Earnings Call: H1 2019

Jul 22, 2019

Good morning, everybody, and welcome to the half year results and the business update. Thank you for coming, and thanks for being on the phone. As you know, this is the last set of results. I'm presenting as the CEO of Julius Baer, and I'm therefore particularly pleased to close my tenure with a strong set of numbers. We saw a significant rebound in profitability since the beginning of the year, fueled by higher revenues. At CHF391,000,000, adjusted net profit was below the record results we reported a year ago, but 18% higher than in the second half of twenty eighteen. We took full advantage of higher levels of client activity and asset valuations. The gross margin rose to over 83 basis points from the lows in the second half of twenty eighteen, driven by stronger net fee and commission income. While not yet benefiting from the cost reduction program initiated earlier this year, the costincome ratio and the pretax margin improved significantly from the second half of twenty eighteen, trending towards medium term targets. The Swiss CHF 100,000,000 cost reduction program we committed to in February is on track, and it is expected to kick in, in the second half of twenty nineteen and fully materialize in 2020. Assets under management rose by SEK 30,000,000,000 to SEK 412,000,000,000 reflecting the market recovery, net new money inflows and also the first time consolidation of Mexican wealth manager NSC Assesores. So I'm very pleased that after a slow start to the year, net new money growth picked up considerably over the last couple of months. We still note a few client exits in the context of the ongoing client risk review, which is nearing completion and the impact from the one off application of negative interest rates to large cash holdings. However, we had solid inflows from clients in Asia, Europe and the Middle East. Excluding Kairos, which experienced some outflows from its funds, the net new money growth rate in our core Wealth Management segment is over 4%, in line with our target range. Our CET1 capital ratio is at 13.1%, up from 12.8% at the end of 2018. The impact of the first time consolidation of NSC ASE Sores was about 30 basis points. Adjusted return on CET1 capital increased to strong 28% from 24% in H2 2018. And in June, we were able to use excellent capital market conditions and placed the EUR 350,000,000 AT1 bonds at very attractive terms, pushing our total capital ratio well over 20%. Now before Dieter will provide you with more color on the financials, I would like to highlight the progress we made on the implementation of the strategic agenda presented to you in February this year. With we have been cutting costs, as I explained before. But at the same time, we have continued to invest into the 17 markets that are at the core of our strategy. In the U. K. And in Spain, we have opened new offices and hired strong teams in Belfast and Barcelona, respectively. In Latin America, we have strengthened our position in Mexico by raising our participation in NSE Arcesores to a majority stake of 70%. Our joint venture with the Siam Commercial Bank, the Ledi Bank in Thailand, started its official operations in April this year with over 50 dedicated professionals both in Bangkok and in Singapore. And our cooperation with Nomura in Japan has set off for a successful start and is building and promising a pipeline of business. In the second part of my presentation, I will give you an update on our plans to further strengthen our position in these core markets and to grow the ultrahigh network space globally. Now to serve clients with specific needs in our core markets and sophisticated international ultrahighnetworth individuals, we continuously invest into our wealth planning, wealth management and wealth financing capabilities. Today, we have more than 1,000 professionals, specialists working in these areas and supporting the relationship managers with a delivery of holistic solutions. And we are improving the tools for our front office that help them to create a truly personalized experience for our clients. Our digital advisory suite, the robo assistant that I have presented here earlier in the year, is now in use with more than 1500 front employees at Julius Baer. Based on their feedback, we continue to evolve it. We have over 100 staff in our dedicated in house group that operates like a proper fintech with agile and short development and rollout cycles. And at the same time, we are improving the online experience for our clients as I will explain later. The upgrade of client documentation is on track to be completed by the end of 2019. This 3 year program was started in 2017 with the aim to elevate our client records to the latest standards. I call it a bit the gold standards. It improves risk control and it creates the basis for data driven client servicing and advisory. Having successfully terminated the U. S. Deferred prosecution agreement in February, we could also take note of the conclusion of the investigation of the Swiss Competition Commission into our FX and Precious Metals business. These investigations were closed without a complaint against how we conduct these activities. These examples show that we are cooperating constructively with the authorities to put historical issues behind us. All these steps pave the way for the future. The constant investment in our risk framework ensures a progressive strengthening of the quality of our franchise. I'm pleased that we have been able to get this far over the past 2 years. Now I'm handing over to Dieter for his deep dive into the numbers. Thank you, Bernhard, and good morning. As usual in our presentation, the results are shown on the adjusted basis. This means excluding acquisition related expenses and also acquisition related amortization of intangible assets. And the full reconciliation is, as always, given in the appendix. Slide 6. The key market developments in H1 were the solid recovery in global stock markets and the moves in key bond yields. Stock markets are up 15% in the first half, recovering strongly from being 11% down in 2018. U. S. Government bond yields, that's the middle chart, moved down significantly in the first half after having risen substantially in 2018, and the yield curve flattened further and even became partly inverted. This continued to affect client investment behavior and also made the job for our treasurer more complicated. I don't usually talk about Swiss interest rates here, but in this case, it's worth highlighting, that's the lower chart, that after a quiet 2018, the Swiss bond yields moved down significantly in 1st 6 months of this year, which had a negative impact on all Swiss pension funds, including our own. Moving on to the results, starting with the development in client assets. AM increased by €30,000,000,000 or 8%, supported by net new money of over €6,000,000,000 and a net acquisition impact of over €1,000,000,000 The currency impact after 6 months on AM was negative €1,000,000,000 with the strong gains in the 1st 4 months of the year reversing into a net negative following the strengthening of the Swiss francs in May June. Other effects were negative CHF 3,000,000,000 driven by a further reclassification of client assets following the continued advisory model rollout. Market performance was €27,000,000,000 following the strong recovery I mentioned in Global Stock and Bond Markets. And as a result, the monthly average ARAM, important for the margin calculation, went up by 4% year on year. Net inflows on Slide 8 improved as the period progressed to CHF 6,200,000,000 but at 3.2%, they are still below the 4% to 6% medium term target range. This was driven mainly by net outflows at our Italian subsidiary, Kairos, after relatively weak fund performance in 