Vontobel Holding AG

Ladies and gentlemen, welcome to the presentation of FONTOBL's full year 2024 results webcast. I'm Sandra, the chorus co-operator. I would like to remind you that all participants have been listened on remote and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. the conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Georg Schubiger. Please go ahead, sir.

Good morning and a very warm welcome from Crystal, Thomas and myself. We are pleased to share our very strong 2024 financial results and the clear strategic progress we have made last year. Let me first briefly recap the market context and how it played into our results. Equities continued to climb in the second half of 2024. The US market was particularly strong, fueled by Fed rate cuts, robust economic data, election-driven optimism, and continued strong momentum in tech and AI-related stocks. Bond yields primarily mirrored the consecutive rate cuts by the central banks. This includes the Swiss National Bank, which announced its biggest rate cut in almost 10 years in December. In FX markets, the US dollar was the strongest performer, driven by the superior growth of the US economy, a marginally more hawkish Fed, and anticipated supportive post-election policies. Overall, 2024 was a year of significant economic and geopolitical changes. Despite challenges like geopolitical and interest rate uncertainty, most asset classes delivered strong performance. In this context, Fontobel returned to growth and delivered the second best financial results in its history. Let me turn to our key messages for 2024. We delivered very strong growth in profitability with profit before taxes increasing 32% to 354 million. After two more challenging years, we returned to positive net new money growth for the firm with revenues increasing in both client segments private and institutional. Our balance sheet and capital position remain solid, with a CT1 ratio of 16.1%, well above our 12% target. This enables us to propose an unchanged dividend of 3 Swiss francs per share at the 2025 Annual General Meeting later in April. In 2024, we made significant strategic progress. We focused on our client coverage on private and institutional clients. We sharpened our execution on both the revenue and the cost side. We elevated our leadership team with top-tier expertise. And in the US, we decided to own and thus insource the distribution of our 40 Act funds. We made two acquisitions with perfect strategic fit. With Ankala, we marked a milestone in our strategy to enter private markets. We are now directly part of the full value chain of producing and distributing private markets investments. With EHAG, we further strengthened our position with ultra high and high net worth clients in Switzerland, Germany and Austria. We are successfully executing our efficiency program and are already seeing tangible results. The program is making our organization sharper, our processes more efficient and our client services faster. Our progress this year does not mean that we will slow down. We remain fully committed to completing the full 100 million program by the end of 2026. As we have often said, our business model is unique. We are one investment firm serving two complementary client segments, private and institutional. Both segments benefit from our deep and broad investment expertise. We add value through advice, active management and customization. Fixed income is a core asset class. Investors are now returning, having pulled back after the sharp market correction in 2022. Fontobel is a leading player in this space, with 24 asset management and our fixed income boutique. 24 asset management offers world-leading strategies such as strategic income and ABS, which attracted strong inflows last year. Our fixed income boutique is equally well placed. It is known for its excellent performance in emerging market fixed income. It may however need to wait a bit longer for investors to return to this segment. Private markets have become an integral part of our capabilities, further diversifying our business mix. Ancala gives our clients access to private infrastructure, benefiting from its stable cash flows, inflation protection, and low correlation to the overall economic cycle. 24 Asset Management will be launching an asset-backed finance strategy. This strategy will build on their longstanding and proven expertise in managing asset-backed securities. Last, Both our private and smaller institutional clients are leveraging our selection capabilities with third-party providers. We are also emerging as a strong provider of customized solutions tailored to meet the unique needs of our clients. One example is the Sustainable Equity Income Plus Fund. The fastest growth rates in the industry are expected to be in private markets and solutions. Fontable is well positioned to benefit from these accelerating trends, while continuing to be a partner of choice on core asset classes, as demonstrated by the net positive flows in fixed income and multi-asset last year. Now over to you, Crystal.

