Release Date: July 24, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- EFG International AG (EFGXY, Financial) reported a record profit of CHF163 million, a 10% increase compared to the previous year.
- Net new assets annualized growth rate was 7.3%, surpassing the company's 2025 target range.
- The company has achieved its 11th consecutive semester of asset inflows, demonstrating consistent strategy execution.
- Return on tangible equity reached 19.2%, exceeding the target range of 15% to 18%.
- Core Tier One (CET1) ratio improved to 17.5%, indicating strong capital adequacy.
Negative Points
- The investment made in 2023 has not yet yielded its full potential, creating a drag on profitability in the first half of 2024.
- Despite the positive results, the environment remains complex with many uncertainties and high volatility.
- Net interest income faced pressure due to the conversion of deposits to interest-earning products and price competition from larger banks.
- The cost-to-income ratio, although improved, remains relatively high at 72.6%.
- The company is bearing the full cost of strategic investments made in new hires and resources, impacting short-term profitability.
Q & A Highlights
Q: You mentioned Lombard loans starting to come back again. Should we expect similar momentum in the second half and beyond? What was the motivation of clients to take out Lombard loans in the first half of the year?
A: The deleveraging has stopped, which is a good sign. We believe lending is an asset class that many of our clients like. The curve will likely start steepening again, which would be beneficial. However, the $1 billion increase in Lombard loans is primarily due to currency translation, not real net growth. We are still waiting for clients to start leveraging up again.
Q: You mentioned the hiring of CROs should be normalizing. Should we expect net new assets to continue above the target range of 4% to 6%? What is the normal time lag?
A: We expect the environment to normalize. The 50-70 new CROs is a guideline, not a target. Quality of hires is more important than quantity. We are pleased with the quality of teams joining us. Regarding net new assets, we are pleased to be at 7.3%. We aim to stay within the 4% to 6% range, possibly at the top end.
Q: How optimistic are you about using your surplus capital for M&A? Do you expect industry consolidation to pick up? What kind of revenue dis-synergies do you typically see in larger deals?
A: Our focus is on organic growth, but we are open to M&A if it meets our criteria. The M&A landscape has been dry, but we are hopeful for more opportunities. We target acquisitions in locations where we are already present, with compatible cultures, and deals that are accretive. In the past, we targeted 30-35% of the target cost base in synergies.
Q: Can you quantify the deposit pricing pressures? Is the 24 basis points NIM in the first half a good run rate, or will it be lower from here?
A: We saw deposit pricing pressure towards the end of last year and into Q1. Overall, interest-related revenues have been flat in the first six months. We are not seeing continued pressure and are working on optimizing deposit pricing and organic growth to support NII.
Q: How do you think about excess capital and capital management given your high CET1 ratio and profitability?
A: We have a capital-light model and generate capital consistently. Our management floor for CET1 is 12%, and if it exceeds 15%, we consider returning capital to shareholders. The first option is M&A, but if that doesn't happen, we may consider extraordinary dividends.
Q: Did you say you expect a rebound in NII in the second half of this year? What would drive that rebound?
A: NII and swap income have been flat in the first six months. We are working on deposit pricing and organic growth to support NII. The timing of these factors is difficult to predict, but we are confident in defending against lower interest rates over the next 12-18 months.
Q: How do you see the factors affecting NII and revenue margin playing out over time?
A: Our strategy on NII is defense in an easing interest rate cycle. We aim to defend NII and increase net commission income through better services and products. The net commission margin is improving, and we are confident in our ability to defend NII and grow net commission income.
Q: What are your thoughts on capital management if you can't deploy excess capital into acquisitions in the next 6-12 months?
A: If M&A opportunities do not materialize, we may consider extraordinary dividends. We are hopeful for more M&A opportunities, but if not, returning capital to shareholders is an option.
Q: Can you clarify your expectations for NII in the second half of this year?
A: NII and swap income have been flat in the first six months. We are working on deposit pricing and organic growth to support NII. The timing of these factors is difficult to predict, but we are confident in defending against lower interest rates over the next 12-18 months.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