2018. However, the fund performance at Kairos improved again in H1 2019. Excluding Kairos, we saw a net new money pace of 4.1% just inside the target range despite some outflows related to the client documentation upgrade project and some outflows following the wider application of negative interest rate charges on some more client deposits. We saw excellent inflows from our business with clients domiciled in Asia, Europe and the Middle East. Revenues were up 8% from the challenging second half of twenty eighteen but down 5% versus H1, with client transaction volumes and interest expenses being the main drivers of change. Commission and fee income of CHF 956,000,000 was down 6% from H1 but improved by 8% versus H2 2018. The main variable items here were transaction volumes, which were lower than in H1 but improved clearly versus H2. There were also some modest fee pressure on standard discretionary mandates as well as a lower contribution from Kairos. Also, the latter improved from H2 on good levels of performance fees in the 1st 6 months of this year. Net interest income was €354,000,000 when excluding dividend on trading portfolios. This represents a drop of 10% year on year but an improvement of 2% compared to H2. In the year on year analysis, the benefit of an increase in credit at higher rates and a larger investment into the treasury portfolio were more than offset by a higher cost of deposits as more client assets flowed into U. S. Dollar coal and term deposits, obviously also at much higher rates, basically a direct consequence of the flattening yield curve. However, the move into term and coal deposits seem to have to come to a halt now following the strong decline in U. S. Short term rates since the end of April. The small improvement in net interest income versus H2 came mainly from a lower amount payable on our deposits with the central banks. Underlying net trading income of SEK 359,000,000 was down slightly by 2% year on year but improved by 5% versus H2. Client FX trading income was relatively dull as currency volatility is low in a historical context, but we continue to benefit from the further internalization of Structural Products issuance. Moving to gross margin on Slide 10. The overall gross margin was just over 83 basis points, which represents a drop of over 8 basis points from the very strong first half of twenty eighteen and an increase of close to 4 basis points from the far more challenging H2. Year on year, we saw a drop of 5 basis points in commission and fees, 3 basis points in net interest income and 1 basis points in trading. The gross margin improvement versus H2 came mainly from commissions and fees following a recovery in brokerage commissions and a higher contribution from Kairos. As I explained in quite some detail last February, a significant portion of trading income is from treasury swap income where we swap excess U. S. Dollar deposits into Swiss francs to deposit at Swiss National Bank. This treasury swap income is close to net interest income in nature, but it's accounted for as net trading income. In gross margin terms, this treasury swap income represented about 5 basis points in H1, similar to H1 and H2 of last year. Moving on to expenses. Total operating expenses grew by 2% year on year as the reduction in staff costs was more than offset by an increase in depreciation and amortization. Personnel expenses were down 2% year on year as lower bonuses more than offset the effects of a 5% increase in average staff levels and the inclusion of EUR 70,000,000 of severance costs in this H1. Compared to H2, stash costs were 8% higher, mainly on higher performance related pay and the mentioned CHF 70,000,000 in severance costs. In the analysis of channel expenses and depreciation, it is important to note that we applied IFRS 16 related to lease accounting for the first time. As a result, €31,000,000 of lease expenses shifted from general expenses to depreciation. This helps explain the flat development in channel expenses year on year despite the fact the provision and losses were CHF 20,000,000 higher than a year ago, mainly on additional provisions for a number of legal cases. And compared to H2, channel expenses were 13% lower. The sum of depreciation and amortization went up by 86% versus H1 and 76% versus H2. This was largely due to the mentioned IFRS 16 related shift of lease expenses from general expenses to depreciation as well as higher IT related amortizations, mainly following the completion of the Temenos implementation in Asia last year. And as a result, the costincome ratio was 71%, obviously higher than a year ago, but the clear improvement from H2 even before the benefits of the cost program have kicked in, on which I will come back a bit later. The expense margin, that's the dotted line, improved significantly year on year by 3 basis points to now 59 basis points. As a result, the adjusted net profit was €391,000,000 obviously not as strong as the record high first half of twenty eighteen, but a clear 18% or $60,000,000 recovery from the challenging second half of twenty eighteen. The tax rate was 16.9%, and our tax guidance remains unchanged between 17% 17.5%. IFRS net profit was also up 18% versus H2. The adjusted return on CET1 capital improved from 24 percent in H2 to 28% in the direction of our medium term target of reaching 32%. On Slide 13. Last February, in order to mitigate the clearly changed revenue environment, we announced a rigorous cost reduction program. It is our plan to continue to invest in growth and in strengthening the franchise but at the same time to cut €100,000,000 in costs elsewhere. The main levers of the program are in the areas of enhanced market focus, further automation and digitalization, 2 areas that Bernhard will also highlight a bit later as well as a stricter performance management. As we said in February, these measures should result in a 2% net reduction in headcount by the end of the year. This means that after accounting for ongoing hiring to support longer term growth and to strengthen the franchise, the growth reduction in headcount is significantly larger than the 2%. Of course, most employment contracts include a notice period, and therefore, many affected employees will only leave the payroll in H2. This is clearly visible from the Feet development in the 1st 6 months as shown in the lower graph on this slide. After initial increase in staff levels and even a bit of a jump after we acquired majority control of NSE in March, staff levels only started to come down in Q2 and will continue down meaningfully from here until the end of the year. This development means that the sequential profit improvement in H1 was not yet due the cost reduction program, but the benefits will start coming through in H2 and will fully benefit the 2020 result. As I also already mentioned in February, the expenses in 2020 will additionally benefit from the end of the client documentation upgrade project by the end of this year, on which we spend CHF 20,000,000 in H1 of this year, and we'll spend probably another CHF 20,000,000 in H2. With these measures, we aim to reach the medium term cost income ratio target of 68% in 2020, assuming no meaningful deterioration relative to average 2018 market conditions. With this, I move to the balance sheet on Slide 14. Since the end of 2018, we saw an increase in the loan book as loan board lending grew by 4% following the improving market environment, and we also invested a bit more into the treasury portfolio. At the same time, client deposits came down very slightly, which meant that our cash position with central banks came down by almost €3,000,000,000 and the loan to deposit ratio increased to 66%. Finally, on capital, the CET1 ratio went up approximately 30 basis points since the end of 2018 to 