Vontobel Holding AG

Hi everybody, I'm here together with Thomas Heinzel, our Chief Financial Officer, and welcome you all for our Fontobel Half Year 2022 presentation and results. As usually, I will kick off with a couple of key points. Then an update on strategy. Then Thomas will guide us through the numbers in all details. I will be back short for outlook and then both Thomas and I do look forward to your questions and the discussions with you. So, first half year of 2022. We posted a robust result against a very difficult market environment that we are all aware of. This market environment has three implications for us as an investment firm. One, it obviously takes down asset levels and therefore revenues. We adjust through that, through cost management, through the cycle with a long-term view. Second, It reduces the willingness of clients to take decisions. We see this as we witness from clients that they struggle within the current uncertainty to take final asset allocation decisions. However, we have very strong data points that we are moving towards a lot of pent up demand because once we've been going through this transition, people will still need to invest in order to protect their wealth in a new regime type of environment. And third, This transition and the environment beyond that creates a land of opportunity as assets are priced more rationally, fixed income assets have higher returns, and challenging environments create opportunities for strong firms such as Fontobel. I will be back to all of the three points I just mentioned. Against this challenging backdrop and environment, we remain disciplined and determined on the execution of our long-term strategy. As an example, we are about to close our SFA transaction with UBS and henceforth start the collaboration with UBS Americas. We obviously, as the markets come through with difficult signals have an increased focus on efficiency to protect our strategic optionality. Our business model of a pure-play global buy-side investment firm serving different channels and different segments has proved its worth once again. We show a balanced business mix and strong and very convincing inflows from wealth management. At the profitability level, This year's numbers do not match the record year 21, but they represent the second-best half-year profitability since 15 years. Our stable and serious risk policy and our conscious approach to risk management has led to a very strong development of our balance sheet and of our capital position. Let me share a few numbers to underpin what I just have said. Assets under management in line with market action. Net new money almost balanced with a strong posting of wealth management with 3 billion net new inflows and obviously in line with markets outflows from institutional asset allocators. Operating income, pre-tax profit, group net profit below last year's which was a record year but above the year before and second best over the last 15 years. Return on equity despite the very strong capital position above our own target, which we want to achieve across the cycle on a mid-term and repeatable basis at 14.6%. CET1 up again to 18.5%. How have we done on strategy execution? Four highlights I want to mention. very happy with the strong investment led and above market growth in wealth management. We not only do what we say, what we do actually works. So we have shown that in wealth management we can grow in mature markets where there is a lot of wealth, but a lot of sophisticated wealth that demands outstanding advice, first class service and strong investment propositions. And we have shown very repeatable and robust growth in these target markets. Our US expansion on the asset management side keeps making progress. It's on the one side, the closure of the UBS transaction, which we expect for Q3, but it's also the broad lineup now of all investment capabilities that we make accessible to the US market. After having brought the fixed income franchise with their outstanding emerging market debt capabilities, after quality growth and 24 to the US market, we have now also delivered on sustainable equities and our quant shop Vesco. We also delivered on the relaunch of Vault and we are very happy to have proven that we can bring a hybrid service offering to the market which will future-proof our capability to serve private clients from different segments, from different channels in a more digital world going forward. Two aspects of the environment we have been witnessing and we're all going through. To the left-hand side, this was one of the most difficult half-year periods over the last 50 years for investors. Only one out of four over 50 years periods where both equity markets as well as fixed income markets are heavily down. This is the rarity of the event, the other aspect that most of the years have happened recently. Why this? Because of monetary policy and the year-long quantitative easing and anchoring of central bank policies are zero. We will move out of this and this has a lot of implications and I will be back with the implication. Turn to the right. across the industry negative flows for active asset managers. It's only the second year after 2008 where both major asset classes drive highly negative outflows. That's one part of the message. Second part of the message, look at the year after the highly negative flows. We have historically always seen rebounds and we do not believe that this time is different. Coming back to that transition, how was the past? Zero or negative