Earnings Call: H1 2018

Jul 27, 2018

Ladies and gentlemen, good morning. Welcome to the Vontobel's First Half twenty eighteen Results Conference Call and Live Webcast. I'm Iruna, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. After the presentation, there will be a Q and A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to the auditorium, Turi. You'll now be joined in the conference room. Everybody, on behalf of Fontholder together with Martin Zeig, our Chief Financial Officer, welcome to everybody here in the auditorium in Zurich as well as to all the people who have dialed in into the telephone conference. As usually, I will start with the highlights of our half year results. Then our Chief Financial Officer will lead us through the details of the numbers. And then I will be back with a strategy update and obviously outlook for the second half year. Before we go into the numbers, let me point out 3 things. We have delivered on the back of the implementation of our ambitious organic growth strategy a solid set of numbers that hit our 2020 targets. The acquisition of Notenstein is progressing well. The integration is on track and things are going fine. We will continue to build our successful future for our clients for us by continuous investments in our brand, in our talent and into technology. Let's look at the numbers. Our client assets reach high of €253,600,000,000 This includes advised client assets of €191,200,000,000 The development of these clients' assets was predominantly driven by strong net new money, net new money across all business lines totaling CHF5,100,000,000. Our operating income is up by 13%, reaching CHF583,300,000. In combination with a sensible scalability of our business model and a group cost income ratio of 72, This results in a group net profit of CHF 132,700,000 which equals earnings per share, which are up almost 30 percent to CHF 2.28. This equals an annualized return on equity of 15.1 percent, which has to be seen in relation with our very strong CET1 capital base of 19.1%. How do we look at these numbers? We are predominantly happy about our ability to grow our top line by 13%, which was driven by both combined Wealth Management and Asset Management. The €5,100,000,000 net new money translate into a growth of 7.2% for asset management and 6.4% annualized growth on a purely organic basis for combined wealth management. Our financial product activities continue to win market share in Europe and Asia. We think the ability to win clients, to build top line, to win assets is the final and ultimate proof of a sensible strategy. We all know that cost cutting by itself is not a business strategy going forward. At the end, you have to win clients, you have to build revenues. Obviously, cost control has to be part of each and every strategy. And that's why we are happy how scalable our platform is. And it is scalable thanks to cost control and thanks to a very focused business model. And that translates into group net profit up 31% to this €132,700,000 So we are happy with where the implementation of the organic strategy has led us. We could close the transaction with Nordenstein Laroche and the acquisition on July 2. We see no significant change in AUM between the announcement and today. The integration project is on track. Things are going fine. I will be back with more details in the strategy part. And we take the opportunity of strong organic development and the potential of the acquisition to upgrade our profitability goals both at the level of combined wealth management as well as the level of Frontopla. We will continue to remain very focused and client centric going forward. We also finished a strategic lineup of our cross border business model in Wealth Management with the divestiture hub and on our regulatory setup of the banking license in Germany. We are convinced going forward in a world with less cheap money, slowly rising interest rates and increased uncertainty, high conviction asset management, our ability to deliver excellence in advisory, research and products will become ever more important. And we will continue to push our investments into the digital touch points with our clients as only digital touch points can move us ever closer to our clients. These were the highlights from my point of view. I now gladly hand over to Martin Sieg, our CFO, who will guide you in detail through our half year results. Thank you. Thank you very much, Tenno. Good morning, ladies and gentlemen. Let me start my presentation with the overview of the development of our Advise client assets on Slide 7. For Von Taubel, 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 these assets are important success factors for us. As you can see on the left hand side of this slide, over the last three years, we were able to grow our Advised client assets by 10% annually, mainly driven by organic growth. In the 1st 6 months to AT and T, total realized client assets grew by 2% to a record level of €191,000,000,000 thanks to broad asset net inflows in Asset Management and Combined Wealth Management. 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. This investment is now reflected by our well balanced global base of private and institutional clients as you can see from the chart on the right hand side. Today, 40% of our assets stem from Swiss clients. Germany, United Kingdom and Italy together account for 27% of Advise client assets, 15% stem from the emerging markets and 11% from the United States. Please note that the Notenstein Laroche transaction will be integrated as from July 2, 2018. None of the figures presented today contain the upcoming consolidation of Nordenstein's Laroche. That brings me to our key figures for the 1st 6 months 2018 on Slide 8. Vontobel's operating income rose by 13% as a result of the increased asset base and higher turnover in Financial Products. Varese operating expense grew by only 7% despite the strong business expansion and ongoing investments in growth initiatives. As a result, our IFRS group net profit strongly increased by 31 percent to $132,700,000 On an adjusted basis, it improved by 25% in the 1st 6 months 2018 compared to the previous year's period. Basic earnings per share grew by 29% to CHF 2.28. The return on equity was The return on equity was 15.1% on an annualized basis, once again significantly exceeding the cost of capital and our medium term target. The BIS, Common Equity Tier 1 ratio, remained very solid at 19.1% at the end of June 2018, and the Tier 1 capital taking into account the AT1 bond issued by the end of June reached 26.4%. Both ratios substantially exceed the regulatory minimum requirement for the total capital ratio of 12%. Our balance sheet should be viewed as highly liquid since the liquidity coverage ratio averaged 2 0 3 percent and that's also significantly exceeded the minimum requirement of 90% defined by FINMA for this year. And our very solid capital position is also reflected in the leverage ratio in the Basel