13.1%. This increase came despite the approximately 30 basis points negative impact of the NSE majority acquisition and the subsequent first time consolidation. And despite the approximately 40 basis points negative impact from the €83,000,000 pension impact on capital following the mentioned fall in Swiss interest rate this year. CET1 capital build after dividend accrual was €100,000,000 Risk weighted assets went up in total by €400,000,000 €700,000,000 increase in credit risk weighted assets was canceled out by a similar decrease in market RWAs after decline in volatility compared to the end of 2018. Non counterparty related risk weighted assets are only a very small component of overall RWAs, but saw a one off increase of EUR 300,000,000 due to the first time application of IFRS 16, which led to an increase of the property and equipment position in the balance sheet. In June, we made use of an attractive market window and our good standing in the capital markets to issue a new A Tier 1 bond, obviously mindful of the fact that 2 of our outstanding bonds have a first call date in 2020. This new AT1 bond explains most of the 200 basis points increase in the total capital ratio as well as the 40 basis points improvement in the leverage ratio. With this, I have come to an end of my presentation, and I hand over for the last time to Bernhard. Thank you, Dieter. And after this update on the financials, let me give you some further details with regard to the strategic progress we made and where we stand. As discussed in February, we are focusing on 3 strategic areas. 1st, smarter market coverage by investing where we see the biggest potential in terms of growth and profitability. 2nd, holistic and personalized advice by ensuring a best in class offering in our core markets and core segments. And third, the technology and digital transformation of our business. So we have a clear plan in terms of where do we want to be successful, what do we want to offer in terms of services and products and how we want to support that with regard to digitalization. The objective is to enhance client experience, improve efficiency and increase revenues from deeper relationships with clients and by growing high quality assets. By smarter market coverage, we mean a more focused approach to the markets we cover in order to allocate resources where they yield the best returns for our group. The first priority are the core markets, and I will give you more details on our aspiration and the strategic approach for these countries in a moment. They are followed by the developed markets where we see the potential to grow the market position we have today. We will do that cross border or through target cooperation models, but not necessarily with an onshore presence. In total, we defined 17 core markets and 20 developed markets that represent about 85% of Julius Baer's assets under management and also profitability. They also represent the bulk of the wealth markets of the future and already contribute most to our current growth rates. Hence, this is where we concentrate our efforts and investments. In our core markets, we want to be one of the top 5 wealth managers. In some, we already are. In others, this is an aspiration level. We want to achieve this through the following strategic efforts. 1st, we want to establish a local advisory presence in many of these markets we have it already today and hire the best local talents. Then it's all about servicing clients with a dedicated and market specific offering, including first, research and investment ideas that are tailored to the local clients 2nd, wealth planning that takes into account the particular circumstances of that country. 3rd, investment solutions that are relevant in the domestic reality of each market. So we talk about discretionary, advisory, structured products. And last, a full shelf of credit products addressing the needs of our wealthy clients. We are pursuing growth opportunities very systematically and in a structured fashion as demonstrated by the hiring of 50 new relationship managers in these focus markets over the past 6 months alone. And we expect to continue to hire at least the same pace in the focus markets in the coming months. So to summarize, core and developed markets are where we invest. In all other geographies, we will either serve the clients on a cross border basis or through a standardized offering or we will discontinue client coverage in these markets altogether. Smarter client coverage does not only pertain to geographies. In order to be efficient and reduce complexity, we reserve our full tailoring capabilities to the clients with the most demanding needs, the ultrahigh net worth clients with over 50,000,000 assets at Julius Baer. The segment of ultrahigh net worth clients fully plays to our strength as demonstrated by the €150,000,000,000 assets under management from this client group. Since 2016, the share of these clients at Julius Baer has grown by 11%. They are mainly domiciled in Switzerland, Western Europe and Asia Pacific. These clients are global citizens, and they come to us for international wealth solutions. At Julius Baer, they are served by local relationship managers with affinity for their culture and needs, not by a central team. But our local relationship managers are supported by our international network of experts. I mentioned before, we have more than 1,000 that support the services and product area. We have all it takes to advise and serve these clients without being conflicted by other lines of activities. Our approach is to fully benefit from our local presence and global reach. Let me move to the technology and digitalization and explain you how we invest into digital delivery of our wealth management services in various areas of the bank. For instance, we are renewing our investment and portfolio management systems. Among other things, we are introducing the AAA Portfolio Management System in Asia, and we are building an innovative solution that allows front office and clients to design their own mandate solution within certain predefined parameters. We call it guided tailoring and allows us to efficient and scalable solutions with catering to client preferences and delivering the competitive investment returns they expect. In the future, this flexibility will support the growth and profitability of our discretionary business in an environment of gross margin pressure. Another example is this digital investment advisory solution, the Robo Assistant supporting our relationship managers and front office teams with data driven holistic advice that is 1st personalized for each client secondly, compliant with new regulation thirdly, proactive and finally, it's event driven. So far, we have rolled it out in Europe and Switzerland. Currently, we are onboarding the front office teams in the Middle East. And next year, we will roll it out to Asia. Now given this is a proprietary tool, we continuously improve it based on our user feedback with short development and testing cycles like a real fintech. Vyas generates automated packages with investment ideas and integrates order entry, reducing the admissive burden for the front office teams. And it's also the basis for our latest innovation, which we call ID to Trade, a fully digital process whereby personalized investment ideas are sent directly to clients via mobile banking. We have rolled it out in Switzerland, and the feedback we get is very positive. In Asia, we are currently working on the basis of the new core banking platform that we rolled out last year to upgrade the e banking and mobile banking solution to the state of the art solution we already have in Switzerland. This project will be finished by year end. Now these are just a few examples to demonstrate that Julius Baer