Ladies and gentlemen, welcome to Vontobel's Full Year Results 2018 Press Conference Call and Live Webcast. I am Haley, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference will be being recorded. The presentation will be followed by a Q&A session. If you can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to the auditorium in Zurich. You will now be joined into the conference room. Ladies and gentlemen, please hold the line. The conference will begin shortly. Thank you.
Good morning, everybody. In the name of Vontobel, together with our Chief Financial Officer, Martin Sieg, a very warm welcome to everybody here in Zurich at our headquarters, as well as to everybody who has joined us on the telephone conference. As usually, I will kick off with a few highlights and remarks from my side. Martin Sieg will lead us in detail through the numbers. I will be back with an update on strategy and the outlook into 2019. Before we get into the numbers, I would like to mention three key points. First, Vontobel has again delivered sensible, strong, organic growth. We have won new clients. Our net new money figures compare nicely in the industry. Second, yes, we were hit by Q4 just like everybody else. It has brought down valuation levels by year-end, and it has muted the transaction activities in Q4.
Nevertheless, our business model is resilient. It has shown its strength. Our profits year-over-year are up by 11%. Third, we look into 2019 as an opportunity. We are convinced that our long-term approach, our client centricity, will create an environment in which we will continue to deliver and create value. Let us have a look into the most important figures. Client assets stood at CHF 247.3 billion by year-end, of which CHF 192.6 advised client assets. Higher year-over-year, despite, again, the substantial valuation impact of Q4. Net new money at group level after incorporating all acquisition effects, CHF 5 billion, strong endorsement by our clients. Operating income up by 9% to CHF 1.157 billion. Group net profit up as well by 11%, CHF 232.2 million. On adjusted basis, after adjusting for the integration costs for Notenstein La Roche, up by 14% to CHF 249.2 million.
This also brings up our earnings per share to CHF 3.96. Backed by this solid set of numbers, our board of director will propose a dividend of CHF 2.10. Our return on equity, 13% against strong and substantial capital ratios after the full consumption of the acquisition of Notenstein La Roche, with a CET1 of 12.3% and a Tier 1 of 18.9%. A few remarks on these numbers. Again, the key growth ambition of Vontobel is and will remain organic growth. We have been able to drive up our operating income by 9%, predominantly by our asset-related core activities in combined wealth management and asset management. Our net new money in combined wealth management from recurring activities is particularly strong, with CHF 3.3 billion, yielding 6.1% annualized growth on an organic basis.
Net new money in asset management from our core activities in high conviction active asset management stands at CHF 4.5 billion, yielding 4.2% on an annualized basis. Financial products protects and gains further market share in Europe and Asia and is moving in the right direction as well. We had executed a successful migration of Notenstein La Roche. The legal and financial merger and migration of clients to our platform was finalized only three months after closing of the transaction. A best practice execution of this integration by our teams.
We faced some attrition since closing net outflows of 7%. As we all know, this compares very favorable to similar M&A transactions in the market, and outflows from that source have flattened out by now. Our business model has proved to be very resilient in a challenging environment. Our asset-linked businesses generated 83% of profit before tax.
Our transaction-based business performed very well until end October and was then hit by market volatility and low transaction volumes in the final months of 2019. This is a short-term setback to the year-end numbers. It does not hinder us to continue our path going forward. Group net profit up 11%, or even 14%, excluding for the one-offs. We are convinced that our client-centric approach, our long-term approach to developing business, and our focused specialization will allow us to create opportunities for our clients and for us in 2019. With these initial remarks, I gladly hand over to Martin Sieg, our Chief Financial Officer.
Thank you very much, Zeno. Good morning, ladies and gentlemen. Let me start my presentation with an overview of the development of our advised client assets. For Vontobel, as a wealth and asset manager, advised client assets form the basis for the continuous generation of fee income. Consequently, the volume and the composition of those assets are important success factors for us. As you can see on the left-hand side of this slide, over the last five years, we were able to grow our advised client asset base by 9% annually. In 2018, total advised client assets grew by 3% to CHF 193 billion, thanks to broad-based net inflows in asset management and combined wealth management, as well as the acquisition of Notenstein La Roche. Advised client assets were negatively impacted by difficult market developments across all asset classes in the second half of the year.
In recent years, we invested systematically across all divisions in the expansion of our business in our home market of Switzerland and in our defined focus markets. These investments are now reflected by our well-balanced global base of private and institutional clients, as you can see from the chart on the right side. Today, 43% of our assets stem from Swiss clients. The percentage amount increased due to the majority Swiss asset base of Notenstein La Roche and the good inflows in Switzerland. A year ago, Switzerland stood at 40%. The rest of our advised client assets is broadly diversified across Europe, emerging markets, and the U.S. That brings me to our key figures for 2018 on slide eight. Vontobel's operating income rose 9% as a result of the increased asset base and our acquisition of Notenstein La Roche. Operating expense grew by 10%.
