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Edited Transcript of VONN.S earnings conference call or presentation 12-Feb-20 9:00am GMT

Full Year 2019 Vontobel Holding AG Earnings Call

Zurich Feb 17, 2020 (Thomson StreetEvents) -- Edited Transcript of Vontobel Holding AG earnings conference call or presentation Wednesday, February 12, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin Sieg Castagnola

Vontobel Holding AG - CFO, Head Finance & Risk and Member of the Executive Board

* Zeno Markus Staub

Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board

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Conference Call Participants

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* Daniel Regli

Octavian AG - Senior Research Analyst - Financials

* Daniele Brupbacher

UBS Investment Bank, Research Division - MD, Banking Analyst and Head of Equities Research Switzerland

* Samarth Agrawal

Citigroup Inc, Research Division - Assistant VP and Senior Associate

* Thomas Hallett

Keefe, Bruyette & Woods Limited, Research Division - Associate

* Young-Sim Song;AWP Finanznachrichten

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Presentation

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [1]

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So good morning, ladies and gentlemen. Thank you for joining us. On behalf of our full year results, media and analyst conference, a very warm welcome in the name of Vontobel, together with Martin Sieg, our CFO, welcome to you here in Zurich, as well as to all the people who have joined us on the telephone conference.

As usually, I will kick off with a few highlights and a few remarks, then Martin will guide us through the details of the numbers and our annual results, and then I will be back with an update on strategy and outlook. And obviously, Martin and I will be more than delighted to take your questions after our presentation.

So let me stress 3 important points. First, we delivered sensible, solid, robust organic growth with revenues up by 9% and very strong net new money of more than CHF 11 billion at an annualized growth rate of 6.9%. All of this is coming while we are not only protected, but also slightly extending our healthy margin. So proof point and a strong testimony that our quality-led growth strategy works and that the clients endorse our differentiated service offering.

Second, we deliver this robust organic growth with efficient and capital-light business model, delivering return on equity of 14.2% at a Tier 1 capital ratio of 19.9%. And third, we are on a -- well on track on our journey to become a pure-play, buy-side investment firm, as announced on December 9. I'm happy to report that since January 1, we are fully operational in this adjusted setup and also the fact that in 2019, our asset-related businesses delivered 88% of pretax profit, is a strong sign and a strong proof point to the credibility and the viability of this strategic development.

Let's go into the numbers. So client assets by year-end stood at CHF 226.1 billion, of which CHF 198.9 billion in assets under management, which both figures are new record highs in our corporate history. Net new money, predominantly stemming from Asset Management, at CHF 11.7 billion, translating into this growth rate of 6.9%.

Operating income, up 9% at CHF 1,261 million. Group net profit under IFRS, up 14%; on an adjusted basis, up 4%. Earnings per share stands at CHF 4.49, and our Board proposes to the AGM a dividend of CHF 2.25, which is both in line with our commitment to a robust, reliable and long-term dividend policy as well as to a payout ratio of 50%. Return on equity, 14.2%; CET1 at 13.5%; Tier 1 at 19.9%, very solid numbers, heavily above regulatory requirements.

What is behind this set of numbers? We are really happy and proud about how clients continue to endorse our products and services translating into revenue growth, delivering net new money of CHF 11.7 billion and also delivering strong investment performance and strong investment results across our book of business.

Our asset-linked businesses are now responsible for 88% of pretax profit, and they were able to deliver solid, strong growth at stable or even slightly rising margin, which proves that there is a price for quality. We have continued to execute this discipline. In Financial Products, it's an unchanged risk profile, though we're suffering from lower turnover in market which -- but we were able to push our market shares to protect our market shares and to make our digital platforms grow.

The integrations both of Notenstein La Roche as well as of the U.S.-based business of Lombard Odier is now fully completed and digested in H2 of 2019. And we are on this journey to become this pure-play, buy-side investment manager that we aspire to be, and we have started well into the new year working already in the new setup.

That's it from my side with a few highlights and points about the numbers for 2019. I now hand over gladly to Martin who will be providing more insights.

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Martin Sieg Castagnola, Vontobel Holding AG - CFO, Head Finance & Risk and Member of the Executive Board [2]

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Thank you very much, Zeno. Good morning, ladies and gentlemen.

I would like to start my presentation by looking at the development of advised client assets on Slide 7. For Vontobel as a wealth and asset manager, advised client assets form the basis for the continuous generation of fee income. Consequently, the volume and the composition of those assets are important factors determining our success.

As you can see on the left-hand side of this slide, over the last 5 years, we were able to grow our advised client assets by 11% annually. In 2019, total advised client assets increased by 17% to CHF 226 billion and assets under management by 16% to CHF 198.9 billion, both represent a record level. The increase was driven by strong net new money of CHF 11.7 billion, a 6.9% growth rate, and positive performance of CHF 20.5 billion, including the negative FX effect.

Here on Slide 8, you can see an overview of our diversified asset base. In recent years, we have invested systematically across all divisions in the expansion of our business in our home Swiss market and our defined focus markets. These investments are reflected by our well-balanced global private and institutional client base. As you can see from the chart on the left-hand side, today, 41% of our assets stem from Swiss clients. This is slightly lower than last year as our Asset Management business has grown strongly internationally. The rest of our advised client assets are broadly diversified across Europe, emerging markets and United States.