Good morning and a very warm welcome from my side. Let us first turn to the institutional client segment where we see positive trends. We grew operating income by 4% year-on-year with stable margins and achieved a continued improvement in flow trends. As anticipated, fixed income was the first asset class to see a rebound in flows for actively managed solutions. Our leading position with best-in-class performance allowed us to capture the return of fixed-income investors. We saw strong net positive flows in spite of emerging markets bond strategies still suffering outflows at Fontobo and in the industry ahead of the US election. We are seeing the first signs of investors regained interest in this segment. We are well positioned to capture future flows with our outstanding track records in the space. MultiAsset also saw a positive turnaround this year, with inflows driven by our innovative solutions. Flow trends have improved substantially since 2022. This amidst an industry with generally continued to see outflows in actively managed investment strategies. Overall, we realized positive net flows across most of our investment strategies. The exceptions being emerging market strategy and a one-off impact on our quality growth equity strategies due to the insourcing of our distribution in the first half of the year. As you recall from our investor day back in November last year, we will accelerate our growth with institutional clients through three key levers. First, by evolving our sales strategy from a traditional product-driven approach to a strategic coverage, dialogue and partnerships with asset owners and managers. Second, by implementing a standardized, scalable client journey, ensuring a consistent, high-quality, seamless and speedy experience for every client, regardless of location. Third, by scaling our numerous existing strong track records, as well as by activating our new strategies in private markets and the solution space. We are back to growth. We are well positioned for future flows and commercial success. For private clients, the positive momentum continued. Our financial performance was very strong with operating income up 10% year on year. We achieved net inflows of 4.6 billion, a near 5% annual growth rate. This comfortably meets our through-the-cycle target range of 4-6%. The quality of flows was high, with about 80% going into advisory and discretionary mandates and with strong growth in our core markets. This validates our investment-led approach and demonstrates our capability to grow in our core markets. These markets account for most of the world's wealth growth and have a favorable geopolitical risk-reward. With over 20 years of experience, Fontobo is a leader in creating and distributing structured solutions. Our clients can create almost any payoff profile using a broad range of global underlying assets. Our 2024 results clearly demonstrate our capabilities and how we are gaining market share. To summarize, last year was a successful year for our private client segment. We captured high-quality flows in our core markets, successfully served the higher client engagement, and delivered very strong financial performance. We grow profitably in private clients and institutional clients. We are successfully executing the 100 million efficiency program. We have achieved exit rate savings of 45 million higher than targeted for 2024. This year made eminently clear that we can grow revenues while at the same time improving our efficiency and reducing our cost base. This translated into a significant improvement in our cost-income ratio, down almost 5% to below 75%. The savings were realised through the levers communicated last year. consolidation of IT infrastructure and application, reduced vendor spend, process automation, and increased use of smart technology as presented during our investor day. We are systematically implementing further measures and remain committed to delivering the 400 million of gross savings by end 2026 as well as embedding a culture of cost discipline, we deliver on our efficiency goals. This year, we achieved a substantial improvement across our key target metrics. But we will not stop here. We have the skills, we have the business model, we have the ambition and we have the ability to deliver 4-6% growth through the cycle. We are resolute on delivering on our cost-income ratio and are steadfast in our commitment to maintain a strong capital position and attractive shareholder returns. We affirm our through-the-cycle targets. With this, let me hand over to Thomas, who will cover the financials.