This increase was an organic growth, investment in talent, technology, and markets, as well as the integration cost of Notenstein La Roche. On an organic basis, that is excluding Notenstein La Roche, operating income grew by 5% and operating expense by 3%, reflecting on our lean and scalable business model. As a result, our IFRS group net profit increased by 11% to CHF 232.2 million. On an adjusted basis, it improved by 14% to CHF 249.2 million in 2018 compared to the previous year. It was helped by lower taxes, reflecting the lower U.S. tax rate and positive integration effects. Basic earnings per share grew by 8% to CHF 3.96 or by 12%, excluding one-off costs. The return on equity was 13%, once again, significantly exceeding the cost of capital of around 9.5%. We are on a good path to achieve our increased medium-term target of 14%.
The CET1 ratio was 12.3%, slightly higher than what we expected for the end of the year when we presented the half-year figures. Our Tier 1 ratio remained very solid at 18.9%. Our balance sheet should be viewed as highly liquid, since the liquidity coverage ratio averaged 205% and thus significantly exceeded the minimum required of 90% defined by FINMA for 2018. Our very solid capital position is also reflected in the leverage ratio and the Basel III of 4.9%. Let's have a closer look at our profit development on slide nine. As you can see on the left-hand side of the chart, Vontobel posted a group net profit of CHF 209 million in 2017.
By taking the CHF 8.9 million costs after tax for the integration of Vescore and an Eastern European client portfolio, as well as the costs related to the U.S. tax reform into consideration, the adjusted group net profit reached CHF 217.9 million in 2017. In 2018, profit growth of 11% raised our IFRS profit to CHF 232.2 million. Adjusting for the integration cost of Notenstein La Roche of CHF 17 million after tax, group net profit reached CHF 249.2 million. On an adjusted basis, the net profit increased by 14%. Growth was driven by good progress in combined wealth management and in asset management. The cost-income ratio on an adjusted basis increased slightly to 74.7% due to ongoing investments in international markets and innovative platforms.
The cost-income ratios in combined wealth management and asset management demonstrate our disciplined cost management in combination with the good scalability of our platform, with an improvement of 2.7 percentage points in combined wealth management and an improvement of 1.4 percentage points in asset management. On July 2nd, we closed the acquisition of Notenstein La Roche. Of the CHF 16 billion assets under management of Notenstein La Roche, at Vontobel, we recognized CHF 15 billion as assets under management, and CHF 0.9 billion were allocated to other advised client assets.
As expected for such transactions, we have had some outflows in wealth management and the external asset managers business totaling CHF 1.1 billion or 7.3% in relation to the assets under management. This is in the expected range. Compared to similar transactions, it is in the first quartile. The final price paid for Notenstein La Roche amounted to CHF 658 million.
This is lower than the originally announced CHF 700 million, as the NAV transferred to Vontobel was below the estimate. Intangible assets comprising client relationships amounted to CHF 45.8 million at closing, and the resulting goodwill was CHF 260.6 million. The integration costs of Notenstein La Roche. The integration of Notenstein La Roche has been progressing smoothly and fast. Therefore, the larger part of the integration cost was spent in 2018. The costs were partially offset by a benefit related to different pension accounting rules. For 2019, we budget for some further integration costs expected to come out at around CHF 10 million. With this, total integration costs will be below our initial estimate of CHF 50 million. Let us turn to combined wealth management on slide 11. These activities encompass our wealth management as well as our business with external asset managers.
Building on its existing activities, combined wealth management acquired CHF 2.2 billion of net new money in 2018. On an organic basis, that is without Notenstein La Roche, the inflows amounted to CHF 3.3 billion. This corresponds to 6.1% growth in net new money, and is therefore organically above our target range of 4%-6%. Strong inflows were generated in the Swiss, the Latin American, and the Italian markets. Assets under management in combined wealth management grew to a new record of CHF 65.7 billion in 2018, an increase of 21.7% due to the acquisition of Notenstein La Roche and the sustained inflow of new money. This was achieved despite the elimination of CHF 1.4 billion of assets under management due to the sale of the Liechtenstein operation at the beginning of the year, and the difficult markets in the last quarter of the year.
Driven by organic expansion, combined wealth management was able to increase its asset base by 69% since the end of 2014, representing an impressive annual growth rate of 14%. The systematic client focus and ongoing enhancement of the advisory process in combined wealth management are not only reflected by the continued growth in advised client assets. The strong progress in this business is also demonstrated by the stabilization of the gross margin, as well as the enhanced operational efficiency and profitability as you can see on slide 12. Despite the risk aversion of many investors reflected by the increased liquidity held in portfolios of private clients, gross margins stabilized at 68 basis points. As a result of the record client assets, we succeeded in increasing our operating income by 27%. Reflecting strict cost discipline and despite significant capital expenditure, operating expense grew by only 21%.
As a result, combined wealth management delivered a significant increase of 46% in pre-tax profit to CHF 121.6 million in 2018. This good progress is also reflected by the cost-income ratio, which improved from 74% in 2017 to 71.3% in 2018. Excluding the integration of Notenstein La Roche, operating income grew by 12% and profit before by 33%. Asset management, on slide 13, generated net new money of CHF 3.1 billion. Excluding outflows of one single private label client due to its consolidation measures, net new money amounted to CHF 4.5 billion or 4.2%. With this growth rate in our core activities, we are in our target range of 4%-6% and clearly above the market average. This figure has to be seen in the light of an asset management industry that witnessed very weak flows in 2018.
