Vontobel Holding AG
SIX:VONN
Earnings Call Analysis
Q2-2023 Analysis
Vontobel Holding AG
The company emphasized its commitment to scaling value creation, aiming to deliver on cost promises and improve the capital position for stability and further growth. A specific focus is on organic growth in Wealth Management, which has historically grown by 5% annually. The company plans to continue growing the wealth management book by at least 4% to 6% going forward. To bolster this growth, the company has hired 50 new people, seizing the opportunity to organically expand in a manner typically seen in M&A activity.
Assets under management increased by 4% to CHF 212 billion with an operating income of CHF 696 million, marking a 1% rise from the first half of 2022. However, due to higher operating expenses (up 8%) and external factors like the war in Ukraine and interest rate hikes, the net profit fell by 16% year-over-year to CHF 127.6 million. Despite these challenges, a return on equity of 12.5% was achieved, which is above the cost of capital, indicating value generation. Notably, compared to the second half of the previous year, net profit has surged over 60%.
Wealth Management enjoyed a 14% increase in assets under management to CHF 98 billion, with net new money at CHF 0.9 billion. Adjusted for specific factors, the increase would be approximately 8%. However, Asset Management experienced a reduction of 8% in assets under management year-over-year. Despite this, the division has seen a slight uptick since the second half of the prior year.
Net interest income has seen a notable increase, tripling to CHF 95 million. Meanwhile, fee and commission income maintained stable margins amid lower average assets under management. Trading income has rebounded significantly compared to the previous half-year period, even considering the closure of operations in Hong Kong that resulted in minor lost revenue.
Excitement surrounds the company's strategic initiatives aimed at improving profitability. Restructuring costs have reached CHF 134 million for the half-year, but the company forecasts an adjusted cost base before restructuring of CHF 1.08 billion to CHF 1.1 billion for the full year 2023. This is expected to decrease further in the subsequent years, with the adjusted cost base estimated at CHF 1.02 billion to CHF 1.06 billion for the full years 2024 and 2025. The one-time restructuring charge is included only for 2023, indicating an operational cost range in which the company currently operates. These measures align with the targeted return on equity of 15% to 17% for 2026.
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Ladies and gentlemen, welcome to the Vontobel Half Year Results 2023 Presentation. I am Sandra, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast.At this time, it's my pleasure to hand over to Dr. Zeno Staub, CEO. Please go ahead, sir.
Thank you very much and a warm welcome to all of you on the call. Thanks for your interest in Vontobel. I'm here with Thomas Heinzl, our Chief Financial Officer.
Good morning.
And we're very happy to give you an update on half-year numbers 2023. As usually, I will start with an update on the highlights and achievements of H1 and an update on how we do against our Lighthouse, our business plan, our strategy, then Thomas will guide us through all the numbers in detail and then I will be back with the outlook and how business has started. Then after that, we will obviously both be very happy to take your questions.So before we go into the details and look into the slides, let me create a little bit of context on where we are. So after record year '21, a very challenging '22 for any investment firm with the weakest and most negative performance of any 50/50 investment portfolio of stocks and bonds probably since 40 or 50 years and the very dismal second half-year in '22. In terms of profitability, we are moving in the right direction and things are improving across the board. What we see is that we continue to run our global diversified business model as a pureplay investment firm.When we look into how we do in the different client arenas, we do outstandingly well in Wealth Management with an annual growth rate of 8.4% of the growing content part of the business. We do sensibly well and very robustly in DI and SST against the very low backdrop of client activity and transactions. And we do exactly as the rest of the highly active high-octane asset management industry is doing with institutional clients.Now let's go and look into it in more detail. So we've seen recovering markets, but we also see persistent uncertainty. However, the macro environment remains uncertain, but we believe we're approaching the end of the interest rate hiking cycle. We have delivered robust financial results after these 2 very exceptional years I alluded to, with Wealth Management leading the pack with very strong underlying growth. We have seen DI normalizing and we also see improving trends in Asset Management.Our results are supported by strong net interest income, though as a pure play investment firm the relative rate in our revenues is obviously lower. We also see first signs of improving investor confidence and are actually expecting that this will improve now over the next couple of months given on where we are in the interest rate cycle.We are structurally addressing costs while continue to seize the unique opportunities and while continue to have our focus very much on the long term. However, we have reviewed our business portfolio and we will deliver against the cost target of CHF 65 million and we are on track and Thomas will share more insights about that. We have accelerated and are expanded our Wealth Management hiring and we have already signed 50 RMs in first half year. I'll be back with more detail around that.Our strategy, our Lighthouse, pure play investment firm focused on client needs that predominantly come from mature markets has already put us in a very good position relative to the geopolitical tensions and geopolitical risks. However, we have decided to fast-track the adoption of our footprint relative to the geopolitical tensions and we are through with more than 75% of what needs to be done in this field.We have further strengthened our balance sheet and our capital ratio. We have navigated the first half year that brought a Regional Banking Crisis in the U.S. that brought an idiosyncratic risk in Switzerland. We have navigated this with a capital position and a liquidity position that is as solid as ever. This brings us a lot of credibility towards the many, many, many clients that choose us as their new partners but obviously also brings optionality going forward.Let's look at the numbers. So Assets Under Management are up by 4%. Our net new money, very strong. 