Ladies and gentlemen, good morning. Welcome to Vontobel's first half 2018 results conference call and live webcast. I'm Irina, the Chorus Call Operator. I would like to remind you that all participants will be listen-only mode. The conference is being recorded. After the presentation, there will be a Q&A session. You can register for questions at any time by pressing star 1 on your telephone. Should you need assistance, please press star 0 to call an operator. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to the auditorium in Zurich. You will now be joined in the conference room.
Everybody, on behalf of Vontobel, together with Martin Sieg, our Chief Financial Officer, welcome to everybody here in the auditorium in Zurich, as well as to all the people who have dialed in to the telephone conference. As usual, I will start with the highlights of our half year results. Our Chief Financial Officer will lead us through the details of the numbers. 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 three 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. 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 a new record high of CHF 253.6 billion. This includes advised client assets of CHF 191.2 billion. The development of these client assets was predominantly driven by strong net new money. Net new money across all business lines totaling CHF 5.1 billion. Our operating income is up by 13%, reaching CHF 583.3 million. 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 132.7 million, which equals earnings per share, which are up almost 30% to CHF 2.28.
This equals an annualized return on equity of 15.1%, 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 CHF 5.1 billion 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, that's why we're happy how scalable our platform is. It is this scalable thanks to cost control and thanks to a very focused business model. That translates into group net profit up 31% to this CHF 132.7 million. We are happy with where the implementation of the organic strategy has led us. We could close the transaction with Notenstein La Roche and the acquisition on July 2nd. 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. We take the opportunity of the 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 Vontobel. 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 of our Liechtenstein business that closed in H1 as well. We will now continue to operate based on the Swiss hub and on our regulatory setup of the banking license in Germany. We're 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.
We will continue to push our investments into the digital touchpoints with our clients, as only digital touchpoints 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, Zeno. Good morning, ladies and gentlemen. Let me start my presentation with the overview of the development of our advised client assets on slide seven. 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 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 first six months to 2018, total advised client assets grew by 2% to a record level of CHF 191 billion, 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 refined 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 advised client assets. 15% stem from the emerging markets and 11% from the United States. Please note that the Notenstein La Roche transaction will be integrated as from July 2nd, 2018. None of the figures presented today contain the upcoming consolidation of Notenstein La Roche. That brings me to our key figures for the first six months 2018 on slide eight.
Vontobel's operating income rose by 13% as a result of the increased asset base and higher turnover in financial products. Whereas 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% to CHF 132.7 million. On an adjusted basis, it improved by 25% in the first six 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 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 203%, and this also significantly exceeded the minimum requirement of 90% defined by FINMA for this year. Our very solid capital position is also reflected in the leverage ratio and 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 29th. 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 101.5 million in the first six months last year.
By taking the CHF 4.6 million cost after tax for the integration of Vescore into consideration, the adjusted group net profit reached CHF 106.1 million in H1 2017. In H1 2018, profit growth of 31% raised our profit to CHF 132.7 million. Starting from the adjusted H1 2017 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 into 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 income ratio improved by 4.1 percentage points to 72% and was three percentage points better than the target cost 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 CHF 1.7 billion of new money in the first six months 2018. This corresponds to 6.4% growth in net new money and is therefore above our target range of 4%-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 CHF 54.9 billion 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 CHF 1.4 billion of assets due to the sale of the Liechtenstein operation.
Driven by organic expansion, combined wealth management was able to increase its assets 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 pre-tax profit to CHF 56.2 million in the first half of 2018. This good progress is also reflected by the cost income ratio, which improved from 75.5% in the first half of 2017 to 69.1% in the first half of this year. The integration of Notenstein La Roche Privatbank AG in the second half of 2018 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%-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 CHF 15 billion, and these strategies attracted more than CHF 1 billion of new money. Assets under management rose by 2% to a new record of CHF 112.3 billion, 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 2018, up 16% compared to the first half of 2017. 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% and a higher pre-tax profit of CHF 92.5 million, 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 Vontobel Financial Products.
