Updated Saturday, October 25, 2014 as of 7:33 PM ET

Julius Baer Full-Year Profit Drops Amid Merrill Integration

(Bloomberg) -- Julius Baer Group, Switzerland’s third-largest wealth manager, said profit declined 30% last year as it absorbed Merrill Lynch businesses acquired from Bank of America.

Net income fell to 188 million Swiss francs ($207 million) from 268 million francs a year earlier, the bank said in an e- mailed statement today, after restating its 2012 earnings. The stock fell in Zurich trading.

“While the result is mostly satisfactory some aspects of the Merrill Lynch integration give cause for concern,” said Alevizos Alevizakos, an analyst at Mediobanca SpA in London. “The second-half gross margin was worryingly low.”

While the Merrill Lynch deal helped boost assets under management to 254 billion francs at the end of December from 249 billion francs at the end of October, Julius Baer has said integrating the businesses, which recorded a pretax loss in 2011, will initially weigh on profitability. The company has said it will cut more than 1,000 jobs at the combined entities to boost earnings from the transaction by 2015.

MERRILL ACQUISITION

Gross margin, a measure of operating income divided by managed assets, at the Merrill Lynch businesses being acquired was 70 basis points in the second half of the year, weakening the margin of the combined businesses to 91 basis points for those six months, compared with 94 basis points in the year- earlier period. A basis point is one hundredth of a percentage point.

The full-year gross margin of the combined businesses was unchanged at 96 basis points compared with 2012, according to today’s statement.

Julius Baer slid as much as 3.7% and was fell 2.7% to 42.87 francs at 9:28 a.m., paring the stock’s advance this year to 0.1%. That compares with a 0.7% gain for the 43-member Bloomberg Europe 500 Banks and Financial Services Index.

“We’re well on track with the integration,” Chief Executive Officer Boris Collardi told reporters on a conference call today. “The focus this year is on transferring the remainder of the assets.”

Julius Baer is targeting 57 billion francs to 72 billion francs of Merrill Lynch assets after it agreed in 2012 to buy non-U.S. wealth businesses from Bank of America. Assets may be reported as units are acquired or transferred and before Julius Baer moves the deposits to one or more of its seven booking centers in Europe, Asia and the Caribbean.

FINANCIAL ADVISORS

The total assets absorbed by the end of the integration process early next year will be “toward the lower end” of that range, the bank said today. Julius Baer reported 53 billion francs of Merrill Lynch client assets at the end of December, of which 40 billion francs was booked and paid for.

Some Merrill Lynch clients chose to follow their financial advisors elsewhere, rather than move their wealth to Julius Baer, and others were refused for compliance reasons, resulting in outflows from units being acquired, Julius Baer said.

“I’m sure management would have liked to have hit the upper end of the target, although not all factors are within their control,” said Andrew Stimpson, an analyst with Keefe, Bruyette and Woods in London.

Net new money outside the Merrill Lynch integration was 7.6 billion francs in 2013, in line with the lower end of the firm’s target range of 4% to 6% annualized growth.

While the company expects inflows from emerging markets in Asia, the Middle East and eastern Europe this year, some European customers will continue to withdraw funds to settle unpaid taxes from the past in their home countries, Collardi said on the conference call.

Julius Baer said it restated results for 2012 in line with revised accounting standards. The firm previously reported net income of 298 million francs for 2012.

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