is truly pushing Wealth Management to the next level and we believe these capabilities are unmatched by any other company our size. I'm convinced that Julius Baer is taking the right steps to be the world's most personal and pioneering pure wealth manager. This is confirmed by the fact that our KPIs are trending towards our medium term targets. So let me start with the costincome ratio. It has markedly improved compared to H2 'eighteen, and we anticipate, as Dieter explained, subject to market conditions, to be below 68% by the end of 2020 once the cost saving initiative this year will fully materialize. The same applies to the pretax margin that we improved from just below 20 basis points to 23 basis points. Return on CET1, this new element that we added in February, improved from 24% to 28%, so we are not yet where we want to be, but 28% return on CET1 is, I think, very respectable. I'm not sure if it's actually the highest in the industry, but certainly amongst the top class. And as I explained earlier, the net new money with 3.2%. If we correct for the outflows for the fronts from Kairos, we're actually already within the target range of 4% to 6%. What about the outlook for the rest of the year? I'm generally optimistic for the second half of twenty nineteen. There are some things we can influence. There are some things that are a bit harder to influence. If I look at specific Julius Baer elements, first, what makes me quite optimistic is that after a slow start in 2019, January, February was about at the levels of November, December last year, we saw a strong Q2. I think we are well positioned specifically in our core markets to capture further growth and profitability. And we have already booked the full restructuring cost for our cost savings program in the first half of twenty nineteen and expect that the first benefit will kick in, in the second half. If I look at the markets, of course, global growth is softening. We see that. However, for the full year, we expect the global economy to grow at about 3.1%, which is a completely respectable number. If I talk to clients, the sentiment is still quite cautious. Clients are still substantially in liquidity, but that can also support the extension of the cycle a bit and the bull markets. We expect central banks to be supportive in the second half of twenty nineteen. On the other hand, of course, there are risks. Let me mention 4. One is the trade tensions. But there, between China and the U. S, we do not expect that it goes completely out of control. The truce in the G20 meeting certainly helped, but we do neither expect this to be solved by the end of the year. 2nd, something that has certainly increased a bit also lately over the last weekend around U. S. And Great Britain with regard to oil. Thirdly, the Brexit with a high probability that Boris Johnson be nominated as the next Prime Minister, I think things will not become more predictive. And then the last point is something I mentioned before. The rate cuts are certainly positive, but they are fully in the market price. And if they will not take place, that can also be negative. Let me, at this point, thank all my colleagues for their outstanding support, and I would like to thank you, our investors, the analyst community and the media for following Julius Baer with such interest, and it has always been a pleasure to discuss your views. Looking back, I'm very proud that at Julius Baer, we have created the largest pure wealth manager globally. And if I look back the last 2 years, we have given the company a clear strategic direction and focus in terms of market coverage, holistic advice and technology and digital transformation. We have introduced, I call it a bit, the gold standard for client documentation and are making continuous progress in resolving legacy issues. And finally, we have reported record profits 2 years in a row, 2017, 2018, and I'm proud on the half year results for 2019. With Philippe Brickenwacher taking over in September, I'm leaving Julius Baer not only in great shape, but in good hands. Thank you very much. So we go to the question and answer session and are pleased to take your questions. Good morning. It's Daniel Lebruchak from UBS. Sorry for my voice. I wanted to ask first regarding the mandate penetration, and I'm looking at Slide 30. You increased that nicely, more than a double from 23% to 52% in 6 years or so. Could you tell us how much that impacted gross margins of those specific client assets? And then going to above 70%, could you tell us how much more you would expect to see as a benefit from increasing demand and penetration? And then I wanted to ask about potential rate cuts. You mentioned those as well in Europe and the U. S. How would that impact your financials, if you could give us some sensitivity there? And then probably just your latest thoughts on Kairos, just to better understand how you look at that entity within your group. And very last but not least, redundancy costs, anything we should expect for the second half? Thank you, Thadiele. Many questions at once. So let me start with the mandate penetration. So we rolled out these fee based mandates, and I think you're well on their way to get to 70% because next year, we'll roll it out to Asia. That's the plan. With regard to additional profitability, what we mentioned earlier on, and I think we can see that when we roll it out, it's about 1 or 2 or 2.5 basis points. And it's mainly coming actually from more activities that we see because we have more touch points with the combined. So the plan is really to be at 70% by the end of 2021, and that's realistic. The rate cuts, I mean, first, the market obviously anticipate in the U. S. Dollar 3 rate cuts this year, another one early next year. And I think also on the euro side, I know there's probably something in the book. But the impact to our numbers, I would like to hand over to Dieter. So if the U. S. Dollar yield curve shifts parallel, there's not so much impact. So I would say probably 1 basis points if it goes up or down. If it steepens, we are relatively short in duration in our bond portfolio. So if the steepening is in the 3 months to 5 years, the impact is also limited. I mean by far, the biggest impact would come from the increase in euro rates, as we said before, which is not likely in the short term. That 100% increase in euro rates would add approximately 3 basis points to our overall gross margin. And the last question was about the Kairos. Look, we can just repeat what we mentioned at the IMS. There is a strategic review. We still have a couple of options. And you know that Italy is a core market for us. So options are obviously to hold on and make sure that we profit from the strength of Kairos. Possibility is to sell it and the possibility is also to look out for strategic partners. So we'll inform you in a good time about the decision we will take. Maybe one more question from the room. The first question comes from Anke Rheinigen, Royal Bank of Canada. Firstly, I wanted to ask about your decline in the relationship manager base. It would suggest take the 50 gross hires and NSE as stores and that there was quite a number of departures. Is that it now as a result of your restructuring program? And should we expect this to have any impact on the net new money? And then secondly, on the loan growth. So you saw some moderate momentum. Is that something that came at the end of the half year? And then you see clients engaging again on the Lombard lending? Or is it still far too early? Thank you very much. I will take the first one. I will leave the second one to the Head of Credit and CFO. Relationship managers, of course, we have the cost savings program and we have also been a bit stricter with regard to looking at the performance and low performer management as we call it. On the other hand, we have hired about 17 new relationship managers first half. So the bulk of it in the core markets, of course, as I explained it before. We have signed contracts for the second half year that will end up at least the same pace, so hiring from competitors. But you're right, obviously with the cost saving measures, we'll not add the same amount of net relationship managers as we have done in the last years. But what is important is 2 things. 