Thank you, Crystal, and a good morning and welcome from my side as well. The positive trends we saw in the first half of 2024 continued and we delivered a very strong operating performance this year. Profit before tax increased by 32%, rising from 268 million to 554 million Swiss francs. Profit after tax increased to 266 million, marking one of the best years in Fontobel's history. The profitability increase was driven by strong revenue growth of 113 million Swiss francs, while we continue to invest 90 million in strategic initiatives such as the hiring of relationship managers. Foreign exchange effects resulted in a profit reduction of 40 million versus 2023, mainly due to a stronger Swiss franc against the US dollar over the course of the year, even if we have seen a strong dollar into the year end. We're also successfully executing on our efficiency program. The in-year impact on the pre-tax profit is a positive 6 million, which reflects 21 million in savings and 15 million of costs to achieve these savings. The exit rate savings, as mentioned of the efficiency program, were 45 million. The 32% increase in profit before tax translates into a 24% higher group net profit due to higher taxes. The tax rate increase was driven by three factors. One, the introduction of the global minimum tax regulation, which affected our Dubai entity. Two, reduced participation exemptions in the UK and three, the profit mix by country. Going forward, we expect the tax rate to come back to 22 to 23% in 2025. And we expect a normalized tax rate of 20% in the longer term. Assets under management grew by 11% to 229 billion. We recorded 2.6 billion in net inflows. FX tailwinds contributed 5.6 billion as the Swiss franc weakened towards year end. And we recorded 14.1 billion performance related gains. This also includes 0.9 billion of reclassified assets under management related to our efforts to focus on a strict set of core markets and private clients. In terms of net new money, we're back to growth and we're able to report positive group net new money of 2.6 billion Swiss francs for the first time since 2021. Private clients contributed 4.6 billion, which is a 4.7% growth rate. Institutional clients continued its recovery trend and despite the 2.1 billion in outflows, this includes a technical booking from the corporate center. Of course, this is not where we want to be yet, but it is a significant step in the right direction. Revenues increased by 9% to 1.42 billion Swiss francs. Of this, net interest income decreased by 36%. For Swiss franc deposits, which is our largest position, the reduction in Swiss interest rates explains a significant part of it. For US dollar deposits, a shift in the mix towards term deposits, call and term notes, all of which bear higher interest rates, drove the reduction. But as a reminder, interest income represents only 8% of our operating income. And this is a direct reflection of our investment-led and not lending-led business model in private clients. Looking into 2025, here we also expect the normalization of net interest income to continue. Net fee and commission income increased by 6% year over year due to higher assets under management levels and stable margins. Trading and other income increased by a remarkable 38%, reflecting high client activity, mostly over the period of January to May and after the US election into year end. We were not only benefiting from a positive sentiment, but we were also able to increase our market share. And as you can see, both client segments contributed to the revenue growth, with institutional clients up 4% and private clients up 12%. Turning to margins next. The margin for institutional clients increased to 37 basis points. This does include one-off items. Without these one-off items, the margin would be slightly up at 36 basis points. The margin in the private client segments, which includes the structured solutions business, increased slightly to 96 basis points. The decrease in interest rate margin was more than offset by an increased contribution from client trading and structured solutions. If we shift our focus to costs now, we've seen a step up in our efficiency. The cost income ratio coming in at 74.7%, which is a near five percentage point improvement. Costs overall have gone up by 3% or 27 million. This includes 15 million costs to achieve the run rate savings as mentioned earlier. It includes our ongoing investments into the private client business and of course, some variable costs. On the cost income ratio, we clearly had some help from the revenue side. We are, however, sustainably improving our cost position and we continue to deliver against our cost target. We will deliver the 100 million savings, but at the same time, we will continue to invest in future growth, such as the hiring of relationship managers or specific investments in smart technology and AI. Switching gears now to capital and balance sheet. Our CET1 ratio at 16.1% remains strong and is well above FINMAS and our internal targets. Even including the EHAC acquisition and Basel III final, we are at a strong 15.4% pro forma ratio. Liquidity ratio, LCR and leverage ratio are also very strong and significantly higher than all requirements. The group balance sheet has expanded by almost 4 billion since the end of 2023. This is attributable to both deposit inflows and increased client activity in structured solutions. Overall, the balance sheet is very strong. And as a reminder, which you find in footnote 10 in our annual report, we do not use any amortized cost accounting for our liquid assets, the so-called hold to maturity. This year, there are some moving parts in the CT1 ratio. So let me go through the developments in more detail. Starting from last year, if you go left to right, we have exhibited continued strong capital generation and ongoing optimization of our capital position. We generated around 150 million of CT1 capital in the year after accounting for the proposed dividend payout of approximately 170 million Swiss francs, which is the translation to the three Swiss francs per share. Next, the Ankale acquisition marked an important strategic milestone, and as you can see from the exhibit, we could basically finance it with the capital generated in 2024. We saw around 300 million in RWA increases due to business growth. Now regarding Basel III final, we have already implemented improvement measures. These measures increase our RWA by half a billion in the old Basel III regime, but they will reduce the risk-weighted assets under the new regime by roughly the same amount. This lends us at a reported CET1 ratio for the full year of 2024 of 16.1%. The pro forma after the acquisition of the client book of EHAG, which closed on January the 3rd, 2025, is 15.5%. And we estimate the effect of the remaining Basel III final regulation, including further improvements to be marginal for the next year. Basically, it is marginal because we pulled forward the Basel III final impact. So all in all, that would take us to a performance starting point of 15.4% for the CT1 ratio at the end of 2024. So what does this all mean? It means we have made two acquisitions, we've maintained our attractive dividend, we've implemented the Basel III final regulation, and we still have more than 300 million Swiss francs of excess CT1 capital. This is testament to our successful capital and balance sheet management and our prudent risk management. And it provides the foundation for investing in future growth. So now we come to the broken record part of my presentation. Overall, our financial objectives are very simple. We want to be a well-performing and long-term healthy financial institutions. This means we follow three financial targets. First, grow the business, both top and bottom line. Second, create economic value with a return on equity exceeding our cost of capital. And finally, generate capital, tangible book equity and CET1 capital, that is. These objectives, paired with conservative risk taking, will allow us to continue to drive a shareholder and capital market friendly strategy. And as we mentioned, we believe they are the basics of a strong financial institution. We've created 160 million intangible book value and including the dividend, we've generated over 330 million in capital, which are beneficial to shareholders. The return on equity is up to 12.3%. Return on ZT1 stands at 22.1%. In 2024, we have grown top and bottom line, we have created economic profit, and we have generated capital, all of which are the cornerstones, not only of a high performing, but a financially sound institution. And with that, I give back to Crystal.

