ANNUAL REPORT 2017 JULIUS BAER GROUP LTD. WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 Cover pictures: Impressions from inside the client reception area at the Head Office in Zurich. Welcome to Julius Baer! WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 Including integration and restructuring expenses as well as the amortisation of intangible assets related to previous acquisitions or divestitures, the net profit achieved in 2017 amounted to CHF 716 million. Excluding these items, the adjusted net profit for 2017 amounted to CHF 806 million. Further information on this basis can be found in the presentation and the media release on the 2017 financial results and the Business Review 2017. KEY FIGURES 2017 2016 Return on equity (ROE) 12.8% 12.1% - Return on tangible equity (ROTE)1 29.7% 28.2% - Cost/income ratio2 71.8% 72.2% - Cost/income ratio3 69.0% 68.9% - 31.12.2017 31.12.2016 Change % Consolidated balance sheet Total assets (CHF m) 97,917.6 96,207.2 1.8 Total equity (CHF m) 5,854.0 5,353.9 9.3 BIS CET1 capital ratio 16.7% 16.4% - BIS total capital ratio 22.0% 17.5% - Client assets (CHF bn) Assets under management 388.4 336.2 15.5 Total client assets 457.1 391.6 16.7 Personnel Number of employees (FTE) 6,292 6,026 4.4 of whom in Switzerland 3,423 3,237 5.8 of whom abroad 2,869 2,789 2.9 Number of relationship managers 1,396 1,383 0.9 1 Net profit of the shareholders of Julius Baer Group Ltd. less integration and restructuring expenses as well as amortisation of intangible assets/(half-yearly) average shareholders’ equity less goodwill and other intangible assets 2 Excluding valuation allowances, provisions and losses 3 Excluding valuation allowances, provisions and losses, and integration and restructuring expenses as well as amortisation of intangible assets Listing Zurich, Switzerland SIX Swiss Exchange under the securities number 10 248 496 Member of the Swiss Market Index SMI Ticker symbol BAER 2017 2016 Change % Information per share (CHF) Equity (book value, as at 31.12.) 27.3 25.0 9.1 EPS 3.25 2.85 Share price (as at 31.12.) 59.60 45.23 31.8 Market capitalisation (CHF m, as at 31.12.) 13,339 10,123 31.8 Moody’s long-term deposit rating Bank Julius Baer & Co. Ltd. Aa2 Aa2 - Capital structure (as at 31.12.) Number of shares, par value CHF 0.02 223,809,448 223,809,448 - Weighted average number of shares outstanding 216,894,003 217,404,899 - Share capital (CHF m) 4.5 4.5 - WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 FOREWORD DEAR READER 2017 proved to be a successful year for Julius Baer. Supported by an overall favourable financial market environment, the operating performance of our Group showed clear improvement on all levels as we reaped the fruits of last year’s strategic hiring initiative and organisational changes. These developments as well as the prestigious award as the World’s Best Bank for Wealth Management we received from Euromoney last summer are further validations of our long-term strategy. Building on our strong business momentum, we pushed ahead with the implementation of our strategic roadmap designed to keep our company fighting-fit for the future. The financial strength of our Group is a reflection of our clients’ trust in our ability to act as their advisors. The net profit for 2017 increased strongly, and net new money growth exceeded our medium-term target range of 4–6%. At the end of December 2017, the Group’s total capital ratio stood at 22.0% (fully applied 21.2%) and the BIS CET1 capital ratio was at 16.7% (fully applied 13.5%). Both capital ratios are well above the Group’s own floors of 15% and 11%, and significantly above the regulatory minimums of 12.2% and 8%. The strengthening of the total capital ratio was partly attributable to the successful placement of USD 300 million of perpetual non-cumulative high-trigger Additional Tier 1 (AT1) securities in September 2017, which generated the biggest subscription level of any European issue in 2017. In light of the excellent financial results, the Board of Directors intends to propose to the Annual General Meeting on 11 April 2018 an increased dividend of CHF 1.40 per share. The total proposed dividend payout amounts to CHF 313 million, up from CHF 269 million in 2017. Under the leadership of CEO Bernhard Hodler, appointed in November 2017, our management team will further sharpen our strategic focus on pure private banking and exploit the opportunities for profitable growth in our chosen markets. Our global franchise is well balanced across geographies and enables us to benefit from wealth creation in established and growth markets alike. At the same time, our industry is evolving at a fast pace. Changes in regulation and client needs redefine every aspect of our business, from the way we advise our clients to the products and services we offer and the job profiles of our employees. With digitalisation sweeping through virtually every aspect of modern life, technology becomes an increasingly important aspect of any value proposition. Continued