interest rates, quantitative easing impacting the rationality of market prices, valuations got distorted, the inflation was not seen in consumer prices for many years but in assets, and we saw a number of market melt-ups and exuberance. We're now in a phase of transition, rising inflation, probably higher inflation, rising interest rates again with the move of the Fed yesterday and obviously a significant level of uncertainty around the geopolitical situation. This phase of transition is difficult both for investors as well to run money but also to allocate money to different asset managers. We respect that, we are very close to our clients and we understand very well their considerations and the lack of visibility they face in order to take actionable decisions. We also see this in our patterns. We are at a similar level as in other cycles in terms of outflows, but the inflows are pent up for later decisions. How do we expect the future to be like once we have made more progress in going through the transition? We will have much more attractive fixed income returns. We will have higher yields, which again adjust then more riskier asset allocations, we will have a normalized portfolio construction and obviously a land of opportunity both on the selectivity for stocks but as well as for firms like ours who are strong, who are long-term and who have the capital to execute on opportunities. How does our performance look like? We have to distinguish between the three asset classes. Fixed income, as we have entered the fixed income asset class only in full breath 6 or 7 years ago, our product range is more modern, more spread-oriented and more aggressive than classic government bond product portfolios. Therefore, over the long term, five, three years, very strong performance. We suffer on a one year basis as in this transition period, higher spread and beta products in the fixed income world suffer. However, we are happy with what we own and our clients are happy with what we do in their portfolios. And we strongly believe in the rebound. Equities. the current transition starts to show proper valuation of quality stocks and therefore our one-year relative performance is trending upwards, our year-to-date performance is trending upwards even more. On the multi-asset class side, we run only a very limited number of funds, which are heavily tilted to very tailored specific B2B demands. Our mandate business is very strong, very sensible performance, and we realized net inflows on the multi-asset class side in H1. Another quick look at the US. responsible for 60% of global wealth. We make progress on these two dimensions on the wealth management side. We will close with UBS in Q3 and we will commence with the deeper collaboration and we will bring global diversification, geographic diversification to wealthy private individuals in the US. Same value proposition on the asset management side, be it international equities, the strategic income fund, global emerging market debt. We bring global diversification to these asset allocations and investors and we have a right to play as we have our boots on the ground since more than 30 years and we know our way around in the US market. A quick, deeper look at flows in wealth management. Robust, repeatable, very broadly diversified, but focused on markets where we have mature clients, where we have sophisticated demand and where our investment-led proposition, which is not lending-led in the acquisition of clients, but based on advice, service and strong investment propositions is working. 80% of our flows are coming from Switzerland, Germany, Italy, UK and North America. These markets are responsible for 75% of global wealth. And when we add from the asset management side our presences in Japan, in Australia and through the global bank franchise in Singapore and Hong Kong, we tap into 85% of the global wealth, money and fee pool and we can respond and help investment-led investors to move forward. We believe this world is in a transition to more sustainability and it has to be on this transitionary path. Within the investment processes and within the investment products, we answer to this overall transition by looking at ESG consideration from a risk return perspective and using them as we believe it will help us to support our clients to achieve their own targets. Being an active house only, we can also use the tools of engagement and voting to fulfil our fiduciary duties as the stewards of our client's capital. We are about to close the first sprint of our path towards the lighthouse. The Lighthouse is our North Star and we kept our look very steadfast on this very strong commitment. Global buy side only investment firm. We will continue to believe that the four levers bring us to where we want to go. Being client centric and investment led at the same time. Use technology to the benefit of our clients and work with great people. We are currently working on how to move into the second sprint, 2023-2024, taking the changing regime into account, also taking the revenue and cost considerations into account, and we will give you a detailed update on our ambitions in the sprint on our investor day on November 10th. One decision we have already taken is that we will add private market capabilities to our private client offering. More of that November 10th. We already look forward now to see you not only on the screen, but hopefully in a physical gathering here in Zurich with human interactions. With that, I hand over to Thomas, our CFO for numbers.

