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Missing assets Baer suffers from bullish acquisition

Julius Baer acquired Merrill Lynch's overseas wealth arm in 2012

(Keystone)

Swiss bank Julius Baer has suffered a double blow as yearly earnings fell short of expectations and clients transferring from recently acquired Merrill Lynch funds were set to reach only the low end of its target range.

The Zurich-based private bank, the country’s third largest, posted a lower-than-expected 19% rise in full-year earnings, reflecting legal fees relating to the United States probe of financial institutions which allegedly helped rich Americans dodge taxes.

Baer said it would hit the lower end of its target for the transfer of assets invested by former clients of Merrill Lynch’s overseas wealth arm, which it bought in August 2012. Baer is presiding over a three-year integration during which it hopes to encourage as many one-time Merrill clients as possible to move their funds to the Swiss bank.

Baer had a target to transfer between CHF57 billion ($63 billion) and CHF72 billion of client funds following the purchase of Merrill Lynch’s wealth management business outside the United States and Japan.

The appeal of the deal was to gain greater access to fast-growing markets in Asia and South America and lessen reliance on Switzerland, but it has also watered down Baer’s profitability because the Merrill Lynch assets are less lucrative than the Swiss bank’s.

On Monday the bank announced that in an effort to take advantage of synergies it would cut 400 positions worldwide, and on Tuesday it confirmed that 100 of those would come from Geneva.

‘Blessing of sorts’

The deal, seen as a key test for Baer chief executive Boris Collardi, has also cost the bank more than it bargained for. Last year, Baer said it would spend CHF55 million more than originally planned on its integration.

The purchase prompted a growth spurt as assets surged by more than a third to CHF254 billion, including CHF53 billion in funds from one-time Merrill clients who moved to Julius Baer.

The bank’s net new money stood at CHF7.6 billion for the year, which translates to 4% growth, at the low end of its target for 4% to 6% growth in client funds.

Julius Baer said that after including all costs to restructure and integrate, shareholders’ net profit for the year slipped to CHF187.5 million, down from nearly CHF268 million last year.

While Julius Baer’s profitability was expected to be undermined by the Merrill deal, particularly after a ten-month trading statement in October showed profitability weakening and spending edging higher, analysts said the sum of assets ultimately being acquired showed the purchase hadn’t gone as well as hoped.

However, given the new assets are less profitable than Baer’s own, this may be “a blessing of sorts”, analysts at Deutsche Bank told investors.

The lower numbers transferring also reduces the overall deal price.

Legal bill

Baer also revealed a CHF15 million legal bill relating to the US tax investigation. It is one of 14 Swiss banks being targeted by US prosecutors for allegedly offering hidden offshore accounts to help clients avoid taxes.

Baer, which hasn’t put aside any funds towards a settlement in the probe except to cover lawyers’ fees, said it would like to reach an agreement with US prosecutors as soon as possible.

“Whenever they call us, we’re ready,” Collardi told journalists on an earnings call on Monday.

While Baer, Credit Suisse and unlisted rivals such as Geneva-based Pictet & Cie are in the crosshairs of US prosecutors, attention has shifted to the wider Swiss banking industry.

The US justice department said recently it had received 106 requests from Swiss entities to participate in a settlement programme aimed at ending a long-running probe of alleged tax-dodging by Americans using Swiss bank accounts.

According to executives at some of the 14 banks being targeted, their settlement talks have stalled until investigations into the second-tier, or midsize, banks involved in this programme are resolved.

swissinfo.ch and agencies

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