How digitalisation impacts the bottom line
Is digitalisation just the buzz word of the day? Or does it actually have a positive impact on the profit of a company? While working at Julius Bär (JB), I saw with my own eyes the effort that was taken to digitalize various business processes and I have always wondered how big the impact of those efforts were at the end of the day on their income sheet. So, let’s have a look at the income statements since 2009 to see the impact.
Digitalisation at Julius Bär
JB had introduced in 2009 their markets toolbox, a web app for creating and pricing on the fly structured products (SPs) for FX like Swaps, Forwards and accumulators and SPs for equity like barrier reverse convertibles and bonus certificates. Before 2009, it would sometimes take a whole day to create a SP, while with the markets toolbox it would be a matter of seconds to create, price and document the SP. In the beginning only a few SPs were supported, but more and more were added with time to the markets toolbox.
In 2019, JB introduced Spark, a web app for quickly screening the underlying universe to find those underlyings that produce the best yield or match the best a given investment preferrence. Spark lets the users quickly discover the combinations of underlyings that are the most interesting ones. Further on, it would allow to quickly compare various input parameters, like barrier levels or tenors (holding periods).
For anyone not too familiar with financial statements: the two main ones are the balance sheet and the income statement (we drop the cash flow statement for the moment as it is just a different presentation mode). The balance sheet gives an overview (usually by the end of the business year) of what a company owns (things like cash, tangible and intagible assets) and what it owes (debt, equity and profits/losses). The income statement shows what was the reason that a balance sheet has changed from one year to another. It shows the income, the expenses and the profits/losses (the so-called bottom line).
Net Income Trends
From JBs investor presenetation, the most interesting numbers are the net trading income with dividend income from trading portfolios (DITP) credited back (dark blue line) and, after a change in the presentation of the income statement in 2018, the net income from financial instruments (green line). The DITP correction to the net trading income (light blue line) is not always included before 2014 so there are some gaps and I have assumed a value of 120m CHF for the DITP (median value; no dark blue line). Of course these numbers give more than just the net income from the structured products business but also include for example the profits from the debt instruments.
The net income from markets: in green the net income from financial instruments and in dark blue the (supposedly equivalent) net trading income with dividend income of trading portfolios (DITP) credited back; in light blue the net trading income. Where the DITP wasn’t available (no dark blue line) it was assumed to be 120m CHF.
The numbers shown in the graph indicate a nice trend. Although it is not 100% clear if the numbers before and after 2018 are directly comparable, there seems to be a growth of about 150% between 2009 and 2020 (or 9%p.a.). Interestingly enough the growth seems to be accelerating as the support for more SPs increases in toolbox and with the arrival of Spark in 2019.
One could argue that this growth could also be attributed to the growth in assets under management (AuM) and the highly volatile market in 2020. However, AuM has only grown by about 4.5% p.a. since 2014 and the net income from financial instruments has only dropped by 2% when comparing the first half year (H1) of 2020 to H1 2021.
Conclusion
So there is a clear increase of the net income in markets in the last 10 years. This result stems most probably from a mix of increased AuM and volatility but it certainly also contains the element of having the tools ready that can absorb the increased traffic, engage the users and drive up the sales.
Does your company have a similar success story? Or is there one in the making? Let me know in the comments!