Thank you, Thomas. 2024 was a successful year for Fontobo. Let me summarize. Profitability is up 32%. We are back to growth. We maintain a solid capital position and an attractive dividend. We made significant strategic progress. We streamlined our organization and client coverage. We made two acquisitions in key strategic areas. We are successfully implementing our efficiency program and will drive it to completion by end 2026. And with this, let's open for your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touch-tone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to disable the loudspeaker mode while asking a question. Anyone who has a question may press star and 1 at this time. Our first question comes from Nate Nemeth from UBS. Please go ahead.

Yes, good morning, and thank you for taking my questions. I wanted to first ask about the CET1 ratio. Obviously, meaningful impact from final Basel III measures. I was just wondering if you could talk about perhaps potential mitigation measures, perhaps potential action you can take to reduce the impact on a run rate basis in 2025 or in the next couple of years. That's the first question. The second question would be on institutional clients. Clearly in Q4, you still had quite substantial outflows from the business. Can you talk about the outlook for 2025? What do you see specifically in the equities business, emerging market? Can you give us a sense of discussions you have? And also equally on fixed income, Do you expect continued momentum, continued inflows, perhaps also acceleration in that part of the business? Thank you.

Thank you very much. I'm starting with the CET1 ratio. As we have guided the investor day, the impact of Basel III for us is roughly 1 percentage point. As you can see here now, we have started already with the mitigation measures, so the 1.2% CET1 reduction that you see here, these are the mitigation measures to a very large degree. And why did we do this already now? Because it was more convenient for us to start some of the things and implement them already in the old year. And that basically means this costs us half a million of risk-weighted assets. So it has increased the risk-weighted assets by half a million, but under the old regime. In the new regime, it will decrease the risk-weighted assets by half a billion. So these are already the implementation measures. And what will happen under Basel III finally in the coming year is our impact we estimate to be roughly 0.1 percentage points. This is currently an estimate. We have a set of mitigating measures that we are implementing. There is another set that we are currently looking into, which would then increase. But what you find in here, the total impact, which would be 1.3, this is what we know for the time being and what we believe we can certainly implement. So that's a bit on the CET1 ratio impact.