Inflows at Vontobel were broadly diversified across fixed income, Vescore, and sustainable and thematic investing boutiques. A proportion of inflows originated from our investment business with Raiffeisen. The impressive quality of our products was the main driver of net new money growth. Our range of sustainable investment products is one area of focus of our growth strategy. These strategies total CHF 23 billion and attracted very good net new money. Assets under management at the end of 2018 were CHF 104.2 billion, 5% lower compared to the previous year. The good inflows could not compensate the negative market developments in almost all asset classes. Let's turn to slide 14. The gross margin in asset management of now 42 basis points reflects the broad diversification of our products across equities, fixed income, multi-asset, and quantitative strategies for institutional and fund clients.
The slight decline in margins is the result of the changes in the composition of assets over the last years. As a result of the systematic execution of our growth strategy, we delivered a 7% increase in operating income in 2018 compared to the previous year. Despite ongoing investments, operating expense grew at a lower rate of 5% than income. This resulted in an improved cost-income ratio of 61.1% and a higher pre-tax profit of CHF 180.3 million, up 11% compared to the prior year period. With its substantial profit contribution, asset management was once again the main earnings driver at Vontobel. Slide 15 demonstrates our strong business development of Vontobel Financial Products.
Vontobel is one of the world's leading providers of structured investment products and leverage products with a market share of 13.1% in Europe and 28.4% in our Swiss home market, measured in terms of exchange traded volume in target segments. In Hong Kong, our market share reached 2.5% in 2018. The international expansion of our financial products is well advanced. In addition to the existing markets, we started market making in the Danish market segment of the new growth market in Stockholm in January 2019. Our market volumes in Europe increased to CHF 23.7 billion, an increase of 20% year-over-year.
The CHF 5.7 billion trading volume in Asia refers to just four months in 2017, as we entered the market in September. Like-for-like growth in Asia is therefore around 16%. Our well-established deritrade multi-issuer platform attracted CHF 6 billion of turnover in 2018, up 30% relative to 2017.
By now serving more than 70 banks and more than 550 external asset managers, the platform again attracted more volumes than the six exchange segments for yield enhancement products. Let's turn to slide 16. In the first half of 2018, Vontobel Financial Products grew its operating income by 11%. Operating income grew by the same number, 11%, until end of October. The increase was mainly driven by further gains in market share in the international and Swiss markets for structured derivative products, as explained before. In addition, these numbers encompass our corporate finance, brokerage, and transaction banking activities.
Came November and December. These two months saw considerably lower exchange traded volumes. In Switzerland, the volumes fell by 35% in these two months compared to the previous year. As a result of these two very weak months, operating income for the full year 2018 was down 2% at CHF 270 million.
The strong growth in turnover seen on the previous slide does not directly translate into profitability. The CHF 14.1 billion increase turnover in Hong Kong comes at lower margins than the European and Swiss businesses. In line with these economics, the overnight value at risk coming from Hong Kong is just 7% of our financial products VAR. Given these economics of the Hong Kong business, we are satisfied with the progress, but we are still in the build-up phase of our market position. This build-up of the structured product brand in Hong Kong is ongoing and will, over time, add to revenue. The high speed of innovation and investments is reflected by the expansion of the cost base in financial products by 11% year-on-year, bringing the cost-income ratio up by eight percentage points to 76%.
As a result of very weak product turnover in November and December, as well as significant cost in expanding the business, pre-tax profit fell by 29% to CHF 63.1 million. Slide 17 gives an overview of the pre-tax profits development in our three business areas. Once again, asset management remained the main driver of profits. Combined wealth management and asset management both delivered substantially enhanced profitability. The operating strength in combined wealth management resulted in a strong improvement of pre-tax profit by 46% to CHF 121.6 million. The positioning of asset management as a high conviction manager and the diversification strategy introduced some time ago are continuing to prove successful. The pre-tax results grew by 11% to CHF 180.3 million. As explained before, weak turnover and the higher cost base led to a lower pre-tax profit of CHF 63.1 million in financial products.
In relation to average regulatory capital allocated to financial products of CHF 209 million, the return is 30%. Combined wealth management and asset management accounted for 83% of the pre-tax profit generated by the divisions. This large proportion reflects Vontobel's successful positioning as a wealth and asset manager. Financial products contributed 17% of group pre-tax profit excluding the corporate center. Let us finally turn to page 18. The CET1 ratio at the end of 2018 was 12.3%, and our total capital ratio improved to 18.9% compared to the 18.4% at the end of 2017. Both ratios significantly exceed the minimum requirements defined by FINMA of a total capital ratio of 12% and a CET1 ratio for category three banks, including Vontobel of 7.8%. Vontobel will continue to have a solid capital position that significantly exceeds regulatory minimum requirements.
These ratios are above the expectations we communicated with the acquisition of Notenstein La Roche. The purchase was funded by using own funds and through the successful placement of a CHF 450 million additional Tier 1 bond. By issuing this bond, we were optimizing our capital structure and ensure the financial flexibility to fund further growth. In 2018, operating income grew by 9% in corresponding risk-weighted assets by 14% year-on-year. The growth in risk-weighted assets is fully attributable to the acquisition of Notenstein La Roche. Excluding Notenstein La Roche, risk-weighted assets would have been even lower than at the end of 2017. That brings me to the end of my remarks. Thank you for your attention until now.