1 is having new relationship managers joining and bringing in net new money. And then of course, for the ones that either left or we let go to make sure that we retain the client assets. So should we be concerned about the impact on net new money into the second half? Look, for the net new money for the second half, we as I mentioned, we had a slow start to January, February. We saw a nice recovery in Q2 also for net new money. We have a nice pipeline. And as I mentioned, from the core Wealth Management business, even the first half was okay. So we are optimistic for the second half with regard to net new money. Okay. Thanks. Then to the second question on the loan growth. As I mentioned, the Lombard loan portfolio was growing, and it kept growing throughout the entire H1. So it did not flatten in June. So I expect that this will continue into H2. Thank you very much. One more question from the phone. The next question comes from Amandeep Sainte, Deutsche Bank. Please go ahead. Hi, good morning. This is Amandeep from Deutsche Bank. Thanks for taking my question. I have the first one on NMM. Just to understand the flow situation better, can you please give some color on when we talk about wider application of negative rates to large cash holdings, where are we in this process? How much maybe was the outflow related to this? And when do you think you can be in a position where we can say that there will be no or very little outflows from this? And secondly, on client documentation related outflows, is it fair to say that there will be no more outflows after second half twenty nineteen? And my second is just a follow-up. Will there be no more restructuring costs in second half? Thank you. Okay. Look, net new money, the negative interest rate was a one off exercise we did at the beginning of the year. The reason was we concluded that negative interest rates in Swiss franc euro and some of the Nordic currencies is something that will not go away short term. So we applied the negative interest rate a bit more systematically. So that's a one off, right? And then the client risk exercise or the client documentation exercise is not yet fully finished, but we are very nicely on track. We'll be finished by the end of the year. So it's still possible that we'll see some outflow. I would expect that's relatively modest. So I think that was a question with regards to net new money. What was the other question? It was in the restructuring cost. Will it be there in second half, the EUR 17,000,000 that you booked? Yes. The restructuring costs were fully booked in first half, EUR 17,000,000 and there will be no more costs in the second half. One more question from the phone. The next question comes from Hubert Lam, BAM. Please go ahead. Hi, good morning. I've got three questions. Firstly, on net interest margin. Can you just so what do the forward curves tell us about interest margin? Does it imply more pressure? Or do you expect the interest margin to stabilize given where forward curves are today? Also on interest margin, are there levers that you can do to improve it either through introducing more negative rates or is that just or you just or is that it? Or can you invest in lower aggregated credit or lower rate of credit to improve the net interest margin? So that's the first question. The second question is on assets under management. I saw that there were some assets, dollars 3,000,000,000 moved from AUM to AUC in the half year. Do you expect more of this to happen as you roll over your advisory out to the Middle East and Asia? And third question is on client sentiment. It feels like that client sentiment improved in May to June, just given the improvement in the brokerage income. Would you say that clients are now ready to invest and this is carrying over the second half? Or would you still say client sentiment is still fragile? Hubert, thank you. Great to have you on the phone. I will leave 12 to the CFO, and we'll take the client sentiment question. Yes. On net interest margin, of course, we could apply the negative interest rate charges to more client. And here, you have to understand that it's a bit delicate to do that in Switzerland because in Switzerland, a lot of banks like the Cantonal Banks, they don't charge clients. It's maybe a surprise to hear that. So we have to look at the competition. It's easier in euro, where we also in the round, just Bernard just explained, were more successful in charging the negative forty basis points on and on average with good success that clients either pay or reinvest and just little assets or cash went out. So we will certainly watch the market. And if it's feasible, we will increase the charging. Then of course, we could invest in lower rated credit on the treasury portfolio book. There is information about the rating of our bond portfolio, and it's highly rated. Just around €800,000,000 is in the BBB bucket. Everything else is above, and this will continue to be our policy. Then of course, as I said, as the lower U. S. Dollar interest rates came down, the shift to coal and term deposits in U. S. Dollar has slowed down in May June, which would also, on a comparable basis to previous age, half years, have a positive impact on the interest we have to pay on deposits. There was the second question about AUM, AUC? Yes, service model rollout. So we had we continued the service model rollout in the UK, where we had the 1st reclasses as clients decided not to opt for 1 of the advisory mandates or discretionary mandate. And we had some late movers in Europe and Switzerland where clients ultimately decided also not go for an advisory mandate. And accordingly, we request that, like in 2017, to AUC. These are now execution only clients. Client sentiment, this is not an easy question. But look, client sentiment, I think, at the beginning of the year, January, February was very, very cautious and we really saw depressed client activities. And since then, it has improved. And you mentioned May. May was quite a volatile month. Maybe you remember May 5, there was this Twitter message from Mr. Trump about U. S, China that made the market tumble, I think, about 6%, 7%. Of course, volatility is always also an opportunity to have transactions. But in general, and I've done quite some traveling the last month, clients are still relatively cautious. And if I look at the liquidity they have is still quite substantial. But on the other hand, that makes me also optimistic that that can extend actually the cycle a bit. But the risk appetite of the clients are is still not at the levels that we saw first half twenty eighteen for sure. Shall we see if there is a question in the room? Yes, please. Thank you. Andreas from Dittel. Bankfrontobel. Two questions, if I may. One again on the RM side, and thank you for the disclosure related to the core and developed markets. So am I right to assume that part of the decline is obviously related to the markets that you call maintain, so some markets which you might be kind of exiting. Can you give maybe a split on how much was related to such markets and how much to the more stricter application of performers or underperformers actually? And on this, maybe if you could give some highlight on which vintages of RMs this relates to, that will be very helpful. 