M&A Announcement

May 24, 2018

Ladies and gentlemen, good morning. Welcome to Vontobel's Acquisition of Notenstein Larosch Conference Call. I'm Irwin, the Chorus Call operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Doctor. Denis Staub, CEO. Please go ahead, sir. Yes. Good morning, everybody. I am sitting here together with Martin Sieg, our Chief Financial Officer. Thanks, everybody, for dialing in this morning on short notice. So today's call is about informing you about our acquisition of Nordenstein Lars from Reifleis in Switzerland. This is a very significant step in the development of our combined wealth management activities and on our growth journey. In order to shed some color and light on this transaction, I intend to use the Investor Relations presentation that you can find on our website starting from seven a. M. This morning. So I will casually refer to the slides that we have posted on the Internet. So let's start on Page three, which gives you the overview and the overview on the very strong economic rationale behind that transaction, which is fully in line with our criteria and the strategy we have put forward to the market over the last years. So this will be a very substantive step up in our market position in Switzerland as 70% of the assets under management we are acquiring through that transaction are with clients domiciled in Switzerland. On top of this 70% in our home market Switzerland, we get an additional very strong fit with our international focus markets of an additional 20% of assets under management. On top, we get an increased footprint in a number of locations here in Switzerland. This is a very high quality book of business. We're talking CHF 16,500,000,000.0 in assets under management, delivering a return on assets of approximately 80 basis points and with 90% of asset management stemming from clients with accounts in a wealth band above CHF1 million. We also expect a very strong and sensible cultural fit as the book of business of Notenstein Laroch has been forged through two asset deals stemming from Magdalene and from La Roche. And we think that we resonate very well with these historic rules, meaning bespoke service, individual solutions, high end private wealth services, independence and Swissness. Fontobel brings all of that to the table. And on top, obviously, our international footprint and our renowned capabilities as a wealth and asset manager. We intend to profit from the occasion of that transaction to migrate to a more efficient capital structure with issuing non dilutive AT1 bonds, which will provide us both capital positions that support that transaction as well as future developments of our company. Our CFO will provide more details on that in a minute. We expect a seamless and fast migration and integration. First of all, Notenstein Lorash has focused on the one booking platform strategy in Switzerland. Second, we have already migrated the Eastern European book of business from this very platform. So we have experience. And therefore, we expect that the target operational model will deliver a marginal costincome ratio of approximately 50%. We have agreed with Raiffeisen on a price of approximately CHF 700,000,000. This consists of the net asset value plus a 1.78% goodwill premium on assets under management, which obviously resonates very well with the high quality of the book of business being 70% Switzerland, return on assets of 80 basis points and 90% of assets above 1,000,000. We expect a fast and significant contribution to our profitability. We expect this transaction to turn net positive as of January 2019. And we expect fully EPS accretion as we finance this in a strictly non dilutive way. Page four gives you some more color to the Nordenstein Larrosh company, which is a first class client centric wealth manager. And we have respect for the history, the roots, the culture, the people that have been driving that business and have been delivering the roots to this business. It's currently headquartered in St. Galne in the Eastern Part of Switzerland and is posting 13 locations across Switzerland. The business today runs total client assets of 21,200,000,000.0 with assets under management, which we intend to acquire of CHF 16,500,000,000.0. It's a very well capitalized business, which has also been sensibly profitable as you see that from the 2017 numbers. Page five sums up why we are very convinced that we are the optimal owner and acquirer of this company. And we intend to deliver a clear win win proposition to clients and to staff. First of all, we are convinced that we are optimal, reliable, long term, future proof home for clients, both in Switzerland as well as from the focus markets that Nordenstein Laroch is servicing. We have proved that by our own ability to deliver organic growth over the last years. And we have evidence to that with the feedback that we get from our clients with an industry leading high net promoter score. We are also convinced that we offer the platform and the environment that will convince key staff and especially relationship managers to see their successful future with Fontotl. We can offer an entrepreneurial ownership driven culture, and we can bring to the table a long term stable independent platform, which is an optimal base to write the next chapter, which is consistent with the historical rules of these two books of business. As an addition, and obviously, as a very important point going forward, we bring to the table our capabilities as a future proof partner. We have one of the industry leading investment led value propositions, both on the advisory as well as on the discretionary side. We have a strong international successful footprint. We do have state of the art digital platforms and support systems. And we have built up a fully compliant cross border platform and business model. This has also been recognized widely in the market by the awards and the feedbacks from clients. So that's the highlights in a nutshell for me. It's a significant transaction. It moves the needle for us in combined wealth management, but it has the cultural fit and the size that we can deliver and execute on a seamless integration and transaction. I would now ask Martin to give you more details on the target, debt migration and the financing structure. Thank you, Tenor. Good morning from my side. Please turn to Slide six. The acquisition we announced today resonates very well with the strategic focus of Bontobel's combined Wealth Management and our existing businesses. Our combined Wealth Management consists of Wealth Management and the business with external asset managers. Of the €16,500,000,000 of total AUM acquired, roughly 11% are with the business of external asset managers and 89% are in Wealth Management. So we add substantially to both businesses. 