development is key, and we are fortunate to be able to harness these trends from a position of strength. We continue to invest in our core banking platforms, the scalability of processes, our investment solutions capabilities and digital tools. The overarching objective is to provide our clients with holistic wealth management services that cover every stage of their individual lives. We call our approach 2 WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 FOREWORD Julius Baer – Your Wealth. It was introduced in 2015 with the offering of a range of new advisory mandates. The comprehensive toolset required for our relationship managers to deliver on this promise in a consistent and efficient manner will be fully rolled out in our Swiss home market in the coming months. In parallel, we are constantly enhancing our digital channels in line with clients’ evolving desire to interact, transact and receive advice and insights online. We regard these efforts as vital to our ability to offer a high-quality client experience, to remain one of the most trusted and respected private banks and to continue to grow profitably across the next business cycles. In our business, trust is earned day after day – with clients, shareholders, bond holders and employees. We would like to thank all our stakeholders for their appreciation of our efforts and we hope to count on their continued support. Daniel J. Sauter Bernhard Hodler Chairman Chief Executive Officer Zurich, March 2018 3 WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 CONTENTS I. CORPORATE GOVERNANCE II. REMUNERATION REPORT 9 GROUP STRUCTURE AND SHAREHOLDERS 40 LETTER TO OUR SHAREHOLDERS 11 CAPITAL STRUCTURE 42 COMPENSATION GOVERNANCE 13 BOARD OF DIRECTORS 46 GROUP PERFORMANCE AND VARIABLE COMPENSATION FUNDING 31 EXECUTIVE BOARD 49 EXECUTIVE BOARD AND SENIOR 34 RULES ABOUT COMPENSATION AND LOANS MANAGEMENT COMPENSATION WITHIN THE GROUP 62 OTHER EMPLOYEE COMPENSATION 35 SHAREHOLDERS’ PARTICIPATION RIGHTS (AS AT 31 DECEMBER 2017) 66 BOARD OF DIRECTORS COMPENSATION 36 CHANGES OF CONTROL AND 68 COMPENSATION, LOANS AND DEFENCE MEASURES SHAREHOLDINGS OF THE EXECUTIVE BOARD (AUDITED) 36 AUDIT 76 COMPENSATION, LOANS AND 38 INFORMATION POLICY SHAREHOLDINGS OF THE BOARD OF DIRECTORS (AUDITED) 80 ABBREVIATIONS 81 TERMINATION PROVISIONS OF JULIUS BAER PLANS 82 REPORT OF THE STATUTORY AUDITOR TO THE ANNUAL GENERAL MEETING OF JULIUS BAER GROUP LTD., ZURICH This Annual Report also appears in German. The English version is prevailing. 4 WorldReginfo - 8197e989-9573-4917-8e99-7f9c1203e9b9 CONTENTS III. FINANCIAL STATEMENTS 156 ADDITIONAL INFORMATION JULIUS BAER GROUP 2017 156 Reporting by segment 157 Related party transactions 158 Pension plans and other employee benefits 84 CONSOLIDATED FINANCIAL STATEMENTS 163 Securities transactions 84 Consolidated income statement 164 Derivative financial instruments 85 Consolidated statement of comprehensive income 166 Financial instruments by category 86 Consolidated balance sheet 169 Financial instruments – Fair value determination 88 Consolidated statement of changes in equity 173 Financial instruments – Transfers between level 1 90 Consolidated statement of cash flows and level 2 174 Financial instruments – Offsetting 92 SUMMARY OF SIGNIFICANT ACCOUNTING 175 Companies consolidated as at 31 December 2017 POLICIES 179 Investments in associates 103 COMMENT ON RISK AND CAPITAL 180 Unconsolidated structured entities MANAGEMENT 181 Acquisitions 186 Share-based payments and other 133 INFORMATION ON THE CONSOLIDATED compensation plans INCOME STATEMENT 191 Assets under management 133 Net interest and dividend income 194 Requirements of Swiss banking law 133 Net commission and fee income 194 Events after the balance sheet date 134 Net trading income 134 Other ordinary results 195 REPORT OF THE STATUTORY AUDITOR 134 Personnel expenses TO THE ANNUAL GENERAL MEETING OF 135 General expenses JULIUS BAER GROUP LTD., ZURICH 135 Income taxes 137 Earnings per share and shares outstanding 138 INFORMATION ON THE CONSOLIDATED BALANCE SHEET IV. FINANCIAL STATEMENTS 138 Due from banks JULIUS BAER GROUP LTD. 138 Loans 2017 139 Allowance for credit losses 139 Impaired loans 202 INCOME STATEMENT 140 Trading assets and liabilities 203 BALANCE SHEET 141 Financial investments available-for-sale 141 Financial investments available-for-sale – 204 NOTES Credit ratings 207 SHAREHOLDINGS OF THE BOARD OF 142 Goodwill, intangible assets and property DIRECTORS AND EXECUTIVE BOARD and equipment 145 Operating lease commitments 209 PROPOSAL OF THE BOARD OF DIRECTORS 145 Assets pledged or ceded to secure own TO THE ANNUAL GENERAL MEETING commitments and assets subject to retention of title ON 11 APRIL 2018 146 Financial liabilities designated at fair value 210 DIVIDENDS 147 Debt issued 150 Deferred tax assets 211 REPORT OF THE STATUTORY AUDITOR 151 Deferred tax liabilities TO THE ANNUAL GENERAL MEETING OF 152 Provisions JULIUS BAER GROUP LTD., ZURICH 155 Share capital This Annual Report also appears in German.