Asian ambition drives Julius Baer’s BofA move
Michael Maslinski
By buying Bank Of America Merrill Lynch’s wealth management arm, Julius Baer has doubled its presence in Asia, but their new unit needs something of an overhaul if it is to become profitable
At a time when markets are squeezed by economic and regulatory pressure in Europe, achieving critical mass for private banks is crucial. Julius Baer’s acquisition of Bank of America Merrill Lynch’s wealth management unit outside of its core market in the US appears to have done just that.
Merrill Lynch’s business consists of $84bn (€67bn) of client assets and more than 2,200 staff, including 528 client-facing private bankers. The takeover boosts Julius Baer’s assets under management by 40 per cent to SFr251bn (€210bn).
The most important strategic rationale for the acquisition by the Swiss bank is the global shift of economic power from West to East, with increased costs of compliance and doing business constraining serious offshore expansion drives from Zurich.
Size matters
The acquisition will see Julius Baer doubling its Asian presence, giving it scale to compete with larger rivals UBS and Credit Suisse, with the bank’s Asian client assets about to jump from 15 to 20 per cent of the total. Similarly, Western European client assets will now make up just one third of funds, compared to 40 per cent previously.
“The deal will allow Baer to shift its focus away from Europe’s increasing compliance, tax and other regulatory requirements which will lead to margin erosion and net outflows for Swiss private banks,” says Eleni Papoula, an analyst at Berenberg Bank.
What Julius Baer needs to urgently address, according to analysts, is the underlying business strategy of the unit, whose employees currently generate more costs than revenues. Merrill’s wealth management businesses in the Middle East, Europe, Asia and Latin America had a cost-income ratio of 105 per cent, and uncertainty over its future led to net new money falling to 1 per cent of assets.
Analysts claim the difficulties of conducting a sale led to a “special deal” for Julius Baer, which only pays for those assets transferred over.
In difficult market conditions, the private banking industry usually struggles, says private banking consultant Michael Maslinski, believing that in such a scenario, when a business does not fit well with the rest of BofA’s operations, it was the right decision to sell.
“Julius Baer bought Merrill Lynch’s international private banking division because wealth management is core to what they do, while Bank of America is a large group, and its international wealth management operations are a minor part of their business,” says Mr Maslinski.
Plenty left
The wealth management unit “is not a major deal for BofA as the bank still has $1.9tn of assets under management left after the deal and still is the largest wealth manager in the world,” agrees Teresa Nielsen, an analyst at Zurich’s Bank Vontobel.
As well as making losses, the unit had struggled under the BofA brand to drive significant net new money inflows in recent years, despite its footprint in higher growth areas, says Jon Peace, an analyst at Nomura Bank. “Not only should this help profitability, but at the margin it will also free some risk-weighted assets which banks globally are under pressure to reduce to meet capital targets,” he says.
