Baer’s reported net income for the first half of CHF 114 million includes a significant amount of acquisition, integration, and one-off items. On an underlying basis, the bank’s net profit was CHF 261 million for the first half, up 26% from the year-ago half, as the bank benefited from higher assets under management and increased client activity. The bank’s underlying return on equity was about 11%. There was a lot of good news in Baer’s update. Most significantly, gross margin grew to 102 basis points from 94 basis points in the trailing half.

Earlier, management reported that the gross margin in the first four months of the year was 94 basis points, so we calculate that average gross margin in May and June jumped to about 110 basis points, a significant improvement. Higher foreign exchange trading, along with generally increased client activity, was behind the higher margin, and we think this may be the beginning of Baer’s gross margins moving to a higher, more normalized, level.

Also encouragingly, the gross margin in the international wealth management business that Baer is acquiring from Bank of America was 93 basis points, well above management’s 85-basis-point goal for 2013. This helps to support the often stated conviction that Baer’s management will be able to turn around the struggling IWM business. Through July, CHF 47 billion in assets have been transferred, putting the company well on track to meet its goal of transferring CHF 57 billion-CHF 72 billion in total (and to transfer 80% of it in 2013).

Regulatory clouds have been hanging over Baer’s head, and we are hopeful that these issues will be largely resolved in 2013. Baer said that Switzerland and the U.S. have made significant progress in their negotiations over tax matters, and that the bank expects to negotiate its own settlement over the next two months.

Moreover, the bank said that it expects the settlement to be “affordable”.  Management’s discussion of the bank’s capital position raised a new concern. Management said that Baer has about CHF 1.4 billion of excess capital, after accounting for all known future impacts, and we expect this number to grow quickly given Baer’s strongly capital generative business model. While management raised the option of a special dividend, it also mentioned an interest in acquisitions. Market prices have risen significantly since Baer announced its acquisition of IWM in August 2012.