8.4% in Wealth. We then adopt to the global geopolitical situation and we suffer in line with the industry on Asset Management, leaving us more or less than flat on the net-net basis.Pre-tax profit stands at CHF 150 million, group net at CHF 128 million. We create added value against our cost of capital with a return on equity of 12.5%. CET1 is up 60 basis points to 17.3%. We delivered this number against quite an interesting backdrop of markets and environment. So global equity markets have recovered somewhat and they keep recovering as we speak.Bonds' markets have at least stabilized. We see us moving towards the end of the interest rate hiking cycle where central banks are closer to being achieving their targeted exit rates and we believe that this will be positive for the willingness of the special institution clients to deploy capital going forward.Volatility on the equity side, very low, higher on the interest rate bond side, then flows in the industry and here, it is obviously important to compare apples against apples. So when we look at active fund flows, because we're a pure active manager cross-border flows are still negative but getting lower. So we're delivering exactly within line of the industry. Obviously, we intend to do better than the industry in each and every opportunity.Quite a number of important themes in H1 2023: The rate hikes and the impact on inflation and growth; the financial system stability that was put into question we think we are beyond that; the regulators and the government have acted very decisively both in the U.S. as well as here in Switzerland. And we as Vontobel have shown that once again, we have navigated challenging waters with very solid numbers and a very, very controlled risk appetite and this risk appetite will not change also in an environment where we very decisively seize opportunities to win market share.We also have seen what we think is a new wave in the potential of technology and AI to finally now deliver on the year-long promise of technology to boost efficiency and productivity and we think we are at the forefront of deploying that given our year-long track record in investing in tech.Our investment performance has become more constructive, especially on the fixed income side where we have always guided that we needed to go through this period of adjustment. This period of adjustment of fast hikes will cause pain also for our relative performance as we are getting closer to the end of the cycle and perhaps in the U.S., we have actually already reached it with yesterday's decision. Our relative performance and peer positioning is improving. Same is true on the equity side and we are delivering solidly on multi asset class especially when we talk about mandates both for institutional as well as for private wealth. And some of our quant-driven models are also finding it more easily now to adopt to in an environment as it has returned to a more standard economic setting and we believe that this is a coherent, reliable bedrock to do business going forward.Sustainability and ESG is an important topic and keeps being an important topic. It has moved globally more towards seizing investment opportunities. And we just highlighted here one of our key options, key solutions for our clients. Global Environmental Change Fund product that we have since 2008, as it happens sometimes, we have been very early in bringing these opportunities to investors. We now see really a global appetite across the theaters from the U.S. to Asia to Europe coming from different backgrounds, sustainability-driven, opportunity-driven, but we have always argued that at the end, investment solutions need to answer both things, do well but also address the challenges of this more sustainable world but deliver investment performance and that's exactly what we do and we see a strong interest of our clients in that.How are we doing against our priorities? We have identified 4. Let me quickly go through them as delivering consistently against our plan is very important to us. So we think the new regimes are offering us the opportunity to deliver a more constructive investment performance, especially in fixed income, the adoption was challenging, but we think we are seeing the end of the tunnel. In private markets, we will be in a position in Q3 to launch a very sophisticated offering for our private clients and there is more to come on this. I already talked about the transition to sustainability where we not only offer investment solutions but also the advice to help clients navigate the sustainability topic.On Wealth Management and delivering best-in-class experience to our private clients, we have keep delivering outstanding underlying growth of 8.4% which we think is industry-leading. This is thanks to our positioning, our competencies, our capabilities, our great talent, and we have accelerated the adoption of our footprint to the global situation.In the U.S., we have completed the merger with SFA. We are now one company, one firm when it comes to Wealth Management in the U.S. We're the largest Swiss-based SEC-registered investment advisor and we are looking forward to use that position as well as the cooperation with UBS Americas.We have also won the first institutional mandate from a U.S. investor produced in Switzerland. So we think that we are uniquely positioned in our industry being able to export first-class institutional pedigree investment quality into the largest, biggest, deepest market in the world. And we are in the position to do that, thanks to the long-term strategic decisions, the investments in systems and processes.We also have a very close eye on scaling our value creation. We will deliver on the cost promise and Thomas will go into more details on that. We have in a challenging environment again improved the capital position, and we intend to keep this capital position both for stability as well as for optionality. And we continue to harvest the potential on technology where thanks to our year-long investments into Cloud, AI and big data infrastructure. We are very well-positioned to put the promise of AI to work and to deliver efficiency.Let me deep dive a little bit deeper into the Wealth Management organic growth opportunity. So what we want to stress here is that we have now for years built a franchise that is based on being client-centric and investment-led at the same time that has delivered consistent organic growth.So over the last couple of years, we have consistently delivered annualized growth of 5%, more or less in the range of CHF 4 billion on a yearly basis. We have further improved the efficiency and the productivity of our relationship managers by giving them tools, systems and processes that allows our relationship managers now to look after CHF 300 million per capita on an average basis.And now we seize the opportunity of the environment. We have hired 50 people. In addition, 20 have started, 30 will start in the second half year and we strongly believe that this is a unique opportunity to organically expand the size of the Wealth Management franchise at the increased level that would usually only come through M&A opportunities.We are equally as confident that we will be able to continue then going forward to grow the bigger book and the bigger franchise at least with 4% to 6% going forward. We will also not nudge on our position when it comes to culture, risk appetite and incentive models. This is an organic add-on to who -- to what Vontobel is, to who we are, but who we are and what we are resonates very well with clients and with talent. We have also adopted our global footprint further and we have gone through more than 70% of the required adoption.With that update on the potential of our Wealth Management business and what we see in the books and what we look forward to realize, I hand over to Thomas, our Chief Financial Officer.
