Good morning, everybody, and thank you for joining us. Thank you for your interest in Julius Bär, and welcome to the presentation of the half year results of Julius Bär for 2018. I'm proud to present a strong set of numbers. At CHF 480 million, almost 20% up year-on-year. We present a record result in the history of Julius Bär, 128-year history of Julius Bär. Gross margin was resilient, cost income ratio is within our target range of 64%-68%. Assets under management are at CHF 400 billion. It's up 3% from year-end 2017. It's a little bit lower than the interim management statement end of April, this mirrors the performance of equity markets, which had a strong start of the year. Except for the U.S. stocks, ended the first half in a more bearish territory.
The currency impact was slightly positive as the US dollar-Swiss franc rate recovered over the course of the second quarter. With net inflows of almost CHF 10 billion, an annualized net new money growth of about 5.1% is, of course, well within the 4%-6% target. The increasingly complex market environment driven by geopolitical uncertainty, trade tensions, and concern over monetary policy changes in the U.S. and Europe impacted also our client flows. We have noticed clients adopting somewhat more caution as the year has progressed, a bit de-risking some of the portfolios. Such an environment, however, plays to our strength. We have seen more contact with the clients. We have seen more need for advice, that's exactly what our strength is. The bedrock of this trust is the quality of our front office personnel, which we continue to grow.
Since the beginning of the year, we have added 79 new relationship managers. 13 came from Reliance. As you know, we closed the deal with the Brazilian wealth manager in June. The net number of new relationship managers for the first six months is actually 66, compared to 41 for the full year 2017. This underscores our attractiveness as a home for private banking talents, it looks as we will reach or even exceed our recruiting target of net 80 relationship managers for the year. Overall, this is an excellent result, we are not standing still. In June, we successfully closed our acquisition of Reliance, as I mentioned, the ramp off of our joint venture with Siam Commercial Bank in Thailand is on track.
Now, before I give you more details on this, I will hand over to Dieter Enkelmann for the deep dive into the results. Please.
Thank you, Bernhard, and good morning from my side. We will now look in a bit more detail at the financial results for the first half 2018. As usual, in this presentation, the figures are presented on the so-called adjusted basis, which means they exclude acquisition-related expenses. A full reconciliation is provided in the appendix of this booklet, of the presentation booklet. The year started very well in January, especially in Asia. After the sharp correction in the first two weeks of February, the stock markets basically edged lower, with key Swiss, European, and Asian markets underperforming the U.S.-dominated global market index. The U.S. dollar initially fell against the Swiss franc, but recovered in Q2. The U.S. Treasury yield curve, that is the lowest, the chart, continued to flatten with the two to 10-year term spread approaching a low 30 basis points at the end of the period.
Such flattening has historically signaled impending recessions, which may be why some of our clients have turned more cautious in the last few months. Now to the results, starting with assets under management. In the first six months, AUM grew by CHF 11 billion or 3% to CHF 400 billion. The increase came on the back of CHF 10 billion in net new money, CHF 4.5 billion from the acquisition of Reliance in Brazil, and a small positive currency impact of CHF 1 billion, partly offset by a negative market performance of almost CHF 4 billion. Compared to the same period a year ago, the monthly average AUM, important for the gross margin calculation, was up 12% to CHF 391 billion. Moving on to net new money. Net new money of CHF 10 billion or 5.1% came in well inside our 4%-6% target range.
All regions contributed positively, with particularly strong inflows from clients resident in Europe, Switzerland, and Asia. The healthy inflows were to a limited extent tempered by the mentioned de-leveraging in Asia and the Middle East. This seemed to be mostly driven by the rising U.S. interest rates, which made leveraged investments in bonds a bit less attractive. About 60% of the inflows came from the large number of RMs who joined us in 2016 and 2017. The number of RMs grew by 79 in the first six months, of which 13 through the acquisition of Reliance. With this increase, the net new money outlook for the medium term appears to be well-supported. Moving on to slide eight. Revenues grew to CHF 1.8 billion, an increase of 12% in line with growth in monthly average AUM.
Commissions and fees grew by 10%, with asset-based income growing essentially in line with average AUM, and brokerage commissions growing at a slightly slower pace. After a strong 2017 with high performance fees, the contribution from Kairos to fee income was modestly lower, despite an increase in client assets. Net interest income, excluding dividend income on the trading portfolio, grew by 2%. This was driven mainly by higher average loan volumes and rates, but partly offset by a substantial decrease in the treasury portfolio and a further increase in interest paid on U.S. dollar deposits. The underlying trading revenues grew by a third to CHF 206 million. The overall gross margin was stable year-on-year, but up 3.5 basis points compared to the second half of 2017.