III of 6.7%. These ratios do all reflect the AT1 bond issued in June as the value date of this transaction was June 29. Let's have a closer look at our profit development on Slide 9. As you can see on the left hand side of the chart, Vontobel posted a group net profit of CHF 101,500,000 in the 1st 6 months last year. By taking the CHF 4,600,000 costs after tax for the integration of Westcor into consideration, the adjusted group net profit reached $106,100,000 in H1 2017. In H1 twenty eighteen, profit growth of 31 percent raised our profit to 132,700,000 dollars Starting from the adjusted H1 'seventeen value, profit growth reached 25%. Growth was mainly driven by good progress in combined Wealth Management and in Asset Management, while Financial Products delivered a solid contribution, roughly unchanged year on year despite ongoing investments in international markets and innovative platforms. The trend on the expense side demonstrates our disciplined cost management in combination with the good scalability of our platforms. Therefore, the cost base increased by just 7%, while the top line expanded by 13%. Consequently, the cost to income ratio improved by 4.1 percentage points to 72% and was 3 percentage points better than the target cost to income ratio of less than 75%. Let's turn to combined wealth management on slide 10. These activities encompass our Wealth Management as well as our business with external asset managers. Building on its existing activities, combined Wealth Management attracted €1,700,000,000 of new money in the 1st 6 months 2018. This corresponds to 6.4% growth in net new money and is therefore above our target range of 4% to 6%. Strong inflows were generated in the Swiss and Latin American and the Italian markets. Assets under management in combined Wealth Management grew to a new record of $54,900,000,000 in the first half. This is an increase of 2% due primarily to the sustained inflow of new money. This was achieved despite the elimination of 1,400,000,000 of assets due to the sale of the Liechtenstein operation. Driven by organic expansion, Combined Wealth Management was able to increase its asset base by 43% since the end of June 2014, representing an impressive annual growth rate of 9%. 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 in the stabilization of the gross margin as well as by the enhanced operational efficiency and profitability, as you can see on Slide 11. Despite the risk aversion of many investors and therefore private clients still holding around 20% in liquidity in their portfolios, gross margin stabilized at 68 basis points. As a result of the record client assets, we succeeded in increasing our operating income by 17%, Reflecting strict cost discipline and despite significant capital expenditure, operating expense grew by only 7%. As a result, combined Wealth Management delivered a significant increase of 46% in pretax profit to $56,200,000 in the first half of twenty eighteen. This good progress is also reflected by the costincome ratio, which improved from 75.5 percent in the first half of twenty seventeen to 69.1% in the first half of this year. The integration of Nordenspa and La Roche Privatbank AG in the second half of twenty eighteen is expected to generate significant positive momentum from 2019 onwards. In Asset Management, this is on Slide 12, the 7.2% annualized growth in net new money exceeded our target range of 4% to 6% and was also above market average. Inflows were broadly diversified across equities, fixed income and multi asset strategies. A proportion of inflows originated from our investment business with Raiffeisen. The impressive quality of our products was the main driver of the growth in assets. Our range of sustainable investment products is one area of focus of our growth strategy. These assets totaled €15,000,000,000 and these strategies attracted more than $1,000,000,000 of new money. Assets under management rose by 2% to a new record of $112,300,000,000 reflecting the positive impact of the strong inflow of new money. The effects of market movements somewhat dampened the growth in assets under management. Worthwhile to mention that especially the equity strategies of the Quality Growth boutique and the Swiss equities generated strong performances well above their corresponding benchmarks. Let's turn to Slide 13. The gross margin in Asset Management stabilized after declining in recent years due in particular to the more diversified business model and the resulting changes in the composition of assets. The margin of now 42 basis points reflects the broad diversification of our products across equities, fixed income, multi asset and quantitative strategies for institutional as well as fund clients. As a result of the systematic execution of our growth strategy, we delivered a significant increase in operating income in the first half of twenty eighteen, up 16% compared to the first half of twenty seventeen. Despite ongoing investments, operating expense grew at a much lower rate of 8% than income. This resulted in an improved cost income ratio of 60.3 percent and a higher pretax profit of $92,500,000 up 33% compared to the prior year period. With this substantial profit contribution, asset management was once again the main earning drivers at Vontobel. Slide 14 demonstrates our strong business development of Montovo Financial Products. Montobel is one of the world's leading providers of structured investment products and leverage products with a market share of over 11% in Europe and 31% in our Swiss home market measured in term of exchange traded volumes. International expansion of financial products is advancing rapidly. We have been operating successfully in Germany and the Nordic market for a number of years. We entered the Italian market in 2015. And last year, we made our market debut in the Netherlands, in France and in Hong Kong, one of the world's largest markets in terms of trading volumes. Over the last 4 years, Von Total Financial Products grew its turnover in listed and non listed Von Total Products by 41% per annum to €24,000,000,000 in the 1st 6 months. Of this sum, €11,100,000,000 was traded in Asia. Growth excluding Asia was 7%, reflecting improved market share across the majority of markets in Europe. We also further strengthened our position in our Swiss home market. This success is attributable to our client proximity and our state of the art digital ecosystem, which allows us to rapidly enter new markets and serve new target groups. Von Tobol Investment Banking has 16 different platforms and web based offerings. With our unique and leading multi issuer platform, 1 Total Dairy Trade MYTH, we enable asset managers and banks to independently compare, create and manage structured products from different issuers for their clients. In the first half of twenty eighteen, a total of $3,200,000,000 of products was purchased on this platform, a significant increase of 45% compared to the previous year and more