Thank you, Martin. Let's move on to the strategy update. Despite somewhat more challenging environment in Q4, we at Vontobel continue on our course. We continue to push forward and implement our strategic priorities. It all starts with the client to whom we want to deliver the unique Vontobel experience. I think we should all be aware of, especially coming from the financial services industry, that clients have learned to compare their last best experience that they may have from whatever interaction they have in their professional or private lives, and put that last best experience to a benchmark for their interaction with financial services providers.
We know that, we accept that, and we work hard to deliver client journeys that are best practice. We also know that quality is the final underpin of any client experience, quality in service, quality in investment performance, quality in products and processes.
We consistently are convinced that people are the key differentiating factor in this kind of environment. We also believe, despite our endorsement of technology and of digitization, that people will remain the masters of technology and not the other way around. Therefore, we do everything it takes to build the best workforce in the industry. We have upgraded and consistently improved our brand experience over the last years. We are convinced that the strong brand experience is key to attract and retain clients in a very competitive environment. Starting with the client, having the best people, delivering a great brand experience has and will continue to deliver organic growth. This will boost our market shares and in combination with a disciplined but not rigid cost management, it will drive value going forward.
Vontobel, such as many other players in the industry, have worked very hard over the last years to disrupt the capped growth perspectives of the traditional private banking models. Value propositions historically were anchored almost exclusively on tradition and stability, and almost misused and very tilted interpretation of Swissness, reducing it to discretion. Relationship managers continued to serve as the sole contact for clients, but were overwhelmed with administration and regulation. We currently estimate that a relationship manager without proper support in a semiannual manual approach takes more than one hour of administrative work to document properly a cross-border advisory transaction on the MiFID. Time that obviously eats into the quality time spent with clients. Operational setups have grown very complex. International growth has been confused with localization for each and every booking center across the globe. Growth drivers were almost exclusively limited to predatory hunting.
We have worked hard to change that by reinvigorating our value proposition. Vontobel believes and executes a purely investment-led value proposition to our private wealth clients. It is based on a proprietary investment approach. It is modeled into a modular, client-specific, and bespoke client offering, and is transported through a value-based pricing system. Our service model still centers and will continue to center around the relationship manager. However, he gets best-in-class training through our fully rolled out academy. He is supported by a range of internal experts, and we have started to roll out expert systems that take off the manual and regulatory documentation-driven burden. Our newly rolled out expert systems bring the time RMs spend on documenting the said cross-border transaction down to 10 minutes. We have also worked further and have translated the full Vontobel experience into an actively managed digital wealth offering.
This actively managed digital wealth offering is live for friends and families. It's working. It's live on my smartphone. The underlying technology is as versatile that it may be used for different client segments and business partners. We believe in a nimble and highly scalable operating setup, concentrating on our state-of-the-art Swiss platform and building sophisticated sales and distribution platforms around it. We have shown over the last years that we attract some of the best talent in the industry, and we intend to continue to do so. Asset management has built a wonderfully diversified book of business with 1/3 from equity, 1/3 from fixed income, and 1/3 from multi-asset.
The strategy that has been based on diversifying the product lineup, expanding our international distribution capacities, and working both on the institution as well as on the wholesale side, has translated into above-average growth. Thanks to the fact that asset management is a very transparent industry, you can check that by consulting the leading lead table of the industry, the top 400 asset managers on a global basis as published by IPE. Since 2011, Vontobel has delivered 18% annualized growth, compared with 11% of the industry average.
Clearly stating that the focused high conviction active asset management model can deliver outstanding performance. We also have sensible momentum in the business as for the first time in 2018, Vontobel ranked in the top 10 of European fund distributors against quite intense competition from 1,450 other active asset managers. The backbone of all of this is the quality of the product portfolio.
Obviously, the multi-boutique setup does only make sense when it translates into above average product quality. We can show that we deliver exactly that. 50% of our funds have received a four or five-star rating according to Morningstar. Again, an objective external endorsement, which compares to the 35 more or less Gaussian distributed average of the industry. When we tilt it to an asset base view, almost 80% of our funds assets has a four or five-star rating. Vontobel is also increasingly accepted and endorsed as one of the leading suppliers of access to emerging market returns across all asset classes, starting from equity, going on to sustainable approaches into all blends of fixed income products. We had strong endorsement for our TwentyFour Asset Management and for Vontobel in the German fund market.
We will continue to push forward to use that potential. We intend to expand our distribution activities in the U.S. and in Latin America. We also will extend fund distribution in Germany and Switzerland. We intend to set up a local office in Japan in 2019. Vontobel Financial Products has been delivering and continues to deliver very solid market shares, both in Europe as well as in Hong Kong. The market shares in Europe are increasing. We are happy with where we are and with the market positions we have gained in Switzerland and in many other European markets. In Hong Kong, the market share development is fine as well, though, as you all know, we were hit as everybody else with a severe drawdown in turnover in the Asian markets, which year-over-year were 40%-50%.