Thank you very much. Welcome also from my side and I would like to guide you now through the financial results. What is important for you to remember is we do not adjust our numbers. That means sometimes our numbers need a bit of deeper digging and need a bit of explanation and this is one of these times where we need to do it. But it also means that if you look into comparisons, you will also have to dig a little bit deeper to compare us with our peer group in order to make sure that it is an apples-to-apples comparison.Assets under management are standing at CHF 212 billion which is up 4%, operating income is CHF 696 million or up 1% from the first half of 2022. The operating expenses at CHF 546 million are up 8%. We will talk a bit about why this increase is so strong and that all leads us to a group net profit of CHF 127.6 million. This is a reduction of 16% versus the first half of last year but it is also an increase of over 60% versus the second half of the last year.At that point, I want to remind you a little bit about 2022. What happened is in the first couple of months, in the first weeks and months, we were still -- we're still having this bonanza of retail trading. So January was an excellent month. And that then started with all the negative effects, the negative incidents that happened, so the war in the Ukraine, the interest rates that continued to increase, in the second half of the year, the debacle with the U.K. pension funds. So we had a series of negative news.And if you look at the numbers, if you look at the numbers on a monthly basis, what we see is we see, if you seasonally adjust the trough around October, November and we're clearly on a path of improvement. Also and what played the role is well is FX which the dollar development has hurt us over the course of the first half of 2023. The cost-to-income ratio stands at 78.2% and the return on equity of 12.5% is above the cost of capital and hence we're generating value.If you dig into this, assets under management has slightly increased by 4% to CHF 212 billion. But what you see as well is from 2021 to the first half of 2022 and these are half year and yearend numbers, of course, we had the significant decline over the first half of 2022 which you will then see when we try to explain a bit about the revenues and what happened in that regard.Assets under management development, net new money minus CHF 0.5 billion if we adjust for the impact of our market focus initiative, it will be plus CHF 0.5 billion over Wealth Management and Asset Management and FX on that -- in that regard has cost us CHF 2.2 billion and performance has delivered CHF 10.6 billion to take us to the to CHF 212 billion.If you look into the assets under management and net new management -- net new money by client unit, what you can see is asset management's net -- asset management's -- assets under management have declined by 8% year-over-year and is slightly up since the second half of the year. In Wealth Management, we have seen an increase of 14% from the CHF 86 billion to the CHF 98 billion. Even if you adjust just for SFA, that would be an increase of roughly 8%.Now net new money, net new money development is CHF 0.9 billion. Basically, it consists of 3 different things that need to be taken into account. First of all, the Wealth Management, the core engine of Wealth Management has delivered CHF 3.9 billion, which is an 8.54% annualized growth rate, net new money over assets -- average assets under management. So a very, very strong number here.Then we have this initiative which we have announced the one which led to CHF 1.8 billion outflows which is basically we exit the business with Russian-domiciled clients and we exit the business, the B2C business in Asia with the local rep office that we have closed down as part of the cost initiative.Asset Management on the other side had an outflow of CHF 3 billion which in total later stand to an official number of minus 0.9%, if you adjust for the outflows, it will be plus 0.9%. The operating income, there's a couple of remarkable things here to mention. First of all, operating income is up 1% year-over-year. FX here hurt us by CHF 15 million. So that is roughly -- that number will be roughly 4% increase year-over-year and what you can see as well is one of the strong drivers has been net interest income. Net interest income has tripled over that period of time to CHF 95 million. And that is also expected -- above our expectations.The reason for this is why it is over our expectations, with the strong asset management inflows, a lot of the money has arrived at cash, and it stayed in our deposits for quite a bit before it then got deployed into the investment side.The net fee and commission income with stable margins, which we'll talk about in a second, and lower average AUM, you see it coming down but slightly improving over the second half. Also on the trading income, that has recovered a lot versus the second half of last year. Despite the fact that we closed down our Hong Kong operations, again, B2C business that we're working on closing down, which is also single-digit million number in revenues that have fallen away.What you see here as well, now I'm moving to the operating income is the digital income, which reflects the self-directed clients in -- they do the trading, they have not yet recovered to the same degree as we have seen on the institutional side. So these self-directed clients, which were basically the ones fueling this huge 2021 development at the 2021 bonanza, they're still very careful and they're still on the sidelines.If you look into Wealth Management, that's a 23% increase year-over-year in revenues and Asset Management is down 18%, and this 18% is explained by the average AUM, the reduction that we had over the first half of last year. And hence, the comparison is slightly down.Moving to the return on assets. What you can see on Asset Management, not a lot of movement. There is minor business mix effect of 0.3 basis points. Normally, we wouldn't even show the rounded number, but it is almost flat and nothing happened on the Asset Management side, on the margin, but that is a reflection that even in times when we see outflows, we're very strict on our pricing discipline, and we hold the pricing discipline. So the effects here were also minor effects on business mix.Wealth Management has increased significantly, not surprisingly as well. Commission income has remained stable. The commission income, the transaction-based commission income has been recovering. So clients have been more active than in the second half roughly at the level of the first half. But still, clients are a bit careful, in particular, those that have missed the uptick from the first half year are very cautious now to get into the market because, obviously, they're afraid that they're now exiting at a high, and then we will see a decline in September.Should we see the markets continuing to evolve or even if we should, should we see the market going down? We're expecting that these clients who are generally also more optimistic but have timing questions will reengage with us, and then the commission income could increase.And finally, net interest income, which we have mentioned already, most of the net interest income that we generate is here reflected in Wealth Management, which took the margin to 82 basis points.Operating expenses, the number that needs a bit of explanation, the 8% increase. Let me start from the right-hand side to go down in the -- by the other direction. First of all, we had an item that has -- that is an IFRS, nonrecurring IFRS booking item that is related to the share-based benefit program and the incentive accruals. The main driver were the massive reduction in our bonus pool in 2022 and the fact that there was an extremely strong price movement in Vontobel