From a product perspective, we also have a very good level of diversification at Vontobel. Equity investments represent around 1/3 of advised client assets, and multi-asset and fixed income each around 1/4. Our clients in Combined Wealth Management hold around 20% of their assets in liquidity. At a group level, this represents around 6% of assets. Other includes structured products and the Private Label business. Our client base is also very well diversified across private clients, institutional and intermediaries. And we have a good level of diversification across currencies with the Swiss franc, euro and the U.S. dollar each representing 20% to 30% of assets under management.

Let us take a closer look at the development of operating income on Slide 9. Operating income rose by 9% to CHF 1.26 billion. In recent years, Vontobel has successfully transformed itself from a financial institution that focused predominantly on the Swiss market into an established and globally active wealth and asset manager. Compared to 2018, Asset Management generated an additional CHF 46.6 million and Wealth Management an additional CHF 71 million of operating income in 2019, mainly driven by the increased asset base.

Financial Products' share of operating income declined in 2019 due to tougher markets with lower volumes and tighter margins. In the corporate center, operating income increased slightly due to the special dividends distributed by the SIX Group AG. The continued shift toward Asset and Wealth Management is also shown by the significant contribution from fee and commission income, which accounts for 68% of operating income. Commission income grew by 9% to CHF 859.2 million in 2019, driven by a 14% increase in advisory and management fees.

The environment continues to be influenced by the growing trends toward all included mandates in Wealth Management as well as the impact of regulatory changes. Trading income grew by 5% to CHF 310.8 million in 2019 compared to the previous year.

Managing the bank's balance sheet while maintaining a conservative risk profile is especially challenging in an environment of continued extremely low or negative interest rates. As a result of our active and systematic treasury management, a slight increase in loans to clients and the one-off dividend distributed by SIX Group of CHF 6.9 million, net interest income rose by 18% to CHF 84.4 million. Excluding this one-off income, net interest income increased by 8%. Other income increased from CHF 5.1 million to CHF 7.5 million, reflecting the sale of debt instruments in financial investments.

Looking at the development of pretax profit on Slide 10, you can see that it reached CHF 276.2 million in 2018. In connection with the integration of Notenstein La Roche, we incurred one-off costs of CHF 20.3 million. Adjusted for these integration costs, pretax profit was CHF 296.5 million in 2018. In 2019, we achieved a pretax profit of CHF 306.7 million. Adjusted for the integration cost of CHF 11.1 million related to Notenstein La Roche and of CHF 0.7 million related to the U.S. private client portfolio of Lombard Odier as well as the positive impact of the special dividend paid by SIX of CHF 6.9 million, our adjusted pretax profit was CHF 311.6 million.

On a reported basis, pretax profit was up 11%. And on an adjusted basis, it rose 5%. The cost/income ratio on an adjusted basis was 75.1%, slightly higher than in the prior year due to ongoing investments in international markets and innovative platforms. Despite the difficult market environment, we are continuing to invest in all our businesses while, of course, pursuing an entrepreneurial approach to cost management.

Group net profit, shown on Page 11, was CHF 265.1 million, up 14% or 4% on an adjusted basis. One-offs included the impacts mentioned on the previous slide, plus a one-off tax benefit. This reduced the tax change by 5 -- the tax charge, excuse me, by 5% to CHF 41.6 million. This tax relief of CHF 10.3 million is due to the change in the tax law in the Canton of Zurich. This resulted in a lower tax rate of 13.6% compared to 15.9% in the previous year. Excluding all these impacts, the tax rate would have been around 17%. The tax rate we expect going forward is in the range of 17% to 18%. Earnings per share rose by 13% to CHF 4.49. The return on equity reached 14.2% in 2019 and was thus above our 2020 target of 14%.

Let us turn to Page 12. The CET1 ratio at the end of December 2019 was 13.5%, 1.2 percentage points above the CET1 ratio at the end of 2018. The total capital ratio was 19.9%, up from 18.9%. These numbers are not fully comparable since Vontobel adopted the new IFRS standard 16 on leases at the start of 2019. Excluding this impact, our CET1 ratio would have been 13.8% and the total capital ratio of 20.4%. Both ratios significantly exceed the minimum requirements defined by FINMA, which are a total capital ratio of 12% and a CET1 ratio for Category 3 banks, including Vontobel, of 7.8%. Vontobel will maintain its solid capital position that significantly exceeds regulatory minimum requirements.

Asset Management generated strong net new money of CHF 11 billion in 2019, corresponding to net new money growth of 10.8%. We are thus well above our 4% to 6% target range for net new money growth and clearly above the market average. This figure has to be viewed in the context of an asset management industry that once again experienced very weak flows in 2019. Inflows at Vontobel were broadly diversified across Fixed Income, Multi Asset and the Sustainable Equities boutique. A proportion of inflows originated from our investment business with Raiffeisen. The good quality of our products and our strong distribution platform were the key drivers of our net new money growth.

Assets under management at the end of December 2019 were CHF 121.6 billion, an increase of 17% compared to the end of 2018, despite reclassification and divestments totaling CHF 5.1 billion. The increase in assets under management was strongly supported by good performance of 11%. Advised client assets increased by 17% to CHF 137.7 billion.

