Category Archives: Banks

ECB data shows Italy, France, Greece, Spain most active propping up their bond markets

Looking at this data showing central banks most active propping up bonds in the euro area and the comparing to what “pure play private banks” like Julius Baer hold on their balance sheet does make you wonder about the sustainability of the ECB purchases and what effect it has on the bond market.


The data below shows what Julius Baer invests billions in. Especially debt instruments and there financial institution bonds caught my eye.

Julius Baer
Financial investments available-for-sale
Money market instruments 2’723.00 15.65%
Debt instruments 14’518.00 83.45%
Government and agency bonds 3’411.30 19.61%
Financial institution bonds 6’406.30 36.82%
Corporate bonds 4’649.40 26.73%
Other bonds 51.00 0.29%
of which quoted 13’532.50 77.79%
of which unquoted 985.50 5.66%
Equity instruments 155.80 0.90%
of which quoted 16.10 0.09%
of which unquoted 139.70 0.80%

UBS Results: The Headwinds and The Green Shoots


The interest rate environment is dampening the business model which relies on “net interest income” , as can clearly be seen above (marked red). Luckily for banks in general and UBS in particular,  loyal customers aren’t putting stronger pressure on fees and commissions.

Own fund business schrinking and lighter customer activity are lowering commissions slight as can be seen in “net fee and commission income”.

A noteworthy positive is the “net trading income” especially as the impact from own credit, that had inflated the result last year QoQ.

Looking at the business divisions UBS has the investement bank and the americas wealth management that are not as profitable or safe as the personal & corporate banking or wealth management units. Also the investment is made to look better by transferring costs out to corporate center. It is inherently riskier and disguised. Asset management is also not especially profitable.


Credit Suisse underlying business – 2Q16 results

You can’t be much else than shocked by the dramatic revenue drops.

This is the unfiltered story, no PR-talk, no salesman talk, just facts and figures:

Credit Suisse
2Q16 1Q16 2Q15 Down
Net interest income 1’999 2’011 2’869 -30.32%
Commission and fees 2’796 2’675 3’259 -14.21%
Trading revenues 94 -271 498 -81.12%
Other revenues 219 223 329 -33.43%

Then compare it to expenses:

All small moves.

Compensation and benefits 2’734 2’482 2’914 -6.18%
General and administrative expenses 1’760 1’848 1’928 -8.71%
Commission expenses 352 387 406 -13.30%
Restructuring expenses 91 255 0

Further important problems:

  • Strategic Resolution Unit (SRU) is a huge black hole for revenues and at the same time costs a lot to run, especially “other operating expenses”.
  • Swiss Universal Bank (SUB) and International Wealth Management are running with decent margin, especially when compared to Global Markets which is very expensive to run. Probably to many “screen watchers” in London, NY etc…


What is an especially large challenge as an outsider; understanding what is in the Strategic Resolution Unit (SRU) and how is it performing.

Some info from the 1H16 report:


The bloodsuckers are

  • the investment banking portfolio which somehow manages to have negative revenue (always a good sign if your assets are working against you).
  • the funding costs

Pure Play Swiss Private Bank (Julius Baer – Vontobel)

In the H1 report Julius Baer is described as a pure play private bank. That’s why I thought it may be useful for discussions to know what this business model entails. Where do the profits in a pure play private bank come from?

According to my calculations **

22% from interest income (8% at Vontobel)

38% from management and fund fees (55% at Vontobel)

16% from commission (~client trading) (12% at Vontobel)

18% from trading (mainly FX trading) (25% at Vontobel ***)

4% from structured products (guesstimate)  * ( ***probably 5% from trading at Vontobel belong here…)

  • * 4% of the AuM at Vontobel are in structured products; 5% at Julius Baer

If we split the Vontobel business modell we see that

18% is Private Banking

57% is Asset Management

20% is Investment Banking

5% is External Asset Managers



1 Interest income 393.90
2 Interest expense -86.40
3 LOANS       307.5 22.94% 22.50%
4 Advisory and management commissions 433.10  
5 Investment fund fees 87.00  
6 MGMT FEES & FUND FEES     520.1 520.1 38.80% 38.05%
7 Brokerage commissions 251.00  
8 Other commissions 60.60  
9 311.6  
10 Commission expense -96.5  
11 COMMISSIONS       215.1 16.05% 15.74%
12 Trading income FX 229.80 229.8 17.14% 16.81%
13 Trading income Debt Instruments 14.20 14.2 1.06% 1.04%
15 Trading income Equity instruments -126.40  
16 Dividend income on trading portfolios 180.20  
17 STRUCTURED PRODUCTS (partially)       53.8 4.01% 3.94%
18 Total of all the selected above 1340.5
19 Total according to H1 Report 1366.9

julius-baer-net-commission-and-fee-income julius-baer-net-interest-and-dividend-income julius-baer-net-trading-income