100% of the AUM we will buy will be booked in Switzerland on our existing and very modern IT platform. This will lead to substantial synergies in production, more about that in a minute. The AUM added to Von Tobel have an extremely high overlap with the existing markets of Von Tobel. 75 or 70%, excuse me, of the AUM are from Swiss domicile clients, while another 20 fully overlap with Von Tobel's focus markets. Due to this overall high overlap in client domiciles, we have a high overlap in important compliance aspects like the production of tax reports, the applicable know how in cross border access and so on. This is important to reach economies of scale. For most, almost all clients, the automatic information exchange is in effect since the beginning of this year. Compared to earlier transactions we have done, this effect significantly reduces the legacy risk embedded in the AUM acquired. It therefore reduces attrition and strengthens the financials of our transaction. The AUM acquired are clearly in the wealth management sector and show a similar structure of the client portfolio. It's important to note that 90% of the AUM are in wealth spends larger than CHF1 million per client, and this at an attractive return on assets of approximately 80 basis points. All in all, the acquisition is a significant milestone for our combined wealth management and approves our footprint in Switzerland, while at the same time adding new locations to our Swiss map. A couple of words on Slide seven on the technical side of the acquisition. Nordenstein Laroch today runs on one IT platform in Switzerland and the core of it is Alog. The same is true for Bank Von Toble, that is the legal entity that will technically run the assets after the merger. One IT system at the core of it is Avolok. This match of core systems allows for a smooth technical merger. We are integrating from one to another analog. In 2017, we announced and transferred the Central and Eastern European clients portfolio from Nordenstein Larosch to Von Tobel. Technically, this transfer was very similar or even equal to what is ahead of us right now regarding integration work. Based on the successful and smooth technical migration as well as the successful integrations we've done in the past of Finturbank, Commerzbank and Afirma Bank in Geneva, we are therefore optimistic to integrate fast and smoothly. We expect the technical merger in Q3 twenty eighteen. After this integration, we will have reached a target operating model on our centralized high quality production platform with a high degree of automation and efficiency. For the integration, we expect integration cost of roughly €50,000,000 split roughly equally over 2018 and 2019. The integration costs will, as usual, be booked in the Corporate Center. After the integration, we ran the former Nordenstein Laurus business at a marginal costincome ratio of 50%. This is considerably lower than the costincome ratio of combined Wealth Management in 2017 of roughly 74%. This fact is based on synergies expected after integration. Please turn to Slide eight, where the highlights of the outlook for a more efficient capital structure by issuing AT1 capital are given. All elements of this slide are expected key features. The details of the expected issue of an AT1 bond will be announced over the course of the next two weeks. We expect to raise CHF $350,000,000 to CHF $450,000,000 by issuing a perpetual bond that is non callable for five point five or six years. The bonds will be similar to other issues by other financials that the market has taken up well in the current environment. We therefore plan for a non dilutive principal write down structure. The conversion triggers will be at a CET1 ratio of 7% or at the point of nonviability. We expect the non cumulative discretionary coupons to be exempt of withholding tax under Swiss law. Our formally stated capital ratio targets remain unchanged and are supported by the AT1 transaction announced. We strive for a minimal CET1 ratio of 12% and a minimum total capital ratio of 16%. The bonds will be structured to support our rating. Furthermore, as the bond will under no conditions convert to shares, the existing shareholder structure of Vontobel is not challenged by this transaction under any circumstances. By raising this AT1 bond, we also support our commitment to our previously stated dividend policy. There are a number of parameters driving our capital ratio in 2018 given at the right side of the Slide eight. First of all, the acquisition of the parameters given in this presentation. Second then, of course, the AT1 bond announced today. And last but not least, all the other businesses of Von Tobel, including the Financial Products business as well as our Asset Management, who continue to run profits and accrue capital. With reasonable assumptions, you can come to a simulated capital ratio as shown on the right hand side of this slide. The CET1 ratio comes off the transaction out at around 12% and the total capital ratio ends at 17.7%, clearly above our target of 16%. On Slide nine, you can see the plan for the Fast Track integration. The AT1 bond issuance is expected to be announced in the more details over the next two weeks. We plan to finish the issuance before H1 completes at the June. The closing of the share deal announced today is expected very early in July. It is of course subject to legal and regulatory approvals as well as the customary closing conditions. On