than the turnover on the Swiss exchange in the segment for yield enhancement products. Let's turn to Slide 15. In the first half of twenty eighteen, Financial Products grew its operating income by 11% to $159,000,000 The increase was mainly driven by further gains in market share in the international and Swiss markets for structured and derivative products, as explained before. In addition, these numbers encompass our corporate finance, brokerage and transaction banking activities. The strong growth in turnover seen on the previous slides does not directly translate into profitability as it mainly relates to the new Hong Kong market where we are happy with the progress and still in the build up phase of our market position. The high speed of innovation and investments is reflected in the expansion of the cost base by 15% year on year, bringing the costincome ratio up by 2 point 0.8%. Pretax profit rose by 1% to €59,100,000 While the Pure Financial Products business posted good growth in H1 2018, the transactional businesses were impacted by the challenging market environment and by new regulation, including MiFID II. Slide 16 gives an overview of the pretax profit development in our three business areas. Once again, Asset Management remained the main driver of profits. Combined Wealth Management and Asset Management both delivered strongly enhanced profitability. The operating strength in combined wealth management resulted in a strong improvement of pretax profit by 46% to 56,200,000 dollars The positioning of asset management as a high conviction manager and the diversification strategy introduced some time ago are continuing to prove successful. The pretax result grew by 33% to 92,500,000 dollars The continuous investment in talent and innovation are the clue for the impressive market success of Financial Products, which is reflected in the strong earnings power of the business and the solid pretax profit of $51,900,000 in the first half of twenty eighteen. Combined Wealth Management and Asset Management accounted for 74% of the pretax profits generated by the divisions. This large proportion reflects from total successful positioning as a wealth and asset manager. Financial Products contributed 26% of pretax profit, excluding the Corporate Center. Let us finally turn to Page 17. Recently, in connection with the acquisition of Nordenstein Laurospruit Bank, we have taken measures to optimize our capital structure. As a result, von Tobel had a very comfortable capital position at the end of June 2018 with the BIS common equity Tier 1 ratio at 19.1% and the Tier 1 capital ratio at 26.4%. As the Nordenstein Lauros transaction was completed on July 2, 2018, that is 2 days after the balance sheet date, it is not yet reflected in these figures. At the end of 2018, we expect the BIS CET1 ratio at around 12% and the Tier 1 capital ratio at around 18%. Both ratios will therefore significantly exceed the minimum requirement defined by FINMA of a total capital ratio of 12% and a CET1 ratio of 7.8%. Fontooble will continue to have a solid capital position that significantly exceeds regulatory minimum requirements even after the acquisition of Nolte and Laroche. The purchase was funded by using owned funds and through the successful placement of a €450,000,000 additional Tier 1 bond. By issuing this bond, we can ensure the financial flexibility to fund further growth. This brings me to the end of my remarks. Thank you very much for your attention. I will now hand back to our CEO, Dennis Dahlb. Thank you. So we continue with the strategy update In the implementation of our organic growth strategy, we are guided by these 5 priorities, which you may know also from our Investor Day discussions. It all starts with the client to whom we want to deliver that unique front oval experience, which is the combination of everything we do for our clients from service to advice to investment products, performance returns, but also each and every touch point that the client witnesses experiences. We are convinced that going forward, the holistic convincing client experience will be the next battleground for success. In order to deliver that, we need the best people in the industry, we need empowered people. We are willing to give our people in an environment where they can have an impact, where they can make a difference, but we expect them to take over personal responsibility. We want to excite our clients with our brands. We want our clients to feel excited while associating themselves with our brand. These all had to feed into growth and increasing market share and obviously in combination with a sensible cost control into increased efficiency and increased profitability. Let us have a look how these five priorities have put their mark on our combined wealth management business over the last years. At the center of it all is an investment content led value proposition that we deliver to the needs of our clients in the combination of a highly educated, highly professional relationship manager base, supported by leading technology. The technology puts choice in the hands of the consumer. The consumer, the client can choose through which channels to interact and it makes our relationship managers more relevant while they interact with clients. This has allowed us to build on an organic basis over the last years, combined wealth management business that reached €54,900,000,000 in assets under management and annual growth of 9%. With an asset manager with a relationship manager base that grew as well, but that stood at 197 by the mid of this year. We were able to stabilize our margins and to post now from our point of view stable margin going forward of around 68 basis points and the 68 basis points and the combination led now to a significant increase in profitability of 46%. On top of that already well running organic development, we will now put the acquisition of Notenstein. We have closed the goodwill premium is more or less unchanged to the information we gave on the day of the announcement and we expect that we increase volumes in combined Wealth Management by more or less 1 third. Nordenstein Laroche will predominantly bring us a broader more regional presence in Switzerland, which has to be the base for more ambitious organic growth going forward. We are well ahead in the integration project, All the leadership roles in the front offices and all the organizational structures are already defined and announced. We are now in full speed in the process of training and onboarding the front office staff. In parallel, we work on the migration. We aim for a full technical and migration and full legal merger by the end of Q3 this year. Our guidance for integration cost remains unchanged. In addition to this, we also have started the process to leverage our successful track record of innovation from the financial product side into the wealth management space by putting together here in Zurich a select group of private bankers, banking