Vontobel 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 terms of exchange traded volumes. The 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 four years, Vontobel Financial Products grew its turnover in listed and non-listed Vontobel products by 41% per annum to CHF 24 billion in the first six months. Of this sum, CHF 11.1 billion 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. Vontobel Investment Banking has 16 different platforms and web-based offerings. With our unique and leading multi-issuer platform, Vontobel deritrade MiT, 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 2018, a total of 3.2 billion 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 2018, Financial Products grew its operating income by 11% to CHF 159 million. 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 cost-income ratio up by 2.8 percentage points to 66.8%. Pre-tax profit rose by 1% to CHF 59.1 million.
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 pre-tax 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 pre-tax profit by 46% to CHF 56.2 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 result grew by 33% to CHF 92.5 million.
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 pre-tax profit of CHF 51.9 million in the first half of 2018. Combined Wealth Management and Asset Management accounted for 74% of the pre-tax profits generated by the divisions. This large proportion reflects Vontobel's successful positioning as a wealth and asset manager. Financial Products contributed to 26% of pre-tax profit, excluding the corporate center. Let us finally turn to page 17. Recently, in connection with the acquisition of Notenstein La Roche Privatbank, we have taken measures to optimize our capital structure. As a result, Vontobel 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 Notenstein La Roche transaction was completed on July 2nd, 2018, that is two days after the balance sheet date, it is not 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%. Vontobel will continue to have a solid capital position that significantly exceeds regulatory minimum requirements even after 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 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, Zeno Staub.
Thank you. We continue with the strategy update. In the implementation of our organic growth strategy, we are guided by these five 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 Vontobel 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 touchpoint 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 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, a combined wealth management business that reached CHF 54.9 billion in assets under management, an annual growth of 9%. 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 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 one-third.
Notenstein La Roche 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. 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. 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. 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 six boutiques with roughly one-third in equity, one-third in fixed income, one-third in multi-asset class and quant. It's globalized. We have a strong global footprint in terms of distribution. All the boutiques have strong products that have critical size and critical quality with more than 13 investment products and investment funds breaching the one billion threshold and being rated by four and five stars.
We're also happy where the margin development is going. It is still first 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. I know you are used as regular visitors to management presentation that every company has awards. I would like to highlight only two, which bring across the point of that combination of institutional and wholesale.
We're very proud we have been awarded by one of the most prestigious institutional awards, the UK Pensions Award, as the Emerging Market Manager of the Year, which shows that our products have the pedigree, the quality, the track record, the stability of the team. In the same period, Citywire, one of the leading commentators and advisors 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 Vontobel 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.
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. It's still early days. We're profitable, but this is only a starting point, and we will need to build out and to go into additional activities in the Asian space. So far, we are in line with our own plans. We will add two new markets in Europe. Markets in Europe can be added at very low marginal costs as similar regulatory framework, similar technology. We intend to enter Denmark and Norway. We continue to push our digital edge. deritrade MiT, 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 Cosmofunding, again, with a pure platform approach. Coming soon, we will enter what the thematic 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 outdid 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. 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. Growth targets have to be met each and every year, and only the fact that you made it in one half year does not mean that they are not ambitious in the next half year. 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%-6%. We also confirm capital and payout targets as we could enhance our capital structure and confirm these ratios and payout ambitions also after Notenstein La Roche. We increase profitability targets both at the level of combined wealth management, where we increase the target for our return on assets to 68, and we become more ambitious on the cost-income ratio as obviously Notenstein La Roche will add significant scalability.
At the firm level, return on equity is increased to 14% as a target to be met every year, cost-income ratio is increased to be lowered to 72%. We want to keep up a 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. It has also been one of the key driver for subdued volatility, which was with the first flickering back in Q1, 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. We continue to see a world which sees big change on the technology side that is a strong opportunity, but also obviously a challenge. 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. You have to be selective at the level of investments, while we will as committed as ever to active asset management. Obviously, in this kind of environment, technology is important, capital is important. We are careful with our capital, and we invest a lot in technology. 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. How were the first weeks in H2? They were fully in line with the usual pattern of the summer months. I repeat myself again, July, August, and December usually happen in the second half year.