Compared to the first half of last year, the increase in the trading income contribution offset the lower contribution from net interest income and from brokerage commissions. Moving on to the expenses on slide 10. Operating expenses grew to CHF 1.2 billion, an increase of 10%, which is less than the increase in average AUM and the increase in revenues. Staff costs were up 11%, reflecting a 5% increase in the average levels of staff, as well as higher performance-based pay, driven by the increase in revenues in the first six months. Channel expenses increased by 8%. This followed an increase in marketing spend, for example, in relation to the very successful Formula E race here in Zurich last month. You may have noticed if you go to the title page of the presentation showing the new advertising campaign, which was linked to the Formula E race here in Zurich.
Further increase in channel expenses resulted from the increase in staff, for example, higher costs related to travel and the additional offices we opened in H1 of this year. To a smaller extent, a CHF 4 million increase in the adjusted provision and losses line. Depreciation and amortization increased slightly by 1%, driven by a small increase in IT-related items. As a result of the further scale benefits coming through, the cost-income ratio improved from 69% to 67% in the first six months of 2018. slide 11. As a result, adjusted pre-tax profit increased by 18% to CHF 583 million, and the pre-tax margin came at 29.8 basis points, very close to our medium-term target. The tax rate was slightly lower than in the previous period at 17.7%. As a result, adjusted net profit for the group grew by 19% to CHF 480 million.
As the full profit of Kairos now accrues to Julius Bär shareholders, the IFRS net profit attributable to our shareholders grew even more by 26% to CHF 444 million. I'm moving on to slide 12, the balance sheet. It grew by CHF 6 billion to CHF 104 billion at the end of June, driven mainly by a CHF two and a half billion increase in client deposits and a CHF 2 billion increase in structured products issued from our balance sheet. On the asset side, the loan portfolio was stable despite the increase in AUM, which ties in with the slight deleveraging I referred to earlier. The loan-to-deposit ratio, therefore, came down somewhat to 66% compared to 69% at the start of the year.
The additional excess deposits went mostly to our cash position as we were waiting for bond valuations to come down somewhat before adding again more bonds to our financial asset portfolio. Julius Bär continues to run a highly liquid and low-risk balance sheet. As you know, all of our lending is fully secured by collaterals. slide 13. To the capital ratios, they remain well above the minimum regulatory requirements and the group's own floors. Risk-weighted assets declined very slightly by CHF 0.1 billion, mainly on lower credit risk-weighted assets, following the reinvestment of most of the additional excess deposits into cash, as I just referred on the previous slide. Despite the increase in goodwill and the CHF 40 million net negative impact from the other comprehensive incomes, CET1 capital grew by more than 1%, resulting in an increase by 0.2 percentage points in the CET1 ratio to 13.7 percentage points.
In March, we repaid one of our AT1 bonds, which led to a reduction in the total capital ratio to 20.2%. The AT1 repayment and the 6% growth in the leverage exposure, which for private bank business is more or less the same as the balance sheet size, led the Tier 1 leverage ratio coming down to 3.8%, still comfortably above the 3% regulatory floor, obviously. With this, I already hand back to Bernhard.
Thank you very much, Dieter. You see very good results, very strong results. Julius Bär is firing on all cylinders. These first half-year results show again the power of our strategy to concentrate on pure private banking and the sharpened priorities on where and how we want to invest. This result is a highly specialized but regionally broadly diversified business, well-positioned for profitable growth, driven by the three growth drivers: organic growth, attracting talents, and M&A opportunities or other strategic transactions, in particular, when they give us access to new markets. All three growth drivers are delivering. Let me discuss a bit more details about the organic growth opportunities and also the geographic balance of our business model. Over the last two and a half years, we have been able to triple the penetration of our fee-based advisory mandates.
After their full rollout in Switzerland and Continental Europe, we are looking at implementing them in the U.K. in the second half of 2018. This will further increase the penetration of discretionary and advisory mandates, which is currently at 50% of assets under management. It will also add further recurring revenue streams, improving the quality of our earnings. In the first half, strong results in Europe and Switzerland have compensated for somewhat muted growth elsewhere. Inflows in emerging markets and Asia remain strong, and our client base in this market keeps expanding. However, as mentioned earlier, we have seen some cautionary deleveraging of portfolios, particularly in these markets, following the increase in US dollar interest rates and the ongoing debate on trade tensions. Generally, I would characterize client sentiment as cautious but still constructive.
It's an environment where the dialogue with our clients and within the bank is highly important in order to tune out the noise and focus on what is important to achieve our clients' long-term objectives. This is exactly why employing the best people in the industry is crucially important, in particular, in markets where we see great long-term potential. Of the net 66 relationship managers we added, most were hired in Europe, including Switzerland, in Asia, and in the Middle East. You know that we have about 50% of our assets under management in growth markets, but we also have 50% in mature markets, and that is why I want to deep dive a bit on Europe today. Europe, and by the way, also Switzerland, made a robust contribution to our net new money results in the first half. This validates our strategy of investing in client proximity.