and process specialists and digital experts to bring our track record from the financial product space to the wealth management space. We are building digital experience that will answer the needs of today's clients because today's clients do benchmark us to the last best experience they had with a usually digital native company. So the experiences have to be fully bespoke. They have to be anytime, anywhere and in real time. The experience has to improve through time by being relevant, proactive and self learning and the engagement has to be exciting. We work on this in order to improve processes and experiences for our existing clients, but it will also create opportunities for us to address additional and new client opportunities. Let's move to Asset Management. And I know what I am about to say, I have been saying it already a few times, but I still think it's worth to repeat it. We never had as diverse and as global a book of business as of today. It's diversified across the 6 boutiques with roughly 1 third in equity, 1 third in fixed income, 1 third in multi asset class and quant. It's globalized. We have a strong global footprint in terms of distribution. And all the boutiques have strong products that have critical size and critical quality with more than 13 investment products and investment funds breaching the €1,000,000,000 threshold and being rated by 4 and 5 stars. We're also happy where the margin development is going. It is still 1st and foremost a consequence of the changing business mix. We still see that as a very specialized high conviction active asset manager, we can protect margins in the different boutiques, but as the business mix changes, the margin develops. I would like to highlight another aspect of our degree of diversification of our business model, which is the mix of institutional and wholesale and investment fund business. And I know you are used as regular visitors to management presentation that every company has awards. I would like to highlight only 2, which bring across the point of that combination of institutional and wholesale. We have we are very proud we have been awarded by one of the most prestigious institutional awards, the UK Pension Award as the Emerging Market Manager of the Year. We chose that our products have the pedigree, the quality, the track record, the stability of the team. In the same period, City Wire, one of the leading commentators and advisers in the wholesale investment fund business has done a global ranking for their top 10 investors for emerging market debt hard currency and emerging market debt local currencies. We're very happy. Fondobel was among the top 10 in both categories, which shows that we have the pedigree to do institutional business in terms of performance and investment process, but also have the service and the distribution power to be a successful wholesale player. And we think that is a very important aspect also to be able to deliver growth through the cycle going forward. Financial product continues to build market share. We did progress in Europe. We have done our first steps now in Hong Kong. We are happy where we are, but it's still early days. We're profitable, but this is only a starting point and we'll need to build out and to go into additional activities in the Asian space. But so far, we are in line with our own plans. We will add 2 new markets in Europe. Again, markets in Europe can be added at very low marginal costs as similar regulatory framework, similar technology. So we intend to enter Denmark and Norway. We continue to push our digital edge, Dairy Trademit, tremendous growth, broad acceptance, we launched additional B2C offerings on the back of that technology. A few weeks ago, we launched, we think innovative proposition for part of the lending business through a cosmo funding, again with a pure platform approach. And coming soon, we will enter what the synthetic investing space on the back of actively managed certificates. The combination of these organic activities has enabled us to deliver numbers that fit our 2020 targets in terms of top line growth and net new money. In both growth dimensions, we outbid our own targets. We also reached the same level in terms of profitability on the return on equity side as well as on the cost income ratio side and the capital ratios are fully in line with our own ambitions and the dividend policy has remained as consistent as ever. On the back of that strong organic development and the potential of the Notenstein acquisition, we already announced that we put our profitability targets under review. We will stick to our growth targets. Again, growth targets have to be met each and every year. And only the fact that you made it in 1 half year does not mean that they are not ambitious in the next half year. So we will stick with the same growth targets and commit ourselves to deliver on a recurring basis top line and net new money growth of 4% to 6%. We also confirm capital and payout targets as we could enhance our capital structure and confirm these ratios and payout ambitions also after Nordenstein Laroche. We increased profitability targets both at the level of combined wealth management where we increased the target for our return on assets to 68 and we become more ambitious on the cost income ratio as obviously Notenstein Laroche will add significant scalability. At the firm level, return on equity is increased to 14 percent as a target to be met every year and cost income ratio is increased to be lowered to 70 2%. We want to keep up the significant ability to continuous investment into our future. Let's turn to the outlook. Let me first try to frame a little bit the environment, how we witness it and how we see it. We expect that cheap liquidity will sooner or later become more scarce. We surely have to be aware that this liquidity has lifted all boats in terms of equity markets and bond markets and it has also been one of the key driver for subdued volatility, which was with the first flickering back in Q1 and which we are very more or less sure that it will be back in the time going forward. We also seem to see a world that becomes less flat, but we continue to see a world which sees big change on the technology side that is a strong opportunity, but also obviously a challenge. And we see a world where wealth becomes more spread and continues to grow, but that increasing spread of wealth is probably also one of the driver of the identity politics we witness in some of the developed markets. We believe that this is an environment where agility is key. It is especially more important than sheer size. We believe it is an environment where selectivity is key at the level of the business strategy. You can't do everything to everybody in this kind of environment. You have to specialize. You have to master everything what you do. And you have to be asset management. Obviously, in this kind of environment, technology is important, capital is important, and we are careful