We had to learn that it will take a little bit of more time in order to reach the financial targets we have set ourselves in Hong Kong. That is fine with us. We have a long-term view. Our platforms continue to excel and to deliver edge in technology to our clients. deritrade volumes are substantially up. They bring a bespoke, truly client-centric experience to our partners and clients, and we are happily working on other innovations and platforms, such as our upcoming launch for actively managed certificates. This is a business that has strong market share, technology leadership. Yes, we had a short-term setback in profitability, but we do not run businesses for quarters. We run our business first for our clients, and second for the long-term benefit of our shareholders. How do we compare according to our 2020 targets?
In terms of top line growth, we are fine. We have matched the targets. In terms of net new money, when we incorporate everything from the attrition of the acquisition from a one-off from a client out of a non-core private label segment, we are slightly below the target. When you look at the operational ability of the business to deliver growth with the 6.1% from private banking, and if you compare that to the industry environment, we are happy with the structural ability to deliver organic growth. This translates also into the first signs we see in 2019. Capital, we are fine. Obviously, we have adjusted our capital base as Martin has repeated to ourselves that we have now that more flexible capital structure.
We remain very committed to our dividend policy, which means that we will continue to pay out at least 50% in a normal market environment. Profitability, slightly below the targets after having digested Q4. With 13% and 74.7%, as you know, we have only increased these profitability targets in summer, after the acquisition of Notenstein La Roche. After having announced new targets and having digested some of the worst months many people have seen, I think we are on good shape, and we stick to our targets for 2020.
Outlook, I think we all have to be aware that Q4 was really quite an outstanding event, as all of a sudden everybody was worried with not only a slower growing global economy, but the fear of recession and an even stronger fear of central bank policy errors, and all of that peaked in Q4. When you put together the performance of the most important 12-18 global asset classes for 2018, and you look for a year that had a worse performance for these most important asset classes, you would have to go back to 1931. A really remarkable year. As in all the years after 1931, after such a year, markets tend to rebound. That's exactly what has happened so far. We also witnessed that asset classes such as emerging market or also fixed income strategies are back on the mind of investors.
Asset allocators and flows have already turned to a certain degree. Transactional behavior, especially of private clients, remains muted. I think understandable after what has happened in December. We take this situation obviously seriously. We are convinced that our approach to do business long-term, backed by solid balance sheets, backed by a long-term shareholder, client-centric, focused on the client, strong brand, technology, innovation people, will continue to deliver added value going forward, and we will continue to concentrate on long-term growth. How did we start into the year? You saw that the rebound of markets already has lifted the asset base by the end of January above the average for 2018. Our assets by the end of January stand at CHF 179.5 billion, which is 3.6% higher than the average assets we held in 2018.
We will continue with aiming for organic growth within our combined wealth management activities. The aim is to translate the much broader business base into significant growth going forward. We will also continue to leverage the technology that we have built within wealth management and to reap the benefits out of that, both internally as well as externally. Asset management, the product pipeline is very strong, very solid. As you have seen, we have put ourselves among the leading high-conviction active asset managers on an international space, and we simply intend to continue that path. Financial products will stick to its two growth drivers, international market access platforms and technology on the other side. That's it from my side. Martin and I are happy to have your questions.
I will have to ask everybody here in the room in Zurich to wait for the microphone as otherwise, the people on the call have no chance to follow your questions.
Please press star followed by one for questions.
I have a couple of questions, please. Firstly, on financial products. Could you comment on year-to-date momentum in the business sequentially and also perhaps year-on-year? Secondly, on Notenstein La Roche . I think in your introductory remarks, you mentioned that these outflows that you experienced in the second half of last year flattened out, and also in the presentation, I think it is stated that these are expected to level off. If you could just clarify what exactly does this mean.
Year to date, did you have any further outflows and what is your working assumption for 2019? Is this close to zero or what should we think about that? Thirdly, combined wealth management, the 68 basis point target. Assuming client activities remain where they are and the negative interest rate regime stays with us, are you committed to this target? Can you achieve these targets without improvement and in these areas?
A fourth question, this is the last, I promise. This is a more technical one. NII in the corporate center. I noticed there is a CHF 18 million drop year-on-year. I was just wondering what's driving that? Thank you.
Yes. Thank you for the questions. I will try to get through all of them ahead of 11:00 A.M. Financial products, perhaps what we did historically, I mean, I'm now in that watching that business for 18 years, there have been quite stable seasonal patterns, actually. You all know that as you follow our numbers. These seasonal patterns have become weaker over the last years. They have become more changing and less predictable than they were in the past. What was the standard seasonal pattern would have been a more or less benign, boring December and then a roaring start into the new year. Now, we obviously had not the benign and boring December, but one in which many clients faced some challenges in their performance given what markets did.
That has impacted from the flow side, the typical pattern we have seen in January. When December and January would be, let's say, April and May, we would actually be happy with the recovery. We will see a clear improvement. We will see that things are moving back towards more or less normal territory. Also, all the valuation effects that we obviously had to incorporate into our year-end balance sheets are nicely coming back. As I've said, transactional behavior for January is muted. Again, we try to look through single months and look at the long-term patterns. Notenstein La Roche, a very simple and clear answer. The ambition and the pattern we've seen so far and the target for 2019 is zero. Coming to the return on assets in private banking, in wealth management, yes, we commit to that target of 68 basis points.
