Baer's Earnings Down in 2011, but Underlying Momentum Remains Good

Friday 10 February 2012

Baer's Earnings Down in 2011, but Underlying Momentum Remains Good

Note: This article is taken from Morningstar's U.S.-based Website, www.morningstar.com. All figures are in U.S. dollars.

by Erin Davis | 07 Feb 12

Julius Baer BAER reported net income of CHF 258 million in 2011, or CHF 1.27 per share, down 27% from the year-ago period. Net income was negatively impacted by noncash amortization of intangibles related to past acquisitions, several one-time charges, including a CHF 65 million settlement with Germany on tax avoidance allegations, and exchange-rate fluctuations during the year. However, net income was also weak on an underlying basis because of poor market performance and low customer risk appetites. Despite this, we see encouraging signs in Baer's results and think the bank is well-positioned to prosper once markets improve. We plan to maintain our fair value estimate.
The brightest spots in Baer's results were its net asset inflows and its related responses to the changing environment for private banking. Net asset inflows of CHF 10.2 billion amounted to a strong 6% of assets under management, and allowed total assets under management (AUM) to remain flat despite the negative combination of market performance and currency appreciation. The majority of these inflows came from fast-growing markets (Asia, Eastern Europe, the Middle East, Latin America, and Russia), which reinforces our opinion that Baer's premium brand will allow it to attract new customers even as Swiss banking secrecy is challenged. Baer expects 50% of its clients to be based in fast-growing markets by 2015 or sooner, which we see as a realistic goal given current growth rates. We're also pleased that Baer is well on its way to resolving allegations that it has helped clients avoid taxes in developed markets. In 2011, it settled its dispute with Germany, and is close to a settlement with U.S. authorities. The bank withdrew completely from U.S. off-shore banking in 2009 and said that those clients had made up less than 10% of its client base at that time. While the bank hasn't announced or provisioned for a settlement, we note that a CHF 100 million settlement would only decrease our fair value by CHF 0.50.
Another encouraging spot in Baer's results is its hefty capital levels. The bank reported a Tier 1 capital ratio of 21.8%. The bank's surplus capital means that it has money to return to shareholders, and it announced a special dividend of CHF 0.40 per share on top of its CHF 0.60 dividend per share for 2011. The bank also bought back 7.6 million shares in 2011 at an average price of CHF 33.40. This is well under our CHF 43 fair value and we see the move as accretive for shareholders. Even better, the bank's strong capital positions it to grow as competitors retrench. The bank discussed its interest in buying the Swiss operations of competitors during its conference call, and we wouldn't be surprised to see a strategic acquisition in 2012.

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