2nd question on a note in the half year report. I read that it's a new disclosure that there's an investigation of the UK FCA. Maybe you could give a bit of information what's that all about? Thank you. Thank you, Mr. Veneti. Relationship managers, very clearly, the topic is very much about focus, this to focus on the core and development markets. And that has an impact, of course, on hiring and also relationship managers leaving. For example, I mean, we closed our office in Amsterdam and we closed the office in Panama. So that's all in the numbers, right, that people leaving. Sometimes we actually sold our business. To give a cut is difficult. I mean, you asked the question with regard to the vintage and maybe Dieter can be a bit more precise here, but a lot in terms of the low performance process is actually happening 1st 4 years. And then typically, if relationship managers made it through that period, they have a nice book of business. But I don't have the exact split. And then your question with regard to the FCA, as you know, the U. K. Is a core market for us, and we have been expanding substantially over the last years and just recently opened this new office in Belfast. It's difficult to talk about the investigation because it's an ongoing investigation. But what I can tell you is it's something that is a legacy case dating back to 2013, on which we recently received more clarity. And it may include a financial penalty, which we believe is manageable at the local level. But based on this information, we decided to put it also into the half year report. That's what I can say. I cannot say much more about this. So I quickly go back to the first two questions. So between the closing of the offices and the impact of the cost cutting in the first half, I would say about 50 RMs left due to these facts. And then on the contribution, as we always gave in previous reporting periods, about 10% of the net new money came from Rm that joined this year. The bulk 75% came from RMs that joined 2016, 2017 2018. So this is the last year. We expect RMs to bring in the bulk of the net new money in the 1st 3 years, and 15% comes from RM that joined before 2016. Another question from the room. Please. Patrick Winters from Bloomberg News. So a first question, to go back to the negative interest rates, at what point do you start to charge a customer? Or do you start to pass these on? Is it CHF 10,000,000, CHF 20,000,000 or CHF 50,000,000? At what point you do that? And I think I heard before that it was described as a one off. Is this kind of a one off? Or is this just something which is going to keep going as long as the interest rates stay at the level which they're at? That's question number 1. Question number 2, a bit of a broader question about Hong Kong and the situation there, which kind of accelerated in the last couple of days. What are your clients saying about that? How concerned are they? And have you seen any movement of money as a result of that? So on the negative interest rates, 1 off, Pernodol did 1 off because it was a 1 off exercise. But of course, we asked the RMs to review their client portfolio at all the times, and maybe there will be more clients that we charge. But this was an exercise concerted exercise. We normally start looking at clients when they have the majority of their asset base in cash, so let's say above 50%. If someone has 80%, 90%, then of course, it's more a cash client. We go to the client and say, why don't you invest? Or if not, then we will charge you. So that's the approach. Asia, of course, Hong Kong, a bit volatility. We have not seen dramatic moves from our client base, but what we have seen is some clients that joined our platform when they have to trade off between Hong Kong and Singapore. Now they preferred sometimes a bit Singapore over Hong Kong. But look, our Hong Kong platform is very strong, and I think this will not have a dramatic impact. Thank you, Patrick. Yes, please. Lucas, hi, Celine Speral. I have two questions, Mr. Holter. 1.5 years ago, you said you would like to stay longer. We interpreted that like 3 or 4 years, now you're leaving. Might you give us a little bit your analysis how that happened that you are leaving now? And the second question is about legacy clients. We've all read about FINMA and enforcement actions. And somewhere in the press release, I read that in a short time, there will be a report or a solution. I don't know. Where are we there? Thank you. Thank you, Mr. Hassig. First, no, I think I have been quite consistent. This is really the result of the long term succession planning, as we mentioned, and I can assure you as very much involved with the board in this long term succession planning. I think the board nominated a very strong candidate, and I'm pleased that Filip Rickenbacher will take over in September and that will help him substantially to have a very good start into his new role. With regard to the legacy issues, I mean, 2 things. 1 is we have invested substantially in this client documentation exercise and are almost finished. And I think we have worked substantially and progressed nicely on the legacy issues over the last 2 years. And of course, we'll continue to do that also going forward. Let's switch to the phone. I see there is a queue. Next question from the phone. The next question comes from Jeremy Synge, Exane. Just two little follow ups, please. Firstly, I wonder if you talk a bit more about the other ordinary results of €28,000,000 which is obviously bigger than normal revenue item in that line. Could you talk about what drove that? But also specifically, how that was booked timing wise? So was that in the IMS gross margin? Or did it all come in May, June? Or was it spread? If you could talk about the timing of that. And then second follow-up, I don't know if you said or not whether you expect any more Kairos outflows in the second half. So if you could repeat that or give a view on that, if you can, please. Dieter takes the first one. I'll take the second one. Yes. No, you're right. The main delta came in May June. It was once was the dividend from we got from SAICs. As you know, most banks in Switzerland are a shareholder of the stock exchange here, and they had they did a divestment and paid out a higher than normal dividend, which came in, in May. And then also, we revalued a better smaller amount a small amount of participation, and this happened in June. Okay. Yes. Kairos? Look, Kairos' outflow, I think, was mainly because of the the performance 2018 that was not so fantastic. Performance this year is actually good. So based on that, I expect that the outflows will slow down or stop. Maybe the announcement our announcement to look into strategic options also created a bit of uncertainty. So we are very mindful that we will communicate very soon our strategy with Kairos. Thank you very much. One more question from the phone. The next question comes from Nicholas Hermann, Citigroup. Please go ahead. Yes. Good morning, gentlemen. Thank you for taking my questions. Just quickly as a follow-up back up on net interest income. Could you just talk I mean, in this if interest rates fall as expected, could you talk about your ability to reprice on the lending and deposit side? And what are your assumptions around deposit pricing repricing, excuse me? Secondly, on treasury, it looks like you've been growing your AFS book again. I mean, how much scope do you see to increase that further? And how far up the risk curve are you willing to go to support margin? On asset sales, if you were to look to sell any businesses, what sort of criteria would a sale need to meet for you to agree to a sale? And then just finally, if I could just ask you on client sentiment. And do you have a sense of how much interest rates need to fall to encourage clients