shares between year-end 2021 and the grant date of our shares in March 2022. So that contributed a lot. And this year, it was going in the other direction, explaining CHF 21 million.Moving to the next point, Wealth Management growth. The SFA acquisition, don't forget the acquisition has been closed in August and the full costs because some of the people moved in then in September. The full costs -- this is the first half year where we have the full cost of SFA on our books. And then we have said it already as a strategic direction, the organic growth in Wealth Management has caused another CHF 10 million.Moving to the cost side. What you can see here is we have mentioned that we have the CHF 65 million exit rate cost target. And we said the cost to achieve the CHF 65 million are CHF 15 million, in our estimate, roughly EUR 15 million. What you see already is in year, so to say, we have CHF 15 million gross reductions achieved already and the cost to achieve these reductions, severance payments and other things amount to CHF 9 million.Moving on. The costs that we have incurred and that I just explained show up mostly in the personnel line item. If you look at the cost-income ratio, 78.2%, even if we correct for the one-off, even if we correct for the FX, which would take us 2.5% to 3% down, the number is still too high, and we have more work to do here on the cost to income ratio. The structural efficiency measures, as mentioned, are on track, more work to be done.Capital, and I will talk a bit about the balance sheet now. On the deposit side, our balance sheet, the deposits are CHF 11.5 billion, if you look into our balance sheet. That, however, doesn't reflect our deposits. We have a product called Term Note, which is, in essence, a term deposit, a fixed term deposit, but it is tradable and as such, is treated under IFRS like a structured product. You will find this in other liabilities at fair value, and that's CHF 2.5 billion. So our total deposit base is CHF 14 billion and hasn't changed a lot over the second half -- over the first half of 2022.If you look at the loans, the loan book is down CHF 320 million. But again here, we've seen a very limited amount of deleveraging. What the -- where the CHF 320 million are coming from is mostly to do with the market focus and the clients that we have let go, which typically had a higher usage of loans in Lombard loans. So that explains that.We have further strengthened the balance sheet, capital deposit, the bond portfolio liquidity, all of our ratios have been going up. CET1 is up 60 basis points. The RWA, despite the RWA being slightly up by CHF 300 million roughly, the leverage ratio is unchanged at 5%. And we had a very strong funding position throughout the year with a liquidity coverage ratio of just short of 180%.I've also mentioned a couple of times that we have a conservative risk stance. We kept this. This was very helpful last year in the second half. It was also very helpful here in the first half. Currently, we're still being careful in the outlook, but we're currently already discussing that we should move to a more neutral stance in terms of the risks because we see a slight recovery. We have not moved yet, but we will contemplate that over the summer.On the business model, I've mentioned it already, return on equity is at 12.5%. We are creating value as we do since 2014. Every year, we have created value for the shareholders. The return on CET1 ratio, we just mentioned is for comparability is 22.8%. Our objective for the ROE stands at 14%, and we are committed to get back to this 14% in the very near future.Comparing to our targets. The balance sheet targets are very good, CET1 ratio, total capital ratio. On the P&L ratio, we have a bit more -- on the P&L-related targets, we have a bit more to do, as I said earlier. Now if we synthesize very quickly, we're on the path of improvement. Wealth Management had an excellent year. Asset Management is in line with the industry and clients are still waiting.Our balance sheet is very strong and has even grown stronger over the course of the year. And the costs are driven by, a lot by one-off costs or explainable effects. Still, we have more to do there.And with that, I hand over back to Zeno.
Thank you very much, Thomas. I'll be back with a quick recap and outlook. So we have delivered robust numbers against an environment and fully in line with our business model and our strategy. We believe that the developments that we see have actually validated our strategic priorities and our positioning. It has validated that our investment-led approach works as a strong organic growth driver. In Wealth Management, our focus on developed markets has been validated to A, by the fact that we can win market share in mature markets; B, that we obviously have a good, strong, low-risk position to adopt to the geopolitical tensions. And as we have shown, we have fast-tracked our adoption to the geopolitical environment even if tensions should move from the European theater to the Asian theater, we will be done with the adoptions of our business books already.So how are we looking into H2 of 2023? A couple of thoughts around that. First, we will deliver the structural cost relief, which we think is very important that this focuses our business model, and it focuses our strengths and our ambitions on areas where we see strong potential future growth. We will complete the adoption of our footprint to the new geopolitical realities. We have already done more than 70%, and we expect this to be finished before year-end.Our capital position, our balance sheet position will remain our fortress. We will use it both for stability and trust towards the strong organic growth but also for optionality should inorganic opportunities arise. What do we see in the first weeks, what do we see in our pipelines, what do we see when we talk to clients when we grow through our businesses?On the Wealth Management side, we are very convinced that we can use the market environment to structurally grow our Wealth Management franchise. We have delivered and built a franchise that has shown 5% annualized growth on average, CHF 300 million load per RM, CHF 4 billion plus net new money at an absolute size.We have now a market environment where we can do organically a size change that would usually only be available through M&A and we are confident that we have the brand, the competencies, the capabilities, the people then to continue to grow the larger book with at least the target range of 4% to 6% going forward.When we go into DI and SST, obviously, we cannot kind of predict the appetite for our transactions from self-guided clients but what we see is that when I look at market shares, market positioning, our -- the partnership discussions we're having when I look at what we roll out from a technology standpoint of view, we will be able to repeat what we've shown in H1 that against very low trading volumes, we deliver low-risk resilient revenues.On the Asset Management side, I keep repeating myself now for the third time in a row, I know. I'm aware of that, that we need to see the end of the cycle of the interest rate hiking in order to trigger the willingness of institutions to put capital to work in more high-octane fixed income products.We are ready to get these flows. As you have seen, the performance is constructive enough and our product range is as attractive as ever, and we have significantly moved closer to the end of this rating hike. And obviously, we have a strong intention to move back to our pattern that we do better than the industry.That's it from our side with an update on strategy, where we are, details on the numbers and a quick outlook. And with that, both Thomas and I are very happy to have your questions.
[Operator Instructions] The first question comes from Nicholas Herman from Citi.
