* Gross margin 96 basis points from 105 bps
* Dividend unchanged at 0.60 francs per share
* Shares down 3.4 pct, lagging bank sector
* Hikes full-year profit 15 pct
* CEO says in talks to settle US tax investigation
ZURICH, Feb 4 Julius Baer reported a slump in profitability as clients slashed trading in foreign currencies, highlighting the challenges facing wealth managers as they seek growth beyond their home markets.
The Swiss private bank, which is being investigated by U.S. authorities cracking down on tax evasion, also blamed the shortfall on its expansion into overseas markets, such as Asia, where the profit margin is lower than for offshore Swiss banking.
The falling margin at Switzerland's third-biggest listed bank underscores the problems facing Swiss wealth managers as international pressure on banking secrecy - the engine of a $2 trillion finance industry - squeezes their traditional markets in the United States and Europe.
But growth comes at the price of lower profitability. Julius Baer is pulling in fresh assets at a healthy clip, but not making as much money off the newer assets.
The Zurich-based firm lifted assets managed for clients to 189 billion Swiss francs ($209 billion) from 170 billion francs and increased its full-year profit by 15 percent by cutting costs to offset sliding revenue. It kept its dividend steady at 0.60 Swiss francs a share.
Gross margin fell to 96 basis points from 105 basis points.
"The big disappointment in these results was the sharp margin drop," Kepler Capital Markets analyst Dirk Becker said, adding he is reviewing his hold rating with a view to downgrading.
Julius Baer shares fell 3.4 percent, underperforming a slightly lower Stoxx 600 European bank index.
The bank's chief executive countered that the mood among clients "seems to have turned" this year. Financial head Dieter Enkelmann said margins were "clearly higher" in January.
"On the back of changing sentiment, and more positive media headlines, clients are going back into equities," Baer CEO Boris Collardi told a press conference.
Baer has been a copious acquirer of rival private banks as part of its expansion drive and on Friday said it had closed the 860 million franc acquisition of Bank of America Merrill Lynch's overseas wealth management unit. It is cutting 1,000 jobs to reduce costs and swing the loss-making business into the black.
Julius Baer confirmed its targets for the deal, including a cost-income ratio of 70 percent at most and 4 percent to 6 percent growth in net new money. It also said it expects a neutral to slightly negative contribution to this year's profit from that acquisition.
CEO Collardi was upbeat about the U.S. investigation into how Baer helped wealthy Americans hide money from tax officials with Swiss offshore accounts.
Though Baer has not put aside reserves against a settlement fine yet, momentum is picking up and the bank is back at the negotiating table with U.S. officials, Collardi said.
A landmark 2009 settlement by Switzerland's largest bank UBS in 2009 has entangled a host of other banks, including Baer and Credit Suisse.