With Boris Collardi at the helm, Julius Baer has effectively doubled its client assets under management to CHF311.4 billion (2016Q2) and orchestrated what many believe to be one of the most successful private banking acquisitions in recent times. In Asia, where the bank ranks fifth by AUM, Julius Baer has added over 100 RMs since the beginning of the year, leading some to question whether its bottomline can hold out amidst these difficult market conditions.
Over green tea and espresso, Collardi tells Asian Private Banker that he remains focused on growth, although current M&A opportunities do little to tempt him.
Boris, a headline story this year is how Julius Baer has been hiring aggressively in Asia, but how much change is too much change?
As you know, after a while, a team that had led the firm from inception to where it is today in Asia needed to be refreshed – and that is what we effected in the past year. We brought in new people with additional skill sets and new networks. It’s a people business, so after a while you exhaust your own network of people. We wanted fresh energy and new perspectives on market strategies, and if you look at Asia within the firm, the region continues to develop along exactly the same line but with more focus.
We recently passed the mark of US$300 billion in assets under management and Asia now accounts for 20-25% of this total.
When you’re on a safari and you’re sitting on the jeep early in the morning and you’re trying to spot that beautiful animal. An hour passes, two hours pass, and you say, “maybe no luck”, and then the next day you go again. That’s how M&A is.
How patient are you willing to be with Asia because this asset acquisition phase will need to be backed up with profit?
The good news for us is that the years where investment was more important than revenues are now behind us.
We are profitable now in Asia and have been for the last few years and, indeed, Asia is starting to contribute significantly to the bottomline.
Obviously part of the incremental profit growth we are having in Asia has been reinvested in new or future growth, but I’m sure we can agree that you need to put your money into people that can produce returns for you and not spend on people who cannot. So the incremental revenue potential in Asia is greater than in many of the other regions where we run the business.
But you’re right: we need to balance this in a very careful way. Now we are using profit in Asia to fund the next wave in investments.
Break down your investments.
These investments are not only in people. Yes, we’ve hired over 100 RMs this year – that’s over 30% capacity for us. But we’ve also invested in other functions – we’ve opened many new accounts in the last few months so you need people to open and follow through; we’ve invested in premises and have taken additional floor space in Hong Kong and Singapore; we’re investing in technology – we should be by the first half/second quarter next year up-and-running with our new global platform which is being developed in Asia and Asia will be the first region to come onstream.
Even so there have been a number of cases of late where Julius Baer has hired bankers that in all likelihood would have struggled to go elsewhere and/or who had fairly small books.
This is our eleventh season of hiring bankers in Asia. We’ve had mixed successes – some batches have been extremely successful. Our Asian asset base was initially built by around 100 individuals who joined us mainly from one competitor. I can assure that these bankers brought 85-90% of their books with them and not 10-15%. Think of the Merrill transaction in Asia: it has been a merger of equals. We already have the same pool of assets in 6-7 years in Asia that Merrill had after over 30 years in the market.
For many, that integration set the benchmark for the industry and, arguably, it has defined your career too.
Yes, but it also spoils us because now everything else we are looking at seems less optimal. We’re pursuing a growth strategy, not because we like it, but simply because, in our industry, if you don’t scale in an intelligent way, you’re not going to be around in the next 100 years. We have a big legacy we need to defend and protect.
But the industry is changing. On the revenue side, we have less opportunities because everything is becoming increasingly regulated, while the cost and complexity of running a business is higher. So how do you compete in this environment? By increasing scale. If you look at Julius Baer’s first half-year results, we made over CHF400 million in net profit. When I joined the group we used to make CHF100+ million in one year.
We didn’t even want to spend one minute on it because we knew the people and we knew the moment their CEO would resign, he would take others with him.
So, as of now, organic growth trumps M&A?
Organic growth is a less risky way to grow than doing M&A. Imagine if for one second if we had acquired another private bank with recent regulatory issues, I suspect we would be in a totally different discussion today. So you need to pick what deals you do. Organic growth is slower, but it gives you more opportunities to adjust your risk-return profile.
There have been lots of opportunities this year simply because the whole industry is in disruption, so people are fed up and don’t want to spend another two years explaining to their clients that their company will be around or not.
M&A has become a little less enthusiastic simply because what I see in the market does not fulfill our criteria. Obviously we need to be present and even if we don’t want to look at something, there are a lot of people that will approach us and roll us into the process.
Take one recently-acquired institution in Asia. We didn’t even want to spend one minute on it because we knew the people and we knew the moment their CEO would resign, he would take others with him. So that’s why we said we are not going to spend one minute on this.
You’re waiting for that ‘right’ deal?
I don’t know if you’ve ever been on a safari? When you’re on a safari and you’re sitting on the jeep early in the morning and you’re trying to spot that beautiful animal. An hour passes, two hours pass, and you say, “maybe no luck”, and then the next day you go again. That’s how M&A is – you need to be extremely patient.
That one opportunity for us, I’m convinced, will exist again. I don’t think Merrill was a once in a lifetime deal. It was a good deal – we got a lot of criticism for the transaction initially – but there could and will be something else. I just don’t know when.
The important thing for us is not to do the wrong transaction because this occupies capacity. It can destroy our reputation because you’re only as good as the last deal you’ve done.
Compared to many of your peers, you seem almost tentative towards China’s onshore prospects, at least in the short-medium term.
I did my first business trip to China in 1998. At that time the discussion was already “How do we tackle the Chinese market?”. Since then China has created a huge amount of wealth, but most of that has been captured in HK and Singapore from a wealth management point of view. So the first pillar of our China strategy is to remain in Hong Kong and Singapore and to capture that market and the assets of those who domicile here. Second, I remain prudent about entering China onshore simply because the regulatory framework – which while normal for a developing financial market – is today not yet there where it should be for running a wealth management operation. Because of licensing issues, the barrier to entry remains high and, frankly, when you arrive there you’re like a mosquito. The local players have an advantage – how many times have we seen wealth management boutiques in China without even a single licence? Of course, we still want to create brand visibility in China. So we’re partnering with local firms and we’re developing asset management products for Chinese companies to distribute in China but with international asset allocation.
You bought a strong wealth management business in India, but it is built around an individual who continues to stay with your platform. Are you worried that business is vulnerable?
You need to be a bit paranoid. You need to think of the unthinkable on daily basis. Having said that, I’m very comfortable with our India onshore franchise. I wouldn’t say it depends on one individual. India was the last location to move over from the Merrill transaction and, despite that, there were basically no losses of clients or personnel. In the private banking context, this is quite rare.
It’s true, we ask our team in India now, post-transition phase, how do we go about growing this business? It will be very interesting to see what will happen, because many of the international players have exited [India onshore].
So are you committed to India for the long-term? Will that business be up for sale in a couple of years?
This is one of the businesses where, for BoA internally, there were a large number of discussions because the local team wanted to keep it. At some stage, the discussion came up regarding regulatory approval and what would happen if we did not get it.
We [Julius Baer] said that we see India onshore as an integral part of how we are going to run our business, because we have a successful NRI business and there is a convergence between India onshore and the NRI business. So we see five ways we can leverage this business: (i) India onshore for Indian onshore clients; (ii) NRI business for NRI clients; (iii) NRI clients that want to invest back onshore; (iv) onshore clients that can legally export capital internationally; (v) finally, Indian solutions for non-Indian residents.
At what point do you expect Asia – what you refer to as your “second home market” – to contribute the lion’s share to your global AUM?
Hopefully before we are retired. It’s reasonable to expect that the next mark will be 30% in the next 5-10 years.