Updated Thursday, October 2, 2014 as of 8:32 AM ET

Julius Baer Reports Drop in Margin Amid Merrill Asset Transfers

Julius Baer Group, Switzerland’s third-largest wealth manager, said its gross margin declined as it absorbed Merrill Lynch businesses it agreed to acquire from Bank of AmericA last year.

The margin, which reflects how much the bank makes in revenue on managed client assets, dropped to 97 basis points at the end of October from 102 basis points in the first half, Zurich-based Julius Baer said in an e-mailed statement today. A basis point is one-hundredth of a percentage point.

“The stand-alone Julius Baer business is performing reasonably well but this is a reminder that business may be disrupted during the transition phase,” said Andrew Stimpson, an analyst at Keefe, Bruyette & Woods in London, who has an underperform rating on the shares. “The gross margin at the Merrill units is particularly disappointing.”

Julius Baer dropped as much as 3 percent and was down 1.8 percent to 41.75 Swiss francs as of 10:52 a.m. in Zurich, paring this year’s advance to 29 percent. That compares with a 16 percent advance in the Bloomberg Europe 500 Banks and Financial Services Index this year.

The bank is targeting 57 billion francs ($62 billion) to 72 billion francs of Merrill Lynch assets after it agreed last year to buy non-U.S. wealth businesses from Bank of America. Assets may be reported as units are acquired or transfered and before the the lender moves the deposits to one or more of its seven booking centers in Europe, Asia and the Caribbean.

‘ON TRACK’

Assets under management advanced to 249 billion francs at the end of October from 218 billion francs at the end of June, Julius Baer said, adding that the integration is “on track.”

The transaction has resulted in about 48 billion francs of reported assets, with 29 billion francs booked as of Oct. 31. About 5 billion francs of assets were added since October.

Julius Baer said in July it absorbed 47 billion francs of assets by adding Merrill Lynch units in the U.K., Spain and Israel to businesses such as in Switzerland and Monaco. It also incorporated units in Hong Kong and Singapore, absorbed a brokerage arm in Panama and plans to add offices in Bahrain, Lebanon and the United Arab Emirates before the end of 2013.

More than 1,000 Merrill employees have joined Julius Baer as part of the integration, including 317 relationship managers, who liaisons between clients and the bank.

“The initial phase of transferring businesses is largely completed and now the hard work starts to improve the revenue margin and make cost savings,” said Tim Dawson, a Geneva-based analyst at Helvea SA who has a hold rating on the stock.

MARGIN DECLINE

The margin at Merrill Lynch units slumped to 76 basis points at the end of October, compared with 93 basis points on reported assets in the first half, amid “temporary disruptions” resulting from the transfer process, Julius Baer said. Merrill Lynch customers pay fees on transactions, prompting revenue declines when they trade less.

“Since the end of June 2013, client activity moderated significantly,” Julius Baer said.

While the contribution from the Merrill Lynch businesses to the firm’s adjusted net income is expected to be “slightly negative” in the second half, Julius Baer reiterated its plans to improve profitability. The bank has said it will cut more than 1,000 jobs at the combined entities as it seeks to boost earnings from the transaction by 2015. The Merrill Lynch non- U.S. units recorded a pretax loss in 2011.

Net new money at Julius Baer’s stand-alone business, established in 1890, increased in the four months through October, bringing annualized net inflows to the “lower end” of its 4 percent to 6 percent target range, it said. While the onshore business in Germany had net inflows, some cross-border customers withdrew money to settle unpaid taxes.

The growth in assets under management was also driven by a positive market performance between June and October, Julius Baer said.

 

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