Let us turn to Slide 14. The current gross margin in Asset Management of 45 basis points reflects the broad diversification of our products across equities, fixed income and multi-asset and quantity strategies for institutional and fund clients. The increase in the margin in 2019 is the result of a slight shift to higher-margin products, an increase in performance fees and the effect of the reclassification of assets into other advised client assets. The latter accounted for 1.4 basis points of the increase.

As a result of the systematic execution of our growth strategy, we delivered a 10% increase in operating income in 2019 compared to the previous year. With the ongoing investments, operating expenses also grew at 10%. This resulted in a cost/income ratio of 61.2%, which is within our 2020 target range, and a pretax profit of CHF 198.3 million. With its substantial profit contribution, Asset Management was once again the main earnings driver at Vontobel.

Let us turn to Combined Wealth Management on Slide 15. These activities encompass Wealth Management as well as our business with external asset managers. Building on its existing activities, Combined Wealth Management acquired CHF 0.5 billion of net new money in 2019. This corresponds to a 0.8% growth in net new money rate, clearly, below our target for 2020. In addition to generally slow growth in the industry in 2019, we witnessed outflows in our Basel branch, but they were more than offset by inflows in other locations. We remain convinced that our underlying structural growth path is intact, and we are committed to our 4% to 6% net new money target in 2020.

Assets under management in Combined Wealth Management grew to a new record of CHF 75.3 billion in 2019, driven by strong investment performance of 12.8%. Additionally, the acquisition of the U.S.-based private client portfolio of Lombard Odier added CHF 0.7 billion or 1.1%. Advised client assets reached CHF 76.5 billion at the end of 2019, an increase of 14%.

The systematic client focus and ongoing enhancement of our advisory process in Combined Wealth Management are not only reflected by the continued growth in advised client assets. The strong process -- progress in this business is also demonstrated by the stabilization of our gross margin as well as our strong operating efficiency and profitability, as you can see on Slide 16. Despite the risk aversion of many investors reflected by the high level of cash in the portfolio of the private clients, the gross margin stabilized at 68 basis points.

On the back of record client assets, we succeeded in increasing our operating income by 17%. Operating expense, quite a slow -- a slightly lower rate of 15% despite investments in our digital platforms, for example, Volt, and in focused markets. This development reflects the cost synergies achieved with the acquisition of Notenstein La Roche. Consequently, Combined Wealth Management delivered an increase of 21% in pretax profit to CHF 147.4 million in 2019. This progress is also reflected by the good cost/income ratio of 69.5%, in line with our ambitious 2020 target.

Slide 17 demonstrates the strong market presence of Vontobel Financial Products and the importance of our digital channels. Vontobel is one of the world's leading providers of structured investment products and leverage products with an overall market share of 12.5% in Europe. The largest share we have is in our Swiss home market with 32%, measured in terms of the exchange rate volume in the target segments.

In Hong Kong, our market share was 1.5% in 2019. The international expansion of our Financial Products is well advanced. In addition to our existing markets, we started market making in the Danish market segment of the new growth market in Stockholm in January 2019. On our digital platforms, we attracted CHF 9.2 billion turnover, up 53% year-on-year. Now serving 89 banks with more than 550 external asset managers, the platform again attracted a higher volume in the SIX Exchange segment for yield enhancement products.

Operating income decreased by 7% in 2019, reflecting lower trading volumes in structured products and warrants, margin pressure and lower operating income in brokerage and corporate finance. The cost base did not immediately reflect the development of operating income. It was down 1% and will adjust over time as a result of our entrepreneurial approach to cost management.

Consequently, pretax profit fell by 25% year-on-year to CHF 47.2 million, which you can see on the next page. Lower pretax profit in Financial Products was more than compensated by Asset Management and Combined Wealth Management, which both delivered a substantially enhanced profit. Our operational strength in Combined Wealth Management and the acquisition of Notenstein La Roche resulted in a strong improvement in pretax profit of 21% to CHF 147.4 million. The positioning of Asset Management as a high-conviction manager and the diversification strategy we introduced some time ago are continuing to prove successful. The pretax result in Asset Management rose 10% to CHF 198.3 million.

Combined Wealth Management and Asset Management accounted for 88% of pretax profit, underpinning the credibility of our journey to become a pure-play investment manager. This large proportion reflects Vontobel's successful positioning as a wealth and asset manager. Financial Products contributed 12% of group pretax profit, excluding the corporate center.

On December 9, we announced our new focused strategy. Zeno will discuss this again in the second part of the presentation, but I would already like to take the opportunity to mention a few numbers related to our divested sell-side and transferred businesses as well as the immediate synergies we realized with the new focused strategy. Let me repeat what we said before: our new focused strategy is not a cost exercise. We are redefining the way we work together in order to better position Vontobel for future growth.

What should be expected on the revenue side without brokerage and corporate finance? In 2019, corporate finance generated CHF 6 million in revenues and brokerage generated CHF 20 million. These revenues were offset by cost of CHF 5 million in corporate finance and CHF 21 million in brokerage, meaning that overall, these businesses were breaking even. Now with the divestment of the sell-side business, we will no longer generate part of these revenues. The research team and the corporate finance team will be transferred to Wealth Management, where they will focus on buy-side research and advising entrepreneurs and ultra-high net worth individuals. Already, in 2020, we expect these teams to generate roughly CHF 14 million of operating income with costs of CHF 17 million. From hereon, we expect the businesses to grow.