On the institutional client flows, the way to look at it is really investment capabilities are the ship and you steer your ship and you make it a strong ship. The flows and the risk appetite of the client, as you will know, are the wins, which we do not control. And we were sitting here last year and the year before saying, what's happening to fixed income? And we were saying, well, when the appetite will come back, we will capture these flows with best-in-class investment teams. And so we did. And yes, we continue to believe that fixed income is a core asset class, that we have core product that have leading performance, and that we will continue to capture these flows. Emerging markets, on the other hand, remain unloved at the moment, which is the part that has seen outflows in equity specifically, but also to an extent in fixed income. What is very interesting and the little glimmer that we can give you, the little hint, is that we are seeing the first signs of interest in EM fixed income. You'd expect from a risk appetite perspective that clients are more likely to re-enter the EM space through the fixed income area, rather than to the equity. It just follows that order. And there too, with the type of track record that we have, we're very well placed. Equity, in a sense, suffered. Funnily enough, continued to suffer, or suffers a bit from the rally being driven almost exclusively by seven stocks. I think what happened with DeepSeek at the beginning of the year can give you a glimpse of why it does matter to have actively managed strategies. An additional thing to say is we're obviously not standing still in what we are doing at our end. whether it's on upscaling investment team and processes, upscaling our sales strategy approach and leadership thereof, being able to customize solutions. So this is what we are actively doing, and that's how we are entering 2025 with a confident positioning.

Thank you very much.

As a reminder, if you wish to register for a question, please press star followed by one. The next question comes from Nicholas Herman from Citi. Please go ahead.

Yes, good morning. Thanks for the presentation, for taking my questions. Other questions on asset management, Firstly, did I hear you say there was a technical effect supporting your fee margin? I was just a bit surprised to see that with EM outflows and equities having shrunk proportionally to AUM that the margin was actually pretty stable, half and half. And in regards to the, just to follow up on Matthew's question on the pipeline, could you give us a sense of the not funded pipeline as it stands at the end of the year?

Sorry, Niklas. Sorry, go ahead.

Yeah, sure. Can you hear me okay?

Yeah, we could not, but I did actually hear you, so I will then repeat your questions, but a little bit, yeah, not so good. But go ahead. We have pipeline and margin for our institutional client business.

Yeah, thank you. I'll try it again, and hopefully you can hear me a bit better. On Revenues, that was clearly a strong end to your 22 to 24 strategic plan period. As we move into the start of your new strategic plan period, do you think you can achieve the 4% to 6% net new money and top-line growth target in 2025? And the final question on costs, if I exclude the CTA and integration costs, your cost base fell by 8% versus the first half relative to revenues down 5%. And that's despite broadly stable employee numbers. So am I correct that the reduction was largely driven by lower variable compensation? And more broadly, I'm wondering, is this level of variable compensation as a proportion of your total comp base sustainable or is the intention to increase the proportion of variable comp over time as you generate the efficiencies that you're targeting? Thank you.

Thank you, Nicolas. I started because I think I can then also repeat some of the questions. Are we confident that we can achieve through the cycle target of four to six percent growth for the firm? Yes. The pipeline into the institutional client business, it is Not dodging the question, it's difficult to give you a pipeline because flows are not in until they are in, but what we can tell you is where we see the QTPs and the interest, and they certainly continue to be in fixed income, asset-backed securities. What is new that I've just mentioned before is the beginning of an interest in emerging market fixed income as well. There is definitely an ask for solution, multi-asset as well. And equity, we have had, given our positioning, strong engagement on defender strategy, which we can only think are likely to be exacerbated by what we have seen at the beginning of this year with deep seek and with the type of volatility that we are seeing since the beginning of the year as well. And then you had two more questions. One, Thomas, that I repeat was the margin in institutional clients and the other one, we heard you better on the costs.