Julius Baer Structured Products & Dividend Games Very Profitable, Only in H1 Always

I find it rather interesting that dividend income from trading portfolios (CHF 180m, 121.9) and net trading losses on equity instruments (CHF 126m ; CHF 104m) only happen during the swiss dividend paying season. The profit margin between the dividend income on trading portfolios and the equity losses on trading are 15-30%. As a sidenote: withholding tax is 35%. Also: Dividends in Switzerland are mainly in H1. The dividend trading income and realised trading losses seem to be related to the swiss dividend paying cycle. If Julius Baer was doing trading with US equities for dividends they would be more evenely distributed throughout the year. However H2 never seems to have large fluctuations.

This could lead to a suspicous mind concluding that tax circumenventing in some form or other is taking place. Likely it is legal of course…

The official explanation (and one that makes a lot of sense):

The dividends come from equity securities that are held as a hedge in conjunction with structured products. 

This would also mean that most or all of the negative net trading income from equity instruments is in fact just marked to market securities held for trading.

It does show you that the structured products division of Julius Baer is rather important.  

Check out “Dividend income on trading portfolios”

julius-baer-net-interest-and-dividend-income Check out losses on “Equity Instruments”julius-baer-net-trading-income

Credit Suisse credit agency ratings – near problem area?


The comparison below is interesting for short-term ratings. Credit Suisse and SocGen would lose the A1 Short Term rating with the next step. Now why is this important? Many multi-billion pension funds are forced to move their liquidity from banks that lose the A1 Short Term rating. That will mean a drain on liquidity, which in turn leads to furth problems. Also the rating impact by itself can already cost hundreds of millions in extra costs. This would be another drag on how safe Credit Suisse is.


Credit Suisse business model flaws – high interest costs

Outstanding capital insturments of Credit Suisse according to this presentation.

According to my calculations (see table below) Credit Suisse pays over CHF 1 bn per year in interest rate costs alone. The coupon they need to pay is high. High risks demand high coupon.

So much profit has to be generated to just cover fixed costs. At the same time more and more peer-to-peer lending business models are springing up, robo-advisors, strong global competition. The Credit Suisse business model seems very challenging, that’s what the stock price and also credit rating tells you.

Do cantonal banks have these costs? Their share prices seem to be saying they have a lower cost and lower risk business model.  Makes you wonder why customers should even bother having assets with a riskier, negative news-flow company.

Table of AT (Additional Tier) 1 instruments:

Currency Nominal in m iCoupon Interest pa CHF interest
USD 2000 6.50% 130.0 128.05
EUR 1250 5.75% 71.9 77.98
CHF 290 6.00% 17.4 17.40
USD 2250 7.50% 168.8 166.22
USD 2500 6.25% 156.3 153.91
USD 2000 7.88% 157.5 155.14
CHF 750 7.13% 53.4 53.44
CHF 2500 9.00% 225.0 225.00
USD 1720 9.50% 163.4 160.95
USD 1725 9.50% 163.9 161.42
CHF 390 0.00% 0.0
as of Q1 2016 1307.49 1299.50
as of Q3 2016 1149.99 1144.36
USDCHF 0.9850
EURCHF 1.0850

FINMA could save Credit Suisse a billion by invoking their right:

Credit Suisse will be prohibited from making any AT1 interest payment if:

– Distributable profits are less than the aggregate amount of AT1 interest payments

– FINMA prohibited such interest payment

– Minimum regulatory requirements are not met

How safe is Credit Suisse?


According to the above presentation for fixed income investors of Credit Suisse the bank is less dependent on counterparty funding. Instead it has core customer deposits and long-term debt making up a larger proportion of balance sheet.

I don’t like this statement of the Credit Suisse CEO today (Interview with NZZ):

He’s asked are customer deposits (so crucial according to the above graph) leaving Credit Suisse in last days, weeks. He doesn’t say no, but says employees are doing a great job, that is diplomatic for yes, in my opinion.


Also this in another important sunday paper in Switzerland:

Basically saying: Swiss customers are transfering money to safer banks, like ZKB (with cantonal guarantee “Staatsgarantie”). It also notes, that UBS didn’t nearly fail in 2008 because of capital, but because customers and especially counterparties were pulling billions out daily.