Yes, so 4 from me, if that's okay. Sorry if that's too many. Just hopefully, they're also a little bit quick.On net interest income, you talked about NII outperforming your expectations. Just curious what the ongoing run rate for NII is, please? That's the first one. In Wealth, I wasn't quite sure I understood you. It sounds like from the release that you haven't done the 50 hires yet, but the slides look like you have made those hires or they're not yet joined. Is that so? Which one is just correct? And so is the ambition to be 50 hired by at the end of the year or is it more than that? And are these gross hires or net hires? Excuse me. And actually, could you also give us a sense of who you're hiring but I guess, regionally, proportion that is teams, AUM per relationship manager versus the current book? That would also be very helpful. So thirdly, in Asset Management, I'd just like to dig into the flows, and I don't want -- sorry if I'm making you repeat yourself for the third time, I guess I heard you that you performed in line with the industry as a whole. I guess I was under the impression that being an institutional franchise rather than a wholesale franchise is a bit more advantageous right now. And it looks like you've seen some investors start to move back towards quality. So I was looking at Aberdeen, for example, I see some good inflows in that, EM equity strategy. So just curious why with your quality bias and your improved performance you haven't benefited quite as much. And then finally, just on the M&A alternatives. Is there any update on who you can public the market with your ambition to move into alternatives in asset management? Do you see any opportunities in the market, active dialogue at all? I'd be interested in anything you can say there.
Yes. Thanks, Nicholas. So I will perhaps start with covering the asset management piece and then little bit talking about to what kind of relationship managers or what are our hiring approaches and what is important to us. And then I would ask Thomas to clarify the numbers around RMs for everybody and NII question.
Yes.
Does that make sense? Good. So asset management. So within the minus CHF 3 million, there is one large single quant-type mandate that has nothing to do with our services or our performance, but actually with a risk allocation decision from the client. So there is a significant kind of chunk in that flow. We are probably 50/50 in our business mix. So from wholesale to institutional. So -- and over the last year's global banks, meaning wholesale has been a significant driver of growth.And we have seen -- so therefore, the business mix exposes us a little bit to the risk appetite that we see in the industry. When it comes to institutional activity, searches, RFP is final, yes, we see an uptick in Q2. We have more activity. We have more pitches. We see more interest. We have also seen a couple of wins that will come through, but we also one or twice come in second. So we are in the race, and we believe that through time, this should be in our favor. But so far, we can't prove it to you now with the actual realized numbers.Then on alternatives, we do 3 things globally as a firm. One thing is we will go live here in Q3. We will work with a partnership to give access to our private clients and prior to -- for private market investments on becoming a private market producer ourselves, we do 2 things. We work on building out of the 24 franchise with that very strong track record and credibility in asset-backed securities. We are very close to move into private debt and launch-related private debt strategies.We are confident that out of the 24 skills that we can build that organically. And beyond organically, we are -- we have a very open mind and very clear criterias when it comes to M&A that you know we want to do things that we can adopt to integrate over time, adopt culturally, become -- make them part of Vontobel but obviously, in the private market area, we would be very willing to allocate capital if it makes sense also from a shareholder and profitability perspective. So we have an open mind. But as usually, M&A is hard to predict.On the type of RMs and hires, so just to give you, perhaps it's worth sharing 2 or 3 facts behind the 50 hires and Thomas will become more detailed on the numbers, there are talks and discussions with more or less 500 people. So we are very careful in a couple of aspects.First, we want to select people that have a high probability to be successful at Vontobel, meaning that the clients they talk to can be served with our service offering, with our capabilities, with our competencies that they themselves fit into our culture that the clients fit into our risk appetite and they themselves fit into our incentive approaches.This needs a lot of scrutiny, due diligence from both sides. So just to show you that the willingness to commit is around 10% of what happens actually as potential talks in the market. So we are very happy with the amount, the quality and they fit to our franchise, but we also remain very strict and very selective and with more formal updates on the numbers. Happy to hand over to you, Thomas.
Thank you. We have -- let me make the numbers clear that we have hired, signed contracts for 50 people. 20 of them have started, but they have started mostly -- I mean, the largest chunk has started in June. 30 of them will start next year. Why is this important?
Next half year.
Next half year. I'm sorry. Next half year. Why is this important? If you look at this CHF 10 million wealth management costs that we have shown, this includes all the recruiting costs for all of the 50, and it includes any form of replacement awards for the people that have started already for the 20. We can book this only when the person starts. So for the 30, this is still to come.If you look at our numbers in general, and if you want to make a prediction of the relationship managers at year-end, right, our churn rates are very low. In particular, if you look at the categories, most of the people when they leave, they leave because they retire. The second largest reason is that we have people -- everybody who joins us, joins us on a business case, right? And making this business case is a crucial thing. And if, of course, unfortunately, if this business case is not hit or if it's not -- we are not at 99%, but if it's a clear miss, then we will have to separate, unfortunately, from the person.And only the last part, which is a very small part is people who actively leave us. So our churn rate or if you add this all, the amount of people leaving in any year or half year is significantly -- in the full year, is significantly below 10%. So we're optimistic that this number will increase because the 50 is what we did already, and we still have a pipeline of relationship managers that we're going to hire in the second half of the year.I hope this answered this question. On net interest income. I mean you can do the math. Our run rate is between CHF 13 million and CHF 15 million. I would still expect that we see a little bit of pressure on this, not because in the core deposits we are seeing -- not because of the core deposits that we see the interest rates rising, but we're more seeing that people, of course, switch from the core deposits, where you take the full margin from whatever you pay to more term deposits, term notes, call money and other instruments, which have a lower margin.And here, we see a flow into that product. They stay on our balance sheet. So from a balance sheet perspective, it is not an issue, but we see slight pressure for the second half on the net interest income margins.