with our capital and we'll invest a lot in technology, but we strongly believe that talent beats all the other production factors by miles. This is an environment where we will see turning points, turning points in business models, turning points in how we do business, turning points in the investment cycle. No algorithm can do turning points. People can. Our people can. So how were the 1st weeks in H2? They were fully in line with the usual pattern of the summer months. So I repeat myself again, July, August December usually happen in the second half year and we see a pattern that is fully in line with that in the 1st weeks in H2. Nevertheless, the environment which probably becomes less linear and less easy to follow trends is an environment where platforms and offerings such as ours which are content and advice led seem to be attractive. So we also continue to see net inflows in the 1st weeks of the second half year. What will be our priorities for the remainder of the year? We strongly believe that the base we have built in combination with the acquisition and our brand gives us a very strong position to push further organic growth. Within combined wealth management, the first focus is on fast and seamless integration of a Nordenstein Laroche and to continue to win over Swiss and international clients based on our offering, based on our relationship manager force, based on our technology. Asset Management will continue to run a high conviction active asset management model based on boutiques, based on global distribution, based on institutional and wholesale channels. And within Financial Products, we push our market entries in Europe and Asia further and we look for further leverage of our ecosystems and our technology. Thank you very much for your attention. We're now happy to have your questions, Martin and I. I have to ask those people here in the room to wait for the microphone because otherwise the In the room, please. Good morning, everyone. Thomas Krillak, Baader Helvea. I have 2, 3 questions. The first question will be on Financial Products, Investment Banking. I see that the expense growth was there quite substantial. I mean, you mentioned that there were some investments, but could you give us more details what exactly you invested in? And what would be the payoff that you expect from these investments? And when we could expect the payoff from the investment, especially in the first half of twenty nineteen, so just these investments? I then the second question on the relationship managers hiring. What should we expect there after the integration of Nother Steyn? Should we expect continued trend of 5% annual? Or there will be some change? I don't know. Should re highlight what's your target? And the last question, it's maybe not so important for investors, but it will be maybe interesting for us as analysts. What is the impact of MiFID on your brokerage business? Could you give us a bit more details here? Because you mentioned this in the slide that Mifid or regulatory initiatives, including Mifid, had negative impact. Yes. Thank you. Yes. So on Financial Products, key costs were related to market entry in Asia, including listing fees. So through times, additional volumes and additional business should then bring the payback on these costs. Do we have additional light on that and that Martin? I think this is the main point. Then on the relationship manager, perhaps let me first make a yes, of course, we are still hiring. Yes, we are a good home for top notch relationship managers. And if you follow us closely, you may have seen that also in H1. We have announced 1 or 2 things in Germany, here in Zurich, in Switzerland for the U. S. Business. So we continue to do that. But how we look at Wealth Management, we do not limit our organic growth approach or our business strategy to a fully linear link of hiring people who know people who have money. We insist that our capabilities, the brands, the capacity, the investment content, the service structures we put at the disposition of our relationship managers and our front office staff are a legitimate part of the value proposition why clients come to us. And when you look at the first half year also at some periods last year, actually there is a decoupling of net new money and fully linear growth of relationship manager staff and we think that this is important going forward. We still believe and are completely committed the relationship manager remains the most important part and remains an important part, but it's part of the value proposition and we invest for example a lot of time to train and onboard relationship managers. New joiners get 18 days training in the 1st 18 months, because we want to sell the front doing wealth management. We do not see ourselves as an external asset manager platform in disguise where we only offer at the end of the day custody and execution. We are still interested and are very happy to welcome additional talent going forward. We also expect that the trend that relationship managers and clients flock to future proof platforms will continue. We are convinced that we are one of them, but our organic growth model is broader and therefore we do not give away hiring targets, we give away net new money targets and there are different ways to create net new money. And in terms of MiFID, yes, I mean our brokerage business is 2% to 3% of revenue, but obviously it's an important part of our pedigree. It's an important part of our history. That's how Fontopo started. It's important on how we are perceived, especially with Swiss clients. So it's important to us, but it has a limited impact on your financial models. But yes, it's difficult. I mean, we still think that I mean, the pricing schemes that especially some of the non boutique players are offering are not sustainable in the long term. Sorry for the gentlemen two places to your right. So we will see where this goes. Currently, we're still undergoing that change from transactional payment to fee based payments. We're doing fine. We think we win a bit of market share. We would like to win more, but it's a tough business. Yes, we have the next question. Good morning. Matti Ramesh, UBS. I have three questions, please. Firstly, on gross margins, good to see that gross margin in combined wealth management increased to 68 basis points. Can you give us a little bit more color on the reasons for the increase and whether we should be seeing this as a welcome outlier? I'm telling you why I'm asking. The combined margin target for Notenstein and the combined Wealth Management is 68 basis points. Notenstein is materially higher. Does the new target then imply a bit of erosion in that asset base? That's the first question. And second one on net new money and loans. I noticed that the loan book grew by €1,000,000,000 since the end of last year. If you could give us a sense to what extent was this Lombard lending and how much did this drive net new money? That would be helpful. And