Julius Baer says offshore Europe asset flows stop as agreements loom

European offshore clients are giving Julius Baer Group no new business as they wait to see what happens with Switzerland’s tax agreements with Germany and the UK, the Zurich-headquartered banking group said today.

The agreements are due to take effect next year, forcing Swiss banks to collect and remit unpaid foreign tax on undeclared accounts of German taxpayers.

But the threat is already deterring European offshore clients of Swiss banks such as Julius Baer from adding business.

Chief executive Boris Collardi said his group took no new business from wealthy offshore Europeans recently.

“They are on hold, waiting to see the implementation of [withholding tax] agreements that are signed [by Switzerland with Germany and the UK], but not yet ratified.”

He added: “We have advised our clients to take advantage of any tax amnesty, so clients have in the past already gone for the voluntary disclosure program.”

Collardi made his comments as the Zurich-headquartered group reported full year results. Volatility and strength of the Swiss franc last year nullified net inflows for the 12 months, leaving AuM unchanged at CHF 170bn.

Collardi is confident Switzerland and Germany will reach accord on tax collection, so their agreement can be implemented next year, as planned.

Some German politicians recently put the agreement’s safe passing through their parliament in jeopardy. But Collardi said Bern made it very clear the agreement would not be redrawn.

Senior managers at Julius Baer’s results said they expected some asset outflows in first years of the agreements Switzerland has made.

But Collardi said Julius Baer saw recent “strong growth” from German onshore clients, and Swiss ones, too.

Julius Baer noted a one-off payment of €50m to Berlin “by the latter on 14 April 2011 [to] end the investigations against Julius Baer and unknown employees regarding tax matters in Germany”. This payment was the main reason full year operating expenses increased by 7%.

Collardi said separate discussions about tax with US authorities had been “constructive and we will deliver information in line with Swiss laws and regulations”.

The Julius Baer Group decided to exit the US offshore market in 2009, when AuM in this segment was “a single digit number in the asset base”.

Collardi pointed to emerging markets – the focus of a separate unit with Julius Baer since 2006 – as key for business growth. Collardi aims to have over half its client base in growth markets by 2015, up from about 33% now.

Most of its inflows last year came from growth markets in Asia, Russia, Eastern Europe, the Middle East and Latin America.

Collardi said he was actively seeking M&A opportunities particularly in such markets. The group recently took a 30% stake of Brazil’s Global Portfolio Strategies, leading to “double digit growth” in assets in emerging markets, and made various senior appointments in the markets.

Julius Baer offers yuan-denominated accounts, and filled its QFI quota inside 10 days, Collardi added.

Overall, the group had net AuM flows of CHF 10bn, or 6% of assets, last year. But it lost commensurately large proportions on the value of its investments, and suffered as the euro fell 10% and US dollar lost 15% against its reporting currency (Swiss franc). Collardi expects Swiss franc strength to continue in 2012.

The recent strength, partly checked by central bank intervention, led the group to revise cost income ratio targets over the next three years from 60% to 64%, to 62% to 66%. The rise last year from 65.4% to 68% was “largely the result of the significant strengthening of the Swiss franc”.

One cost that will fall will be Collardi’s salary, which he announced he had voluntarily cut by 10% from 1 September.

The medium-term pre-tax profit margin targets were revised from above 40 basis points before, to above 35 basis points now. The group is aiming for 4% to 6% net new money in the medium term.

It reported today underlying net profit of CHF 452m, down 10% year on year, and adjusted net profit of CHF 401m, down 21%.

The group’s BIS total capital ratio stood at 23.9% and its BIS tier 1 ratio at 21.8% at 31 December.

A dividend of CHF 0.60 per share, and special dividend of CHF 0.40 per share, were declared, as was a new share buyback programme worth up to CHF 500m, to be executed over the next two years.

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