The divestment of the sell-side business will lead to around CHF 2 million of one-off restructuring costs. However, with our new setup, we realized immediate synergies of CHF 8 million. This included streamlining our structured product offering and creating synergies by bundling the services of the 3 divisions as part of our focused strategy. This has by now been implemented. Overall, this results in a positive impact of CHF 3 million.

That brings me to the end of my remarks. Before handing over to our CEO, Zeno Staub, I would quickly like to give you some key dates from our financial calendar. At the General Meeting of Shareholders at the end of March, we will give you a short trading update. And in June, we will present the new reporting structure with our 2019 figures. Half year results will be announced at the end of July, as usual. We will also present our new midterm targets at that time. In September, we will invite you to our Investor Day to give you more details on our strategy and targets. And in November, we will issue a short 9-month trading update before presenting the full year results again in February '21.

With that, I thank you for your attention, and I hand back to Zeno. Thanks.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [3]

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Thank you, Martin. Let's go back to our strategy update and outlook. Every sensible and credible growth strategy has to start with a client's problem that you need to solve and that you need to solve better than your competitors try to do it.

So what is the client problems that we at Vontobel try to solve? It is the challenge of investors to protect and build their wealth through time. And we are convinced that the need for professional investment advice and investment solutions has never been bigger and will continue to grow over the next years.

Why? First of all, the simple way of protecting and building wealth, which was called saving, is dead as negative interest rates do not compound. As the tide of very loose monetary policies have lifted all the boats, expected returns of off-the-shelf, passive products are very low, so the expected return of passive-only does not satisfy the needs of investors.

Nevertheless, the general public is still holding too much cash. According to a public research, people across Europe with bankable assets of up to CHF 1 million still hold 80% of that in cash. And thirdly, as the Group of Thirty has very impressively reported by the end of last year and -- is the G30 country, there is a gap of $15.8 trillion in pension fund assets in order to fulfill the existing promises.

So the need for investment advice for investment solutions is strong. At the same time, the way how clients are looking for advice, selecting partners, interacting with their providers and deciding on their journey is developing and is heavily changing. We were used to control physical journeys that we controlled. Now our clients control the digital journeys for which they interact with us. That's why we believe that we have to combine our strong investment pedigree with a technology skill set that allows us to produce this client centricity and the relevance of each and every client interaction.

In order to answer to this channel -- challenge, we have adapted our way of working and how we set ourselves up. So we have combined all client-facing activities into 4 client units that are geared towards distinct client needs, be them Asset Management needs, Wealth Management needs, or we partner with other intermediaries through platforms and services or we reach out directly in a digital way to our end clients. These client units are then supported by centers of excellence. The most important ones, obviously, investments and technology and services.

Within investments, we now combine, on a global basis, 300 investors located in New York, London, Zurich, Hong Kong and Singapore that look after the CHF 200 billion in assets under management that clients have entrusted to us. And technology and services provide the processes, the platforms, the technology, the data analytics in order to help and support the client units in delivering the best of what we have to offer to our clients.

A key success factor of this journey is, obviously, the quality of our investment capabilities. So let's have a look. This chart shows very clearly that we have the privilege to have, across asset classes, from equity to fixed income to multi-asset class, very strong relative outperformance and very strong relative positioning against the industry. We're also very proud about the fact that we have very long tenures with our teams, very long-term stability as 5 of these funds even have track records going back to almost 30 years. We're also happy to report that also our Wealth Management investment offering is clearly claiming a first quartile position and we had -- that we have a lot of very successfully managed themes and investment opportunities offered to our Wealth Management clients.

That quality of investment results translates into growth. So what you see here is how, at the European level, all 1,500 competing fund distributors have performed in 2017, where everybody had a good year; 2018, where nobody had -- almost nobody had a good year; and in 2019, the industry was doing so-so. We have been able to deliver substantial growth in each and every of these years and in each and every of these environments, thanks to the quality and the breadth of our product platform, thanks to our regional presence that we keep expanding, both in Europe as well as in other theaters, and thanks to an increasing focus on global banks and distribution partners.

Let me go more in detail in a few of our key capabilities that are of relevance to all our client units and to all our client groups. And now -- as by now, everybody is talking ESG, I would like to give you some insight about the position of Vontobel in this very important topic of ESG. We have been starting ESG, investing in 1998, so we have launched the first product, that we're integrating and respecting ESG criteria more than 20 years ago. We are a signatory party to PRI since 2010. We are, as a whole company and as a whole firm, climate neutral since 2009. And on a global basis, we have more than 40 investment professionals that lives and breathes ESG. That has translated into more than 26 strategies across equity, fixed income and multi-asset class that we put at the disposition of our investors that respect and integrate ESG criteria. It has made us #3 in ESG investing in Switzerland. And we're very happy and proud that the clients entrusted us CHF 30 billion in ESG-related assets to look after.

Other very important trends and topics where we see constant demand and where we have established to be one of the leading providers of know-how, of expertise, of products, of solutions is surely emerging markets. We all know that -- where the growth and the relative growth of global GDP is going. We are convinced that allocations to emerging markets will grow through time. Vontobel today is one of the largest active emerging market managers across Europe. We are now running over CHF 30 billion in emerging market-related assets, again, across all asset classes in composing equity and fixed income.