In our Swiss home market, we have 14 offices. We have expanded our presence in the two largest European wealth markets, the U.K. and Germany, which are the number five and number four global wealth management markets, respectively. Very substantial wealth in U.K. and in Germany, and a great opportunity for us to tap into that and to expand our footprint. We have opened a new office in Hanover, as you see here. It was at the beginning of July. It's our ninth office in Germany. We continue to hire relationship managers in our London office. Our new teams and offices in Leeds, Manchester, and Edinburgh are now fully operational, and the start was very successful. Both in the U.K. and in Germany, we have seen good business momentum in the first half, not least as a result of our strong footprint.
In Italy, in 2018, we have consolidated our presence by acquiring the full ownership of Kairos. Despite the current political uncertainty and intense competition, growth potential in Italy remains highly attractive. We have also continued to invest in our European hub in Luxembourg to support our relationship managers to deliver an integrated end-to-end advisory process that is fully compliant with MiFID II regulations. Let me turn to the Asian markets. As you know, we call it our second home market. I personally lived in Asia for a couple of years, it's very close to my heart as well. At the end of June, we employed 20% of our global workforce in the region, and the Asian wealth made up around a quarter of our assets under management.
As evidenced by the significant net new money flows in the first half of 2018, our presence will continue to grow. In Singapore, for instance, we have recently relocated to a larger space in a landmark building in Marina One. I'm pleased that with our new core banking platform, live since end of March this year, we also have a strong backbone in place to support our ongoing Asian expansion. Overall, we are firmly positioned amongst the top five private banks in Asia. In India, we are among the top three foreign wealth managers. Asia's an increasingly sophisticated wealth market and still offers great untapped potential. I'm therefore very excited to see the progress in our joint venture with Siam Commercial Bank in Thailand. We announced that in March, as you know.
We will begin our cooperation with Siam Commercial Bank in August, and by the first quarter 2019, we expect the joint venture to be fully operational. This tie-up with the Siam Commercial Bank is a golden opportunity to enter the Thai market or expand the Thai market, with its rapidly growing population of high-net worth individuals and their needs for global advisory and investment solutions. Siam Commercial Bank is the leading bank in Thailand, with more than 13 million clients. It has been serving wealthy clients for 111 years, and is therefore the perfect partner for Julius Bär. The joint venture will be operated via offices in Thailand and Singapore, and we have the option to increase our initial 40% stake to 49%. It's an initiative that shows Julius Bär's pioneering spirit and our determination to explore new ways of accessing untapped potential.
In all of this, it's important to ensure that growth is based on solid foundations. We are investing in our operational backbone, building on the successful Asian core banking platform implementation earlier this year. Like other industries, wealth management is also undergoing a transformation. Technology and automation of commoditized processes will enable us to increase efficiency, and more importantly, to facilitate tailor-made advice. We therefore continuously invest in front-end technology, making our relationship managers more effective in providing holistic services to our clients. We want it to be easy for the relationship manager to act as wealth architects that capture and anticipate client needs, generate targeted recommendations, and tap into the full range of investments, wealth planning, and wealth financing solutions in a fully suitable way.
Our robo-assistant, we call it, for instance, helps our relationship managers to complete MiFID II-compliant investments proposals in just a few minutes, allowing them to spend more quality time to advise our clients. We also see increased demand for discretionary solutions, mainly in Europe. It's also a bit based on the MiFID II regulation. We have therefore strengthened the respective discretionary offerings in different locations. 18 months ago, we have started a dedicated project to further improve our client documentation standards. This includes an in-depth review of specific markets and client groups and enhanced transaction monitoring. This will improve the knowledge and quality of our franchise, help to advise our clients more specifically, and reduce our exposure to critical client profiles and transactions.
Building a robust framework for sustainable growth is an ongoing task, and all these structural investments in growth are enabled by our financial strength, demonstrated by our long history of profitability, our strong capitalization, and our highly liquid balance sheet, which we continue to manage very conservatively. Looking at the second half of the year, I expect the market environment to remain challenging. Central banks in the U.S. and in Europe will continue on their paths of policy normalization, and political developments will lead to volatility in financial markets, which in turn will likely moderate monetary tightening. However, the economic situation remains positive, which should continue to drive growth in corporate earnings. Yes, the cycle is mature, but while the U.S. Treasury term spread keeps falling, we do not yet see direct signs of an upcoming recession.
It's an environment which is actually quite favorable for Julius Bär, because we see more contacts with the clients, and that allows us also to do more transactions. I'm confident that net new money will continue to grow within our target range of 4%-6%. Despite ongoing investments in our business, we anticipate to achieve our cost income ratio target of 64%-68% for the full year. From the operating leverage on our growing franchise, and if necessary, by counteracting potential headwinds with cost discipline when it comes to discretionary spending. The pre-tax margin is very close to our target of 30%. However, its achievement is harder to predict given the impact of market performance, currencies, and especially client activity on our revenues.
To conclude, again, I'm very proud and I'm very pleased with our performance in the first half of 2018, and I would like to thank all our 6,500 employees for their passion and hard work to achieve this. The strengths of our unique strategy and business model will enable us to continue to deliver on our commitments. Thank you very much for your interest, and now Dieter and I are prepared to take your questions. Thank you.
