Julius Baer Says Margins Decline Before Merrill Integration

(Updates with Merrill Lynch business in ninth paragraph.)

Feb. 4 (Bloomberg) -- Julius Baer Group Ltd. posted declining revenue margins on client assets as Switzerland’s third-largest wealth manager starts integrating the Merrill Lynch business acquired last year.

Julius Baer fell the most in almost six months in Zurich trading after reporting its gross margin, or revenue generated from the Zurich-based bank’s 189 billion francs ($208 billion) of assets, fell to 94 basis points in the second half of last year from 104 basis points a year ago as clients traded less. A basis point is one hundredth of a percentage point.

“The gross margin is clearly under pressure,” Teresa Nielsen, an analyst at Vontobel Holding AG in Zurich, said in a note to clients.

Julius Baer said in October it may cut more than 1,000 jobs after purchasing Bank of America Corp.’s Merrill Lynch wealth management units outside the U.S. While the deal may boost client assets by as much as 72 billion francs by 2015 as Julius Baer makes purchases to compete with larger rivals UBS AG and Credit Suisse Group AG, the unprofitable Merrill business may increase pressure on the bank’s margins.

Julius Baer dropped as much as 4.1 percent and was down 3.4 percent at 36.28 francs as of 2:21 p.m. in Zurich. That trimmed the stock’s gain this year to 12 percent and valued the company at 8.1 billion francs.

Matching Estimates

Full-year profit rose 15 percent to 297 million francs from 2011, Julius Baer said today, matching analyst estimates.

“Investors will be focusing on whether client activity is picking up in the first quarter and if margins are improving,” said Christian Stark, a Zurich-based analyst with Credit Agricole Cheuvreux.

Chief Executive Officer Boris Collardi said 2013 got off to a “good start,” adding that improving market sentiment is pushing clients to switch into equities, structured products and exchange-traded funds.

Julius Baer started absorbing Merrill Lynch units this quarter, beginning with the 11 billion francs of assets under management at the Swiss business. Baer has seen a “strong commitment” from clients and from financial advisers, Collardi told reporters on a conference call this morning.

The Merrill Lynch business in Europe, Asia and Latin America had about 81 billion francs of client assets at the end of June. Funds under management slipped to 80 billion francs at the end of December after financial market gains failed to compensate for “negative flows” at Merrill Lynch, Julius Baer Chief Financial Officer Dieter Enkelmann told investors at a presentation in Zurich.

Restructuring Costs

While Collardi hopes to attract “the vast majority” of Merrill Lynch financial advisers to work for Julius Baer, their number has dropped to 470 to 480 from 525 last June, the CEO said.

Julius Baer booked 57.4 million francs of integration and restructuring costs, according to the firm. Client inflows totaled 9.7 billion francs in 2012, in line with Baer’s 4 percent to 6 percent annualized growth target.

Assets under management as of Dec. 31 gained from the 187 billion francs reported at the end of October, helped by “a significant positive market performance,” the company said, adding that Merrill Lynch assets aren’t included in 2012 financial reporting.

Attacking Costs

“With the bank missing on gross margin and with net inflows slightly disappointing in the second half we hope for some more bullish remarks from management on client activity in the first half of 2013,” said Andrew Stimpson, a London-based analyst with Keefe, Bruyette & Woods. “Baer can now focus on bringing assets across on to its platform and start attacking costs to drive profitability.”

The bank’s cost-to-income ratio worsened to 71 percent, from 68 percent in 2011.

Julius Baer is one of at least 11 Swiss financial firms under investigation for allegedly helping Americans hide money from the Internal Revenue Service. Credit Suisse Group AG, Switzerland’s second-biggest bank, set aside 295 million francs for U.S. tax matters in the third quarter of 2011.

“There wasn’t much progress in 2012,” in resolving the matter, Collardi told Bloomberg Television in an interview today. “We haven’t made a provision and we’re not disposed of any new information to make a reliably assessable provision.”

While the size of a potential fine remains unclear, Julius Baer said legal and accounting costs related to the U.S. matter totaled 38 million francs in 2012.

--Editors: Dylan Griffiths, Jon Menon.