I've already touched the ESG topic. Another important thing, obviously, fixed income in a world of negative interest rates where long only simply holding government bonds will not generate any recurring yield. Yield and income are obviously one of the most scarcest resources on this earth. And therefore, the demand for clients for more sophisticated, more professional risk-based investment approaches into the fixed income world are only demanding.

We now have very strong boutiques. On the one side, we're very proud about and happy with the development of TwentyFour based out of London and also with the Fixed Income teams based here in Zurich. And we posted a growth of 26% last year, now running CHF 45 billion in fixed income. I think it's also a testimony, despite the strong growth in fixed income, we concentrate, obviously, on these most sophisticated, most demanding approaches to fixed income investing as we had this growth in fixed income while, at the same time, slightly increasing the margin in Asset Management from 42 to 45. We are very convinced that these topics will continue to drive investor demand and investor need, and we are very committed to be one of the key providers in solutions in emerging markets in ESG and in sophisticated fixed income solutions.

How do these results compare against our existing 2020 targets? We meet most of them, except the cost/income ratio. We are aware of that. But we are also in line with our approach that we will continue to not sacrifice midterm growth potential for short-term cost or profitability increases. We will continue to manage costs cautiously, to manage cost in an entrepreneurial way. But our first priority is the viability of the company and the ability to deliver growth through time.

How does this translate now into 2020? First of all, we have a strong base with assets under management and advised client assets that we had by year-end. So we have assets under management of CHF 199 billion and advised client assets of CHF 226 billion, which is an increase of 17%, which is obviously the base for our recurring fee income and for the revenue development going into 2020. We are convinced that the focused strategy we communicated on December 9, with going pure-play, buy-side investment firm and understanding the investment capacity and the technology skills as our 2 main capabilities put us in a good position to master the future successfully.

In 2020, we will continue to drive our regional footprint in the Asset Management distribution side. We have announced the office in France, which is the third largest -- is among the top 3 fund markets in Europe. We will have boots on the ground in Japan in autumn this year, and we continue to expand in the U.S. We will further foster our offering to serve global banks across all theaters from the U.S. to EMEA to Asia.

Within Wealth Management, we are back as an employer of choice. We are back to hire relationship managers. And we also are confident that the bundling of the capacities and of the skills of capital advisory and of bottom-up research will help us to address different client segments.

Within Platforms & Services, we think that our technology, our platforms and our products and investment skills put us in a prime position to be the leading partner to other wealth managers in Switzerland, Germany, Hong Kong and Singapore. And we continue to look for ways to serve the end client directly through digital channels in our digital investing endeavors.

How has the first few weeks of the new year been? We had a strong start into the new year. We continue to see strong development of revenues based on asset development, and we continue to see strong continuing net new money inflows. Overall, we remain respectful to the environment in the new year. We keep seeing the same challenges, more a dampened global growth. So we are still expecting the world economy to continue to grow, but there are challenges to that. We have a global political uncertainty. We will go through a number of elections in this year and, obviously, negative interest rates are here to stay. So we are respectful to this environment, but we are convinced that as a very focused, quality-led firm, we will continue to make a difference in this kind of environment.

Thank you very much for your attention, and Martin and I will be very happy to have your questions. For those in the room, please wait for the mic as we have quite a few people on the call that have no chance in understanding you otherwise.

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Questions and Answers

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [1]

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So we have first questions from the back. If you could quickly introduce yourself to also for the people on the call, please?

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Operator [2]

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(Operator Instructions)

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Daniel Regli, Octavian AG - Senior Research Analyst - Financials [3]

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This is Daniel Regli from Octavian. My first question is regarding your cost/income ratio target for 2020. Obviously, this is 3 percentage points below the 75.1% you had on an adjusted basis. If you could give me or give us a breakthrough how you want to get there. Is this purely increased operating income, of course, excluding the closure of the brokerage impact? Or is this also including some kind of cost savings?

Then question two is on the Slide 10, I think, it was or 11, where you show the 2020 impact of your decision to close the brokerage. And there, I was just wondering what exactly is this about? CHF 14 million, you expect from new businesses or transferred businesses from revenues. It's Page 19, sorry, Page 19. And maybe also, again, about this minus CHF 8 million, you've seen focus on synergies. Maybe if you can explain to me a little bit further how exactly you achieved this minus CHF 8 million on the cost side?

And maybe third, regarding the closure of the brokerage, can you give us an indication about the capital consumption of the business or how much capital is going to be released from this decision?

Then my third question is regarding the dividend payout, and you have now paid out just above the target of 50%. You're quite substantially above your CET1 capital targets. Why have you decided to only propose a dividend payout of 50%?

And then maybe fourth question. Could you give us an indication about the outlook or the start in 2020 with regards to Financial Products and, particularly, what you see there? What do you expect in terms of margins and turnover? How should we look at 2020?

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [4]

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Good. Thank you for these questions. I hope we have enough time for other questions, too, but that's fine. So I'm very happy to try to, together with Martin, to answer your questions. And we are also very respectful to the changes that we implemented in brokerage and corporate finance and are aware that this is affecting people and also affecting part of our history and our DNA. Nevertheless, allow me one sentence before I go happily into all your details. We are talking about 1% of our total revenues. And we all know that a little bit of volatility in global markets is more affecting the top and the bottom line than transactional revenues contributing 1% to the top line.