Good morning. It's Daniele Brupbacher from UBS. I wanted to ask about the deleveraging which you mentioned, whether you've seen a continuation going to the second half, given that trade tensions, if anything, intensified a bit, whether you saw a continuation there. Then just on NII and net interest income, you did mention higher rates on U.S. deposits. I was just wondering whether you could tell us how much of the deposit base is dollar-denominated. When I look at the interest expense on deposits on page 24, that went up a lot, almost doubled, I think, compared to the second half last year. Is that all just dollar-driven? If you could just give us some more details there. Then lastly, sorry, again, a bit technical on the financials portfolio, what exactly changed there, and why did you reduce those positions?
I saw quite some movements in the sub-positions there as well.
Thank you very much, Mr. Brupbacher. I'll take the first one, then maybe Dieter takes the second and the third one. Maybe, for the next questions, it would be great to concentrate on one or two that everybody can ask some questions. The first one, with the deleveraging, just to avoid any misunderstandings, we have seen some clients positioned in fixed income instruments in U.S. dollar that partly financed these portfolios through loans that they deleveraged. Just because this strategy is no longer very attractive if you look at the flat yield curve in U.S. dollars. We think that's more or less over on our books. It was not a massive deleveraging, but it's just one element that we see that happened based on the change in the yield structure of the U.S. dollar.
Good. On the second questions related to the interest paid. It is true that in the first six months of this year, the fiduciary placement with our banks, that is one month to 12 months, they increased, as it is more attractive to have money deposited on that level. This was the main reason why the interest paid went up. Of course, we experienced that these are our own clients, but also sometimes used by client relation managers to attract new clients, first with a fiduciary deposit, and then try to reinvest that money. On the financial portfolio, it went down because, as we discussed in the last conference and the conference before, the loan-to-deposit ratio went up. That means more of the deposit went into lending to clients, mainly Lombard lending, as the mortgages are more stagnating.
Therefore, there was less money available for treasury to invest in the bond portfolio, and this led to the decrease. The change in the composition was mainly driven by our assessment of the credit spreads, and where we felt that the credit spreads were not rewarding the quality of a bond, then we went out and went more into governmental securities.
Let's take one more question from the room. Please.
Thank you. David Hart from Kepler Cheuvreux here. Two questions, one of them on the Lombard loans, seem to be flat since the start of, or since year-end 2017. Could you give us a little bit of color how you see that developing into H2, especially in Asia? Seem to be an element of growth for that in the past. Second of all, in terms of the strong net hires in H1, could you give us a bit of a color about where these have come from? Are they mainly from the three offices that you've expanded in the U.K., or how many of that has been in Asia as well?
Let me start with the second one, then Dieter will take the first one. The hires, the 66 net really came mainly from Asia, from the Middle East, and from Europe. We have seen also quite some new relationship managers joining in Germany. We have not only opened the new office in Hanover, we saw teams joining the Frankfurt platform, the Munich platform. It's a very attractive market for us. We saw relationship managers joining in the U.K.
On the first question, on the Lombard loans. The deleveraging took mainly place April, May. It slowed down in June. Obviously it's hard to predict where it will lead, but it has rather slowed down a bit towards the end of half year.
Our best guess, I would think, is that the loan book will grow in parallel with the assets under management. Because this deleveraging was very specific on these U.S. dollar fixed income portfolios. We have not seen it in other areas of our business. Maybe we go for a question from the phone.
The first question from the phone comes from Giulia Miotto from Morgan Stanley. Please go ahead.
Questions from me. Going back on your outlook for clients being more cautious and worrying about trade wars. I was looking at Slide 26 and the asset allocation of your AUM. Considering what you're hearing now from clients, would you say that going forward, the peak asset allocation to equities and, on the flip side, the very low asset allocation to money markets could start declining on the equity sides and start increasing on the money market instruments? What effect could that have on your margins? That's my first question. The second question on MiFID. Are you seeing any impact or are you expecting any impact at all on your margins coming from MiFID? Thank you.
Maybe briefly for the first question, and maybe Dieter will go into more details. We have not seen massive changes in the asset mix of our clients. We have seen a bit more cautious positioning with regard to diversification within the asset classes. We also see more value in the equity markets actually, because the economic situation is still quite strong and financial results of the corporate earnings are still strong. I don't see a massive change in that mix. Trade tensions are one element. There are some other elements in there. The good thing for us as Julius Bär is really we have more interaction with the clients. The clients need more advice. They call us more often. That has shown already positively in the numbers for the first half and could be a positive factor also for the second half.
With regard to impact on the profitability.
From MiFID II, there is a slight impact on the advisory business as it's definitely much more complicated to execute brokerage transactions. As Bernhard mentioned, we support the RMCS tool, but nevertheless, it's a bit more complicated also for the client. Therefore, there was already a slight impact in first half. As mentioned before, the way we try to mitigate that is to offer discretionary mandate solutions to the clients, which obviously from a handling perspective is much easy. The impact net was very small.