That's very helpful. Just one -- I mean I have a few more but I'll leave the floor open to others to ask questions first. Just one follow-up on that, though, just on the wealth management hires -- the relationship manager hires. Excuse me. I think your AUM per RM is slightly north of CHF 300 million per relationship manager. Just -- would you expect the new joiners to basically effectively have a -- bring in the same level or greater level of assets on average?
Our business case is that we are doing -- are going at the average rate, which is CHF 300 million. But the thing is it takes a little bit of time, first of all, until --
Sure, sure.
All of the money has come in. So our business cases are 3 years. After 3 years, they are not yet typically at the full CHF 300 million. So the business cases are a bit lower, but a good 80%, 70% should be achieved after 3 years.
Very helpful.
The next question comes from Daniel Regli from Credit Suisse.
I have also 4, if I may, and some are a little bit follow-ups to Nick's questions already. Obviously, a quick follow-up on the NII. So could you maybe just give us some -- a bit of color on the movements? As you said, some people have moved out of the classic deposits and other products which are then treated as structured product. Is this revenue you generate on these structured products, that's still counted as a net interest income or will this then be kind of fee income or something else?And then a second question on the net interest income. I think your AT1 bond is callable in H2, given your CET1 ratio being quite high. Can we assume that you will call this AT1 bond and not replace it by another kind of fixed income instrument?And then thirdly, a bit on the trends in net new money. Can you maybe elaborate a bit the trends in Q2 versus Q1? I think with some of your peers, we have seen a kind of acceleration into Q2. We have not seen the same with you. Was this kind of related to this market focus thing?And also maybe here, can you talk a bit about is this already done now or should we expect some further impact on H2 net new money numbers coming from this market focusing in Wealth Management? And then last but not least, quickly on costs. So you alluded to that the SFA integrate or consolidation added CHF 15 million to the cost. Can you maybe give us the number, what was the impact on the revenue side? And then secondly, you alluded to that you have to do more. So can we expect the CHF 65 million number to grow from here or do you still have just a lot of things to do to achieve the CHF 65 million? And where exactly are you taking out these costs? Sorry, a lot of questions and I apologize for this but thanks a lot for the answers.
Thomas will have all the answers.
Yes. So the movement -- the first thing is these term notes will show up in the net interest income. That has to do with the fact they are net interest income. It's just -- it's a term deposit that has an icing. That's the point behind it. And that's why the number has grown to CHF 2.5 billion. We have launched this product basically last year at the -- in summer last year. So you can do a little bit the math around the movements that we can see here.On the AT1, this -- the AT1 is a very important instrument for us. And with what happened during the first quarter, we will need to see whether we are going to call or not going to call, right? We would like to have the AT1. We believe it's a very healthy financing structure that we do have. And hence, we are -- we will look into of calling and rolling. The question though is, we do not want to do this at any price. We are not -- we have not made the decision. The decision will be made in September because if we call, you have to call end of September for end of October. That's all I can say at this point in time. We will look very carefully into the shareholder situation, but we like -- very much like the strategic freedom that we get from having an AT1, and we believe it is a very attractive financing instrument, in particular, since we have less flexibility on the equity side.Then net new money, first quarter -- Q1 versus Q2, that's true. We didn't see an acceleration, but we had already very good numbers in Q1. What we saw is a very steady development over the course of the half year, which basically gives us a lot of comfort. I said this a couple of times across all our regions. And across all the months, we have a very, very steady development, which shows us that the engine is working well. It's not lumpy inflows, outflows and stuff like that. It is a really very good, very steady development.And what you see is the number -- let's take aside for a second the markets that we have chosen to exit. I mean the number is extremely high, and that has started already in Q1, where we have been clearly perceived as a safe haven bank and got a lot of inflows and that has continued now into the second half of this year -- into the second quarter of this year.Regarding future outflows, the CHF 1.8 billion, we are currently roughly 3 quarters done. So you can expect another CHF 600-ish million, CHF 500 million to CHF 700 million in terms of outflows for the second half of this year from this initiative because we're executing very strictly and very fast on this one.And the last question on SFA, you can assume for the half year, it was -- that we had a profit on SFA of roughly CHF 5 million per half year. So that's the background to this. And the last question, sorry, the CHF 65 million and more to go. No, we will stick with the CHF 65 million for what I was referring to is we are working to make sure that we not only do the CHF 65 million and declare victory in the CHF 65 million, we want to achieve 72% cost/income ratio, and we are working against that target.
May I add a quick other question on your RM hiring? Maybe how far was this RM hiring caused by the special situation on the market at the moment and probably which created some opportunities for you or in how far this was like planned for a longer time period. Can you elaborate on this?
Yes, I can. So we have now for a couple of years invested very consistently into our wealth management franchise. Those of you who look on us now for many, many years, you may remember that during the Notenstein La Roche integration, we once had to stop for 18 months, and that cost us then 1 or 2.5 years in terms of net new money growth. So we understand that this has to be a consistent process. We also have, as you've seen from the wealth management investment numbers continue to do so.So we already went into the year with a commitment to grow and to bring on new talent. It is what we are doing now is an acceleration as we see this as being a unique market environment, and we have already delivered against this unique opportunity set with the 50 people that are -- that have signed with us. So it's a combination of both, and it's a very clear expectation of us that there is -- this is a one-off size change in the franchise. And from that, we will continue to deliver 4% to 6% on the bigger book.
[Operator Instructions] The next question comes from Mate Nemes from UBS.