Having said that, let's go into all the details. So cost/income ratio, perhaps if I -- I know we have not met yet that target. I would dare to remind that we only increased it a year ago, so we actually had a 75% target before. And then we expected the scaling opportunities of Notenstein La Roche to come through and increase the target. Actually, the scaling and the profitability uptake in Wealth Management is fully here. If you do the 3-year number comparison, Wealth Management changed from contributing CHF 80 million pretax to CHF 150 million pretax. So we realize that business case, but due especially also to lower turnover on the SP side, we are not yet there where we want it to be. So you always have to work on both sides on the equation of the cost/income ratio. So I happily admit that we concentrate on working on the revenue side. And as long as we see revenue growth and as long as we are convinced that the investments translate into growth, we will continue to do so.

Nevertheless, I think we have also shown over the past that we are entrepreneurial, that we are cautious on cost management and on development of our cost base. And I would expect that our new way of working and our more bundled approach to resource allocation leads to more efficiency. So again, it is not a priority that tops midterm growth to reach the cost/income ratio in 2020 through short-term measures on the cost side.

Then brokerage on Page 19. So it's a number of activities that stays with us, and we're very happy that we can keep up that talent and that skill set. And for example, obviously, the former corporate finance team has always done a number of advisory business that were not related to sell-side capital business. So we keep these mandates and these clients, and we continue with that business. And we keep also these revenues and businesses where we have implemented the research content in a buy-side context. So as you may know, the research content is also implemented through investment certificates and other ways of having access to this source of alpha. And we will continue with that, and that's our current best estimate that this will lead more or less to these revenues.

And then on the cost side, this is really simply immediate effects from bundling resources in centers of excellence. And second, also, we -- as we have these ambitious growth targets, we know we have to concentrate on business cases that has the potential to deliver outstanding growth. So we refocused the number of business cases, very small ones, where we would not see the midterm potential. That's already implemented and done, and that led to a number of cost savings.

Martin, can you comment on the capital consumption from brokerage?

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Martin Sieg Castagnola, Vontobel Holding AG - CFO, Head Finance & Risk and Member of the Executive Board [5]

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Yes. Neither corporate finance nor brokerage created any risk-weighted assets in the market or in the credit risk side. So the only thing that changes is really the CHF 12 million decrease in operating income that will lead to 12% of these CHF 12 million, less operational risk, so that's an absolutely negligible figure regarding the BIS ratios.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [6]

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Good. Then I'm back with dividend payout. We were expecting this question, obviously. Let me stress how we think about our dividend policy. A number of thoughts. We are convinced that the key driver for U.S. investors is reliability and robustness of our dividend stream, and we are very committed to that reliability and to that robustness. As you have seen from the historical track record, I think with 1 or 2 exceptions, there were never lowering dividends. And we are very committed to protect reached levels of dividends.

I would also like to remind that this company has managed to pay a dividend in each and every year since it went public in 1986, including all the years of the global financial crisis. And we all know that if we put all of this into a discounted cash flow modeled effect, that you can expect very reliably a sensible dividend in each and every year is the more important value driver than the question if it's short term, CHF 0.05 or CHF 0.10 more.

Second, we also would claim that we -- it is about the combination of the robustness of the dividend stream and our ability to put retained earnings to work. We do not see ourselves as a business that has no growth potential and that just has the privilege of being a cash flow rich and we should give everything back. We can and do deploy capital, we think, at sensible compounding rates at 14% return on equity. So we think the combination of the growth we deliver through the retained earnings and the reliability and the robustness of the dividend stream should make a sensible package to a long-term investor.

And outlook, Financial Products, pretty strong development in market shares in the first weeks. And -- but that was to be expected as January '19 was weak. But in terms of turnover and client-driven business, significantly beating January '19.

Okay. Then we move on to the next question to the front row.

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Young-Sim Song;AWP Finanznachrichten, [7]

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I'm Song from AWP. I also have a question regarding the restructuring. I would like to know if all the remaining, about 20 employees, have been transferred to Wealth Management? And also, I would like to know if -- another question, if -- in the Wealth Management, which regions have been the most difficult? And which regions have been easier or better? And also, do you expect an improvement this year?

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [8]

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Yes. So on the first point, yes. All the changes and the implementation steps that were related to the divestment of the pure sell-side business are done. And for every employee and team member, there is clarity about his or her role and how we move forward.

Second point, perhaps one important thing, all the regions that were not affected by the integration works has delivered net new money growth in 2019. So we know that the underlying ability to generate net new money is here, not in all, according to our own ambitions, but these ambitions are also respectfully high. There is no particular picture where I could say this region is more difficult because we have already fairly concentrated book of business, our focus markets, and we had similar patterns across these, obviously, with the exception of Switzerland where we had to digest the integration.

So going forward, we are structurally confident. We think that we should also not forget that in '18 and '17, we delivered sensible growth, so we know how to deliver these kind of results. And we are back in implementing these measures in order to bring us a robust organic growth.

We have a question now from the call. Maybe quickly hand over to Citigroup coming in from the call.

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Operator [9]

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The first question from the phone comes from Samarth Agrawal from Citigroup.

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Samarth Agrawal, Citigroup Inc, Research Division - Assistant VP and Senior Associate [10]

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This is Samarth Agrawal on behalf of Nicholas Herman. I have 3 questions. The first related to margins in Wealth Management. Given that you are already at 75% mandate penetration, what additional levers do you see to sustain margins at 68 basis points?

