A pedestrian shelter under an umbrella passes a subsidiary of Julius Baer Group Ltd. in Zurich, Switzerland, Tuesday, July 13, 2021.
Stefan Wermuth Bloomberg | Getty Images
Julius Baer’s share price fell after the Swiss private bank disclosed 606 million Swiss francs ($692.7 million) of loan exposure to a single conglomerate client.
The disclosure and swirling concerns about concentration of risk in the lender’s private debt business came against a backdrop of emerging news that troubled Austrian real estate group Signa was reeling. It filed for insolvency on Wednesday.
The 606 million Swiss franc exposure to one client – through three loans to different entities within a European conglomerate – is secured by commercial real estate and luxury retail, the firm revealed. It represents around 18% of Julius Baer’s CET1 capital at the end of June 2023, according to analysts at DBRS Morningstar.
The bank last week set aside provisions of 70 million Swiss francs to cover the risk of a single borrower in its private loan book.
Despite the speculation, Julius Baer has not confirmed that the client is Signa, and a spokesperson told CNBC on Thursday that the bank “cannot comment on alleged or existing client relationships.”
DBRS Morningstar Senior Vice President Vitaline Yeterian and Managing Director Elisabeth Rudman said on Wednesday that such a large concentration of funds in a distressed real estate borrower raises concerns about risk management and highlights the broader risks for the banking sector as highly leveraged companies struggle with higher. debt financing costs in a dangerous economic environment.
The European Central Bank recently examined the commercial real estate sector and the provisioning methods and capital buffers of European banks.
DBRS Morningstar says Julius Baer’s capital levels are adequate to absorb further losses, with a hypothetical loss of 606 million Swiss francs accounting for around 280 basis points of the Swiss bank’s 15.5% CET1 ratio, on a risk-weighted basis assets of 21.43 billion Swiss francs. since the end of June.
“However, we see the recent significant drop in Julius Baer’s share price as a reminder of the growing impact of technology and social media on stakeholder behavior,” they said in Wednesday’s note.
“Meanwhile, the limited level of disclosure makes it difficult to assess the full picture for the bank at this stage. Any deposit experienced by Julius Baer would be negative for the bank’s credit profile.”
Rickenbacher released a statement on Monday confirming that the bank would continue its dividend policy, along with other updates, while reassuring investors that any excess capital left at the end of the year will be distributed through share buybacks.
Julius Baer has a strong capital position with a CET1 capital ratio of 16.1% as of the end of October, the bank said on Monday, significantly above its own floor of 11%.
Even under a hypothetical total loss scenario, the Group’s pro-forma CET1 capital ratio at October 31 would exceed 14%, the bank said, meaning it would remain “significantly profitable”.
“Julius Baer is very well capitalized and has been consistently profitable under all circumstances. We regret that a single exposure has led to the recent uncertainty for our stakeholders,” said Rickenbacher.
“Along with investing and multi-generational wealth planning, financing is a distinct part of the wealth management offering to our clients.”
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He added that the board is now reviewing its private debt business and the framework in which it is conducted.
However, Julius Baer shares continued to fall and were down 18% for the year as of Thursday morning.
“We continue to closely monitor sectors that have suffered stress as a result of more uncertain economic times, higher for longer interest rates, strengthening in lending conditions, weaker demand, higher operating costs, and especially the commercial real estate sector,” DBRS. Morningstar Yeterian said.
Several economists in recent weeks have suggested that there are lingering vulnerabilities in the market that may be exposed in 2024 as the sharp increases in interest rates implemented by major central banks in the past two years wear off.
Exposure to commercial real estate has emerged as a concern for several major lenders this year, while the risks associated with panic-driven bank runs on smaller lenders became stark in March, with the collapse of Silicon Valley Bank.
The ensuing ripple effects shook global investor and depositor confidence and ultimately contributed to the downfall of Swiss giant Credit Suisse.
A common theme during the mass withdrawals of investment and customer deposits was panic fueled by rumors about the lender’s financial health on social media, a trend lamented by its bosses at the time.