In conclusion:

  • The CEO doesn’t deny they are seeing outflows
  • The banks capital is in better shape than in a long time
  • The CEO seems to think Q2 results shoud reassure investors
  • At the same time he states that we’ve only seen one quarter of twelve quarters of the transformation process
  • If Q2 doesn’t reassure investors I wouldn’t be surprised to see floodgates open
  • Time is a luxury Credit Suisse doesn’t have; so point 4 above could be rendered mute by reality.
  • In my view, and to reassure customers of the “crown juwel” (according to Tidjane Thiam), the Swiss Universal Bank should be granted temporary state guarantee. This would stop outflows. It would give the CEO the urgently needed breathing space. — Problem: At what price could this state guarantee be made?  Is it legally possible? Would CS shareholders have to take a large write-off?
  • It’s not the CEOs fault

Which banks are suffering most 2016

This bubble diagramm gives a good impression of which banks, by market cap have suffered most this year.

The highest percentage losers are the ones that the market thinks are most likely to fail, need bail-outs, increase capital – or generally put: Which will be first to fall off the cliff.

Unicredit, RBS, Credit Suisse, Deutsche Bank, Barclays, UBS – in that order – are considered unsafest by shareholders, currently.

In a normal capitalist world, these weak banks may see themselves in a death spiral or at least in a negative feedback loop. If you have a lot of money parked with those banks you will be asking yourself the question, is it safe there, should I risk having large liquidity there? Do these banks have derivatives or property investments or loans that will suddenly wipe out the capital, like in 2008 after it began to look dodgy in 2007.

I’ve read lots of articles stating people are worried about a reoccurence of 2007-2009 in last hours and days. Whether it materialises or can be circumvented is a very open outcome. But investors and people in general react by moving on the rumour.

If you’re in a herd and it starts running, I assume in 9 out 10 cases there is a predator lurking somewhere.


Deja Vu with Brexit – Standard Life Fund Freeze – Pre Bear Stearns Moment – the Lehman Moment can still come

If you like working through the worst case scenario it would probably be sensible to consider the Brexit Vote the beginning of problems to come.   (Telegraph Group Business Editor James Quinn is doing a great job of reporting effects of Brexit!)

Trading in a £2.9bn commercial property portfolio managed by Standard Life Investments has been halted after a flood of withdrawals exhausted the fund’s cash reserves.

Standard Life said the move followed “an increase in redemption requests as a result of uncertainty following the EU referendum result”.

Details were not provided on the current liquidity position or on whether any buildings would now be sold.

The latest figures for the portfolio, from May 31, show the fund held 13pc in cash. Much of this may have been paid out to departing investors.

In the ten days since Brexit two other commercial property funds – run by rival managers Aberdeen and Henderson – have cut almost £300m from the value of their holdings. Freezing withdrawals is the “next step”, commentators say.

Time line – Bear Stearns Hedge Funds Collapse (we could be at the moment in time: June 2007 – meaning we won’t see the worst to come untill 2017 or early 2018. These things don’t unravel in a few days.)

July 5th update: “Three property trusts, including Standard Life, M&G Investments and Aviva Investors, have suspended trading. The suspensions now account for more than a quarter of the £35bn-sized sector.” “Andrew Bailey, the new head of the Financial Conduct Authority, also attempted to ease concerns around the property sector, saying the actions taken by the property funds was not a “panic measure.” Mr Bailey, until last week the head of the Bank’s Prudential Regulation Authority, said the purpose of suspending redemptions is to allow a funds’ underlying assets to be revalued.” <– not a panic measure. No, just an indication that a haircut of unknown proportion is likely to follow. That is not something that is a calming thought to the owners of properties or property fund holders. — The big question: Will a self-fullfilling prophecy ensue. Worried people, pessimistic people selling because they are told they can’t sell. If a large proportion of your net wealth is in property, wouldn’t it be prudent to now take money of the table with property prices still high? I think so. — Mostly, if a ball gets rolling, it’s velocity doesn’t slow down. — Except the CHF vs EUR, that ball is being held by the SNB. The problem is: That ball is getting larger. — It reminds me of my attemps as a child to dam a little stream in the Swiss Alps. Just a question of time before pressure builds up and flushes away the dam. — But maybe the dam is so strong the SNB is building, that the safety seeking liquidity will go to Gold and other markets…


Marketwatch has it summed up nicely:

“What’s happening?”

“Standard Life Investments on Monday was the first to halt trading in its open-ended property fund. Aviva moved to suspend trading in its fund Tuesday, followed minutes later by M&G. Observers expect other U.K. real-estate funds to follow suit.”  (My view: aka Domino-effect, trickle-down-effect, contagion, you name it, it’s happening. It’s also going to be enough that buyers pause, to leave the sellers quickly swelling in number…)

“Redemptions can put a strain on such open-ended real-estate funds. Unlike stock funds, they can’t move to quickly liquidate holdings to meet redemptions. Most carry significant cash cushions, but those appear to have been sharply eroded. Complicating matters, unlike stocks, properties can be hard to value and liquidate during times of stress.”