The second question is related to net new money growth. And perhaps, so you are targeting 4% to 6% net new money growth in 2020. How do you relate the decline in relationship managers with your net new money target? Some commentary about that would be very helpful.

My third question relates to Asset Management cost. Particularly, if we -- if revenue environment deteriorates in 2020, how much cost flex is there in Asset Management division?

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [11]

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Thank you. Could you please reiterate the last sentence of your second question? The net new money growth in relation to relationship manager, I didn't quite get that.

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Samarth Agrawal, Citigroup Inc, Research Division - Assistant VP and Senior Associate [12]

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Okay. So that was the -- okay, so the second question -- okay, the net new money growth question. So your relationship manage -- the number of relationship managers declined in 2H, and it further declined from -- it also declined in the first half. I was expecting if you can give some color on how you would be able to deliver 4% to 6% net new money growth if we compare with declining relationship managers.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [13]

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Yes. Okay. Thank you. Martin, could you then take the third question on cost as we, I think, we provide details of how much of the labor costs are flexible?

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Martin Sieg Castagnola, Vontobel Holding AG - CFO, Head Finance & Risk and Member of the Executive Board [14]

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Yes.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [15]

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So mandate penetration in Wealth Management, yes, that is already very high, and we are actually proud about that. So what we have done is that we have been able to, on the one side, either discretionary- or advisory-based mandates so that people actually pay us for our core competencies, which is advising them and running money. We have also done that, and I think there are details in the appendix. We have deliberately moved transactional revenues to recurring revenue.

So if you could quickly show up Page 35 on the slides, you see what we have deliberately done. So we brought up recurring commission income from 37 to 42, which I think has a number of advantages. First, it brings the revenue pattern to a more recurring stable level. It also aligns Wealth Management revenues even more heavily with Asset Management revenues. It's also an easier and easier to understand alignment of interest between clients and managers. And we happily accepted that the commission income was going down from 14 to 11 as we have shifted the pricing pattern to recurring fee levels.

So one answer to that is that the pricing policy and the product policy we adopted is actually protective to the margin in and by itself as it has moved more of the top line to recurring asset-related revenues. We expect that at these levels of margin, we think that -- or how do we look at the development of margins? We all were witnessing that everything that was transactional, everything that was commoditized was coming down. And the only part of the revenue streams that could be protected were advice, management, investment solutions and a sensible penetration with leverage and credit. And we think we have now reached a level that is more or less stable on the outlook as we have moved so much of the revenue pool to advice, to investment management, to product and to a sensible penetration of leverage, both obviously only on the Lombard business level. And therefore, we are confident that we see stable levels going forward.

So net new money, yes, the numbers of RMs have declined. That was due to the fact that we focused on integrating and digesting the combination of all the businesses. And we stopped hiring at the historic levels of new relationship managers. We are now back in this hiring process. We're happy with the number of people we can talk to. We're happy with the quality. We are happy with the retentions we can do. We are happy with the people we can hire. That's an important source of net new money, but we insist, it should not be the only one.

We clearly insist that our brand, our quality of products, our investment category, our service, our client experience should and will be a source of net new money in and by itself. Wealth Management is not there historically, brokerage was, that the client center revenues moved with the people from institution to institution. We have deliberately built a Wealth Management platform where the RM is important, will remain important, but where the brand, the platform, the investment content is a key contributor as well in terms of attracting clients, in terms of improving share of wallet. So we see net new money growth as a combination, on the one side, yes, the pipeline that comes through net hires of relationship managers, but also, as we like to call it, true organic growth from a better positioning of our offering in the market.

And then on Asset Management cost, Martin, I think we can give the number at group level.

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Martin Sieg Castagnola, Vontobel Holding AG - CFO, Head Finance & Risk and Member of the Executive Board [16]

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Yes. On Asset Management, we had CHF 201.9 million of personnel costs with CHF 56.4 million on the general expense. We do not give a detailed drill down of the proportion of variable payments relative to general -- to personnel expense. It's roughly 1/3 on a group level. Obviously, it's a bit more in the business divisions, and it's a bit less in the corporate center. We hope this answers your question. Otherwise, we are ready on -- with Investor Relations to go on the phone after this call in more detail as we did not understand you very well. I'm sorry.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [17]

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Good. Perfect. Then we are back in the room with Mr. Hallett.

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Thomas Hallett, Keefe, Bruyette & Woods Limited, Research Division - Associate [18]

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Two questions. One for Wealth Management. Regarding the net new money growth, this was a little bit subdued due to the leaving of the gentlemen in Basel and the Gloor brothers. Could you tell us how much money they -- in order to [commence] take with them, how much money you lost due to that 4 partners left the bank?

And secondly, Financial Products, if you compare the latest number with your goals that you reiterate, you are quite light years away due to the structural products offered in the market. Are you still confident to meet them in 2020? Or will there be an adjustment in targets? For example, operating income, you have a gap of CHF 50 million. It seems a bit quite -- well, very ambitious to meet that in 2020.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [19]

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Yes. So first of all, net new money in Wealth Management, again, important from our point of view to look at the broader picture. So also, when we look what we have seen so far in the market, the whole industry seems to see a subdued growth. We have delivered growth in all market areas where we are not digesting the integration, so we have no reason to doubt our underlying ability to deliver growth. The digestion of Notenstein La Roche took us a little bit longer than we expected. It was also heavily related to the fact then the process of up onboarding all the clients to our product offering to one product platform, to one level of service and product.