Thank you very much and good morning from my side too. I quickly comment now on the financial numbers. Now, I'm sure you heard it numerous times, but it was a difficult half year. The war in Ukraine, inflation, rising interest rates, increasing recession fears towards the end of the second quarter led to a very difficult environment for equity and fixed income. And as an investment house, of course, we felt the impact and we could not match the record numbers from 2022. Our assets under management stand at 209 billion, net new money is minus 1 billion. Going through the P&L, an operating income of 686 and operating expenses of 506 have led to a pre-tax profit of 180 and a group net profit of 151 million. Now the Group Net Profit is down 21% over the last year, but we have mentioned that before. This is the second best year in 15 years. So while it looks down quite a bit, it is versus a record 2021 and we always have to keep this in mind. The cost income ratio, of course, with a reduction in operating income of 12% and operating expenses of 7%, cost income ratio increased to 72.8%, mainly as said because operating income reduction has outpaced operating expense reduction. The 72.8% is slightly above our target rate. Return on equity is very strong with a 14.6% number. If you put a bit more color on the assets under management, what you can see here over the longer time period, we still have a healthy 7% growth rate per annum. The IOM has come down 14% since the end of last year. On the right hand side, you will see how that is composed. Net new money did not have a big effect. FX also not a small effect. Mostly it was driven by market developments, as we have said, with equity and fixed income going down at the same time to a degree that we have seen only once in the last 50 years. Quick remark on FX. It had almost no impact here. You will find in the appendix a chart that will also explain it had almost no impact on the P&L. That is due to the fact that while we had a strengthening dollar, which helped us, All other currencies weakened and they were eating up the benefit that we had from the U.S. dollar gains. If you look at the net new, at the asset under management by client unit, you see a decline of 10% in wealth management and you see decline of 17% in asset management. Moving to the net new money, what you can see is we're of course, we're particularly satisfied with wealth management. We have gained 3 billion in an adverse environment. basically coming out of the developed markets to a large degree and also the ultra high net worth business has contributed nicely to this 3 billion assets under management. Sorry, 3 billion net new money. The nice thing as well is that net new money has been realized very steadily and across all of the areas that we look into every month. So this is an indication for us that the net new money machine in wealth management is doing very well. Asset management has moved more with the market. If we decompose this a little bit, the four billion, we had inflows in multi-asset class and we had outflows in equity and fixed income. If you look at the gross versus the net, what you will find is the outflows, the gross outflows were at the same level as previous years in essence. What we have seen is the inflows are less and that has led to a negative net new money. The inflows basically include Q2. What we have seen is clients have been very hesitant. Clients have been very hesitant to fund even if we have won the mandate already. Clients were very cautious in funding the mandates. On the operating income side, you can see a 12% reduction. This is also 94 million. If you look at where the reduction is coming from, two thirds is roughly coming from the trading results from our digital investing client. One third is from net fee and commission income. A quick remark on net interest income that has been stable over the last year. We have done an analysis showing that basically an increase of interest rates across all tenures, across all the currencies would deliver roughly 70 million additional revenues over a year, over 12 months. Why do you not see this here? The main reason is that this only starts to really kick in when we have positive interest rates. Because of the negative interest rates and the particular setup in Swiss francs and our focus on the Swiss franc, until the interest rates reach zero, we're eating more into our allowance that we have from the SMB. And hence, the effects are much less pronounced and are maybe at other places. But this will come as soon as we cross the zero barrier, we will get additional income here as well. If you look at the operating income by client unit, WM resilient, digitally investing clients have normalized and asset management, we have seen a reduction in the assets under management and also a slight reduction in the margin. If we now look at this margin in asset management, it's been down four basis points. The explanation of these four basis points is as follows. Roughly one and a half basis points have to do with the business mix. Business mix, two effects that explain this. First of all, equity was more down than fixed income. And the second one was the inflows that happened were in multi-asset class mandates. Zeno explained this earlier, which come, of course, at a lower margin than the business. One and a half basis points, so business mix. Another one and a half basis points is coming from performance fees. And then we have a half basis points one-off effects that are in there. That explains the asset management development. If you look at wealth management, what you can see is the investment-led focus. Our strong focus on being investment-led is paying off very handsomely here. Recurring income, the commission income, the recurring part has not moved over all of the last three half years that we report on. And we believe it pays off to have this focus and we now see the results of it. Commission income is down again, driven by a very strong 2021 and interest income is slightly up. One of the remarks here is very net new money. The good news is net new money is not only the amount of net new money in wealth management is nice, but the quality of net new money. Largest chunk of the inflows was in managed accounts and more than a third was in discretionary mandates. If I move on to the operating expenses, you'll see a 7% reduction overall, of which the personal expense declined 14%, which is in line with the revenue reduction. Where we had a slight increase was in G&A and in other cost items. In G&A, it was mostly driven by IT related costs, which is something that we have announced at full year. And then travel and entertainment came back a bit more with the opening of the economies and marketing expenses have increased as well. So