the client that led us to this additional provisioning of these new credit situations in the 1st 6 months. Okay. Good. Thank you. Ladies and gentlemen, that was the last question. There seem to be no more questions. And so we would like to thank you very much indeed for our attention today. It was a pleasure having this result conference together with you and being able to announce this very strong result for the first half year and looking forward to making now with a lot of confidence our next transformation steps into the second half. Thank you and bye. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Bye.