to shift out of term deposits and back and into investments? That would be helpful. Thank you very much. Thank you, Nicolas. Maybe Dieter, you take the first three or take the last one. Yes. On the net interest income and our ability to reprice, I mean, on deposits I talked about, the charging more clients negative interest rates is a repricing. I don't think that in U. S. Dollar, we have strong power to negotiate or to change the pricing. However, on the lending side, obviously, we try to reprice and increase the margins on loan book loans and mortgage if and when it's possible. In the lending markets, some areas are more competitive like Asia, but for instance, in Europe, where we compete against European banks, we achieve in some areas quite nice margins, and it's possible to still increase these to a certain extent. Then just Second one on the treasury. Treasury, I'm not sure whether I'm stooped to what you're referring to. I mean, it's It just looks like as a proportion of your excess deposit as a proportion of deposits or excess deposits, your treasury book increased. So I was just kind of curious as to how much you could, one, increase that further. But also, I was wondering if you I mean, maybe my interpretation was wrong, but is the margin on that going up? Or is it flat lining? And do you see scope to kind of support the margin by going up the risk curve there? Yes. I mean the size of the treasury portfolio is basically the result of deposits minus lending, and then a part goes to the national banks as cash and the rest is treasury portfolio. So it's a bit passively driven. And of course, it can go up. It was already once higher than €15,000,000,000 In terms of quality, as I referred to it, it's on Page 28. Most of that investment, actually 95 percent, is in the A to AAA bucket and only about 5% in BBB and nothing below BBB, so it's quite high credit quality. And the margin, obviously, as we said, went a bit down as we also shortened the duration. But that's an actively managed portfolio, both in terms of the duration and the credit. Asset sales, I mean, I think you referred to our market focused strategy. And then what do we do if we decide to exit the market like the Netherlands or Panama? Of course, the first option is always to sell it. So we're looking for partners and try to find partners to sell them that business. Criteria, yes, of course, it has to be more beneficial than closing it and it has been the case is, for example, of the Netherlands. Client sentiment, we discussed it before. And our clients we have cash on the balance sheet, I think, from our clients of about 20, 21, 2021. It was higher in the past after another 2 or crisis, we were at 33, but 21 is still quite substantial. Of course, we show our clients alternatives to cash. And what we tell them is we think this year, as I mentioned in my presentation, there are still opportunities and opportunities outweigh a bit the risks. So we think to be invested is actually to be cautiously invested is actually a good thing to do. What I also see when I travel and meet clients and talk to clients is a higher appetite in private equity and less liquid markets. Of course, it's difficult to find the return on the bond side. On the equity side, people don't know exactly, so that's probably why they are more interested also specifically the large clients in private equity markets. Let's go back to the phone. Sorry. Let's take one more from the room, sorry. One more from, I didn't see you. Angelica Hooper from Reuters. You started this client compliance program. So I was wondering what you think, how clean is your client book now? And how much will legacy issues still be a task for your successor, Felix Kienbacher? Thanks. Yes. Look, that's a very good question. I mean, it's quite unique that we decided actually 3 years back before I became CEO to do this exercise. And I just repeat, we did it for two reasons. One is really the higher demand also from the regulators and we wanted to have these gold standards. But secondly, it was definitely to have a good basis also for the digitalization. And as I mentioned, we are very well on track to have reviewed all the client files by the end of the year. So with that, I hand over, I think, a very clean, very nice book to my successor. Of course, we still have a couple of percentages to do. And as always, we look at that very carefully. And if there are one or the other client that we think we don't want to have on the platform for good, we would also react and that's then also for my successor to react until the end of the year. But I don't know of any competitor that went through the whole client population as we did over the last two and a half years. To the phone now. The next question comes from Kian Abu Hussain, JPMorgan. Please go ahead. Yes. Two questions. The first one is discretionary margins. You mentioned there's some pressure building. If you could just talk a little bit about geography and type of clients that are driving this pressure? And if you think that's more cyclical or structural? And then secondly, just talking about long term transaction margins, they clearly don't correlate very well with markets or market levels as they have done historically. Can you just talk a little bit about structural issues, in particular on transaction margins? What you believe the issues are that there is very little correlation or significantly less correlation, I should say, relative to market level movements? Thank you. And is there any geography that's driving it? Or if it's a client base that's driving it or new clients that are coming on board that are changing the mix? Can you talk about that? Or maybe I'm totally wrong. Okay. First one is for the CFO. I think the second one. You got the exactly. The discussion pressure on margin on discretionary mandates, I would say it's more on the larger clients. And of course, as Bernard pointed out, we grew more in the past few years on larger clients, and they also go, and that's the good news, into discretion mandates as part of their usage of our products and services. But on that clientele, the margins are slightly decreasing, and it's just an observation. We wanted to tell you, if this is cyclical or structural, it's difficult to say. It can also depend on the type of mandates they give, fixed income versus equity or balanced mandates. And it's something to be watched. I mean, it's not major. It's just a small one, but we just wanted to highlight. And then the margins, look, has obviously a lot to do with the risk appetite of the clients. So I understand your question with regard to the correlation of the markets, the market levels and basically decline activities. And unfortunately, it's not a one to 1. Look back at January, February this year, markets behaved extremely well, right, went up. But the client risk appetite to do transactions to be engaged was very depressed. So it's not only if the markets go up or the markets go down, it's very much also what the clients are prepared to do in terms of transaction structure products and things of that nature. If asked about the geographies, geographies is it's very similar when I travel that the appetite to be more active is still not at a level of the first half twenty eighteen. So I see that in Asia. I see it when I travel Europe. I see it in Switzerland. I see it in other areas. So it's not something that you can force push. Of course, we show interesting opportunities to our clients and we explain them what they could do to increase, to improve the asset allocation. But unfortunately, it's not a one to one relation to the market development. Next question comes from Stefan Stahlmann, Autonomous. Before I start my questions, I just want to say all the best to you, Mr. Hodler, for your future endeavors. And