Julius Baer: Navigating Credit Risks for a Turnaround Opportunity

Julius Baer Group, Switzerland’s second-largest private bank, has entered a pivotal phase in its history as it confronts a series of loan book challenges that expose vulnerabilities in its legacy private debt portfolio. Yet, beneath the surface of recent credit losses and regulatory scrutiny lies a strategic restructuring effort that could position the bank for long-term resilience. For investors, the question is clear: Do the current headwinds create a compelling entry point for a turnaround play?

The Credit Crisis Unveiled

Julius Baer’s first-quarter 2025 results revealed a stark reality: the bank faces material losses tied to two German real estate projects. A CHF 130 million loan-loss charge—primarily from a Hanover property project in forced administration and another near-default development—highlights lingering risks from its now-disbanded private debt desk. This desk, once linked to the collapse of René Benko’s Signa Group in 2023, has left a legacy of write-downs totaling over CHF 700 million since 2023.

The bank’s decision to exit private debt entirely by 2026 underscores a critical shift. By reducing exposure from 0.8 billion CHF in late 2023 to below 0.2 billion CHF by early 2025 (now just 0.4% of its total loan book), Julius Baer is aggressively de-risking its balance sheet. This move, however, comes amid a broader 6% drop in assets under management (AUM) to 467 billion CHF, driven by currency headwinds and market volatility.

Capital Strength Amid Stormy Seas

Despite the loan losses, Julius Baer’s CET1 capital ratio remains robust at 17.5% post-charge, comfortably above the 10.5% regulatory minimum and its internal target. This cushion, bolstered by a CHF 400 million AT1 bond issuance, provides a safety net as the bank navigates ongoing reviews of its credit portfolio.

CEO Stefan Bollinger has also prioritized cost discipline, targeting CHF 110 million in savings by 2025. While the adjusted cost-to-income ratio rose to 72% in early 2025—above the 64% target for 2026—the path to efficiency is clear: a streamlined executive board, consolidation of risk functions, and a new Chief Compliance Officer to bolster governance.

Regulatory Crosshairs and Leadership Overhaul

The bank’s challenges extend beyond credit losses. An ongoing FINMA probe into money-laundering controls—unrelated to the Benko case—adds reputational risk. To address this, Julius Baer is reorganizing its risk, legal, and compliance teams under Ivan Ivanic, a seasoned executive from UBS, effective July 2025. This leadership refresh aims to rebuild trust with regulators and investors alike.

Valuation: A Discounted Turnaround Play?

Julius Baer’s shares trade at a 25% discount to its Swiss private banking peers, reflecting investor skepticism over lingering risks. However, the stock’s price-to-book ratio of 0.8x suggests a margin of safety, especially if the bank can stabilize its AUM growth and meet cost targets.

The Case for Patient Investors

While near-term catalysts include the June 2025 strategy update and H1 2025 results, the long-term appeal hinges on Julius Baer’s core strengths: its CHF 467 billion Lombard lending book, which remains stable, and its Asia-Pacific client growth (contributing 4.2 billion CHF in net new money). With capital ratios intact and a disciplined exit from high-risk private debt, the bank is posturing for a return to profitability.

Risks on the Horizon

• Further defaults: The German real estate market’s decline—22% valuation drops in major cities since 2018—could trigger more impairments.
• Regulatory penalties: The FINMA probe’s outcome could impose fines or operational restrictions.
• Client attrition: Aggressive cost-cutting may strain client relationships, especially in a competitive wealth management landscape.

Final Analysis: A Buy with a Long View

For investors willing to look past near-term volatility, Julius Baer presents a compelling turnaround opportunity. Its strong capital base, strategic de-risking, and new leadership align with a path to profitability. While risks remain, the valuation discount and focus on core competencies suggest a potential 30-40% upside over the next two years if the restructuring succeeds.

The verdict? Hold for now, but watch for the June strategy update—a key inflection point for bulls.