thirdly, Financial Products. If you could discuss a bit the mix shift in the business in Financial Product as a result of the heavy expansion in Asia? Thank you. Yes. So starting with gross margin in combined Wealth Management, the development is more on the B2C part of the business. So within the wealth management, they are the color behind that or perhaps to start I think it's easier to understand the development when you not predominantly think about an increase, but if you think about it as stabilizing. We think that what we tend to see and remember we have kind of a pure top line margin at almost 60 basis points to 55 basis points of that is purely from the security linked business and our part from lending and FX is lower than when we compare it to some of our peers. So we kind of see a stabilizing level of pricing which is supported by the market in a world where we have negative interest rates, low returns, but when you have a bespoke distinct offering, there is still that price point that gets accepted. So it's clearly not something that we expect to continue to erode just for the sake of it. So we see this as stabilizing. The measures behind that were clearly our new product offering, which helps as it makes the offering more modular and more easier to understand to our clients. Linked with that is also a fully value based pricing scheme, which starts at the specific modules of the product offering. And you have also seen that despite the fact we have over the last year slightly increased our lending offering, So I would like to mention that our loan to deposit ratio still stands at 50% of the industry average. So we're not changing our risk appetite. We're simply adjusting to a more or less normal level. When you start at the Notenstein margins, obviously Notenstein numbers are not yet available in our segment reporting. So not all the revenues will end up in combined wealth, but part of it will also end up with our product divisions or with our treasury as we have a different way to allocate revenues. So we do not expect kind of further erosion. The contrary of it, we felt now comfortable in the combination of the measures we have taken, the developments we have seen and the incoming business from Notenstine to clearly commit ourselves to a stabilizing margin at 68% or above. On net new money, I'm happy to pay it over to Martin. For lending. Yes. On the lending position, on the loan position that is up roughly €1,000,000,000 some more detail on that, roughly €200,000,000 are really on Lombard lending and roughly EUR 160,000,000 are on mortgages. The rest has to do with shorter dated and more volatile positions like margin accounts of our clients and or DVPs that are open at the balance sheet date. Then the Swiss Exchange has been reallocated from bank to clients due to regulatory reasons. So the loan growth of €1,000,000,000 is not really all driven by profitable wealth management business. There's a number of other components going into that. Roughly 15% of our net new money was driven by loans. Relative to our peers, we've not seen the phenomenon of a slowing in lumber lending. Some of our peers mentioned that they are the peers that are more U. S. Dollar geared than us. And in the dollar, of course, you've had a rising and a flattening of the curve which makes these loans less attractive. Good. Then coming back to the Financial Product business mix shift perhaps it's worth highlighting that we do the approach to Asia and especially Hong Kong step by step, now the first round was leveraged products on the Hong Kong Stock Exchange. So now for these 1st 6 months, you saw at the margin more leveraged products in the business mix, whereas now we are now entering the next phase, which will also bring investment products and again with higher tenure to the Hong Kong market. So it's not the structural change in the business mix shift. It's more linked to this phased approach into the Asian market. So I propose to give a chance to the people on the call to have first question from Nicholas from Citi. The first question from the phone comes from the line of Mr. Nicholas Herman. Please go ahead, sir. Good morning, gentlemen. A couple of questions, please. Firstly, on Wealth Management, and there's 2 parts of this. Just had to get a follow-up on the gross margin trends. One of the things you referenced there was improvement from new products. I wanted to ask you if you could give a bit more detail of what those new products are? Is this what kind of mandates they are? And what was also the contribution from these new products in terms of volume and margin? Secondly, also within that, net new money was strong. And I'd be interested to know actually, over the past 6 months or a year, could you give us a sense of how much the net new money has been coming from new versus existing clients? I think that would be quite interesting. Thirdly, in terms of Asset Management, the investment performance was a bit weaker than the market expected. And I could be wrong, but my take from your Q1 update was very strong investment performance in Asset Management. And it looked like you gave that back in Q2. And I'd be interested to know your comments there. And then finally, in terms of your treasury income, there's been a significant decline again year on year. About 25 your operating income in your corporate center is about EUR 25,000,000 less than it was in 1H 2016. And I'd be interested if you could please comment on the trends and what you're seeing there? Thanks very much. Okay. So on the gross margin, again that's probably a combination of 3 things. One is simply that the price point in the market itself seems to stabilize at a certain level. 2nd is that we have slowly and within risk limits, but nevertheless built out our lending activities our last year and then the 3rd in the last years. And then the third point is that the products offering and the changed pricing scheme. So I'm happy to give some light on that. I think the most important point is that in the old days, not only us, but most players in the industry tried to figure out more or less in the first meeting with a client if he's a discretionary or an advisory client. And then you got backed into 1 or the other box and the price discussion started with an aggregate fee list that you found on the Internet and then the whole discussion was to go down that starting point. And we have changed that 1st and foremost because we think clients are a little bit more complex and more diverse than that 2 bag approach and that they deserve a more differentiated advisory experience. So what we put now in front of the client is the ability to structure his relationship with us into different compartments. So he may well have discretionary mandate, let's say, for global bond as global bond investing has become quite complex given interest rates and credit risk, whereas many Swiss clients, for example, have their own views on Swiss stocks and may only want to have an