I have two questions, please. The first one, more strategic, going to your Slide 19, where you highlight your focus on the ultrahigh net worth business. Now you basically don't have booking capabilities in the U. S. You don't have any structured lending capability at the moment and you don't have an investment bank. How do you want to compete in this business with more truly global competitors like UBS or Goldman Sachs, for instance? Maybe you could talk a little bit more in detail about that. And the second point going back to the revenue momentum during the first half of the year. You had about 82 basis points gross margin in the 1st 4 months and then probably around 85 basis points in May June. Besides the other operating income, could you highlight which other revenue categories basically created this jump in May June compared to the 1st 4 months of the year? Thank you very much. Thank you, Stefan, also for your comments. And Ultra High net worth, that's exactly why I wanted to show it here because we hear that from some of the investment banking, universal banking competitors to say, you can only be successful if you have an investment banking arm. And we just wanted to show you it's not true. We have lots of UltraAnet clients that like our offering a lot. And we also have a network with strategic corporation partners where we can offer also investment banking type of products. We work with Bank of America. We work with Macquarie and others. Structured lending, it depends what you how you define it structured lending. We have a credit book of about roughly EUR 50,000,000,000, 10 mortgages, about EUR 40,000,000,000 Lombard and structured lending. And so it's something that we can definitely offer to the ultrahigh net worth clients and they like it in the context of wealth manager, probably a bit more personalized way. So of course, our offering is a bit different to the large universal banks with investment banking type of activities. But that's why we wanted to show you the number. We are very successful in that segment and want to continue to be successful and competitive. Revenue momentum? Yes. What was stronger in May, June compared to the previous 4 months was clearly trading income. We had a strong month in June with quite a strong result coming from the trading income, primarily equity from the equity side, issue of structured products, but also a bit more on the FX side. Okay, great. Thank you. One more from the phone. The next question comes from Andrew Lim, Societe Generale. Please go ahead. Hi, morning. Thanks for taking my questions. I just wanted to follow-up more specifically on Hubert's question on forward rates. So looking at the U. S. And the European side, how do forward rates translate into impacts on gross margin for the next 12 months or so? I think you gave an indication on the cost of deposits there, but I just wondered on the asset side and the liability side and how that translates into the gross margin impact there, if you could give more guidance there. And then secondly, on the cost cutting initiatives. I mean, obviously, there's a bit of headcount reduction there on relationship managers. As you progress towards the end of your cost reduction plan, how much more headcount reduction on RMs could we expect? Thank you. So on the first one, as I said before, if you apply the forward rate on the U. S. Dollar, there's it's almost no meaningful impact on the income. And on the second one On the European side? Yes. Sorry? On the euro forward rate side? Euro forward, I don't know, but I don't think there is an impact coming from the year forward. And there, the expectations are anyway that rates stay below 0, which is the major negative point. And as I said, I mean, if your rates would go up by 100 bps, that would have a big impact, approximately 3 basis points on the overall gross margin. But I guess the forward rate is relatively flattish. Cost cutting and the impact on relationship managers, our party is obviously already in the numbers. And as I mentioned, we're still hiring relationship managers away from competitors and that number will be about the same second half versus first half. But you will see also still in a more obviously, relationship managers leaving from the cost cutting exercise because some of them are still in the headcount numbers. And my best guess for the year end in terms of number of relationship managers when I look at all the different components is that we will have more on the platform, maybe 20 more on the platform by the end of the year. So that's a combination of hiring and cost cutting and this performer management exercise. There's one more question in the queue from the phone. The last question comes from Adam Terralek, Mediobanca. Please go ahead. Yes, good morning. I just had a quick follow-up on NII, on the cross currency swap. It's flagged to 5 basis points in the gross margin. Can you quantify the volume of the swap and how that's moved half on half, please? And then secondly, on Kairos, the flow detail is helpful, but can we have a little bit more on the revenues? So what's the gross margin year to date? And could you give us an indication on performance fees and how much has been booked in the 4 month statement against May June as well, please? Thank you. Yes. On the first one, no, I don't know the volume. Just as I said, in terms of basis points, in the trading income, it's about 5 bps in the first half year of this year, and that's flattish from second half of last year and first half of last year. But I don't know the volume, to be honest. And on Kairos, as we said, the level of performance fees year to date is quite nice. It's higher than last year. And with this also, the end of June gross margin is somewhat higher than in the first half of twenty eighteen and clearly higher than in the second half of twenty eighteen. Indeed, it's above 100 basis points. Okay. Thank you. Thank you. Any more questions from the room? Yes, please. Michael Kunz from Tuchel Kantonalbank. You mentioned that you're still interested in hiring relationship managers from other places. And I suppose you're not the only one in the market who's trying that. Has it become more aggressive compared to 1 year ago? Or kind of what impression do you have in the market? And the second question is, you mentioned that clients ask for more private equity. Are you selling kind of 3rd providers products? Or are you planning to develop in house capabilities? Or what are you doing exactly there? Thanks. First hiring, yes, I would say it's probably a bit more aggressive because there are some players that focus more on wealth management than in the past, Deutsche or we have others. So it's quite a competition out there. But salary and packages are not the only thing. What we see in our interviews is also is very, very important and relevant for relationship managers to find a platform that has all the products. And there, I think we are one of the best platforms in the world globally. So that's attractive. What is attractive also is that we focus on wealth management. They don't have that normally at other place, but I would confirm that it's quite a competitive a competitive field definitely. Private Equity, we have built our own in house capabilities. So we have expanded actually the private equity and department where we have some of our own products, but we clearly cooperate with the known providers there. And we see specifically, as I mentioned before, in 2004, the ultra handwares segment is something that they are very interested and we plan to continue to expand it. I see there no queue in the phone for any other questions. Last chance here in the room. Then I would again like to thank you a lot for your interest in Julius Baer and wish you a very nice day. Thank you.