We see a pattern that is fully in line with that in the first 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. We also continue to see net inflows in the first 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 Notenstein La Roche, 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. Within financial products, we push our market entries in Europe and Asia further. We look for further leverage of our ecosystems and our technology. Thank you very much for your attention. We are 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 colleagues on the telco will not be able to follow us.
For questions, star and one.
In the room, please.
Good morning, everyone. Thomas at Baader Helvea. I have two, three questions. The first question would be on financial products, on investment banking. I see that the expense growth was there quite substantial. You mentioned that there was some investment. Could you give us more details what exactly you invested in?
Yeah.
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 2019. Just these investments.
Yeah.
The second question on the relationship managers hiring. What should we expect there after the integration of Notenstein? Should we expect continued trend of, I don't know, 5% annual, or there will be some change? I don't know. Could you re-highlight what's your target? The last question, it's maybe not so important for investors, but would be maybe interesting for us as analysts. What is the impact of MiFID on your brokerage business? Could you give a bit more details here? Because you mentioned it in the slide that regulatory initiatives, including MiFID, had negative impact.
Yeah. Thank you.
Yeah. On financial products, key costs were related to market entry in Asia, including listing fees. Through times, additional volumes and additional business should then bring the payback on these costs. Do we have additional light on that, Martin?
I think this is the main point.
On relationship manager, 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 it also in H1. We have announced one or two things in Germany, here in Zurich, in Switzerland, for the U.S. business. We continue to do that. 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.
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. 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 of training in the first 18 months because we want to sell the Vontobel way of 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, Our organic growth model is broader, therefore we do not give away hiring targets. We give away net new money targets, there are different ways to create net new money. In terms of message, yes. Our brokerage business is 2%-3% of revenue, obviously it's an important part of our pedigree. It's an important part of our history. That's how Vontobel started. It's important on how we are perceived, especially with Swiss clients, it's important to us, but it has a limited impact on your financial models. Yes, it's difficult. We still think that the pricing schemes that especially some of the non-boutique players are offering are not sustainable in the long term.
Sorry for the gentleman two places to your right. 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, it's a tough business. Yes, we have a next question.
Good morning. Martin Umesch, UBS. I have three questions, please. Firstly, on gross margins. It's good to see that gross margin in combined wealth management increased to 6-8 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 6-8 basis points. Notenstein is materially higher. Does the new target imply a bit of erosion in that asset base? That's the first question. Second one on net new money and loans. I noticed that the loan book grew by CHF 1 billion 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. Thirdly, financial products. If you could discuss a bit the mix shift in the business and financial product as a result of the heavy expansion in Asia. Thank you.
Yes. Starting with gross margin in combined wealth management, the development is more on the B2C part of the business. Within the wealth management, there the color behind that is. 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, 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. 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.
When you have a bespoke, distinct offering, there is still that price point that gets accepted. It's clearly not something that we expect to continue to erode just for the sake of it. 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. You have also seen that despite the fact we have over the last year slightly increased our lending offering. Though I would like to mention that our loan-to-deposit ratio still stands at 50% of the industry average. 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, not all the revenues will end up in combined wealth. Part of it will also end up with our product divisions or with our treasury, as we have a different way to allocate revenues. We do not expect 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 Notenstein to clearly commit ourselves to a stabilizing margin at 68% or above. On that new money, I am happy to give over to Martin for lending.
On the lending position, on the loan position, that went up roughly CHF 1 billion. Some more detail on that. Roughly CHF 200 million are really on Lombard lending and roughly CHF 160 million are on mortgages. The rest has to do with shorter-dated and more volatile positions like margin accounts of our clients and/or TVPs that are open at the balance sheet date. The SIX Swiss Exchange has been reallocated from bank to clients due to regulatory reasons. The loan growth of CHF 1 billion is not really all driven by profitable wealth management business. There is a number of other components going into that. Roughly 15% of our net new money was driven by loans. Relative to our peers, we have not seen the phenomenon of a slowing in Lombard lending. Some of our peers mentioned that they are the peers that are more U.S. dollar geared than us.