And then we had, as we all know, a very specific situation in Basel, but we do not give details on a tactical setback. We continue to march on. We have rebuilt the team already in Basel, and we are committed to our service offering in that region of Switzerland.

I commented on our firm-level targets. And we are confident and committed to still compare us to our firm-level target. And we will try our best to reach that in 2020. Let's see where then the isolated question of revenues in SP will grow. But at the firm level, we commit to our 2020 target.

Then we have another question from UBS.

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Daniele Brupbacher, UBS Investment Bank, Research Division - MD, Banking Analyst and Head of Equities Research Switzerland [20]

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It's Daniele Brupbacher from UBS. Sorry, again, on net new money, I would be just interested to hear your general views regarding sense and nonsense of net new money targets, given that some of your peers decided to skip that. Yes, just how you think about it. How important is it really in terms of, not just communication to the outside world, but how you steer the business internally?

Sorry, and then probably more of a strategic question. I mean if Vontobel is about protecting and growing your clients' wealth over time, which makes a lot of sense, do you feel that your product shelf is there? Or do you see any gaps in terms of products?

And in this context, really, I'd be interested to hear your views regarding using the balance sheet. I mean your loan-to-deposit ratio is low, it's very low, 50% or so. And I see a lot of banks who can't resist the temptation to use the balance sheet more aggressively to use -- to generate revenues. And that's in Switzerland, and obviously, certainly in Europe and around the world. Do you have this debate with the Board internally with your risk people, with Martin? How aggressively do you want to use the balance sheet to generate potentially additional revenues and offer products you currently probably don't offer? Just interested to hear your views there.

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Zeno Markus Staub, Vontobel Holding AG - CEO, Head Platforms & Services, Head Digital Investing and Member of the Executive Board [21]

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Yes. I'm happy to try to answer this question. I can already confirm that Martin and I do have discussions on many topics, yes. And so net new money targets, you know that's a heated one. I mean this industry and also actually people like you sitting in this room for the last 10 years have used to boil us all on net new money all over the place. We have, I would say, differentiated opinion on net new money. We always -- we have internally a very strong link then to net new revenues. So our internal MIS systems and rewards are heavily linked to the quality of net new money. In terms of return on assets and the consistency with our strategy and our product range and our ambitions, we think this is important.

And -- but once you have that, we also think it would not be -- we are not contemplating shedding new money targets. Why not? Because at the end of the day, what is the ultimate proof point of the success of a firm in the marketplace? And I always come back to the same question. We have to solve the problems of the clients better than our competitors do. So through time, we should win more clients than we lose. So we have to face this ultimate test that through time, we should win clients. We should not win them through the wrong -- for the wrong reasons. So the most -- obviously, we all know the traps in our industry. It starts from KYC, goes over to customization and then to lower margins and then continues with aggressive leverage. But if you win them for the right reasons, I think it's a fair test of your viability in the marketplace. So we will continue to use net new money targets, but we will continue also what we have always done to link them in our internal target discussion and our internal assessment also of people heavily with the quality and the rentability of the business they bring in.

Then protecting and growing assets and how do we feel about the product range, I think we never felt as good as today. Let's start with that because when you look back 5 years or even 10 years, we were much more heavily concentrated or even limited on our product side. We now can truly say that everything that is liquid asset classes, everything that is public markets, I think we can credibly claim that in all major asset classes and in all major buckets, we have strong, reliable, credible investment offerings, from equity to fixed income to multi-asset class, from developed markets to emerging markets. And we have not only discretionary bottom up, we also have a very strong quant offering. So we feel pretty well.

Are there still a few white spots? Or are there a few emerging white spots? Yes, they are. We think we can address most of them through internal developments and by building the investment teams and the skills through time. So we are confident that we have what we need.

Then on the balance sheet, glad that you confirmed that we are still very low in our lending penetration. So we have increased it over the years. We have to say that. And we deliberately wanted to do that. We also brought in a new offering for Swiss residents in market shares. We will continue to remain conservative or cautious about working with our own balance sheet for many reasons. First, we think we are not predominantly a bank. We are predominantly a wealth and asset manager and an adviser. But the most important point is actually, if you start to think from the client, is your own balance sheet actually the best source of financing for the client. Given the fact that bank balance sheets by the environment that we face, negative interest rates and capital requirements are actually reduced in their long-term ability to be the best source of financing.

So we believe that we will see a further deconstruction of the value chain in combining demand and supply in financing. And we will prefer to work towards the direction where we can sit on the side of the -- on the same side of the table as our clients and say, now, what's the best way for your financing? And our own balance sheet will always remain implied in this question and probably for most clients. So the significant part of it are a part of it, but most probably not everything. So we would prefer to work towards an open architecture, so to say, on the financing side as well because we think it's in the interest of our clients. So you should not expect a catch-up from Vontobel in aggressively pushing our own balance sheet.

Any further questions? Perfect. Then we all thank you for your time, your attention and your interest in Vontobel. And we wish you a successful day.

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Operator [22]

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Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.