Julius Baer talks up Merrill acquisition

Julius Baer has unveiled plans to buy the international wealth management business of Merrill Lynch in what group CEO Boris Collardi called “the worst-kept secret over the Zurich summer”.

The deal will see Michael Benz transfer from his post as Asia-Pacific head of wealth management at Merrill Lynch to Asia chairman for Julius Baer, reporting directly to Collardi. Tom Meier remains Asia chief executive and a member of the bank’s executive board.

The transaction will see Julius Baer pay 1.2% of eventual AUM transferred, which it expects to be between SFr57 billion and SFr72 billion. Based on the latter, it will pay SFr864 million for the business.

Julius Baer expects the transaction to boost global AUM by 40% to SFr251 billion, subject to regulatory approval. Include SFr90 billion in assets under custody, and the Swiss private bank will have SFr341 billion in client assets, with a market cap of more than SFr7 billion.

It cements its position as the largest pure-play private bank, having separated its asset management business in 2009. By Scorpio Partnership data it will be the 12th largest global private bank. In Asia, sources estimate this deal doubles AUM to about $70 billion (provided it can keep the assets).

“In a best-case scenario we are expecting a jump of 40% of AUM, that puts us into the sweet-spot category, with critical mass increasingly important,” noted Collardi in a press conference.

But as sources point out, this is a different quality of assets, with more volatility and lower returns at Merrill Lynch, which as a brokerage does not enjoy recurring fee income.

The Merrill Lynch business had a cost-to-income ratio of over 100% and net new money of just 1%. Post completion, Julius Baer is targeting net new money of 4-6% (it was 6% in 1H this year), a cost-to-income ratio of 65-70% (was 70.4%) and a pre-tax profit margin of 30-35 basis points.

One major concern with the acquisition remains whether Julius Baer can successfully integrate a brokerage with a bank. Broker money tends to leave when a broker leaves, so Julius Baer will need to incentivise the brokers to stay.

The question of compatibility was one Collardi was at pains to try and answer during the conference. “We will not be changing our credit policy, the way we advise clients and deliver products and services. We are not intending to onboard a brokerage mentality and culture.”

Collardi went further, saying that during the due diligence process Julius Baer examined Merrill Lynch’s asset allocation and did not find equity-driven highly leveraged trading clients at all.

It found the same regional asset allocation patterns as at Julius Baer, with a higher portion of equity for both businesses in Asia, and a higher penetration of discretionary mandates in Europe.

As part of the deal, Bank of America-Merrill Lynch will provide certain products and services to Julius Baer, including global equity research, corporate advisory and IPO allocation, while there will be a cross-referral of clients between both organisations.

On the Julius Baer side, Collardi highlighted as complementary its credit offering including mortgages, while he added “our clients will be able to take advantage of more trading-oriented processes [at Merrill Lynch] that we will be able to onboard and take over”.

He noted that corporate advisory investment banking services would be offered to its clients in Latin America and the Middle East for the first time – given that these are not covered under Julius Baer’s alliance with Macquarie. It also recently announced a tie-up with Bank of China, as evidence of its strategic focus on growth markets.

In response to a question on whether Julius Baer really needed to have a relationship with a big global investment bank, Collardi replied: “I would say it is a fringe benefit with a nice add-on, but we are not basing our strategy on having an investment bank.”

Collardi noted one of the nice side-effects of this deal was that the majority of Merrill Lynch’s resources would come onto Julius Baer’s international platform, in effect reducing its exposure to Swiss francs. Julius Baer will also postpone its planned IT overhaul to post-completion.

While this acquisition involves overlap in 12 existing markets, it will see Julius Baer add new locations in Bahrain, the Netherlands, India, Ireland, Lebanon, Luxembourg, Panama and Spain.

Merrill Lynch’s business had total AUM of SFr84 billion and a presence in 20 international markets, with two thirds of its AUM derived from Asia, the Middle East and Africa. It has 2,200 staff, of which 528 are financial advisers (which Julius Baer likens to relationship managers).

On the question of staff transfer, Collardi confirmed that it had not yet locked in higher performing RMs and that the process is starting now. “I will be seeing the large majority of FAs over the next three to four weeks. There will be a retention plan for the key people.

“I think we can expect some quality upgrades. Our aim is to attract the best professionals. We will have a fair nomination process with different talents coming from both organisations.”

A spokesman for Julius Baer in Zurich batted away AsianInvestor questions on Merrill Lynch joiners, with a number understood to be on board already. Senior regional staff at Merrill Lynch IWM include Hans Diederen, head of Southeast Asia advisory, and North Asia head Wilson So.

Once the transaction is complete, due by 2015, it is estimated about 50% of Julius Baer’s AUM will come from growth markets, from a third previously, and it will have 800 RMs. 

“This will be good news for clients as we enlarge our product mix, base of advisers and relationship managers,” said Collardi.

The deal will be financed by a redeployment of excess capital, while Julius Baer revealed it would cancel a planned share buy-back announced earlier this year. Some SFr240 million in Julius Baer shares will be issued to Bank of America; SFr500 million through a proposed rights offer; and SFr200 million from the issuance of new hybrid instruments.

The Julius Baer board will also propose to raise a further SFr250 million in new share capital for future strategic flexibility, subject to approval at an EGM scheduled for September 19 this year.