In the U.S. dollar, of course, you have had a rising and a flattening of the curve, which makes these loans less attractive.
Coming back to the financial product business mix shift, perhaps it is worth highlighting that we do the approach to Asia and especially Hong Kong step by step. Now the first round was leverage products on the Hong Kong Stock Exchange. Now for these first six months, you saw at the margin more leverage products in the business mix. Now we are now entering the next phase, which will also bring investment products, then again, with higher tenure to the Hong Kong market. It is not a structural change in the business mix shift. It is more linked to this phased approach into the Asian market. I propose to give a chance to the people on the call to have a first question from Nicholas from Citi.
The first question from the phone comes from the line of Mr. Nicholas Herman. Please go ahead, sir.
Morning, gentlemen. A couple of questions, please. Firstly, on wealth management. There's two parts to this. Just like to get a bit of follow-up on the gross margin trends. One of the things you referenced there was improvement from new products. I just wanted to ask you if you could give a bit more detail of what those new products are. Is this custom? What kind of mandates they are? What was also the contribution from these new products in terms of volume and margin. Secondly, also within that, net new money was strong. I'd be interested to know, actually, over the past six 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'd be quite interesting.
Thirdly, in terms of asset management, the investment performance was a bit weaker than the market expected. I could be wrong, but my take from your Q1 update was very strong investment performance in asset management. It looked like you gave that back in Q2. I'd be interested to know your comments there. Finally, in terms of your treasury income, there's been a significant decline again year-on-year. Your operating income in your corporate center is about CHF 25 million less than it was in H1 2016. I'd be interested if you could please comment on the trends and what you're seeing there. Thanks very much.
On the gross margin, again, that probably a combination of three things. One is simply that the price point in the market itself seems to stabilize at a certain level. Second, it's that we have slowly and within risk limits, but nevertheless, built out our lending activities in the last years. The third point is that the products are offering interchange the pricing scheme. 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.
Then you got bagged into one or the other box, the price discussion started with an aggregate fee list that you found on the internet, the whole discussion was to go down that starting point. We have changed that first and foremost because we think clients are a little bit more complex and more diverse than that two-bag approach, they deserve a more differentiated advisory experience. What we put now in front of the client is the ability to structure his relationship with us into different compartments. He may well have a 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 chat with a sparring partner, but they do their own decisions. It's a little bit, I guess most people of you have bought a car. You start then with the price of the different modules, if you want additional services you have to pay additional fees. It's a value-based pricing scheme, we think and witness that this approach actually helps clients and advisers to get to a better understanding how to really answer the needs of the clients.
We also see some increased, 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, a discretionary mandate for parts of their relationship.
Yes
We are very happy now. We are around 20% discretionary and are above 60% advisory penetration. That's significant, that obviously underpins, again, our positioning. We're a wealth manager. We are not a custodian or an execution bank.
It sounds like your differentiated advisory offering has also been margin-accretive as well then.
Sorry, I didn't get it.
Actually, it sounds like your new differentiated advisory offering, as you put it, has definitely been quite margin-accretive then.
Yes, absolutely. Yeah. 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 wallets from existing clients. 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, our relative performance was not significantly different between first and second quarter. Some of our equity strategies, especially quality growth, even did relatively much better in Q2. 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. That was probably simply a bit over-optimistic. On treasury income, I hand over to Martin.
Yes, on treasury income, it has been a hard game 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 three- to five-year bond rates have not gone up systematically, the yields that we can earn there. Credit spreads are depressed there. This is the range where we earn money in treasury, three to five 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. This explains the effects.
Okay, thanks. Fine. This effectively is a new base. There was 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 dollars yield curve.