What we maybe can say as well is that particularly in Germany and in the U.K., we see the discretionary ratio going up. More clients decide to go into these discretionary offerings. We have discretionary teams on both platforms in Germany and in the U.K. that actually do really well also in terms of performance and the offering, the service for the clients and the relationship managers. This is a trend we think will continue in the MiFID II countries. Maybe we'll see that also in Switzerland over time with FIDLEG, and that could also swap over to other markets over time.
Penetration of discretionary mandates?
The penetration is stable at around 16%, we mentioned before, as the main growth comes from Asia. Asia contributing to the growth where the penetration [risk and discretionary mandate] is still relatively low. That outweighs the growth in the mandates Bernhard just mentioned in the U.K. and Germany.
Thank you.
Yeah, in these markets, in the European MiFID markets, penetration is much higher. It's more like 50%, actually. Thank you. One more question from the phone.
The next question from the phone comes from Evie Kostakis, HSBC. Please go ahead.
Hi. Good morning. Thanks very much for taking my two questions. One question, regarding the H2 and generally the outlook. Cost income ratio improved significantly year-on-year, now it's within the targeted range. However, given that you accelerated the hiring in H1, should we assume that there's going to be some slight, cost income ratio pressure in H2? Of course, that would probably mean that the pre-tax margin, which is now closer to your target, is going to be slightly lower. Then a general kind of strategic question, if I may. We've been to a lot of presentations lately, and you yourself admit that the market is becoming more and more competitive. The large peers in the U.S. and the EU show us tools about how to aggregate AUM and provide incentive to people to actually reduce the number of wealth managers.
What would you say is now Julius Bär USP? Thanks very much.
Okay. First, the cost income ratio for the second half. We feel comfortable that we can deliver the full year within the cost income ratio. The second question, really the differentiating factor, the unique selling proposition of our platform is that we focus on wealth management. I think it's very attractive for clients, for relationship managers. We position ourselves more in the high net worth, ultra high net worth space. There in that space, I think the human factor, this trusted advisor factor is still important. Of course, we also invest substantially into automation, digitization, supporting the relationship managers, that they have the right tools. That's differentiating us from some of our competitors, that we think this trusted advisor element will continue to be there and continue to be important and differentiating us from others.
Maybe one more question from the phone and then we go back to the room.
The next question from the phone comes from Jeremy Sigee from Exane. Please go ahead, sir.
Thank you very much. Good morning. Two follow-on questions really, both on the growth theme. The first was on the forward-looking expectations for RM hiring. You said you hope to at least hit your target of 80 and maybe exceed it. Obviously, you're well ahead of that run rate at the half year stage. I just wondered whether it could be substantially above the 80, on a full year view. Then second question, partially related, is really you're ahead of expectations on capital here. I just wondered what sort of appetite you have for that sort of third element of your growth strategy, pursuing further sort of infill acquisitions, and whether you have capacity to do that at the same time as the recent hiring and the Thailand joint venture, whether it's reasonable to expect smaller acquisitions to continue over the next 6-12 months.
First, for the relationship management hiring, we formulated the 80 net goal for 2018. We have seen that our platform is very attractive for private banking talents. Just a little anecdote, I was in Germany a couple of weeks ago, talked to our head of the German business, and he said, "I am interviewing 30 people when I hire one." There are actually a lot more that we have discussion with, and then we do a very thorough due diligence on quality and other factors. We think that will continue. We will not close the door. The expectation that we land over and above the 80 is a fair expectation. The second one with acquisitions, I leave the second part of that to Dieter, but the first part is we have done small acquisitions this year and this joint venture in Thailand.
I think the market will become even more attractive for M&A transactions in the next 12 to 24 months. In the last couple of years, it was a bit more difficult because there were substantially more buyers than sellers in the market. Prices were a bit high. I really expect that the consolidation will continue and maybe even accelerate in the next 24 months. With regard to capital
Maybe just to add to the acquisitions view, we look at all decent targets that come to the market. As Bernhard mentioned, there were not many in the first six months. With the purpose either to achieve synergies, to get more volume in one of the key markets, or in the form of joint ventures or corporations. Of course, we have a good cushion on CET1 ratio level compared to our own floor that could be used to finance any type of acquisitions, smaller ones, medium-sized.
Strain on capacity with the Thai joint venture, the workload required for that does not prevent you pursuing acquisitions in parallel?
No. To set up, let's say, the Thai joint venture, it's an effort at the beginning like an acquisition. Once it's running, we have, again, the capacity to focus on another deal. We did, as Bernhard mentioned, in the first half, the Reliance deal. We bought the last 20% from Kairos. We did the joint venture in Thailand all at the same time. We have capacity, experienced people to do it.
Let's go back to the room. Two, three questions from the room, please.
Thank you. Ralph Atkins from the Financial Times. Two questions. Last November, when Mr. Collardi left, Julius Bär said you'd embark on a evaluation of the long-term leadership of Julius Bär. Can you update us on the results on that, and whether you still expect to remain as CEO over the long term? Second question, since you took over, have you seen any increase in poaching by rivals of Julius Bär relationship managers? Thank you.