advisory relationship where they get our research, they can check with a sparring partner, but they do their own decisions. And then it's a little bit, I guess most people of you have bought a car. So you start then with the price of the different modules. And if you want additional services, you have to pay additional fees. So it's a value based pricing scheme and we think and witness that this approach actually helps clients and advises to get to a better understanding how to really answer the needs of the clients and we also see some increased and at the end service or product penetration out of that as clients who perhaps would have not been interested in a 100% discretionary mandate, obviously, then see the benefit to do, for example, discretionary mandate for parts of their relationship. Overall, we are very happy now. We are around 20 percent advisory penetration. So that's significant and that obviously underpins again our positioning. We are a wealth manager. We are not a custodian or an execution bank. It sounds like you would differentiate the advisory offering than it is actually clearly has also been margin accretive as well then? Sorry, I didn't get it. Actually, it sounds like your differentiated advisory your new differentiated advisory offering, as you put it, has definitely been a margin quite margin accretive then? Yes, absolutely. Yes. Yes. Then we don't disclose the separation of net new money between existing and new clients, but as you may guess from the decoupling between net new money and numbers of relationship managers, we also win share of wallet from existing clients. Then asset management performance, we would have then probably been not sufficiently clear with our Q1 guidance. Sorry for that, if that was your understanding. Actually, we our relative performance was not significantly different between 1st and second quarter. Some of our equity strategies, especially quality growth even did relatively much better in Q2. So we were not giving back that much of performance. I think simply in the estimated total assets under management numbers, the market action that was factored in by some market participants as you have highlighted in your own report was simply too benign. Nobody had 9% market action in the first half year. So that was probably simply a bit over optimistic. And on treasury income, I hand over to Martin. Yes. On treasury income, it has been a hard gain to earn money in euros and Swiss francs for the last couple of years. While over the last couple of years, you could still earn some money in United States dollars, This situation has changed from a treasury perspective in the sense that the 3 to 5 year bond rates have not gone up systematically, the yields that we can earn there. Credit spreads are depressed there. So this is the range where we earn money in treasury, 3 to 5 years, and where we pay money out because we pay money on deposits to Wealth Management, rates have gone up at the short end of the curve where you see the Fed policy raising United States dollars interest rates. So this explains the effects. Okay. So this is what okay, fine. So this is effectively the new base or nothing one off in nature in this result? No, it's not a one off story. It's just a flattening of the United States dollar yield curve. Got it. Thanks. Good. Then we will move back here to the room. We have a question in the last row. Hello. Thank you for taking my questions. Daniel Regli from MainFirst. I have three questions, if I may. First is on costincome ratio targets. I just made some quick back of the envelope calculations and based on your current run rates of revenues and costs. And if I add the rough top line by Notenstern and you once said you target to have a 50% marginal cost income ratio, that revenue I get to a 64% costincome ratio for combined Wealth Management and something above €70,000,000 for the group. So could you maybe give me some more details why you're now and your targets are higher than this? Then secondly, on turnover in Financial Products, you are now close to, let's say, 50% of turnover generated in Asia. Do you is this of any worry for you given that the Asian clients tend to be a little bit more volatile in terms of demand? And thirdly, could you give me in the footnote on Page 11 of the presentation, you say that 52 basis points of the gross margin were driven by commission expense. Could you give me the number in H1 'seventeen? And what was the trend year on year? And have you seen muted client activities we've heard from your competitors? Thanks. Good. So I start with costincome ratio target. So if you flip to Page 26, we have announced the cost income ratio target for combined wealth management of below 70, whereas only at the group level, we keep it as below 72 as obviously the group level also has to absorb non allocatable costs from the corporate center. So but we will share your view that the Notenstern should add significant scalability to the Wealth Management business and therefore have within combined Wealth Management improved our ambitions of the cost to income ratio to below 70. So I think there we are more or less in line. Again, we do not want to starve ourselves with cost income ratio targets. We still believe that we are in an environment where one needs to invest in order to have a seat at the table in the next decades. And therefore, we will also use the additional strength not to go crazy on investing, but to continue with our speed of investing in people, in technology, in branding. So it's not the change in attitude now simply to kind of milk the additional scale to a short term profitability. The business mix between Europe and Asia so far is not in the Financial Products side is not varied to us. And obviously, you also see that from the numbers and the historical development. So turnover has not a linear relationship with profitability. There are differences in markets and products and time periods. We think right now obviously that Asia brings diversification to our book of business as it's also an area that is less kind of muted as Europe sometimes is. So we actually look forward to increase further a little bit the business share, especially also on the investment product side, where we see volumes that are closer to peak volumes that to what the levels what they have ever recovered here in Europe. So it's still a positive for us. And again, we now look at the 6 months where we more or less not only but predominantly had leveraged products out of Asia whereas going forward we also want to build out investment products further in Asia. And then on margins, I don't know if we have the year over year figures? Yes. The one figure that you mentioned on slide 11, 52 basis points commission driven used to be 51 in the first half of twenty seventeen. Good. We have another question on the call from Marco from Goldman Sachs. Mr. Marco Di Martello from Goldman Sachs, your line is now open. Please go ahead. Good morning and thank