Got it. Thanks.
Good. We go 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 cost income 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 Notenstein, and you once said you target to have a 50% marginal cost income ratio. The revenue I get to a 64% cost income ratio for combined wealth management and something above 70 for the group. Could you maybe give me some more details why now your targets are higher than this? Secondly, on turnover in financial products, you are now close to, let's say, 50% of turnover generated in Asia.
Is this of any worry for you, given that Asian clients tend to be a little bit more volatile in terms of demand? Thirdly, 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 2017, and what was the trend year-on-year? Have you seen muted client activity as we've heard from your competitors? Thanks.
I start with cost income ratio target. 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. We will share your view that Notenstein should add significant scalability to the wealth management business, and therefore have within combined wealth management, improved our ambitions of the cost income ratio to below 70%. 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.
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. It's not a change in attitude now simply to milk the additional scale to a short-term profitability. The business mix between Europe and Asia so far in the financial product side is not varied to us. Obviously you also see that from the numbers and the historical development. 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 muted as Europe sometimes is.
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 to what the levels, what they have ever recovered here in Europe. It's still a positive for us. Again, we now look at the six months where we more or less, not only, but predominantly had leverage products out of Asia. Whereas going forward, we also want to build out investment products further in Asia. Then on margins, I don't know if we have the year-over-year figures.
The one figure that you mentioned on slide 11, 52 basis points, commission-driven, used to be 51 in the first half of 2017.
Good. We have another question on the call from Marco from Goldman Sachs.
Mr. Marco di Matteo from Goldman Sachs, your line is now open. Please go ahead.
Good morning. Thank you for taking my question. I would like to ask, you mentioned that there's 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? 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 Notenstein. Maybe just again to reckon 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 La Roche and with the relationship managers. That's also what we see in the first weeks. We are successful in retaining talent. We are successful in onboarding the front office people. We plan based on all the locations. We expect to be at the lower end of what the market sees, usually in these kind of integration projects. It's obviously early days and we will be happy to report then in much more detail with our full year numbers. You may judge our targets, obviously, by yourself. We think to repeat them year after year.
Even if you made them in one six 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. We think that's a solid, sensible set of targets. As we have shown in the past, we're not shy of surpassing them if we can.
Thank you very much. It's very clear.
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.
Yeah.
What are your 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-
Yeah
cost income 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. We're probably closer to the end of the cycle than to the beginning, 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 it through, we will continue with our path as we have done in more difficult years in the past as well. 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 market position or our competitive position, but is due to the market factor. Why are we still think that we can outdo in 2018 our 2017 profitability numbers, and why we are happy to increase our midterm targets? 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.
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 have the ambition to do it slightly better than our average competitor. We can still win market share and grow. 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. 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?
Yeah. First, we are not a very big fan 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. We do not do wealth bands almost at all. What we try to do it on a need base. We try to answer to needs of clients, and then we talk to entrepreneurs. We are very happy to serve entrepreneurs. We are very happy to serve them on their wealth management side. We are not the merchant bank or the global investment bank that helps entrepreneurs build entrepreneurial wealth. We are 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. 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. 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. He may be an entrepreneur, he may have inherited the money, he may have built the money through activities in his generations or across generations. We stick to that. Our sweet spot is the focus of our offering. We don't care that much if it's a smaller, a mid-sized or a larger client.
Obviously with that offering, we never target 100% of that ultra-high-net-worth individual because then you talk about global custody and reporting and lending. That's not our business. We then target for these 10% or 15% that he wants to have managed globally, actively across generations or specific carve-outs for global equities or whatever. We try to match where we are really good with the need of the client and not with a specific wealth band segmentation. Yeah.
I think you got more details on this on slide 36 of the slide set that we distributed, where you see the differences in segmentation approaches that happen in the industry.
Any other questions? Good. We don't have any others on the call either. Thank you for your interest. Thank you for your questions. We wish you, for those of you who can, a summer break and a successful day. Thank you.
Thank you.
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