Let me start with the cost side. You've been asking whether we have reduced the variable compensation. This was not the case. In percent, it has come down a little bit in the second half of the year. And that is basically driven, don't forget, our compensation system functions. Of course, net new money plays a role. And in the first half, the net new money was still higher. In the second, it got a bit down, mostly in the quarter four. So that gave an adjustment. But it's not that we've changed fundamentally anything here. The costs came down on the FTE side also, and this is a technical booking topic because we have roughly, there are currently a little bit more than 30 people which are still technically employed, but they're not working anymore. So that goes into our restructuring costs. So that is how this works. The day a person stops coming into the office, we have to rebook all the future payments into restructuring because we're not getting a benefit anymore under IFRS. So that's the reason why some of the costs are out, but they go in line with the people. That's why the FTEs to you, they're still FTEs, but the people are already not coming to work anymore. So it's a technical reason why the 8% and the FTE number does not fully match. But it's the FTE number that is inflated versus the cost number. On the margin, the margin in asset management was 37 basis points. And what I have said earlier is there were some one-offs at year end, which increased the margin a little bit. a couple of basis points. But even without, we were still up versus the last year. So that's the background. That's what I exactly was saying. And I'm not sure I fully understood the question and what you were asking for. But maybe you repeat and then I can go a bit deeper into it.

No, no, I think you just did. So that's really helpful. Thank you for all the color.

Thank you.

The next question comes from Daniel Regli from ZKB. Please go ahead.

Good morning, everybody, and thank you for taking my questions. I have three questions. The first is pretty straightforward on the tax rate. Obviously, what we have seen is quite an elevated tax rate in H2, also in H1 already. you maybe give us a little bit of a guidance what you expect in terms of tax rate for 2025 and beyond and then my second question is a bit about the structured solutions business obviously this has gone quite well in h2 can you give a little bit a sense about what do you expect in 2025 respectively what how you have started in structured solutions this year and then my last question is on the risk-weighted assets and the fundamental review of the trading book in particular Can you maybe just out of curiosity explain what exact measures you have or what measures you have taken to kind of improve the risk weightings on the Basel III final? And then can you maybe relate this a bit to your structured solutions business? Can you give us some kind of indication how much of your RWA is driven by structured solutions and what is the impact on this of the Basel III final regulation? Thanks.

So we start with the tax rate. As I've mentioned, it is the global minimum tax regulation. It is, of course, the business mix for us, depending in which country our revenues accrue. That also makes a difference. And the last one is some participation exemption adjustments in the US. So for this year, you're asking for the outlook. Our guidance would be it's around 22% to 23%, as I mentioned earlier. And after that, I would assume that we go back to 20% tax rate. So that is for the taxes. For FRTB and Basel III final, the improvement measures are very difficult to describe. They're various. It is an adjustment, of course, in the structural product range on the product range, the product design. You can adjust in all kinds of directions, but you normally design them in such a way or set the pricing in such a way that those products that are more that are better for our risk-weighted assets have a lower price, and the other ones have a higher price. So this is, for example, one of the measures. The other ones is what you hold on your balance sheet on the asset side with respect to bonds. FRTB, for example, has much higher requirements for banking bonds than for industry bonds. So you adjust your portfolio. And what we decided to do is to get this started and basically implement as much as we can already in this year, knowing that we will take more disadvantages for us now. But in the long term and economically, it is better what we have done now. So that's on FRTB. And as I've mentioned in the investor day, on the FRTB, the risk-weighted assets go up for a bit. And if you look at the rest of Basel III, credit will be flat and our operational risk charges will go down. You will see that in half year.

And as you said, our their structure product business performed very well last year's revenues increased mainly due to higher client activity which is driven by investor confidence and I would say a healthy amount of volatility in the markets then for example there were some you know stock specific events like all the discussion around the Magnificent Seven that created opportunities for our clients Maybe also we can say that revenues were also supported by an expanded set of underlying instruments, including US stocks. And we observed some competitors actually retrenching in selected European markets, allowing us to gain market share. And then I think we shouldn't forget that the fourth quarter was particularly strong on the back of the U.S. elections and crypto volatility. Now, transaction activity is always difficult to predict, and it's too early in the year to have any view on where we will end up in 2025.

Can I quickly add one follow up on structured solutions? We have heard some of your competitors talking about increased margin pressures for structured products. Are you seeing something similar?

No, we actually haven't. And as the result shows, it can't be seen in our result either.

Okay, thanks. Ladies and gentlemen, that was the last question. I would now like to turn the conference back over to Christelle Rondudelint for any closing remarks.

Well, thank you all very much for the discussion, your interest and your question. With that, we wish you a very successful day and look forward to meeting you soon.

Thank you.