Despite the headwinds we have from client activity and negative interest rate environment, as we have shifted our pricing model from transactional towards asset related, we think it is easier to align therefore the interest between clients and us. It's easier to explain. We have quite a strong endorsement of that. That actually also helps us to make margin development less dependent on client activity. Obviously, a less negative interest rate environment, especially in the Eurozone, would still have a small double-digit million impact. We stick to our targets despite that headwind. We think what we have done, product offering, pricing model, extension of product, helps us to underpin that margin. I think the margin protection we delivered in this kind of environment proves that we are on the right track.
On net interest income in corporate center, I'd gladly hand over to our CFO.
Yes. Thank you. Your question was on the development of net interest income in the corporate center. We have to focus on what's happening in treasury to answer your questions. Treasury does two things. It earns money on a bond portfolio with an average duration of, let's say, three years. Treasury compensates the businesses for the deposits that they bring to our bank. Now, whenever the yield curve is as flat as it is in the U.S. dollar, the term spread becomes zero. That remains in corporate center. That explains the majority of the move that you see in the corporate center.
Good. We have the next question there in the last row.
Hello. Thank you. This is Daniel Regli from MainFirst. I have another question with regards to the Notenstein La Roche integration. Could you maybe give us some more details on how you see the integration, particularly on the marginal cost-income ratio? You want that to be at about 50%. Do you think you can hold to this target or not? What do you see in terms of margins on these assets?
Yes. To start with the question on the target, we stick to that. We say we still intend that after the full integration on a recurring basis, we will achieve 50% marginal cost-income ratio. The integration has been done technically, legally, I think really very smoothly. The three months integration since closing to full migration of all systems, having the clients moved legally and having them onboarded on our platform, I think is a best practice performance. Obviously, that was also one of the reasons why we liked the target so much because we saw that this is one legal entity, one bank, one booking center, everything on more or less one booking hub. Also the time to execute such a transaction obviously helps in realizing then the synergies and the benefits going forward.
We expect that we can work with Notenstein La Roche client and asset base in line with the targets we have set ourselves. There was a question here from Mr. Alec.
Thank you. Holger Alec from Target Intermedia. A question about your dividend. Market seems to be quite in deception about your dividend, that there wasn't a raise. Your revenues are going up, your result is going up, integration of Notenstein La Roche is going smoothly. Why are you so conservative on that? Because a stable dividend could be seen as a sign of pessimism for the future. Secondly, on wealth management, you have faced lots of income, new money from Italy. Is that due to the political turmoil? Is there a special effect that you can talk about? Then a technical question about these integration costs. I found three numbers, one in the presentation in your press release, one in your result, one in the annual report. What is it, CHF 80 million net effect from IAS 19? Can you just elaborate on this a little bit? Thank you.
I will leave the technical questions, obviously, to our CFO. The only thing I can assure you, all the numbers are consistent. That's that. Good. Let's start with dividend. I think perhaps a few remarks to that. First, we remain absolutely committed to our dividend policy, which is to pay out at least 50%, given more or less normal market circumstances. There is an unwavering and very strong commitment to that dividend policy. It is exactly this dividend policy which has delivered dividends in each and every year since this company went public. We have paid dividends also in each and every year going through the financial crisis. There is a strong commitment, and we have lived up to that policy, and it is unchanged going forward.
For 2018, I think we just have to accept that this company is just digesting the biggest acquisition of its history. I think in that context, it makes a lot of sense to propose the dividend as it has been proposed by our board of directors, and you have to see it in the light of that single big transaction we did this year. The third point I would like to mention is that it's also a very strong commitment, obviously, from our anchor shareholders that they want this company to have all the capital it takes to underpin future organic or non-organic growth. When it comes to Italy, no, there is no political pattern to that. We do two things in the Italian market. We distribute our investment funds and our institutional mandates to local clients and to also local distribution partners.
That is a business that we have built very successfully over the last year. Our invest partners are local institutions, local banks who serve local clients. We just happen to be one of the most successful foreign providers of investment solutions in Italy. That drives up these numbers. Second, we have obviously broadened our private wealth activities since we bought the Finter activities two or three years ago. The business base has become a little bit broader, and that business base develops in line with our organic growth targets. We don't see a specific political momentum. As I would like to stress, we try not to base our competitive edge on the weaknesses of our neighbors, but on our own strengths that convince clients.
On the pension fund that we consolidated, you have to look at the fact that Vontobel applies international financial reporting standards. This implies that we also apply the IAS 19 rules, how to treat pension funds in the consolidated Vontobel statement. When we consolidated Notenstein La Roche Privatbank, we also had to consolidate the pension fund of the employees of Notenstein La Roche. When we did this, we applied the same rules that we already apply at Vontobel. We applied a slightly lower rate how assets under management in the pension fund convert to pension income for the people insured in that pension fund. This lower rate leads to a gain under IFRS.
A second effect is that those people who left Vontobel had a higher pension fund liability under IAS 19 than they had under the Swiss pension law, so they took less money with them than was on the balance sheet in the pension fund. These two effects accounted for the CHF 17 million before tax that we mentioned in footnote three on page nine.
The net number perhaps.
The net number of the pension liability effect was CHF 17.6 million before tax and CHF 14.8 million after tax.
No, I mean the net number on integration. The total.
The total on integration was the 37 cost minus the pension fund effect yielding roughly CHF 20 million in 2018.