July 27, we will announce the first half year results for Vontobel and give an update on the transaction announced today. Our colleagues in combined wealth management operations and finance at risk will be busy with the legal as well as the technical merger of Banks Vontobel and Nordenstein Larrosch throughout the third quarter of the year. We plan both mergers, the technical and legal merger in Q3 twenty eighteen in order to be back to our focus on growth and profitability. We expect the net positive contribution from this transaction from 2019. Let's go to Slide 10. We confirm the existing targets on growth, capital ratios as well as our dividend policy. The targets on profitability and the cost income ratio are under review. We will give an update on these figures together with the presentation of the half year results at the July. With that, I hand back to Zena. Thanks. Thank you, Martin. And I would like to conclude with a short summary that you also find on Page 11. So at the very center of this is a high quality book of business that fully matches our strategy and our acquisition criteria that we have consistently put forward over the last years. Behind that is also a company and people that fit very highly to what Fontobel stands for. So we are confident that we can provide a culturally smooth integration with our own client centric culture, with our own commitment to independence and long term business development. We are also convinced that given the high quality characteristic of the assets, as again, they stem from two asset deals executed under very recent regulatory conditions, the high fit to our home market and to our focus markets that we can manage that transition with a very sensible attrition level. And obviously, the economics of the Nordenstein book of business will be very positive in the combination with combined wealth management. We expect strong economics also from a synergy side as this is a highly concentrated focused business model with a single platform booking hub here in Switzerland, both on the Knopenstein side as well as on our side. We have already done the migration. So we think that these are the very best conditions for a seamless, fast track and highly adding value technical integration. We can provide added value to our core shareholders and our investors as we profit from the occasion of that transaction to move to a more efficient capital structure, which will bring us also the ability to underpin further organic and further growth in the future. Integration costs are in a sensible size, and we expect net profitability already starting January 2019. So this is a significant important transaction for us that is an addition to our organic growth trajectory, but is moving the needle for our combined wealth management. It underpins our long standing trusted partnership with Rheifaizen, with whom we will continue and broaden our cooperation that we have already struck last year. And we can deliver a transaction that is fully shareholder value accretive and starts to be net positive very fast in early twenty nineteen. So that's it. From our side, as an overview, and as you know, there will be a combined media conference from Raiffeisen at us at 10:30 here in Zurich. So we ask our people who have listened in from media then to join in 10:30 and also to hold their questions for that occasion. And we will take however questions from investors and analysts if they occur already now. The first question from the phone comes from Reggie Daniel from MainFirst. Please go ahead. Hello, good morning everybody. A quick question regarding the acquisition price. I just made a quick calculation, and I expect you excluded the intangible assets from the equity value of Nordenstein Larrosh, is this true? Yes. That's a fair assumption. Okay. Thanks. The next question from the phone comes from Thomas Gralax from Helvea. Please go ahead. Yes. Good morning, everyone. Just one question on cost synergies. Could you give us a bit more color on that front? I think that it seems that Nordestein has subscale operations as it has pretty low net profitability despite quite high gross margin. And could you comment how exactly you would like to extract cost synergies from Nordestein platform? And what extent of these cost synergies could be? Yes. Thank you for that question. So first of all, we obviously expect a very, very high, almost perfect overlap in terms of the business model, the products, the services. As we know this business inside out, it's providing high class wealth advice to private clients predominantly based in Switzerland and in a purely cross border model. So this is exactly what we do every day and will fit, therefore, very well with the capabilities we already have. Second, obviously, we expect also from the experience we already have done with the migration of the Eastern European part of the portfolio that we have already taken over, full fit with our IT capabilities. So we expect that our IT systems and processes will fully fit the needs of what we need for the business and will fully scale. Second, as you know, when you check the map, there is a significant overlap in locations. So we can join forces in a number of cities, especially Geneva, Zurich, Basel, Lugano. So there is another sensible set of synergies. We guide for a target marginal cost income ratio of around 50%. For more details, it is obviously too early. And we, as always, will do will apply utmost diligence now in understanding the business, talking to people, being respectful to the history of that company and finding sensible and professional ways in order to offer the most smooth onboarding as possible to the people running the business today. Okay. Thank you. So we have no further questions from investors and analysts. Thank you, everybody, for joining in. And if you have additional questions or details, do not hesitate to call our Investor Relations team. They are here to help. And for everybody else also from the media side, we do look forward to meet you at 10:30. Thanks for joining. We wish everybody a successful day. Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.