Thank you, Ralph. First question, I like my job. I'm here to stay. Second question, of course, there are lots of competitors out there that also try to hire talents in the market. We're not the only ones. As you can see from the numbers, we have been quite successful in actually retaining talents and also gaining new talents to our platform. It's not easy, because as I mentioned, competition is quite tough. Another question from the room.
Hello. Daniel Regli from MainFirst. Just quickly, could you maybe elaborate a bit more on commission income margins? I saw they also were a bit weaker this year. What was mainly driving this? I think there was some input from Kairos, but were there other trends what you have noticed in commissions income?
If you look at the different months, January was very strong, March was a strong month. May was also a strong month. In between, the months, the trading activity of our clients was a bit lower, therefore that resulted in, on average, a lower income than last year.
Kairos, last year had already in the first half, much more performance fees. The gross margin of Kairos is more back to the level of 2016. Last year with the performance fees, it was exceptionally high.
Good. Thank you.
Anton Casey, Bloomberg. One follow-up on the acquisitions. When thinking about acquisitions, is it still bolt-on, or would you consider asking the market for financing? Maybe strategically for the remainder of the year, what's your focus?
First of all, it depends on the size of the acquisition, obviously. We mentioned that market entry transactions can be small or mid-sized, as you have seen with Reliance and others. Of course, we can finance that out of our capital cushion. I don't exclude larger acquisitions. Of course, there, we would have to go to the market, explain the transaction, and hopefully get the support from our investors. The goals for the second half of the year is continue with our focus on wealth management, continue with our focus on the, we call them, core key markets, to expand there. We continue to work also on our robo-assistant. It's already implemented in the European offices. We want to roll it out towards the end of the year also to the Swiss platform.
It will be an improved version that really supports our relationship manager even much better. With that, the long-term goal is really to move more clients over time into these fee-based mandates, because we really think that's the future of our business. Establish us not only in the wealth management space, but really the holistic space, wealth management, wealth planning, wealth financing, and to act as a holistic advisor for our clients, a trusted advisor for our clients. That's a journey we have embarked, and it's a journey we will continue. One more question from the room.
Michael Brecher, Handelsblatt, good morning. I have a question about the client servicing. You mentioned that you want to increase the emphasis when it comes to client documentation. Could you shed any light on what your plans are and why you're going down this juncture?
Yep, thank you for the question. It's actually something we started about 18 months ago, is a project where we increase the quality of the documentation, KYC, generally the know-how about our clients. We do it for two reasons. The first reason is regulatory standards are different than they were five, 10 years ago, and we want to ensure that we are fully compliant with these standards. The second reason is very important as well. It is, the better you know the client, the better you can serve the client. Now, these days with the robo-assistants, it's specifically important to have the right information also in the system, because otherwise, the system does not support you fully and does not come up with the right recommendations for investments within the right investment universe and the risk appetite of the client. We are well advanced with that project.
It will help us in these two elements that I just mentioned.
Just a follow-up to understand. Does it mean, are all clients cooperating, or what happens if they do not provide information you are requesting? Will we see any impact on the AUM side?
No, it's a good question. Our clients, in most of the cases, we have the relevant information in the bank. We have the relevant information sometimes in the heads of the relationship managers, so they can just document it. There are instances and cases where when we go through that process, we come to the conclusion it's probably not the right clients to have. We have done it for the last 18 months, and that's basically fully in the numbers already, and we don't expect any acceleration of that going forward.
Thanks.
One more question from the room. Shall we go to the phone? The next question from the phone.
The next question from the phone comes from Anke Reingen, RBC. Please go ahead.
Yeah, good morning. Thank you for taking my questions. The first question is on NII again. Clearly, you have given us some commentary before about what you expect the positive sensitivity would be to higher rates. There isn't really much we have seen so far. Is it a fair assumption that the deposit replies faster than the loans? Still the net benefit of rising rates should be coming through? Secondly, on your commentary with the cost-income ratio, it being within your target range in 2018. I just wondered how committed you are in terms of reaching that guidance, because clearly second half, usually cost-income ratio is worse. Would you be willing to step towards your investments and marketing in order to reach that target depending on how the revenue's coming in? Thank you.
I think on the first questions, the main delta to our comments we made early in the year when we commented on 2017 results. On the interest rate sensitivity is really the flattening of the curve. I already said in the full year conference that if rates go up 100 basis points, I cannot remember the amount, but I think it was about one to two basis points
Unless the curve is flattening. I think this was one of the main reasons why interest income developed a bit disappointing. I also mentioned that we have, towards the end of the half year, more cash, more deposits, which we left in cash and did not yet reinvest in the treasury portfolio. We are waiting for a bit more favorable rates. The third one, was the reason I mentioned before, that we have more fiduciary placements or placements from 1 month to 12 months, due to the increased rates, and that led to higher interest paid. On the outlook, it is a bit difficult. Normally, if clients get a bit more cautious, they sell funds and/or equities and the deposits go up, which of course would help the interest income. On the other side, if the curve is flattening, further flattening, that is negative.