Good. Next question there in the middle, please.
Michael Kunz, Zürcher Kantonalbank. Three questions, please. First, regarding to total loans. They are up relatively considerably. To what extent is this due to the Notenstein La Roche integration, and to what extent have you become maybe a little bit more sporty in offering clients some lending products? The second question relates to the trading income. This has two line items that are fairly volatile. If I look at page 156 in the annual report, the security trading and the other-
Sorry, I don't get you physically.
Can you hear me now?
Yes, perfect.
You have two lines in the trading income.
Yeah.
The security trading and the other financial instruments at fair value.
Yeah.
They change the sign from 2017 to 2018.
Yeah
Per balance, it's okay, but kind of what's driving the swings?
Yeah.
The final question, at some point in the presentation, you mentioned that performance fees in asset management were lower.
Yeah.
What kind of products would have a performance fee potential in your asset management business, and what percentage of AUM do they represent?
Yeah.
Okay, thanks.
Thank you. I take the first and the last one, and I would ask Martin then to answer the
The one on trading income?
Yes, exactly. Total loans, that's almost 100% Notenstein La Roche loans. There is no ambition for us to catch up with some of our peers in terms of lending penetration in our assets under management. We have not changed our lending rules, and we do not intend to do so. If the business grows as clients ask for it under our stable risk appetite, that's fine with us, and we're happily to do that, but we have not changed our approach on this. Performance fee. There are not many investment products that actually have performance fees.
Most of the performance fees last year were actually coming from an asset class or a product type you will be surprised, which is balanced mandates in Switzerland, as we are more or less the last standing hero of delivering actively managed balanced mandates to Swiss institutional clients, as many of our local competitors have given up and migrated into passive offerings. We offer some of them with performance fee components. It's not relevant. Last year, I think it was a single digit, CHF 3.2 million, and this year it's a bit lower. It's not the relevant part of our business model. 13, and this year it's three. It's in relation to revenues of more than CHF 400 million. It's not a relevant thing, and we are fine with that, actually.
Regarding the table on trading income on page 156 in the annual report, this is a slightly confusing table that IFRS forces us to publish. What happened here is the following. Imagine you sell a call option and you buy a stock as a hedge. When markets later go up, you earn money on the security, the share, and you lose money on the short call. These two components, securities and the derivatives, will always have opposite signs. Please just look at the net as you did. If you look at the net, you don't have this confusion that this table may provoke.
I can offer you a quote out of our risk and audit committee, where one of the members commented on IFRS reporting, ever more transparency for ever fewer people. Yes.
Thank you. Just two quick questions. You have mentioned this outflow of Notenstein La Roche of CHF 1 billion and something. How many clients have you lost with that money? How many customers? The second question is about your remarks on capital. I conclude from these remarks that your major shareholders considered your capital base at the moment as not thick enough, strong enough. That's my conclusion. Also, this conclusion I draw from your salary, which is, despite the excellent notes you get in your assessment, you only get 1% more pay. What I read in your annual report is because the board wants a fair redistribution of the benefits. Thank you.
I'm actually positively surprised that I would ever be asked to comment on a too low compensation. Thank you for that question. Let's start with NLR. There was not a concentration pattern in these outflows. That was really more or less evenly distributed. No specific client situation behind that. You can do the math if you want to with the average client assets that we gave for Notenstein La Roche. I would not even have the exact number in my head. That may be a few hundreds, perhaps.
It was.
I don't know if we published that at the time of the acquisition. We probably did not. Let's assume there were a few hundred clients left, and we will work very hard to convince them to get them all back. In terms of the capital base, I have to say that I cannot support your interpretation. I think the key base to interpret the dividend decision of this year is clearly twofold. First, this is no change in our long-term dividend policy, rest assured. I think we have proven that over many, many years and in very difficult and challenging environments. Second, we have to accept that this is the year where we had to digest the acquisition of Notenstein La Roche, and therefore, we think this is a sensible decision in the interest of our long-term shareholders.
The nomination and compensation committee decides and does that in a very thorough process and on compensation. I just can tell you that I feel very fairly compensated, and I have nothing more to add. Yes.
Galway Finews. In the last years, you took over or acquired companies that belong to the Raiffeisen empire, namely Vescore and Notenstein La Roche . Over at Raiffeisen now, the new president, Guy Lachappelle, has announced some write-downs on former takeovers and is also trying to recoup some of those write-downs in the future. It was mentioned that could also mean that Vescore or Notenstein La Roche are targeted at these recoups. Is Vontobel involved in any way or affected in any way with these recoups at Raiffeisen?
Absolutely no. Good. We have a question from the call from Nicholas.
The first telephone question comes from the line of Nicholas Herman of Citigroup. Please go ahead.
Good morning, gentlemen. Thank you for taking my questions. Actually, I should also note that I fully recognize your comment on IFRS reporting, by the way. Since we are well before 11:00 A.M., I hope you don't mind if I ask quite a few questions, because there are a few things that I'd like to clear up, please. If I take those in turn, firstly, with wealth management, your gross margin was very resilient. Clearly, most of the uplift was from Notenstein La Roche , but could you help us to understand how much of the margin uplift to the recurring margin came from new products and repricing? That would be helpful. As part of that as well, what proportion of your wealth management mandates are now advisory, please? I think back in 2014, it was approximately 50/50 split between advisory and discretionary.
