Value Ideas Blog
Update: Banque Privee Edmond de Rothschild

Recently BPER announced a change in the CEO position of the Group and the CHF jumped after the Swiss National Bank abandoned the CHF/EUR exchange rate of 1,20. Ariane de Rothschild will replace Christoph de Backer, which served BPER for three years, on the 31.01.2015. You can read the full press statement here. You can find our initial analysis here which we think is still intact despite the fact, that the new exchange rate possible decreases the Net Profit a little bit.

Ariane_de_Rothschild

Christoph de Backer was the head behind the ongoing transformation and strategic repositioning of BPER. As we have read some rumors in the newspaper, this transaction has not pleased everybody and some older employees have left the group. The change was quiet surprising for us and we already observed some recent changes in the last years and months which are probably a result of the coming change. For example a new position of a Deputy CEO was created and Sabine Rabald, who worked for the Group nearly 20 years, was announced to serve in this role. But If you read the annual statements of the past years the change is not that surprising as it looks at first. Benjamine de Rothschild mentioned several times that the lead of the group will be taken over by a women in the foreseeable future. As Ariane de Rothschild already served in different banks in New York and Paris and has an education which is focused on finance we  see the change not as a negative step towards the future.

 

Lately the Group announced the acquisition of an extra stack in OROX Asset Management which should strengthen the Property Funds business of Rothschild. The overall stack is now at 82% and the purchase price was not disclosed.

 

In our view the semiannual result of the group was quiet satisfying, the business profit which is the best proxy for the ongoing operations rose by 32,4 %. Sadly this growth was not seen in the Net Profit of the Group which dropped by 18,8% for the half year, due to the result in the extraordinary income, which was quiet high last year. The total Assets under Management in the Group rose slightly by 1% in the half year. This is not really impressive but is explainable with the sale of non-core businesses in Italy. The like-for-like AUM rose by 4%; way more in line with our expectations of the groups’ expansion into Asia. The Tier I ratio remained unchanged on 36,9% under Basel III which is a really comfortable buffer.

5 Comments

  • Hey Nils,

    Thank you for the update.

    I’d be glad to know your thoughts regarding some things which troubles me about this investment idea:

    1. As I’ve commented before, I’m concerned about the unprotected state of the small investor (us) against a decision of the holder of controlling interest (Benjamin de Rothschild), as the company’s Articles of Association states that “A bidder is not required to make a public offer to acquire the Company”.

    2. The obvious decline in profits along the last decade derives from the company’s decision to reduce to minimum its loaning operations, which took place just after the 2008 financial crisis – this is clear by studying the company’s balance sheet along these years: we can clearly see that starting the end of 2008 and to this day, loans to banks and customers are about 50% lower in proportion to the total balance sheet; and conversely, the cash position has grown to between 20-30% of the balance sheet, from about 2-3% before 2008. In other words, The company has been operating for the last 6 years as a cash box, instead of as a bank.

    3. Looking at last year’s net income after a simple deduction of extraordinary items and 12% minority’s share (derived from the average of the last 8 years), we get a net income of about CHF 24mm. That’s 35% lower than 2012 figure. And it reflects a p/e of about 50 today. (by the way, It’s not proper that the ‘net income attributable sums’ aren’t disclosed in the income statement itself, but only in the notes)

    4. In 2013 there was an exceptionally high provision in the sum of CHF 48.6m, for reasons unclear to me, as this sum is only described as “other provision” in the the notes to the financial statements.

    To sum it up, as the company is doing ok in regard to its AUM operations (as evidenced by the solid AUM profitability along the last decade), the real worry is the trading operations and especially the regular banking/loans operations which are the obvious culprits in the company’s low profitability along the last 6 years, and thus for its low valuation in the market.

    As we keep “enjoying” an environment of insignificant interest rates, the question is whether the management will change its course of action and start acting again like a bank.

    Kind regards,

    Michael

    • Hey Michael,

      thanks for your great insights. From your last post I remember that you were already concerned about the fact of minority shareholder protection. But my point of view is a different one, yes you are right that they can squeeze out the minorities without any problem. But, the family never needed outside shareholders and only made the company public for the publicity and transparency reasons. Furthermore why haven’t they done it before, so why should they do it? Additionally they always try to protect the reputation and integrity of the family name, if they would try to do it in a nice way, du to the fact that many shareholders are also clients. But I will ask a question concerning minority protection in the next AGM.

      Point 2 is a one which i also see but as you have seen in the Case of Sal. Oppenheim in Cologne it can be good not to be a big lender to your clients. My thoughts where that the old CEO was about to change this and when they change it it will nicely increase Net Profits. But also some material for a further discussion…

      3+4. The overall transparency and the way how Rothschild responds to questions is not sufficient which is also related to the industry in which they do their business. Have you already asked the IR about this topic?

      Wrap-up: We bought the company due to their low AUM-valuation and positive long term perspective. Furthermore we think that they will handle their problems and that the expansion into new markets will finally pay off. As we are concerned as you about some points we will ask some critical questions at the AGM and hope to see you there. So thanks again for your good input and I hope to see you soon

  • Hey Nils,

    Thank you for the kind words. I’m happy to contribute what I can, but of course not as much as you have been doing on this blog.

    Re. the issues above, I haven’t addressed RLD’s investor relations. But if you do and get some answers to our quite important matters above – I’d be happy to be updated on the matter, and see whether it can alleviate at least some of our concerns.

    Re. your inputs, 2 thing –

    1. AUM fees and commissions are in a secular decline all over the world as brokerage and investment management firms sell their services and expertise for more competitive prices as time goes on. This trend derives mainly from the improvement of capital markets’ technologies and outsourcing, and also declining regulative borders between them, therefore making lower and lower the cost of services in this sector. Thus, I don’t think that counting on a higher fees and commissions to AUM ratio in the future is very prudent (this ratio for RLD today stands at about 0.55-0.6%).

    2. A bank must issue conservative risk-adjusted loans in order to make money for its shareholders. For some reason (a lack of skill or maybe indifference) RLD made less and less loans alnog the last decades. In the same time, many other banks made a lot of money on loans. Making good loans and thus utilizing the bank’s free capital is essential for a good bank investment. Today, as the interest rate environment just gets more and more harsh, more and more negative, I don’t see any reason to think that RLD will start again acting more like a bank. Until that happens, we are talking about a huge cash box which doesn’t seem to be liquidating any time soon.

    This last point brings me to my last concern, which is RLD’s huge pile of cash nominated in CHF in a negative 0.75% environment (as for 31.12.2013, CHF2.9B out of CHF3.4B in cash and cash equivalents). It’s not hard to understand the implication of this on RLD’s net income attributable to its shareholders.

    Kind regards,

    Michael

    • Hey Michael,

      thanks for your comment and sorry that I didn’t reply to it so far, I know that this is no excuse but the master thesis, the CFA and my new work kept me quite busy. I also started to read the new annual report and I would appreciate to go to the AGM, will block me the time slot next year but the yearly Omaha convention is also always at the 1st of May so I’m blocked this year.

      I think you are 100% right with your thinking and I will write them in the next couple of days. However the company is still cheap, which we all know but I’m more comfortable to put my money in such a cash box than in to lofty valued stocks, for us the investment has a cash characteristic which gives you a nice dividend.

      Cheers
      Nils

  • Hey Nils,

    Fair enough.
    Congrats on the new job.
    I’d appreciate it if you could keep me updated on their response.

    Kind regards,

    Michael

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