Julius Baer Earnings: Credit Risk Seems Contained, but Lower Rates Depress Margins

After a disastrous second half of 2023, wide-moat Julius Baer returned to profitability in first-half 2024. The results showed no indication of further credit quality issues. While management ascribed the sharp decline in net interest income to clients switching into higher-yielding term deposits, we speculate that Julius Baer also paid more for deposits than previously. The significant loan loss provision that Julius Baer had to raise last year dented its reputation as a safe haven bank. Net new money flows from clients also reflected initial concerns, with limited inflows in January but meaningful improvements after that. The market disliked the results, with the share price down 9% on the day. Julius Baer is now trading 23% below its May 2023 high and at only 9 times our 2024 earnings estimates, a 25% discount to its long-term multiple. While it has clearly suffered reputational damage, this firm still generated a return on tangible equity of 26%. With credit risk addressed and a new CEO appointed, we view Julius Baer as attractively valued. After updating our model with the latest results, we increase our fair value estimate slightly to CHF 66 per share from CHF 65.