those were minor increases in total 7% down. As I have said earlier, the reduction in revenues have outpaced the reduction in costs that we could achieve, which led to a higher cost income ratio of 72.8%, which is slightly above the 70.0% target that we have set ourselves. If you look into the cost management, a couple of remarks on this page. First and foremost, what you can see is we had a structural decline in the cost income ratio over time. We have plotted this for the last 10 years to show how we got from 80 into more of a range of 72-ish, where our current cost income ratio resides. One of the curious things of the last year has been that the economic cycles seem to have changed quite significantly. If you think about that in 2020, we had a very sharp recession. We had a strong boom afterwards. It looks like we're going in a recession as well. And that all happened in two years with very, very high amplitudes. In such an environment, it's very important to stay vigilant and to stay long term focused, because if we only go after the market, by the time the costs are down, the market is up already again. And by the time we have rebuilt the resources, the market will be down already and we will be caught on the wrong side every time. That has to do with timing and time lags. But in the light of the market decline, we have a focus on cost containment and prudent steering of our long-term investment pace, and we will act as required to protect our strategic flexibility. What it means is we believe in our strategic direction, but we will watch very carefully and be, as the Fed said, data dependent on how we move on the cost side. Speaking about capital and balance sheet, we have a very strong balance sheet, very strong capital ratios. Over the last year, we have generated 80 million in CET1 capital, that's a plus of 7%, and we got the CET1 capital to 1.2 billion. At the same time, we have decreased risk-weighted assets by 14% from 7.4 to 6.4 billion. Now, this comes from an ongoing optimization effort where we have actively been very careful with risks since Q4. Again, something we said already that we are going to be careful in the falling market. But we have done other things as well. We've looked into optimization of pricing, product optimization. We are currently looking into client profitability calculation. All of this, including capital and capital usage. The leverage ratio is up by 10 basis points to 5% and this strong capital level of 18.5 will also persist after the SFA acquisition, which will currently pro forma take us roughly slightly above 16% CT1 ratio. If we move that forward, what you can see here is we focus since a couple of years on economic profit slash capital productivity. This chart should show you that over the long term, we focus on increasing the value creation every year by year. And we're seeing this. You see the scissors going, the spread widening between the ROE and the cost of equity. The ROE stands at 14.6%, which is a very good number. And even the return on CET1 is at 26.2, despite a very high 18.5% CET1 ratio. Also, what you can see here, we are driving an attractive and shareholder-friendly dividend policy, which not only generates value, but also has shareholders participate in this value creation. With that, I'm already through and I want to summarize the business KPIs versus our targets. First remark, it's very important these targets are through the cycle targets. This means through a whole cycle, an economic cycle, we want to make these targets. Net new money has decelerated and is below our long term target, but we also had a couple of years where we were significantly above. Operating income is down 12%. Again, we have to put this in context of an extraordinary 2021. With pre-tax profit down 23 and net profit down 21, I would make the comment again, the net profit that we had of 151 million has to be put in context and is the second best result since the global financial crisis. Cost income ratio 72.8%, slightly above our target. We will watch very, very carefully what the development in the second half will be here. Return on equity 14.6 is above the target and of course the CET1 and total capital ratio are significantly above target, allowing us various forms of strategic flexibility going forward. That's a summary of the financial results and with that I hand back to Zeno.

Thank you very much, Thomas. I'll be back with the outlook. So, I think we can say in H1 we managed volatility and the situation with the war and the increased uncertainty with very strong results on risk management side, but also with satisfactory profitability with bringing the second best profitability over 15 years. We do not exclude that the current conditions may prevail for an extended period. We think that at least inflation needs to peak and global geopolitical uncertainty needs to find certain boundaries in order that the uncertainty goes back and clients are back with significant willingness to take decisions. However, this new regime will also bring or is bringing significant opportunities from a different yield level in the fixed income world to more rationally priced assets to opportunities that strong firms can profit from. What will be our focus in H2? We will take our clients forward to navigate the higher inflation environment as clients need to protect and build their real purchasing power that is reflected in their wealth, be it institutional or private. They will need to act also in a higher inflationary environment. And we have the tools, the capabilities and the experience to take them forward and to help them build their futures. Another focus is the closing of the SFA transaction and then the initiation of that cooperation with UBS Americas in Q3 already. I can only reiterate the commitment also of Thomas and myself to contain costs and act as required to protect our strategic flexibility Do not expect us to move into stop and go but trust in us that we will act decisively to protect the long-term viability of this firm and the capability to continue to invest in growth with a very clear focus on cost containment and on focus. We will continue to work towards this lighthouse ambition in which we believe strongly and I think Data points such as the pattern, the repeatability, the quality of flows in wealth management shows that this pure play, buy side only global investment firm is the North Star on which we need to concentrate. We're now working on the second sprint and on the decisions and on the focus topics we intend to take for the second sprint 23, 24. And we do look forward to see hopefully a lot of you on our investor day on November 10th, which we also combined with the trading update on the first nine months. With that, I thank you for your attention.