I have 3 questions, please. The first one is just going back to the NII, Thomas, you mentioned that you would expect some slight pressure on NII in the second half of the year coming mainly from higher financing costs. I was just wondering if you could provide us with a downside interest income sensitivity to lower rates in dollars, euros, and Swiss francs. The second question is a follow-up on cost and cost management. I'm not sure I caught it but could you give us an update on the status of the CHF 65 million in run rate savings? So how much of that is done exactly and what is still to come by the end of the year? And just taking the first year cost base and deducting the -- was it CHF 25 million impact, the one-off impact. That gets me to around CHF 525 million. Is that a good starting point going into second half or could there be other kind of moving parts beyond the cost savings on that?And the last question is on gross margins in the Wealth Management business. You clearly saw some benefits from NII, and that's fine and in a way, that is exogenous. But you also mentioned that the retail trading activity or trading sentiment is naturally back to where it was prior to 2022. That's also partly beyond your control. However, what you can certainly control is the recurring bets on commission income.I'm just wondering if you could talk a little bit about what else you're doing to perhaps increase that and offset maybe an eventual turnaround in the NII component. I know you're working on the private equity and private markets product and access. But if you could give us a bit more color on what you're doing on the recurring bet on commission income.
Yes. So shall I quickly kick off with point 4? So the recurring bet, I mean, we are actually doing probably 3 things very systematically, one you already mentioned, we will bring private market offering to our wealth management clients in a more systematic way. We think that this is long term a very important initiative, but obviously, this is a slow burner as it takes time.We will also be, again, be very investment-led and disciplined and go out there with actually a very systematic vintage year after vintage year offering in order to recommend to clients to build that evolving portfolios that then start to self-finance themselves over time. But obviously, over time, this will be a significant contribution to the returns our clients can achieve to deepening the relationship and the consistency of our relationship with the clients, it will also be helpful for margins.Second thing, we have already a very strong investment-led offering on the liquid side. So actually, the use of mandates keeps increasing. We have a very strong offering on the discretionary side. We're also very happy with the performance of our mandates. You may be able to check them because our mandate strategies are also available as an investment fund report. So feel free to reach out and look at the numbers. We think we do very well in the multi-asset class side, on the mandate side, and we get a lot of positive response from clients.We also have launched years ago, I would say, a very significant ability to do tailored mandates to answer to very specific needs. So mandate penetration is the second tool. And the third is we will review in the course of the second half and first half next year pricing discipline also in Wealth Management because we have had now years of very, very significant growth. And this is a hygiene exercise that you need to do from time to time. So pricing power will also be one of the tools that we will deploy over the next 12 months.
I will then go with the other questions. Net interest income. We're not giving the sensitivity by currency, but what we said is 1% across all currencies is roughly CHF 60 million to CHF 70 million. So if interest rates go down by 1%, the impact is CHF 60 million to CHF 70 million negative or positive. What you can do is you can -- I've said a couple of times, we are clearly most of our deposits are in Swiss francs. Most of the net interest income comes from Swiss francs, very closely followed by U.S. dollar and then a far distance to the euro. That should help a bit determine what the numbers are.Then on the cost management, the number is as follows and I think there is also a question from Anne-Chantal going in the same direction. What have we done? We have said the CHF 65 million is the exit run rate. So the CHF 65 million, you will not see in the P&L. However, the CHF 15 million that we said for the costs to achieve, that you will see in the P&L. They are normally front-loaded because when we do a restructuring, we take the hit immediately and the benefits then come as, for example, people roll off our roll-off -- they rollout from the firm.So the status is we're slightly below, in terms of run rate, slightly below the CHF 65 million divided by 2, so we're at around CHF 30 million, slightly above CHF 30 million run rate that we have achieved, and we have spent CHF 9 million so far to achieve this. And that's why we're saying we will deliver these cost savings, and we're on a good track. So we're not behind plan. But in order to get this started, also something that I said at the Investor Day, it takes a bit of time until you get all the things started. And we are very positive that these cost reductions are now coming through for the second half of the year.
Perfect.
Good. Thank you, Thomas.
We have a follow-up question from Daniel Regli from Credit Suisse.
Quick follow-up. One, again, on the Wealth Management margin. And just quickly, can you maybe talk a bit about what was the margin on these exited markets, respectively? Should we expect a margin impact coming from the exit of these markets for Wealth Management? And secondly, and so sorry, again also a follow-up on the relationship manager hiring. So can you give us some kind of guidance on what you expect to hire in a normal year in terms of relationship managers?
On the Wealth Management margin, that will not change and the effects that we will see from interest rates from client activity going up or down will be significantly above what you will see from clients exiting. So put in another way, we do not have huge changes of the margin over the course of this half year. So it has remained relatively stable as clients went out even if you look at it on a monthly basis.So that is one -- that is question one. On the RM hiring, we cannot give you significant guidance. Normally, it would be, as I said, you saw the numbers in the past in 2000, 2001 -- sorry, 2020, '21, '22, where it stayed almost stable. That basically meant, of course, we've hired a lot of clients of relationship managers, but also a lot of relationship managers left. But this -- and that was in balance. But this number is, as I said, significantly below 10% because our churn is -- the churn in particular, people that are leaving us, and we don't want them to leave is very low in wealth management. So you can do a bit of math here and find out what the normal hiring would be. The 50 in half year is significantly above what we normally do.
But obviously, all these numbers have also been are obviously relative to the size. And we have now, over the years, significantly grown the Wealth Management franchise, and this will then obviously also adopt on a relative basis with the size. Next question?
We have another follow-up question from Nicholas Herman from Citi.
