Capital raising: Julius Baer tests its shareholders
Investors baulk at part of rights issue; Collardi talks up transformational deal
In August, Swiss private bank Julius Baer did something quite extraordinary for a European bank. It announced a complex and transformational acquisition, of the international wealth management business outside the US of Bank of America Merrill Lynch, and then went to the equity capital markets to finance it.
Even many bullish equity capital markets dealmakers privately concede that European banks are close to uninvestable right now. It is testament to the high regard in which investors hold Julius Baer and its management team, led by a young and ambitious chief executive, Boris Collardi, that it could even contemplate such a move. Collardi has concentrated the bank on wealth management since taking over as CEO three years ago, dispensing with its old asset management business, and now wants to grow scale and reach into growth markets.
"Julius Baer is a very solid, pure-play private banking organization with a strong management and track record," says one banker. "The deal with Bank of America is relatively complex because it combines business transfers and legal-entity acquisitions. It’s not clear how many client assets or financial advisers will come across. But Julius Baer has protected itself from overpaying."
The Merrill Lynch international wealth management division has SFr81 billion ($84 billion) of assets under management after excluding US clients. Julius Baer, which has SFr179 billion of client assets under management, has struck a deal to pay 1.2% of whatever new assets are transferred to it, expecting that financial advisers at Merrill, which Bank of America has quietly had up for sale for about two years when it has been impossible to attract new money because of the uncertainty of ownership, will welcome the idea of working for a bank whose sole business is private banking.
The deal includes an arrangement to continue deriving research from Bank of America Merrill Lynch. It will also bring the Merrill financial advisers new capabilities. Merrill advisers in Asia have had to book Asian clients in the US. Now, with Julius Baer, they can book them in Singapore and Hong Kong.
Two-thirds of the Merrill business’s assets under management come from emerging markets, notably Asia. The deal will help the Swiss bank achieve its strategic deal of sourcing half its assets under management in growth markets. And it will push the enlarged bank’s assets under management up to roughly half that of global industry leaders such as Credit Suisse.
"It’s good to see a proactive capital raising by a bank designed to take the business forward in line with declared strategy, rather than a defensive deal needed to plug holes," says an equity capital markets banker. "Talking to investors, they are ready to look at each proposition on its own merits, rather than turning their backs on the whole banking industry." As Euromoney went to press, the bank’s shareholders were due to consider approving the rights issue at an extraordinary general meeting scheduled for September 19.
The risk is that some Merrill clients might not recognize the Julius Baer brand or care to come across, while the best Merrill financial advisers will no doubt seek to parlay new contracts from other potential employers. And Julius Baer rather confused shareholders with a wide estimate of between SFr57 billion and SFr72 billion of assets eventually to come across.
Those assets have not been run as efficiently or as profitably at Merrill Lynch as customer assets are at Julius Baer. And although the Swiss bank targets 15% earnings accretion from the deal in the first full year after integration, that won’t be until 2015. Meeting that target will require Julius Baer to bring the cost/income ratio on the Merrill assets under management down from an unappetizing 105% today, towards the Swiss bank’s much healthier-looking 70%. That’s quite ambitious.
Daniele Brupbacher, banks analyst at UBS, says: "The problem I have is that while it could be a success, it could equally be a failure. The risk/reward isn’t great. We calculate a potential 11% return on investment if it is a success but we won’t know whether it is or not for at least three years, more likely five. And they have cancelled a previously announced share buy-back programme that at least offered certainty. Was there a strategic necessity to do this deal? No."
|Boris Collardi has concentrated the bank on wealth management since taking over as CEO at Julius Baer|
The bank’s share price fell in the aftermath of the deal announcement, having run up strongly in the months leading up to it. And while Collardi and the management team went off on a roadshow in late August wooing senior Merrill financial advisers, shareholders’ feet got colder. Adding to their discomfort: the bank’s intention to raise SFr500 million to pay for the deal through the rights issue and then another SFr250 million on top of that to give it flexibility to pursue further deals. Within one week of announcing the deal, Julius Baer was forced to cancel that second SFr250 million portion of the rights issue: not a killer of the whole deal maybe, but a blow nonetheless. Handed that bitter lemon, Collardi strives to turn it into lemonade. "We talk to our investors, we listen to our investors and we respond," he says. "In the middle of a deal there are so many variables. With hindsight we might have communicated better over that SFr250 million portion, which some investors worried might dilute returns from the Merrill deal and which is now off the table. But investors are fundamentally supportive. They told us: ‘If you have another actual deal, we’ll give you the funding for it, but until you do let’s not confuse matters.’"
Collardi has a following among investors, who might have wondered at first if he was the right man to run the bank following the untimely death in late 2008 of Alex Widmer, former head of private banking at Credit Suisse and a consummate and charismatic charmer of ultra-high-net-worth clients. Collardi’s background is as a chief operating officer. Brupbacher says: "In an environment where regulation, processes and controls have become more prominent in banking, it may be that Boris Collardi has exactly the right credentials to run a private bank. I’m sure he comes across very well to the financial advisers and relationship managers."
Collardi remained confident in late August that the deal was on track after meeting the senior Merrill advisers and pointing out Julius Baer’s capabilities and special focus purely on their business. Compensation has been central to negotiations.
At the official unveiling of the deal, Collardi promised it would be transformational but that Julius Baer would not incorporate a US brokerage culture. He tells Euromoney: "We have an entrepreneurial compensation model at Julius Baer that’s quite similar to Merrill’s. The Merrill model pays a slightly higher bonus but after steeper discounts on assets under management. We pay a lower percentage but in a higher denominator so the payouts are quite similar."
And how will Julius Baer manage the ambitious target to improve the cost/income ratio on the Merrill business while still paying the Merrill advisers enough to keep them? He says: "I believe we can increase income now that the Merrill advisers see a future for the business, can do more with existing clients, for example in our credit products, and generate new money. On the cost side, the overhead allocated as being part of the large Bank of America group will be replaced with our much lower overheads. This is a lean organization with no parallel reporting lines to support cross-selling in other divisions."
No doubt too, as the bank will do much greater volumes of business, so it will be able to renegotiate certain supply contracts on better terms.
If the initial fall in Julius Baer’s share price and cancellation of part of the rights issue has dented Collardi’s confidence, he doesn’t show it. "We need to be self-confident. Julius Baer is a market leader and it’s growing. People trust us. We are a pure-play private bank and don’t have an investment bank or a Libor scandal. While the whole private banking industry is asking what the way forward is and the smaller banks are hunkering down in survival mode, we are taking the future into our own hands by acquiring franchises in international growth markets." It’s bold talk. Let’s see if the bank’s shareholders back him up.