I can also give the sensitivity from today's viewpoint, where 100 basis point parallel shift would lead to, on the dollar deposits, which were more than half of the deposits, it would lead to a benefit of between 1 and 1.5 basis points. A much bigger impact would be on the EUR. If there, the curve would go up 100 basis points. That would add 2 to 2.5 basis points. That impact obviously is bigger as the curve is still very low.
Cost income ratio, we are committed, we are optimistic that we will deliver within the range based on a couple of different factors. One is, if we look at our franchise, growing franchise, that makes us feel comfortable. We are not so pessimistic about the markets. I think it is very important. The most likely scenario for us is, yes, volatility, but we do not expect a recession to start this year, maybe not even next year. Not a huge market drop, just market volatility, which is not necessarily bad for Julius Bär, because we will see also transactions. We are also prepared to support that with even more cost discipline if the markets would react differently, if we would see some surprises from the market. Yes, we are committed to the range.
Thank you. Can I please follow up on the interest rate comment? Thank you for the 100 basis points sensitivity. Could you also tell us what the sensitivity or what the expected impact is on the current forward curve? Is that difficult because there is too many moving parts, the funding placements and so on?
Well, it will be lower.
Okay. Thank you.
Thank you. Okay, one more question from the phone. The next question.
The next question from the phone comes from Hubert Lam, from Bank of America Merrill Lynch. Please go ahead, sir.
Hi, good morning. Just a few questions from me. Firstly, on your net interest income, I think you mentioned that a lot of the deposits, you moved to cash rather than reinvest into your investment portfolio. I'm just wondering, when do you expect to reinvest the cash into the investment portfolio? Are you looking for any particular event? I assume this would also have a positive impact on your net interest income if you do. Second question is also on the net interest income. I think Dieter mentioned that some clients have moved the term deposits from current accounts, because they're seeking higher interest rates. Do you think this is temporary or do you expect this to reverse anytime soon? Last question is on RM hires. I know you've done a lot in the first half of the year.
Do you expect this to have a positive impact on net new money in the second half of the year, or is it more of a 2019 benefit? Thank you.
Yes. Let me start with the second question on term deposit, whether this is temporary or not. It's a bit difficult to say. As I mentioned before, RMs also use term deposits to attract clients from other banks, with the hope that then they get investments. New client relationships do move over to real clients. It's hard to predict whether this is temporary or not. I would rather say, given the increased rates, that this is probably there to stay at this level. On the reinvestment of the cash into the bond portfolio, it was simply the view that the five-year rates, which is our benchmark for the bond portfolio, would tend a bit higher and then we would reinvest. This can be weeks or couple of months.
The RM hires, Hubert. Normally, relationship managers bring their assets over a four-year period as an average. Yes, the first year is also relevant. It depends a bit when they were hired, as a January hire or a December hire. For the early year hires, definitely we will see some traction already in 2018. For us, it's just important to have a bit constant flow, because it is one of the three elements of growth for our bank. I think we'll see first traction also from the 2018 hires in 2018. One more question from the phone.
The next question from the phone comes from Stefan Stallmann, from Autonomous Research. Please go ahead, sir.
Yes. Good morning, gentlemen. Thanks for taking my questions. The first question is regarding credit quality. I noticed that your Stage 2 loan doubled year to date. Do you see any particular credit quality trends in that portfolio, maybe also by region, that start to make you a bit nervous given the market environment? The second point goes back to the reinvestment of your cash holdings, which I guess we can expect at some point in time. What kind of risk-weighted asset impact would you expect to see from this reinvestment? Thank you very much.
Thank you for the question. On the second one, on average, our bond portfolio carries a risk weighting of around 20%-25%. If we invest another CHF 1 billion, this leads to CHF 250 million additional risk-weighted assets. On the first question, credit quality, we have not changed the credit policy nor the approval of credit. Therefore, this is part of a normal fluctuation of the credit portfolio and definitely no trend.
Okay. Thank you.
One more question from the phone.
The next question from the phone comes from Kian Abouhossein from Deutsche Bank. Please go ahead.
Yes, good morning. My first question, at the risk of flogging a dead horse, is really on the kind of deposit beta that seems to be the case over the last two semesters. We've seen a doubling of interest expense on customer deposits second half of last year and first half, then first half of this year on second half. I guess, what percentage of your clients have termed out on deposits? To what extent could this trend continue? Is this happening across the board or in certain geographies? My second question was really to try and understand how much gross margin uptick you get when you get higher mandate penetration. That would be quite interesting. Thank you.
Okay. Coming back to the deposits, as I said, it's less geographic areas. It's really more the kind of deposits and the 2 type of deposits, where obviously the client expect that we pay interest rates, and this is on US dollar term deposits. It's also on structured product with an underlying interest rate product underlying, which is basically also term deposit with some additional feature. They have growing, as you said, in the last 12 months quite a bit, for reasons I explained. One is the increased US dollar rates as such, and second, also because RMs realized that this is a way to get clients from other banks. New client as an entry product. We see aim then to develop that relationship into a normal wealth management relationship.
