Vitaline Yeterian and Elisabeth Rudman, Senior Vice President and Managing Director of DBRS Morningstar respectively, remarked on Wednesday that having a large focus on a troubled real estate lender raises doubts about risk management and indicates a greater risk for the banking sector. Julius Baer reported on Monday that their Common Equity Tier 1 (CET1) capital ratio, which is the foundation of their strong capital position, was at 16.1% as at the end of October and stands far above their own benchmark of 11%. Nevertheless, DBRS Morningstar commented that the current decrease in the value of Julius Baer's shares is a manifestation of the mounting influence of technology and social media on stakeholders.
Julius Baer's stock price drastically declined after the Swiss investment bank stated its loan exposure to one single conglomerate had reached a total of 606 million Swiss francs ($692.7 million). This news followed reports that Austrian real estate company Signa had declared bankruptcy. Apparently, the tremendous exposure was provided to three entities from the European conglomerate, with their assets backed up by commercial real estate and luxury retail. According to analysts from DBRS Morningstar, this amount is equivalent to 18% of Julius Baer's CET1 capital as of the end of June 2023. In an attempt to mitigate the risk associated with a single debtor, the bank has booked 70 million Swiss francs in provisions. Even though no official confirmation has been made, there have been speculations connecting the private lender with Signa. Nevertheless, the ECB has recently conducted an examination of European banks' commercial real estate sector and provisioning methods, which reveal Julius Baer’s capital levels are more than enough to cover possible losses. As a result of the combination of these circumstances, the company's share price has experienced a rapid decrease, providing a powerful reminder of the influence that technology and social media has over stakeholder behavior.
Despite the limited disclosure, it is difficult to determine the full implications for Julius Baer. Any outflows of deposits that the bank experiences would be detrimental to its credit profile. On Monday, a statement from Rickenbacher was released, affirming the maintenance of dividend policy, while also informing investors that any excess capital at the end of the year would be distributed via a share buyback. Julius Baer's capital position is strong, as shown by its October CET1 capital ratio of 16.1%, which exceeds its own floor of 11%. Even under the worst-case scenario, the CET1 ratio at the end of October would have remained at well above 14% thus displaying a level of profitability. Rickenbacher states that the current state of affairs is regrettable, given the recent uncertainty it has caused, but emphasises that Julius Baer is well-capitalised and has continuously earned profits in all circumstances. It is obvious that financing is a major component of the bank's wealth management strategy.
Julius Baer's board is currently assessing its involvement in private debt markets and the approaches under which it works. However, Julius Baer's stocks continued to decline, standing at 18% below the baseline level as of Thursday morning.Yeterian of DBRS Morningstar pointed out that the firm was keeping a close eye on segments that were affected by global economic uncertainty, enduring high-interest rates, stiffer lending terms, and reduced customer demand, with special attention devoted to the commercial real estate sector.A few economists have intimated that there could be underlying issues in the economy that will come to light in 2024, caused by the recent surge in central bank interest rates.This year, increased talks of the potential dangers of commercial real estate investments have circled major lenders, while the fragility of certain banking systems was brought to the spotlight in March when Silicon Valley Bank failed.The resulting shock to investors and depositors worldwide further caused Credit Suisse to experience a dramatic downfall.
The mass withdrawals of investment and customer deposits were accompanied by a sense of panic, spurred by rumors of the lender's financial health on social media, leading to discontent voiced by its managers. Bank analysts at Deutsche Bank claimed that Julius Baer's private debt exposure, assumed to be Signa, could result in "material credit losses" affecting the bank's profitability in 2021, but with strong capital ratios, a steady dividend yield, and a potential share buyback in 2023, it was deemed that decisive action needed to be taken to affirm the trustworthiness of the otherwise sound business model. At a price-earnings ratio of 7.6 in 2021, this is below the average of 10x, and the German bank kept their "buy" rating, although they revised their forecasts and stock price target.
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