Yes. Just 2 more, if I could. On the Wealth Management side, as you said yourself, it will take time for the -- it takes time for relationship managers to bring money in. So you're not even at full capacity after 3 years. If you're hiring significantly more of relationship managers, in the second half of the year, it will take them I guess, what, 6 months at least to start bringing money in. So the effect of what I'm saying is next year, you will have front-loaded a significant amount of cost of, I don't know, more than 1% on your cost-to-income ratio, you will not be getting in all of your -- all of the revenue yet. So what is it that's giving you confidence on -- you said in the -- in your release that you're confident in delivering our targets. What is it that's making you confident that you can deliver your targets and to be clear, by the way, I'm not saying this is the wrong thing to do strategically, absolutely. But I just -- I'd like to dig into on what's giving you confidence that you'll hit your 2024 cost to income target?And then secondly, just going back on to alternatives. Just I guess, from a Lighthouse perspective, what is your vision for -- how do you see the asset management division and alternatives, I guess, both in terms of mix, size, coverage, proportion between public/private within private or alternatives, the business mix shift? And I guess I don't -- in the context that we are talking about a sector that has tremendous growth, but at the same time is also consolidating incredibly rapidly too with investors themselves consolidating relationships. So you are obviously, again, it makes sense to enter into, but you are also kind of, I guess, starting from a related position and running to stand still. So yes. Any color there would be helpful, please.
Yes. Thank you. So first, let's start with the alternative ambition. It obviously hinges a little bit on our ability or on the timing on when we see also inorganic opportunities because we believe that in order to position us meaningfully, it will probably need lift outs or inorganic options as well. If I look into the models we run and the options we consider probably over the Lighthouse year at the asset level, we could probably land between 5% to 10% being allocated to alternatives. That's now then it has -- can be obviously something very different on the revenue and profitability basis, but that would be a case where I would say we have executed sensibly well against the Lighthouse plan of 2030, we would enter the -- approach actually, we would enter that market in the same spirit as we behave in public markets, meaning that we would position ourselves as a specialist. We would deliver outstanding focused capabilities that may then again be parts of broader private market solutions. So we would not go from day 1 to be the kind of the multi-sector multi-type solution provider in terms of private markets, but we would build a, organically from the asset-backed security shop of TwentyFour, a private debt offering and then depending on opportunities, other distinguished capabilities that would feed in the institutional market to various specific client demands.That's what we actually see also because the institutional buyers of private markets are going through the same cycle as it has happened on the liquid side. They become ever more specialized, they compartalize. We would not aim predominantly for the wholesale global banks, franchise within our Asset Management division. We would really go after institutional clients that have the selection capabilities and the overall strategies to buy into specific slices.Now you may argue that we are late, but perhaps the -- that we think this is a very long-term business, and it's never too late to start this in a proper institutional pedigree approach. You sensed a follow-up question to what I've just said. Is that right, Nichola?
I was just going to say that. So, just to paraphrase you, effectively, you see the business. So 5% to 10% of the business in alternatives predominantly private credit, potentially also some kind of value-add strategies depending on availability. And actually, I would probably argue that a value-added strategy would probably make sense to you given your track record as you know within the active ownership.
Absolutely, yes. And so for example, one of the things that could come to one mind is obviously infrastructure where you as an owner also deploy adding value strategies. Yes. Absolutely right. Then on the cost to income ratio, we have a set of initiatives and a set of plans, both on this structural review of the cost side. We obviously also have the opportunity that we currently see in the market wrapped in an overall envelope that we would be willing to deploy.So we see this as a structural opportunity. And as we are long-term, and we believe that you are long-term, we do it because we think it's the right thing to do, but we will not create a completely senseless sake J-curve with a hiring spree. We have enveloped this in a very clear plan, discussed it in detail with the Board, and we will execute against this envelope. That, in combination with a couple of other measures on the cost side and where we have invested in potential scalability, we aim in the budgeting process to match our targets.
Gentlemen, there's further no more questions from the phone.
Good. Then let's move on to the ones in writing. And as I understand, the briefing from our team, we will need to read them out as not everybody can see them. So we start with the top wealth management margin and a question from Anne-Chantal. Wealth Management margin and strong increase to 82 basis points and higher net interest income. How do you expect this to evolve in H2 and 2024? Thomas, I think you already gave some guidance.
I think we already answered this.
Yes. Then let's move to the next. Anne-Chantal, if you feel differently, just call IR, and we will be at your disposition. Given the macroeconomic condition, as I mentioned, clients have remained cautious in H1. Did you see any sign of improvement through H1? Which of your boutique strategy is best positioned to recover in terms of flows?So the first one we answered as well. Yes, we saw increased activity in Q2. We would think that we are best positioned with our fixed income franchises. So, when I look into '24 both, the strategic income, fund, strategy as well as the absolute return, credit, strategy, these are all bottom-up yield strategies that have invested in quality, that have invested in bonds that have now suffered through the yield pickup, but nothing is lost. It's just mark-to-market. And now going forward, as soon as we have stability on the interest rate outlook, actually, the carry that is on sale is amazing.So we would expect that this matches the appetite as soon as people are willing to deploy similar for the fixed income strategies we do out of Zurich, where our emerging market debt team has a very strong offering, for example, look into the performances of our blend strategy or our local emerging market bond strategy, also the corporate, both European as well as global looks very attractive, same argument, purely bottom-up, selection-driven, the yields are more or less locked in as long as the payments come through, which we believe we have a very strong handle on because we're very good in selection. As soon as there is stable outlook, we should see people buying into this carry.And then I think on the equity side, we need more clarity around where our interest rates, where is recession, where is quality going and then let's see where there the allocation opportunities come.Then let's move on to the next. Again, from Anne-Chantal. On the cost side, you have achieved -- yes, I think this one you answered as well, Thomas.
Yes. I think the last 2, we answered.
And the last one, we answered as well on the negative outflows. Any additional questions, ladies and gentlemen?
No. So far, there are no further questions, sir.
Good. Then I think you gave us quite an opportunity to work hard this morning. We thank you for that and we wish you a successful day. Thank you very much.
Thank you.
Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.