The turmoil sweeping René Benko’s faltering corporate empire continues to drag down Julius Baer’s stock price. The private bank’s stock market valuation appears to be presaging the worst possible outcome of the debacle.
Julius Baer is dishing up the bad news in dollops. The venerable Zurich private bank revealed last week it had set aside 82 million Swiss francs ($94 million) in loan loss provisions before acknowledging on Monday the need to restructure a single 606 million Swiss franc exposure in the private debt segment.
Acute Payment Difficulties
It then stated that the counterparty is a «European conglomerate». It’s widely accepted on the market that the Signa Group, owned by Austrian investor René Benko, owes Julius Baer this staggering sum. Signa is in acute financial distress and has an estimated $13 billion in liabilities. Some subsidiaries have already filed for bankruptcy.
Signa’s daunting debt is enough to intimidate even the hardest-of-nails hedge fund managers. But the Swiss private bank is still hopeful. It said its loans would now be restructured and further provisions would only be made if necessary. In addition, Julius Baer is, according to CEO Philipp Rickenbacher, «very well» capitalized. The banking group also intends to stick to its existing dividend policy. These payouts are expected to be at least on par with 2023, and a new stock buyback program is in the offing.
Gigantic Losses Right From the Get-go
While this may be the bank’s view of the debacle, it isn’t necessarily the stock market’s, as market observers, who wish to remain anonymous, have highlighted. Julius Baer’s market value has sunk by more than 20 percent since the Monday before last. The biggest book losses came at the start, but on Tuesday (yesterday), the stock price gave up another 5 percent of ground.
Given the erosion in the price, these same experts have calculated the market has already priced in the worst possible outcome in the past few days: a total loss on the entire individual exposure of over 600 million Swiss francs, with consequences for the dividend policy. Last week’s closing price implies, according to these sources, that the bank would have to write down additional private debt loans.
Julius Baer declined finews.ch’s request to comment further on the statement from last Monday.
A Total Loss Would Have Consequences for CET1 Capital
But we can still draw conclusions from the announcement on the dividend policy. Julius Baer has stressed that if it did experience a complete loss on these loans, the group’s pro-forma CET1 capital ratio would be over 14 percent as of last October 31. The CET1 capital ratio was actually 16.1 percent on this date. The group’s self-imposed lower limit is 11 percent, while the regulatory minimum is 8.2 percent.
Julius Baer has also remained committed to the conditions for a stock buyback program: CET1 capital that significantly exceeds a CET1 capital ratio of around 14 percent at the end of a financial year will be distributed through a stock buyback program launched the following year, unless strategically sound and financially attractive acquisition opportunities arise.
No Immediate Consequences for the Workforce Yet
The emphasis here is on the word «significant»: the hypothetical 14 percent CET1 capital ratio would probably not be enough to justify another stock buyback program – even if potential additional provisions and writedowns are, given the long-drawn-out restructuring process, a long way down the road in 2024. Investors have already factored in significantly reduced stock buybacks, according to the observers.
And there are other uncertainties that could negatively affect the outlook for the Baer share. The banking group has not yet made any statements regarding possible writedowns on the individual exposure. Nor have they put out information on the consequences for the workforce or potential salary implications for management – if the bonuses of the bank’s bosses were scrapped, for example.
When Will Finma Take Action?
Finma, the Swiss Financial Market Supervisory Authority, has also been keeping its cards close to its chest, as its relationship with Julius Baer has been strained, at least in the past. In one example, the supervisory authority temporarily banned the bank from making major acquisitions in 2020 due to failings in anti-money laundering measures. The authority declined to comment on any further measures it would take regarding the bank.
All of this creates uncertainty, and that is usually poison for the stock price as investors will worry that Julius Baer will dish up more dollops of bad news if the Benko empire continues to implode.