If you could provide an update on that would be helpful. My final question on wealth management is, I realize that December was pretty exceptional and that January has been also quite positive, we also cannot rule out that market conditions will not get progressively worse. If you get a risk-off, so markets fall and also a strengthening in the Swiss franc, that would clearly be quite negative for yourselves. If markets did get worse, would you be willing to slow the pace of investment to meet your target returns? On asset management, in your third quarter update, you referenced the target to grow your high margin business at a faster rate. I think it looks fair to say that that proved difficult. What do you need to do to achieve this?
Finally on that, can you also give an indication of fixed income and 24 flows at the end of 2018? Were there any outflows there, please? Finally, just one follow-up on corporate center. I just want to follow up on one question one of my peers asked, particularly related to the cost. It looks like on an adjusted basis, your costs fell by almost CHF 15 million versus the first half. I know it's a volatile area, but I'm struggling to understand where the flexibility came from in the cost base, particularly given all of your ongoing investments, Notenstein La Roche notwithstanding. Yeah, a lot of questions. I apologize for that, but if you can help, that'd be much appreciated. Thank you.
Yeah. Nicholas, we appreciate that you dial in from abroad. We will try to do as much as we can here, but if we don't get through all the number crunching, I will ask our staff from IR then to give you more details afterwards, if that is fine with you.
Yeah, that's fine. Thank you.
Yeah. I don't know if you have an update on discretionary versus advisory with concrete numbers. That would be one of the questions we would perhaps need to follow up. Let's start with the top line in wealth management. The 68 basis points. Actually, we do not disclose the impact of the different drivers, but there are threefold. The product offering has been modularized. We now have a broader range and offering of both discretionary and advisory products, which through time filters into a higher mandate base. That continues to happen. This is combined with a value-based pricing approach, which helps us as well to explain transparently to clients what the added value is for which they pay, which helps us on the margin realization side.
As you have seen over time, over the years, within an unchanged risk appetite, our lending book has grown, and we extended the offering to mortgages here in Switzerland. These three factors all help consistently to protect our top-line margin. What helps also to protect our top-line margin is not to take part in every race to the bottom. We reserve ourselves the right to insist that our services do add value and services that add value have a price. We have said no or lost clients that are only shopping for the cheapest price in the industry. There are many people in this industry who take part of the race to the bottom, and we try not to go there.
Your question on market outlook, yes, we are obviously aware of the fact that, as always, markets could be volatile, and if I may say so, when we said it in August and published our updated targets, some of the feedback we got from the market, that our targets were boring and that everything would be fine anyway. Well, through time, things may change. When it comes to slowdown in investments, I would give a two-folded answer. Yes, we obviously are cost conscious, and we have always said that cost management is part of line management. We also would repeat that one of the duties of line management is also allocating and shifting resources to the most promising growth opportunities.
As soon as cutting of investments only protects the next quarter bottom line, but eats significantly into the prospect of next year's or the year afterwards growth potential and market position, we would be very hesitant to do it. This is a company that has the stamina and the governance and also the tenure of the decision-makers that we will continue to run this for the long time. We think that will add more value to all of us, if we continue to do so. Asset management flows. We were actually very happy with our flow pattern in relation to the industry. Despite there was quite a significant sell-off in fixed income with everything that was linked to credit returns or linked to emerging markets.
There was massive outflow in the industry, as you may know. That's one of the reasons why we gave that objective figure. You don't get into the top 10 out of 1,450 providers in Europe if you're not above average in flows. We've clearly had very strong and up to October, almost immune flow patterns to the market environment. Now, November, December, we were flattish in terms of fixed income flows. Neither for 24 nor for the fixed income boutiques out of Zurich, any structural challenge out of what has happened in December. Performance track records are fine, interest of clients is fine, and we've seen some recovery of flows in January. When you look at the flows, aren't we said you had problems to grow the high margin products. I would challenge that to a certain degree.
We had that CHF 1.4 billion which we disclosed, which comes from private label fund business. When I look into the further details of the flows, we actually do. We gain money on higher margin, and we lose on some of the lower margin. We're structurally fine on this. What we will do to push that further is what I tried to bring across in the presentation, is increase our international footprint in distribution. I don't know, Martin, if you have some additional details on his questions. Otherwise, we would have to get back to him.
We can get back in more detail later on. The discretionary part in wealth management is roughly 25%, and advisory is roughly 52%. We can be more precise later on with you, Nicholas.
Yep.
That's great. Thank you very much.
I will propose to move on. Any other questions? Again, the Target Intermedia Group.
Sorry, quick follow-up on Notenstein La Roche . Could you just give us the number of people who had left Notenstein La Roche after the integration? If you take Notenstein La Roche as a standalone company?
Yeah
How many people are yet in the Vontobel group, and what's the delta between the two? Thank you.
Yeah. We are in line with what we have announced, and we were, I think, transparently and fairly forthcoming on this. We said that up to 140 people would leave in line of the integration, and we are roughly in that ballpark, a little bit below. Good. We all thank you for your interest in Vontobel, and we wish you a successful day. Thank you.
Thank you.
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