Yeah. The second question.
What was the second?
The second question was about the advisory mandates and then the margin increases. Really with the advisory mandates, we have more contact with the client. We have a more organized, a more regular contact with the client. Quite often that leads to more transactions, more specific transactions for the client. It's not so easy to quantify, but my assessment is that it's in the range of probably one to two basis points, that we see the uptick if we are successful in having that more intense dialogue with the client from the advisory mandate.
Plus, the client pays not only for custody and brokerage fees, he pays also for advisory.
Yeah.
There is an incremental fee he pays, which on a net basis, we said when we started the exercise end of 2015, should add 1 to 2 basis points overall to the income line.
Right. Sorry, just on the first one, would you be able to disclose what % of your client base has turned out, of the existing client base, as opposed to the attracting new clients?
You mean on that, you're talking about the term deposits?
On the term, yeah. Exactly. Term deposits.
I don't know the breakdown. No.
No. Thanks.
Maybe just on the interest paid, you have also to realize, yes, there is an increase. The increase is quite sizable, but the basis is still very low, the absolute level compared to the overall deposit base.
Good funding instrument. One more question from the room. Let's go back to the room. Please.
Thank you. Andreas Melliti from Bank Vontobel. When you started, Mr. Hodler, you said one of your objectives or changes as a CEO from previous strategy was to be a bit less dependent maybe on new hires for growth, compared with existing RMs, which I think it was quantified as maybe 1% growth from the existing base. Have we seen already some impact there from this new strategy, or will this take a bit more time in order to get this? Thank you.
Thank you very much. That's a good question. We want to be successful in all three pillars. Let me talk about this pillar. I think we see already a bit of traction. What we do, for example, I give you an example, right? How we want to extract more value there, is that we try also to shift a little bit clients from very experienced
Large relationship managers to deleverage them, so to speak, to more junior relationship managers, that they have more time also to interact with clients, to go for cross-selling, to go for share of wallet, but also to try to get new potential clients. It's an exercise we do across the platform, to make sure that we can extract even more value from the existing platform. Yes.
Angelika Gruber from Reuters. You mentioned there could be further cost discipline, I think these were the words you used, if the markets go down further. Could you be a bit more specific what you might do, and do you consider job cuts?
No. For example, we have grown the platform quite substantially first half. We are a bit more cautious in hiring in the second half, not necessarily with front people. If the markets behave as we expect, yes, volatility, but no substantial market drop, I think the cost discipline that we currently have is fine. Of course, we always have a plan in our drawer, if there is a substantial move in the markets to react on different cost elements. One more question from the room, then we go back to the phone. Let's get a question from the phone.
The next question from the phone comes from Nicholas Herman from Citigroup. Please go ahead.
Yes, good morning. Thanks. A few more questions. Most of my questions have been asked already, just two small ones. Firstly, on mandate penetration. It seemed, again, it was fairly flattish, half on half. Back in the, I think it was full year 2016 presentation, you said that you wanted to have the majority of your clients on Your Wealth. I think possibly even as high as 80%. What's happened that's made it more difficult to get closer to that number, the upper end of that number, of the range? The second question is, would you be able to disclose also what proportion of your deposits are non-interest-bearing, please? Thank you.
Let me take the first one. It's not necessarily more difficult, actually, we just have a plan when we roll out the mandates, where, as I mentioned, in January, we have rolled it out on the Swiss platform and the continental European platform, where we have a very high penetration. It's not rolled out in Asia. It's not rolled out in LATAM. It's not rolled out in Middle East, and it's not rolled out in the U.K. What we will do, we have started that actually, and we'll continue the second half, is to roll it out to the U.K. Then over time, we will look at the other regions of the world. What I said in January is, I see that this is a trend. This is where we want to position ourselves going forward. It's an organized process.
On the first question related to the deposits. Obviously, we don't pay on any CHF and EUR deposits, and also not on the vast majority of the USD deposits. As I said, we pay interest on fiduciary deposits, and on structured products that have the same characteristics as a fiduciary deposit. The vast majority also on the USD deposit, we're not paying interest.
I see.
Thank you.
Yeah.
On Your Wealth, again, if I go back to that presentation of the full year 2016, you said by the end of 2018, the vast majority of clients expected to be served along Your Wealth globally. What was it that made you decide then to roll it out a bit more slowly than, I guess, than you expected at the time?
Yeah. Look, we obviously carefully look at what are the needs and the expectations of our clients. I think, if I look at Asia and Latin America, they're probably not yet fully there, but we'll continue to roll out over time. I see that there are no more questions from the phone. Maybe there is still a question from the room. We have approximately five minutes left. That is not the case. I would like to thank you very much for your interest in Julius Bär, and wish you a nice day. Thank you.