you for taking my questions. So I would like to ask, you mentioned that there has been no significant change in AUM for Notenstein. Can you just give us an indication of what you expect in terms of client attrition from the transaction? And then just on the revised targets, I think there is not a single one or the one that you revised where you're not either meeting or exceeding it without Rothenstein. So then maybe just again to go back on this, what is driving this somewhat conservative outlook in terms of return on equity, for example? Thank you for these two questions. In terms of attrition, you all are experts. You know the market where attrition numbers in acquisitions normally are. We expect clearly to be at the lower end of that range as we are convinced that we have a strong fit with the clients of Notenstein, Laroche and with the relationship managers that's also what we see in the 1st weeks. So we are successful in retaining talent. We are successful in onboarding the front office people. We plan based on all the locations. So we expect to be at the lower end of what the market sees. Usually in these kind of integration projects, but it's obviously early days and we will be happy to report then in much more detail with our full year numbers. You may touch our targets obviously by yourself. We think to repeat them year after year, It's not even if you made them in 1 6 months, you still have to deliver the same level of growth next month. We will also now have the challenge of that integration going forward. So we think that's a solid sensible set of targets. And as we have shown in the past, we're not shy of surpassing them if we can. Good. Any other questions here from the room? Yes, please. Hello there. Patrick Winters, Bloomberg News. I'm going to go straight to your outlook, where you flagged the possibility that because of volatility, high interest rates, global asset pool might get a little bit smaller over time. At the same time, you're also hoping to increase your profitability targets, cost income ratio is going to come down a little bit. So what are your kind of thoughts on how these two things play together? Because you're saying it could be that revenues get a little bit smaller, at least in Wealth Management, but at the same time, you expect to improve costincome ratio. What are your thoughts there? Yes. Very happy to comment on that. I think the one point on outlook in terms of volatility or interest rates is just a reminder to everybody and also to ourselves, nothing in life is linear, especially not revenues and top line in a financial services company. We can't do anything against it. It's linked to the global market. And we're probably closer to the end of the cycle than to the beginning, and we just should be aware of that. We should also be aware of even if that would happen, we are then not that kind of company who then immediately starts with short term cost cutting in order to protect next quarter's bottom line as long as possible, as long as sensible, as long as we believe in our ability to see through, we will continue with our path as we have done in more difficult years in the past as well. So it's simply a reminder that it's probably not sensible to extrapolate the good development we had just to be on the cautious side and remember that we will not react overly hectic to some dent in top line that is not due to our fact. Why are we still think that we cannot do in 2018 to our 2017 profitability numbers and why we are happy to increase our midterm targets? It's our biggest advantage is we're small. Even if the pump gets smaller, we're so specialized, so focused, we think we can still win market share. We see it. I mean, obviously, the share of passive may even increase in Global Asset Management pools, but the remaining pool in active business is still so big and we are so small and we share and grow. And we think the combination of the organic development we have done plus obviously the synergy potential of the acquisition put us in a position to be confident despite the respect we have for the environment to outdo profitability 2017 and to answer to more ambitious targets going forward. Some of your competitors or quite a few actually have trended in wealth management towards clients, which are entrepreneurs. So they basically want to serve clients, ultra high net worth individuals who are also entrepreneurs and basically building up their own businesses. What is your sweet spot? What kind of client are you basically targeting in Wealth Management? Yes. So first, I mean, we are not very big fans of these wealth bands. In reality, we do not see that actually client needs are fully linear with the wealth band segmentation that most of the industry is doing. So we do not do wealth bands almost at all. So what we try to do it on a need base, so we try to answer to needs of clients and then we talk to entrepreneurs. We're very happy to serve entrepreneurs. We're very happy to serve them on their wealth management side. So we are not the merchant bank or the global investment bank that helps entrepreneurs build entrepreneurial wealth. We're not going into lending. We are very reluctant in single stock lending. We are very reluctant in financing ships. We are not in trade finance. We are here when entrepreneurs start to diversify into financial wealth. That's our sweet spot. And then we are convinced that these people have actually similar needs than, for example, somebody who has inherited wealth. It's about also wealth creation, but also protection across generations. So we really start with our sweet spot is there where we can help the client and where we can make a difference. And we can make a difference whenever it's about advice and running financial wealth. And he may be an entrepreneur, he may have inherited the money, he may have filled the money activities in his generations or across generations, we stick to that. Our sweet spot is the focus of our offering and then we don't care that much if it's a smaller, a mid sized or a larger client. But obviously with that offering, we never target 100% of that ultrahigh net worth individual because then you talk about global custody and reporting and lending, that's not our business. We then target for this 10% or 15% that he wants to have managed globally, actively, across generations or specific carve outs for global equities or whatever. So we start we try to match where we are really good with the need of the client and not with a specific wealth band segmentation. Yes. I think you got more details on this on Slide 36 of the slide that we distributed where you see the differences in segmentation approaches that are in the that happen in the industry. Any other questions? Good. We don't have any others on the call either. So thank you for your interest. Thank you for your questions. We wish you for those of you who can summer break and a successful day. Thank you. 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.