The recent Julius Baer earnings call was dominated by the elephant in the room – a substantial loan loss provision stemming from a single private debt exposure. While understandable, the intense focus on this event has obscured a more subtle, yet potentially significant, trend: the silent and relentless appreciation of the Swiss franc. This, I believe, is a story no other analyst is telling.

While the bank celebrates its "strong underlying performance" and "improved net new money flows," the strengthening Swiss franc has quietly eroded asset values, potentially setting the stage for future challenges. This silent force might not be making headlines, but its impact on Julius Baer's future could be significant.

Let's delve into the numbers. The bank reported a 1% increase in assets under management (AUM) to CHF 427 billion. This, at first glance, appears positive. But a deeper dive reveals a concerning picture. The positive effect of market performance and net new money inflows was almost entirely offset by the strengthening Swiss franc. This means that the real value of Julius Baer's assets, when measured in other major currencies, has likely declined.

Imagine this scenario: you invest in a global basket of stocks that performs well, generating a healthy return. However, you convert your earnings into a currency that has simultaneously appreciated significantly. Your nominal gains are there, but the actual purchasing power of your returns has diminished. This is precisely the situation Julius Baer faces.

"The bank acknowledges the Swiss franc's impact, stating it "nearly entirely offset the positive effect of market performance." This statement, however, is buried within the transcript and lacks the emphasis it deserves. The severity of the situation is evident when considering that the Swiss franc has appreciated against all major currencies in recent years, including a 9% appreciation against the US dollar in 2023 alone."

This trend raises critical questions about Julius Baer's future profitability. A strong Swiss franc makes the bank's services more expensive for clients outside of Switzerland, potentially impacting future net new money inflows. It also makes potential acquisitions more costly, limiting the bank's growth opportunities.

The bank's confidence in its "ongoing capital generation" and "unchanged dividend" is commendable. However, this confidence might be misplaced if the Swiss franc's appreciation continues. A shrinking asset base, coupled with more expensive acquisitions and potentially lower net new money inflows, could squeeze future profitability and challenge the bank's dividend policy.

Hypothetical AUM Growth Scenario

The following chart illustrates a hypothetical scenario of Julius Baer's AUM growth in 2024, assuming continued positive market performance and net new money inflows, but also factoring in a conservative 5% appreciation of the Swiss franc against a basket of major currencies.

While the private debt saga rightly demands attention, investors should not overlook the silent Swiss franc tsunami. It might not be making waves today, but its long-term impact on Julius Baer could be profound.

"Fun Fact: Julius Baer's headquarters are located in Zurich, on the prestigious Bahnhofstrasse, one of the world's most expensive shopping streets. The rent on Bahnhofstrasse is so high that it has been dubbed the "Golden Mile.""

While Julius Baer navigates the choppy waters of private debt and seeks new leadership, it's crucial to remember the silent currents that could determine its long-term fate. The Swiss franc, like the glaciers that carve its landscape, is a powerful force that can reshape the financial landscape. Investors should keep a close eye on this silent force as it shapes Julius Baer's future.